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Earlier, on July 2003, responding to a batch of writ petition filed by hoteliers running air-conditioned restaurants, serving alcoholic beverages, the Kerala High Court (Single Judge) had declared the imposition of service tax on hotels and restaurants as "unconstitutional" on the ground that levy of tax on supply of food or drink, whether by way of, or as a part of service, is a State subject. The petitioners had argued that the Constitution defined supply of food and drinks in hotels as 'deemed sales' and empowered only states to collect sales tax on total value of such deemed sales. The Court had held sub clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, as illegal and unenforceable. The said Sub-clauses are as under:
(zzzzv) services provided or to be provided, to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has license to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises;
(zzzzw) Services provided or to be provided, to any person, by a hotel, inn, guest house, club or camp-site, by whatever name called, in relation to providing of accommodation for a continuous period of less than three months
Not only this but the Court had also concluded that the petitioners were entitled to a refund for any payments made to the Centre towards the same.
However, on 08/04/2014, the Bombay High Court in case of Indian Hotels and Restaurants Association and Vishwavihar Bar and Restaurant WP-2159/2011 pronounced a judgment holding clause (zzzzv) as above as constitutionally valid. The Bombay High Court had held that “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.…..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.”
However, as stated earlier, now on 21/10/2014, the two judge bench of the Kerala High Court has upheld its earlier single judge verdict and disposed off the writ filed by the Commissioner of Central Excise, Custom and Service Tax, Cochin and stated that ”we do not find any reason to interfere with the decision of the learned single judge.”
The relevant excerpts of the judgment are as under:
“we are of the view that sub clause (zzzzv) of Clause 105 of Section 65 of the Finance Act, 1994, relates to the supply of food and other consumables in restaurants. As indicated earlier, after the Constitution (Forty Sixth Amendment) Act, the said activity is deemed as a sale of goods. After the Constitution (Forty Sixth Amendment) Act, 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. In K. Damodarasamy Naidu (supra), the Constitution Bench of the Apex Court had also held that in view of the words used in article 366(29A) (f), the bill raised on the customer cannot be split as charged for the service part and as charged for the food part and that the supply of food by the restaurant owner to the customer, though it may be a part of the service that he renders by providing good furniture, furnishings and fixtures, linen, crockery and cutlery, music etc., tax is leviable for the whole amount of the consideration received by the restaurant owner. In other words, in view of the aforesaid constitutional amendment, it cannot be said that there is any service involved in the supply of food and other articles of human consumption in a restaurant. It is thus evident that the matter covered by sub-clause (zzzzv) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011 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.”
“Coming to sub-clause (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, as found by the learned single Judge, the Constitution Bench of the Apex Court in Godfrey Philips India Ltd v. State of U.P. [(2005) 2 SCC 515], held that the word “luxuries” in Entry 62 of List II means the activity of enjoyment of or indulgence in that 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 Act and as per the terms of the said statute, the State Government is levying tax on matters covered by sub-clause (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994………….. In view of the decision of the Apex Court in Godfrey Philips India Ltd(supra), we have no hesitation to hold that the matter covered by sub-clause (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, 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.”
The Kerala High Court also referred to the judgment of the Bombay High Court but preferred not to agree with it.
“It is seen that the Bombay High Court has taken the view that merely for the reason that an inclusive definition was inserted in the Constitution for the sale and purchase of goods so as not to leave any room for argument that a tax on sale or purchase of goods does not include a tax on the supply of food or any other article for human consumption, by way of or as part of the service, it cannot be contended that the Parliament was denuded of its competence to legislate and impose a tax on the service provided by air conditioned restaurants. It is beyond dispute that by virtue of the provision in Article 366 (29A) of the Constitution, even the service part involved in the supply of food and other articles of human consumption, is deemed as a sale to enable the States to impose tax on the same. The point, therefore, is as to whether, having characterised constitutionally the subject matter of supply of food in a restaurant, including the service part of it, as a sale, can the Parliament characterise the same transaction as a service for imposition and levy of service tax. We are of the view that 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. We are, therefore, unable to agree with the view taken by the Bombay High Court.”
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Levy of Service Tax on Restaurants, Hotels Unconstitutional. Sale of Goods is State Subject-Kerala High Court Judgment 21-10-2014
