Service Tax - Section 66E(i) of Finance Act, 1994 is intra vires Constitution - No service Tax on sale and vice versa: High Court
By TIOL News Service
BILASPUR, MAY 19, 2014: THE validity of the following provision in Ch. V of the Finance Act, 1994 is in challenge in the present Writ Petition filed before the Chattisgarh High Court.
SECTION 66E. Declared services. - The following shall constitute declared services, namely:-
(i) service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.
In respect of the services provided by the hotel, Service Tax of 40% on the bill value of the food and drinks is charged in view of section 66E(i) of the 1994-Act read with rule 2C of the Service Tax (Determination of Value) Rules, 2006.
The following points that arose for determination and the observations of the High Court are as under -
(i) Whether any service tax can be charged on a sale of an item or vice versa;
• A tax on the sale and purchase of food and drinks within a State is in exclusive domain of the State. The Parliament cannot impose a tax upon the same. Similarly, there is no entry in List II or List III under which service tax can be imposed. There is no legislative competence with the States to impose a tax on any service;
• The Parliament cannot impose tax on sale and purchase within a State (except on newspapers). Similarly State cannot tax a service.
Held: NO SERVICE TAX ON SALE AND VICE VERSA
(ii) Whether in view of Article 366(29A)(f) service is subsumed in sale of food and drinks; & (iii)Whether section 66E(i) of the 1994-Act is violative of Article 366 (29A)(f) of the Constitution.
Article 366(29A)(f) of the Constitution does not indicate that the service part is subsumed in the sale of the food; it rather separates sale of food and drinks from service.
Section 65B (44) as well Section 66E(i) only charges service tax on the service part and not on the sale part. It indicates that the sale of the food has been taken out from the service part as was interpreted by the Supreme Court in the Associated-Hotel [A.I.R. 1972 S.C. 1131] case and the Northern-Caterers AIR 1980 SC 674: (1980) 2 SCC 163 case.
In our opinion, section 66E(i) of Chapter-V of the Finance Act, 1994 is intra vires the Constitution.
HELD: SECTION 66E(i) is INTRA VIRES
Nonetheless, the High Court after listing out the recommendations observed that there are some difficulties in the working of this rule 2C. They are as under -
+ Sale tax is being charged under the VAT-Act and is known as VAT. Generally, the hotel and restaurant owners charge service tax on 40% or 60% of the bill amount and charge VAT on the bill amount. The 40% or 60% over which service tax has been charged, cannot be subject to VAT. One does not know why they do it but it is possible that this might be resorted to, as the Commercial Tax authorities might be taking the value of the food and drinks to be the bill value. This is not proper.
+ As we have already held that no VAT can be charged over the amount meant for service. It will be open to the Petitioner to object the same before the VAT authorities. However, there should be coordination between the State and the Central Government authorities. The amount over which service tax has been charged should not be subject to VAT.
+ There is no provision in the VAT-Act to bifurcate the amount. The State Government will do well to frame such rules to this effect. These rules may be in conformity with the bifurcation as provided under the 1994-Act or ensure that the Commercial Tax authorities do not charge VAT on that part of the value of the food and drink on which the service tax is being assessed.
+ The restaurant and caterer are also normally charging VAT on the bill value. This is not proper. They may charge service tax on 40% or 60% as the case may be of the bill value and charge VAT at the rate of 60% or 40% of the bill value, but not on the entire bill value.
+ The State Government will be well advised to issue a clarification/ direction in this regard and will ensure that the consumers are not unnecessarily doubly taxed over the same amount.
The Writ Petition was dismissed.
In passing: Nonetheless, the order is unique & appealing for reasons more than one, beginning with the layout and the various paragraph headings that make the order. Do take a look.
(See 2014-TIOL-758-HC-CHHATTISGARH-ST)
