Whether service tax on supply of food/ beverages in hotels/restaurants is Constitutional?

Hotel East Park vs. Union of India [2014 (52) taxmann.com 341]


The Hon’ble Division Bench of Chhattisgarh High Court held that the entry “service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity” in Section 66E (i) of the Finance Act, 1994 is not ultra vires the Constitution and is valid as the same taxes only the service portion. In respect of the services provided by the hotel, Service Tax of 40% on the bill value of the food and drinks is charged in view of section 66E(i) of the 1994-Act read with rule 2C of the Service Tax (Determination of Value) Rules, 2006. Article 366(29A)(f) of the Constitution does not indicate that the service part is subsumed in the sale of the food; it rather separates sale of food and drinks from service and Section 65B (44) as well Section 66E(i) only charges service tax on the service part and not on the sale part. No VAT can be charged over the amount meant for service. It will be open to the Petitioner to object the same before the VAT authorities. There is no provision in the VAT-Act to bifurcate the amount. The State Government will do well to frame such rules to this effect. These rules may be in conformity with the bifurcation as provided under the 1994-Act or ensure that the Commercial Tax authorities do not charge VAT on that part of the value of the food and drink on which the Service Tax is being assessed.


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