By TIOL News Service

MUMBAI, APR 14, 2014: BY this Writ Petition under Article 226 of the Constitution of India, the Petitioners are claiming a writ, order or direction declaring clause (zzzzv) of Section 65(105) of the Finance Act, 2011 as ultravires the Constitution of India, null, void and of no legal affect.

Clause (zzzzv) reads –

(zzzzv) 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;

It is inter alia the submission of the petitioner that the tax which is sought to be imposed on services in the present case is nothing but a tax on the sale or purchase of goods.

The High Court observed -

++ Article 366(29A)(f) is inserted by the Constitution (Forty-sixth Amendment) Act, 1982 so as to take care of the continuing controversy, namely, that while taxing sale or purchase of goods the State Legislature cannot impose 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.

That the controversy was on account of the following judgments of the Supreme Court –

++ In the case of Associated Hotels of India Limited (2002-TIOL-65-SC-CT) where it was concluded that -

"17. The transaction between a hotelier and a visitor to his hotel is thus one essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals at stated hours. The Revenue, therefore, was not entitled to split up the transaction into two parts, one of service and the other of sale of food stuffs and to split up also the bill charged by the hotelier as consisting of charges for lodging and charges for food stuffs served to him with a view to bring the latter under the Act."

++ In the case of   M/s Northern India Caterers (India) Limited v/s Lt. Governor of Delhi, (1980) 2 SCC 167,   the Supreme Court held that when meals were served to casual visitors in the restaurant operated by the Assessee in its hotel, the service was for satisfaction of a human need and did not constitute a sale of food.

Relying upon these decisions and the amendment made the petitioner submitted that each of the aspects which go into sale or purchase of goods has thus been included so that the State can impose a tax envisaged by Entry 54 of List II and, therefore, a separate tax on service cannot be imposed, levied, assessed or recovered by the Parliament.

The High Court expressed its inability to agree to the above and observed -

++ Each of these judgments of the Supreme Court must be seen in the context of the challenge raised and argued before it. The challenge was to several State Acts and particularly levying, assessing and recovering sales tax on the food and meals served in a restaurant. The argument was that this is a service and not a sale of goods and particularly food items or drink. It is in that context and when the Supreme Court rendered the decisions so as not to empower the States to impose such a sales tax, that the Parliament clarified that the food or drink may have been served in the restaurant or hotel, but it is nothing but a sale of goods within the meaning of the Sales Tax Act. Therefore, it will not be possible for the hoteliers or restaurants to say and urge that they do not sell goods, but only provide services.

++ The Parliament, therefore, inserted an inclusive definition in the Constitution vide Article 366(29A) which reads thus:

"(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."

++ This inclusive definition was inserted 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 goods which may be food or any other article for human consumption or any drink (whether or not intoxicating), by way of or as part of any service or in any other manner whatsoever. It is for that limited purpose and to put an end to the controversy, which was dealt with by the Supreme Court and to get over the basis of its judgments or to alter them that the Parliament stepped in.

++ We do not see as to how a service tax can be said to be a component of tax on sale or purchase of goods envisaged by Entry 54 of List II (State List). To say that the Parliament was denuded of its competence to legislate and impose a tax on service provided by an airconditioned restaurant serving food and drink, under its taxing power, is to do violence to the plain language of the Constitutional provisions, Articles and Entries.

++ Once we take care of the argument and hold that the very foundation has no basis in law, then, there is no difficulty in holding that the Parliament is fully competent to impose a tax on service.

++ It is, therefore, clear that a sales tax is on sale of goods while selling, supply thereof is contemplated and covered by Article 366(29A) (f) of the Constitution of India. It does not mean that the service during the course of or while supplying the goods is taxed, but the tax is and remains on sale of goods. That is why the State Legislatures were held to be empowered to impose, levy, assess and recover a tax on sale of articles of food and drink which have been termed as "goods".

++ In this context if one refers to amendment to the Finance Act and ChapterV of the Finance Act, 1994, it would be clear that what is imposed is a service tax.   Therefore, a service must be to any person by the Restaurant and which can be called by any name such as hotel, lunch home, dining or lunch & dinner home having the facility of airconditioning in any part and that is termed as an establishment. The restaurant and which has licence to serve food or alcoholic beverages or both in its premises, is rendering a taxable service. When it renders such service that service can be taxed in terms of the Finance Act.

++ A service tax or tax on a service, which is made taxable by the Finance Act is thus a completely distinct tax. It should not be and cannot be confused leave alone equated with a tax on sale or purchase of goods.

++ A "service" has been defined to mean the action of serving, helping or benefiting. It is also understood as something provided, usually for a fee that may not be classed as manufacturing or production in any form. That is how professional services are identified and known.

++ By no stretch of imagination, therefore, a service tax can be the same as a tax on sale and purchase of goods. By the nature of the tax, which has been imposed, so also, bearing in mind the wording of the entries in the Seventh Schedule to the Constitution of India, it would be evident that a service tax is not a tax on supply of goods.

++ What is contemplated by Article 366(29A)(f) is the supply, by way of or as part of any service or in any other manner whatsoever of goods. Thus, the goods which may be food or any other article for human consumption or any drink (whether or not intoxicating), being supplied in the course of their sale, does not mean that the tax imposed on them is a service tax. The tax is on the sale or purchase of goods. That includes the supply of goods. The service during such course is not taxed. The sales tax, therefore, cannot be termed as a service tax. The food or article for consumption of human beings or any drink is sold. Therefore, the State Legislature can levy the sales tax thereon. The Parliament levies the service tax when a service is rendered by a restaurant to any person and noted as above.

++ The Parliament cannot be said to have transgressed into leave alone encroached upon the power of the State Legislature to impose a tax on sale or purchase of goods vide Entry 54 of List II. The taxing power of the Parliament and traceable to Article 248 of the Constitution of India r/w Entry 97 of List I of the Seventh Schedule enables it to impose a service tax. To enable it to so impose, the term "taxable service" has been defined. The definition of the term "taxable service" makes the nature of the tax clear and precise.

Amongst the plethora of case laws cited by the petitioner is also the Kerala High Court decision Kerala Classified Hotels and Resorts Association v/s Union of India 2013-TIOL-533-HC-Kerala-ST .

The High Court held that the analysis of the Single Judge of Kerala High Court in the cited case cannot be accepted. The High Court observed –

The learned Single Judge of Kerala High Court beyond referring to three Supreme Court judgments, namely, Associated Hotels of India Ltd. (supra), Northern India Caterers Limited (supra) and K.Damodarasamy Naidu (supra), neither observes or holds that the tax in question is covered by the State List (Entry 54). A categoric finding in that regard is necessary. The analysis of the learned Single Judge and of the Constitutional definition, with respect, cannot be accepted. The attempt by the learned Single Judge to get over the judgments of the Honourable Supreme Court relied upon by the learned Additional Solicitor General, does not commend to us. The learned Single Judge has not underscored and noted the distinction, with respect, referred by us in detail. We are, therefore, unable to agree with the view of the l earned Single Judge of Kerala High Court.

Nonetheless the High Court held that the reliance placed by the ASG on decision of the Supreme Court in Tamil Nadu KalyanaMandapam (2004-TIOL-36-SC-ST) is well founded.

The Writ Petition was accordingly dismissed.

(See 2014-TIOL-498-HC-MUM-ST)