AUGUST 07, 2010

By K Vaitheeswaran, Advocate

THE next time you travel in a train and you are served with food or snacks or beverages you can reflect upon this interesting tax issue that went upto Delhi High Court. Indian Railways Catering and Tourism Corporation Limited (IRCTC) supplied food and beverages to Indian Railways. The food is loaded in the trains as per the finalized reservation chart and on completion of the journey a certificate of actual occupancy of seats is issued by the Indian Railways. The bill is raised by IRCTC and service tax is paid under the category 'outdoor catering services'. Food is served on board the train by the employees of IRCTC.

The Delhi Sales Tax Department wanted VAT on the transaction which resulted in the matter landing in the Delhi High Court in the case of Indian Railways Catering and Tourism Corporation Ltd. Vs. Government of NCT of Delhi and Other 2010-TIOL-517-HC-DEL-ST.

To understand this case in a proper perspective one needs to travel in a culinary judicial and legislative journey and look at a multi-course lunch. The first is in the form of a 'starter' being the decision of the Supreme Court in the case of State of HP Vs. Associated Hotels of India 2002-TIOL-65-SC-CT where the Supreme Court held that the Revenue is not entitled to split the transaction into one of service and one of sale of food stuff for the purpose of levy of sales tax, when a hotel charges a consolidated bill. The added 'snack' was the decision of the Supreme Court in the case of Northern India Caterers Vs. Lieutenant Governor of Delhi (1978) 48 STC 386 wherein it was held that when food is supplied in an eating house or restaurant it is a sale of food and the rendering of service is merely incidental.

The first course came in the form of the 46th Amendment to the Constitution whereby Article 366(29A) was inserted in order to provide that the tax on sale or purchase of goods includes 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. It is relevant to note that pursuant to the 46th Amendment the supply of food or drinks either by way of or part of any service was treated as a sale or purchase of goods.

The second course came in the form of the decision of the Supreme Court in the case of K. Damodharaswamy Naidu and Brothers Vs. State of Tamil Nadu (2000) 117 STC 1 wherein the Supreme Court held that the price that the customer pays for supply of food in a restaurant cannot be split up and sales tax is leviable on the entire amount that is charged to the customer. The second course went well with the first course since the decision analysed the 46th Amendment, its purport and object.

The main course was initially brought in the form of a levy of service tax on 'outdoor catering' in the year 1997 w.e.f. 01.08.1997 and since the serving was not as popular as it was conceived, it was withdrawn w.e.f. 01.06.1998. This main course was brought back by Finance Act, 2004 w.e.f. 10.09.2004 in the form of introduction of Section 65(105)(zzt) seeking to impose service tax on an outdoor caterer.

As the main course was considered to be 'spicy' the effect of the food was attempted to be mellowed down by the Government through the introduction of an abatement Notification.

In terms of the abatement Notification, where the caterer supplies food along with the catering service and the bill is inclusive of charges for supply of food, 50% abatement from value is available. Ironically, 'food' as per the Notification means �a substantial and satisfying meal�. Whether a meal is substantial and satisfying is generally a prerogative of the person who consumes and not the person who provides. Definitions in tax laws can sometimes be 'food for thought'.

The second main course is the decision of the Supreme Court in the case of Tamil Nadu Kalyana Mandapam Association Vs. Union of India 2004-TIOL-36-SC-ST. The Supreme Court while upholding the constitutional validity of service tax on outdoor caterers held that �a tax on services rendered by mandap keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or hire purchase activities. Services rendered by outdoor caterers are clearly distinguishable from the services rendered in a restaurant or a hotel in as much as, in the case of outdoor catering service the food / eatables / drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant the customer choice of foods is limited to the menu card. Again in the outdoor catering customer is at liberty to choose the time and place where the food is to be served. The customer negotiates each element of catering service, including the price to be paid to the caterer. Outdoor catering has an element of personalized service provided to the customer.

The third main course which is the major item is the recent decision of the Delhi High Court in the case of Indian Railways Catering and Tourism Corporation and the Delhi High Court has held as under:

++ States can levy sales tax / VAT on the whole of the consideration in a transaction of sale of goods such as sale to a customer in a restaurant irrespective of the incidental element of service which is necessarily involved in the sale of goods in this nature.

++ Where a transaction falls under Article 366(29A), States can levy and collect sales tax / VAT on the value of the goods involved in the execution of the transaction and it is not permissible to levy sales tax / VAT in respect of the service component of such composite transactions.

++ In respect of composite transactions other than those covered by Article 366(29A), if there is an intention to segregate the elements of sale and service and the transaction represents distinct contracts, clearly discernable, the State has the power to tax the sale component. If no such intention is found or the transaction does not involve two distinct contracts one for sale of goods and one for providing services it is not permissible to disintegrate such a composite contract in order to levy sales tax / VAT on the sale component. The dominant nature of the transaction has to be ascertained.

++ The transaction of supply of food, snack and water to passengers in the train is not an outdoor catering service. There is no choice for the passenger and he cannot ask for a different item or more items or substitute items he has no role to play and hence there is no element of service except the heating of cooked food and serving the food and beverages. In fact the service component in a restaurant is more than the service component in a train.

++ The decision of Imagic is not attracted to the facts since the element of service involved in serving meals in a train cannot be treated as the same as services of an advertising agency in the form of consultancy, design and art work where no transfer of property is involved.

++ The property in the goods passes from IRCTC to Indian Railways when the food is loaded in the trains. The moment the food is loaded, the food belongs to Indian Railways. The fact that the food is served while the train is moving through another State is immaterial. It is not possible to accept that property in goods is transferred only when the food is served to the passenger as it would lead to impossible situations.

++ It is not our view that service tax cannot be levied on outdoor catering. In our view, the transaction between IRCTC and Indian Railways does not amount to a contract of providing outdoor catering but is a transaction of sale of food and beverages by IRCTC to Indian Railways.

The third main course has a special item in the form of an observation that the contract is not for providing services nor a composite contract for supply of goods and providing of services and that there is only sale of goods loaded on board the trains in Delhi. The Court has held that IRCTC can claim refund of service tax already paid in respect of such transactions and if the refund is denied, it can initiate such proceedings available under law and if any service tax is sought to be levied in the future, it is open to challenge the same in appropriate proceedings.

There is no space for dessert but there is a dessert in the form of the decision of the Bombay High Court in the case of Narang Hotels and Resorts Vs. State of Maharashtra (2004) 135 STC 289 wherein the Bombay High Court held that sale by a flight kitchen of eatables or goods to foreign airlines for consumption on board during the period such aircraft is foreign going aircraft does not constitute a sale in the course of export since the sale is complete when the goods are loaded in the supply unit and dispatched to the international airport.

As an aperitif, there is a decision under UK VAT Law in the case of Central Trains Ltd., MAN/00/1095 (VTD 17475), wherein the Tribunal has held that where food is supplied from a trolley service on the train, it is a case of supply of food in the course of catering and supplies are clearly within the ordinary definition of catering.

Interestingly, the culinary judicial journey would not be complete without reference to one course which has not been consumed which is the decision of the Kerala High Court in the case of Saj Flight Services Pvt. Ltd. Vs. Superintendent of Central Excise (2006-TIOL-89-HC-KERALA-ST) wherein the Kerala High Court has observed that supply of food and beverages to aircrafts for service to passengers' falls under 'outdoor catering'. Cooking is fun but taxing food is a complex recipe.