Levy of Service Tax on Restaurant Services

Levy of Service Tax on Restaurant services has been one of the most controversial topics in Service Tax.   Time and again the same has been challenged by assesses as being not exigible to Service Tax.  Moreover, even the valuation of restaurant services has also been a matter of dispute between the government and subjects.  In this article we shall discuss the levy and various controversies as arisen in past basis the various court rulings on restaurant services.

Before we examine the current provision, we must examine in brief the constitutional provision and history of levy of Service Tax on restaurant services.  Prior to introduction of Article 366(29A) in the constitution, sale of food in restaurant was not exigible to Service Tax.  The understanding was upheld in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd. [[1972] 29 STC 474] wherein Apex Court has held that the transaction between hotelier and the visitor to the hotel is one essentially of service and the hotelier serves meals in the performance and as part of the amenities incidental to the service and that such supply of meals by the hotel to the residents is not sale of food.  It is pertinent to mention that at that time, no Service Tax was there on restaurant services and thus, dispute was limited to levy of Sales Tax. Accordingly, Article 366(29A) introduced the following provision deeming such supply of food as sale:

“(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

The levy of VAT on food and drinks supplied for human consumption in case of hotels / restaurant was brought by introduction of this sub clause.  Thus, while there is an introduction of deeming fiction of levy of Service Tax on supply of food, however, the same can be as a part of service and thus, existence of service in such supply is well accepted by the Article.  In East India Hotels Ltd. v UOI [(2001) 121 STC 46 (SC)], it was held that the moment food is supplied to the customer, a sale is effected, and it is not material as to whether whole of the food is consumed by the customer or not.  Thus, this supply contains both elements viz. of sale of goods and provision of services and the two respective statutes have devised Rules to levy tax on their respective share in the activity.

To understand the concept better, we can also refer to the decision of Delhi high Court in the case of The Federation of Hotels Restaurants Association of India And Ors v UOI [2007-TIOL-345-HC-DEL-SWMA], wherein the question examined was whether it was impermissible for the Petitioners to charge their customers/guests any price above the maximum retail price (MRP) mentioned on mineral-water packaged and bottled by third parties.  Hon’ble High Court held that answer in negative and held as under:

“That charging prices for mineral water in excess of MRP printed on the packaging, during the service of customers in hotels and restaurants does not violate any of the provisions of the SWM Act as this does not constitute a sale or transfer of these commodities by the hotelier or Restaurateur to its customers. The customer does not enter a hotel or a restaurant to make a simple purchase of these commodities. It may well be that a client would order nothing beyond a bottle of water or a beverage, but his direct purpose in doing so would clearly travel to enjoying the ambience available therein and incidentally to the ordering of any article for consumption. Can there by any justifiable reason for the Court or Commission to interdict the sale of bottled mineral water other than at a certain price, and ignore the relatively exorbitant charge for a cup of tea or coffee.”

Thus, as on date, both Service Tax and VAT are levied by Centre and states respectively on sale / service of food in restaurants.  Even in case of Bharat Sanchar Nigam Limited vs. Union of India [2006(2)STR161(SC)], Hon’ble Apex Court held that except in cases of works contracts or catering contracts [exact words in article 366(29A) being – ‘service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service’], composite transactions cannot be split into contracts of sale and contracts of service.

Restaurant service was first made taxable with effect from May 1, 2011, when the then Hon’ble Finance Minister introduced the new category by explaining its scope vide Circular No. F.No. 334/3/2011-TRU, dated 28-2-2011 (Extracts) as under:

“Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.”

Thus, what was being exigible to Service Tax was the service provided in restaurant by way of space, ambience, air conditioning, service etc.  Accordingly, the scope of services was to envisage the services provided in terms of servicing and providing good ambience to customers during their consumption of food and not every provision or supply of food.  The Circular further clarified that the levy was intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. Also, it was clarified that the amount paid by the customer ex-gratia e.g. as tip to any member of the staff doesn’t constitute consideration paid to the restaurant and shall remain outside this levy.

Further, an exemption @ 70% of the gross value i.e. the total price charged by the restaurant was given by amending the notification No. 1/2006-S.T., dated 1-3-2006 vide notification No. 34/2011-S.T., dated April 25, 2011. The exemption was available provided no Cenvat credit is availed either of inputs or input services. It was further clarified that the exemption is available on the gross price charged by the restaurant for the taxable service, including any portion shown separately e.g. service charge.

The application of Service Tax on such services continued under the negative list also, and as on date only factory canteen and non air-conditioned restaurants are exempted from levy of Service Tax.  Further, the in place of erstwhile abatement, effective July 1, 2012, vide notification no. 24/2012-ST, Service Tax (Determination of Value) Rules, 2012 were amended and 40% of the billed value, for supply of food or drinks in a restaurant, was provided as value of services there and made liable to service tax.

The levy on restaurant services was challenged by the assessee in Kerala Classified Hotels And Resorts Association & Others Vs UOI & Others [2013 (31) S.T.R. 257 (Ker.)], wherein Hon’ble Court struck the levy of Service Tax on restaurant services is beyond the legislative competence of the Parliament as the sub-clauses are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule.  The Hon’ble Court held that it can be seen from Article 366(29-A)(f) that service is also included in the sale of goods. Accordingly, if the constitution permits sale of goods during service as taxable necessarily Entry 54 has to be read, giving the meaning of sale of goods as stated in the Constitution. The Court thus held that if read in that fashion, necessarily service forms part of sale of goods and State Government alone will have the legislative competence to enact the law imposing a tax on the service element forming part of sale of goods as well, which they have apparently imposed.

However, to the contrary, Bombay High Court upheld the levy in the case of Indian Hotels And Restaurant Association & Others v UOI [2014-TIOL-498-HC-MUM-Service Tax], wherein Hon’ble High Court held as under:

“The fact that the tax on sale of goods involved in the said service can be levied, does not mean that the service tax cannot be levied on the service aspect of catering. With respect, this means that when a restaurant renders to any person a service, the tax on sale of goods involved in the said service can be levied. That does not mean that a service tax cannot be levied on the act of serving food at a restaurant. That is the tax in this case imposed by the Parliament. There could be a sale during the course of rendering of service at a restaurant and therefore, a sales tax could be imposed by the State Legislature. So long as there is no prohibition against imposition of service tax on the services rendered, then it must be held that the Parliament is competent to impose a service tax in question.”

Due reference to the decision of Kerala High Court was made by the Court and it disagreed with the decision of single member judge and upheld the levy relying on the decision of Apex Court in the case of Tamil Nadu Kalyana Mandapam Association v/s Union of India [2004-TIOL-36-SC-Service Tax].  In the said case, hon’ble Apex Court held in Para 45 that the concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering.

Further, Hon’ble Uttrakhand High Court in the case of Valley Hotel & Resorts v CCT [2014-TIOL-600-HC-UKHAND-VAT] while has not examined the levy of Service Tax on such services but has examined the extent to which VAT and Service Tax can be levied.  The Court held that VAT cannot be levied on the portion on which Service Tax has been prescribed by competent authority of Service Tax.  Hon’ble Court observed that authority competent to impose service tax has also assumed competence to declare what is service and the State has not challenged the same.  Therefore, it was held that where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, (i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax) no Value Added Tax can be imposed thereon.

Thus, basis the above discussion, it can be said that though the odds are in favour of levy of Service Tax on restaurant service, the non levy of VAT on service portion can bring some relief to the tax payer.  Taxpayer is not frustrated by levy of taxes, but their multiplicity and multiplicity of the authorities having jurisdiction over his business. Thus, a simple regime with both VAT and Service Tax levied in justified and non overlapping manner can  bring end to the controversy of levy of Service Tax / VAT on restaurant services.


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