Service Tax on Restaurants and hotels beyond legislative competence of Parliament - Refund can be claimed if tax paid: High Court
By TIOL News Service
ERNAKULAM , JULY 11, 2013: THE petitioners in the above writ petitions are challenging the validity of sub clause (zzzzv) and (zzzzw) of clause 105 of Section 65 of the Finance Act, 1994 and Section 66 of the Finance Act, 1994 as amended by the Finance Act 2011 relating to levy of service tax on taxable services referred there and for consequential reliefs. The relevant portion reads 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 licence 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, for providing of accommodation for a continuous period of less than three months;"
The main contention urged by the petitioners is that the imposition of service tax in relation to serving of food or beverage including alcoholic beverages represents only sale of goods which transaction squarely falls under Entry 54 of List II (State List) of the 7th schedule to the Constitution of India and therefore within the exclusive competence of the State Legislature. The service tax was originally introduced by the Parliament in exercise of the residuary power under Entry 97 of List I. Though Entry 92 C has been introduced to List I of the 7th schedule which enables the Union to levy "Taxes on Services", the said entry had not come into effect as it was not notified by the Government. Similarly the State Legislature had enacted Kerala Tax on Luxuries Act, by which tax is levied for accommodation. By introducing service tax on the basis of sub clauses (zzzzv) and (zzzzw) to clause 105 of Section 65 the Parliament has encroached upon the legislative powers of the State under Entry 54 and 62 of List II. The main contention of the petitioners is with reference to the legislative competence of the Parliament to impose a tax on sale of goods which is absolutely the domain of the state legislation.
Revenue contents that service tax can be imposed on the service involved during the sale of a product and so long as the Statute does not transgress to any restriction contained in the Constitution, contentions regarding lack of legislative power cannot be sustained.
The High Court referred to several decisions of the Supreme Court and observed that under Article 246(1) of the Constitution, Parliament has exclusive powers to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to the Constitution. As per Article 246(3), the State Government has exclusive powers to make laws with respect to matters enumerated in List II (the State List).
On a consideration of the law laid down by the Supreme Court, the High Court was of the view that that there are two judgments which throw light on the subject matter in issue. Those are K. Damodarasamy Naidu (2002-TIOL-884-SC-CT-CB) and T.N. Kalyana Mandapam Assn. (2004-TIOL-36-SC-ST). But it could be seen that in T.N. Kalyana Mandapam Assn, the question was with reference to services rendered by mandap-keepers which is not the situation here. Here the factual situation is almost similar to the statement of law as held by the Supreme Court in K. Damodarasamy Naidu .
As per Article 366 (29A) (f), "tax on the 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 (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 High Court observed, “ The very purpose of incorporating the definition of tax on sale or purchase of goods in Article 366 was to empower the State Governments to impose tax on the supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink either intoxicating or not intoxicating whether such supply or service is for cash, deferred payment or other valuable consideration. The words "and such transfer delivery or supply of goods" is deemed to be a sale of those goods by the person making the transfer. Therefore the incidence of tax is on the supply of any goods by way of or as part of any service. When food is supplied or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale. Apparently, the transfer is during the course of a service and when the deeming provision permits the State Government to impose a tax on such transfer, there cannot be a different component of service which could be imposed with any service tax in exercise of the residuary power of the Central Government under Entry 97 of List I of the Constitution of India .
The High Court observed that it can be seen from Article 366(29-A) (f) that service is also included in the sale of goods. 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. 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 .
Held : i) It is declared that sub Clauses (zzzzv) and (zzzzw) to Clause 105 of Section 65 of the Finance Act 1994 as amended by the Finance Act 2011 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.
ii) That if any payments have been made by the petitioners on the basis of the impugned clauses, they are entitled to seek refund of the same.
(See 2013-TIOL-533-HC-KERALA-ST)
