Whether levy of Service tax on Restaurants under Section 65(105)(zzzzv) of the Finance Act, 1994 (“the Finance Act”) and on Hotel accommodation under Section 65(105)(zzzzw) of the Finance Act constitutionally valid?
Facts and background:
The Hon’ble High Court of Kerala (“Kerala HC”) in the case of Kerala Classified Hotels and Resorts Association and others Vs. Union of India and others [2013-TIOL-533-HC-KERALA-ST] held that levy of Service tax on Restaurants and hotels is beyond legislative competence of Parliament. It was declared that sub-clauses (zzzzv) and (zzzzw) to Section 65(105) of the Finance Act, 1994 (“the Finance Act”) as amended by the Finance Act, 2011 is beyond the legislative competence of the Parliament as the said sub-clauses are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule. The Kerala HC also allowed refund of Service tax paid by the Petitioners in the stated case. Being aggrieved, the Department filed a Writ Appeal before the Division Bench of the Kerala HC.
The Department placed reliance on the subsequent decision of the Hon’ble High Court of Bombay (“Bombay HC”) in the case of Indian Hotels and Restaurant Association and others Vs. Union of India and others [2014-TIOL-498-HC-MUM-ST] wherein the Bombay HC gave contrary judgment denying the decision of the Kerala HC, stated supra and upheld the constitutional validity of levy of Service tax on AC Bar Restaurants. It was held by the Bombay HC that:
Service tax or tax on a service, which is made taxable by the Finance Act, is a completely distinct tax. It should not be and cannot be equated with a tax on sale or purchase of goods;
The Parliament cannot be said to have transgressed upon the power of the State Legislature to impose a tax on sale or purchase of goods vide Entry 54 of List II. The taxing power of the Parliament and traceable to Article 248 of the Constitution of India read with Entry 97 of List I of the Seventh Schedule of the Constitution enable it to impose a Service tax.
Recently, the Division Bench of Kerala HC disposed of the Writ Appeal filed by the Department against the Single Judge’s Order and emphatically endorsed the view of the Single Judge and distinguished the Bombay HC order.
The Division Bench of Kerala HC held as under:
Service Tax on Restaurants under sub-clause (zzzzv) of Section 65(105) of the Finance Act:
After the Constitution (46th Amendment), the Restaurant activity is deemed as sale of goods and it cannot be said that it is an activity of service. When the said activity is deemed to be a sale of the food and other articles of human consumption, by a constitutional definition, tax on the said activity can be imposed only by the States in view of Entry 54 in List II of the Seventh Schedule;
Since the whole of the consideration received by a Restaurant owner for supply of food and other articles of the human consumption, including the service part of the transaction, is exigible to tax by the State by virtue of the constitutional definition, it is not open to the Union to characterise the same transaction as a service for imposition and levy of Service tax;
Evidently, Section 65(105)(zzzzv) of the Finance Act is a matter enumerated in Entry 54 of List II of Seventh Schedule and the States alone have the legislative competence to enact any law imposing tax on the said matter.
Service Tax on Hotel accommodation under sub-clause (zzzzw) of Section 65(105) of the Finance Act:
The Constitution Bench of the Apex Court in Godfrey Philips India Ltd Vs. State of U.P. [2005-TIOL-10-SC-LT-CB], held that the word ‘luxuries’ in Entry 62 of List II means the activity of enjoyment of or indulgence in something which is costly or which is generally recognized as being beyond the necessary requirements of an average member of society;
It is not disputed that invoking Entry 62 of List II, the State legislature had enacted the Kerala Tax on Luxuries and as per the terms of the said statute, the State Government is levying tax on matters covered by Section 65(105)(zzzzw) of the Finance Act;
Thus, the matter covered by Section 65(105)(zzzzw) of the Finance Act, is a matter enumerated in Entry 62 of List II of Seventh Schedule and the States alone have the legislative competence to enact any law imposing tax on the said matter.
Accordingly, the Division Bench of the Kerala HC dismissed the Writ Appeal filed by the Department.
Point to note:
Effective from July 1, 2012, there is paradigm shift in taxation of services under the Negative list regime, as definition of all taxable category of services are rescinded and new definition of taxable service in general provided with the chargeable Section 66B of the Finance Act. In this regard, Section 65B(44) of the Finance Act which provides definition of the term ‘Service’ includes declared services but excludes deemed sale of goods covered under Article 366(29A) of the Constitution from the ambit of Service tax.
Further, in terms of Clause (i) of Section 66E of the Finance Act, service portion in an activity wherein goods, being food or other articles of human consumption or any drink is supplied in any manner as a part of the activity is a declared service. Thus it implies that service provided by Restaurant is a declared service chargeable to Service tax.
As regards, the manner of determination of service portion in such an activity, Rule 2C of Service Tax (Determination of Value) Rules, 2006 (“the Valuation Rules”) inserted vide Notification No. 24/2012-ST dated June 6, 2012 (effective from July 1, 2012) [“Notification No. 24”] provides that a person engaged in AC Restaurant services, wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner at a Restaurant, shall charge Service tax on 40% of the total gross amount charged excluding VAT/ Sales tax, if any, levied thereon.
In this regard, the Hon’ble High Court of Uttarakhand (“the Uttarakhand HC”) in the case of Valley Hotel & Resorts Vs. Commissioner of Commercial Tax, Dehradun [2014-TIOL-600-HC-UKHAND-VAT] has recently held that VAT can be imposed on sale of goods and not on services by holding that:
VAT can be imposed on sale of goods and not on service. Service can be taxed as per the Service tax laws;
Therefore, where element of service has been so declared and made chargeable to service tax in terms of the Valuation Rules vide Notification No. 24, no VAT can be imposed thereon.
Further, the Hon’ble Chhattisgarh High Court (“Chhattisgarh HC”) in the case of Hotel East Park & Another Vs. Union of India & Others [2014 (5) TMI 652 – CHHATTISGARH HIGH COURT], while upholding the Constitutional validity of Section 66E(i) of the Finance Act, held that:
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.
On the other hand, Section 65B(44) as well Section 66E(i) of the Finance Act only charges Service tax on the service portion only and not on the sale part.
But, at the same time, concern was raised on unnecessary double taxation burden on the consumers by Restaurants charging VAT on 100% of the bill value including 40% which has already suffered Service tax. Accordingly, the Chhattisgarh HC recommended the State Government to issue a clarification/ direction in this regard and to ensure that the consumers are not doubly taxed over the same amount.
Therefore, it is quite interesting to see how legal jurisprudence will settle down on issue of levying Service tax on services provided or agreed to be provided by AC Restaurants, which is likely to become even more debated issue in time to come.