Service tax on short term hotel accommodation less than 3 months u/s 65 (105)(zzzzw) is unconstitutional – Delhi High Court

Service tax on short term hotel accommodation less than 3 months u/s 65 (105)(zzzzw) is unconstitutional – Delhi High Court

ABCAUS Case Law Citation:
987 2016 (08) HC
Date/Month of Judgment/Order: August 2016

Important Case Laws relied upon:
K. Damodarasamy Naidu v. State of Tamil Nadu (2000) 1 SCC 521
Tamil Nadu Kalyana Mandapam Association v. Union of India AIR 2004 SC 3757

Brief Facts of the Case:
Federation of Hotels & Restaurants Association of India (Petitioners) had challenged the constitutional validity of:

(a) Section 65 (105) (zzzzv) of the Finance Act 1994 (FA) imposing levy of service tax on provision of service by air-conditioned restaurants having license to serve liquor.

(b) Section 65 (105) (zzzzw) of the FA imposing service tax on short term accommodation for a continuous period of less than three months in a hotel, inn, guest house, club etc.

The Petitioners also sought a declaration that Rule 2C of the Service Tax (Determination of Value) Rules, 2006 is invalid as it arbitrarily attributes 40% of the value of the composite contract of supply of food and drinks to the service component.

Contentions of the Petitioners:
According to the petitioners, a catering contract involving the provision of food and drinks in a hotel or restaurant is different from a mere sale of goods or food and drinks.

Contentions of the Respondent (UOI):
Service tax was collected on specific taxable services which would include catering contracts, which were composite contracts. The objective under the FA was to levy service tax only on the service component of a transaction, with abatement being allowed for the value of the goods supplied in the course of such contract.

Petitioners relied on the decision of the Constitution Bench of the Supreme Court in K Damodarasamy Naidu whereas the Union of India relied on the decision of the Supreme Court in Tamil Nadu Kalyana Mandapam Association.

Held:
The Delhi High Court:

(i) Upheld the constitutional validity of Section 65 (105)(zzzzv) read with Section 66E (i), Section 65 (22) of the Finance Act 1994.

(ii) Upheld the constitutional validity of Rule 2C of the Service Tax (Determination of Value) Rules, 2006;

(iii)  Struck down Section 65 (105) (zzzzw) of the Finance Act 1994 pertaining to levy of service tax on the provision of short-term accommodation and the corresponding instructions/circulars seeking to operationalise the levy as unconstitutional and invalid. 

Note:
The Delhi High Court however refrained from discussing the decisions of the other High Courts which had taken a view on the issues involved in the present writ petition since three of such decisions (i.e., Kerala High Court in Union of India v. Kerala Hotel Association , the Bombay High Court in Indian Hotels and Restaurant Association v. Union of India and the Karnataka High Court in Ballal Auto Agency v. Union of India ) were subject matter of pending appeals in the Supreme Court.