JULY 13, 2015

By S B Parikh

SERVICES by air-conditioned Restaurants having license to serve alcoholic beverages became taxable under Section 65(105)(zzzzv) of the Finance Act, 1994, w.e.f. 01.05.2011. However, services by air conditioned restaurants not having license to serve alcoholic beverages became taxable w.e.f. 1.4.2013 after amendment of entry at serial number 19 of Notification No. 25/2012-ST vide Notification No. 3/2013-ST dated 1.3.2013. Nevertheless, small-scale exemption under Notification No. 33/2012-ST dated 20.06.2012 is available to the restaurants having value of taxable service below Rs.10 lakh in a financial year, subject to conditions mentioned therein. This article has been written keeping in mind the restaurants that are liable to pay service tax.

Scope of discussion:

Whether restaurants are required to reverse any CENVAT credit taken on input services like Renting of immovable property, General Insurance, Banking & other financial services, Supply of manpower, Security, Telephone and services provided by Chartered Accountant, Advocate, Interior decorator etc.

Discussion:

As per Rule 2C of the Service Tax (Determination of Value) Rules, 2006, the value of service portion involved in the restaurant service is 40% of the total amount charged by them. As per Explanation 2 to the Rule 2C, they cannot take CENVAT credit on any goods classifiable under Chapters 1 to 22 of Central Excise Tariff. These Chapters contain mostly foodstuffs and beverages. For the goods falling under remaining Chapters, there is hardly any scope that restaurants get such goods under duty paying documents and such goods are covered under the definition of input for the service provided by restaurant. So, the question of taking CENVAT credit on other goods as inputs, generally, does not arise. In respect of capital goods, only few restaurants import them or get them directly from the manufacturer or registered dealer under duty paying document and avail CENVAT credit of duty paid on them. However, most of the registered restaurants are availing input services on which service tax has been paid and taking CENVAT credit on input services. No doubt, CENVAT credit on input services is admissible to restaurants, which are paying service tax on their output service. But, the root question is whether they are entitled to retain full amount of CENVAT credit taken on input services OR they are required to reverse any credit on the logic that only 40% of the total amount charged by them is subject to service tax and on remaining 60% amount, there is no service tax or central excise duty.

Following activities of restaurants will be discussed from the purview of service tax and central excise.

(1) Manufacture/production and sale/deemed sale of excisable but exempted goods:

Restaurants prepare/cook variety of food items by using flours, pulses, vegetables, eggs, meats, spices, milk etc. By using such ingredients, restaurants prepare various dishes of snacks, meals, beverages etc. of different cuisines. Processes adopted by restaurants amount to 'manufacture', as new marketable products come into existence which have different characteristics, identity and use than the ingredients; and the new products are covered under Central Excise Tariff.

Food preparations of Chapters 16, 19 (except 1905) and 20, which are prepared and served in a hotel, restaurant or retail outlet attract Nil rate of central excise duty unconditionally under serial numbers 12 & 13 of Notification No. 12/2012-CE dated 17.3.2012.For example Roti, Naan and Paratha are covered under Heading No. 1901 as food preparations of flour and these items attract Nil rate of duty when prepared and served in restaurants. The definition of 'exempted goods', as given at Rule 2(d) of CENVAT Credit Rules, 2004, includes the goods chargeable to Nil rate of duty. For the items like bread, pastry, cakes and biscuits falling under Chapter Heading 1905, though exemption under aforesaid Notification is not available, SSI exemption upto value of Rs.1.50 crore under Notification No. 8/2003-CE dated 1.3.2003 is available to most of restaurants subject to the conditions prescribed therein.

Thus, it can be said that almost all restaurants are engaged in manufacture of exempted goods.

(2) Provision of taxable service:

The activity of restaurants falls under the term 'service' as defined at Section 65B(44) of the Finance Act, 1994 (as amended). It is also covered under the term 'declared service' as defined at Section 66E ibid. This definition is as under (emphasis supplied):

"(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 this regard, extracts from Para 6.9.1 of CBEC Education Guide is as under (emphasis supplied):

"In terms of article 366(29A) of the Constitution of India supply of any goods, being food or any other article of human consumption or any drink (whether or not intoxicating) in any manner as part of a service for cash, deferred payment or other valuable consideration is deemed to be a sale of such goods. Such a service therefore cannot be treated as service to the extent of the value of goods so supplied. The remaining portion however constitutes a service. It is a well settled position of law, declared by the Supreme Court in BSNL's case 2006-TIOL-15-SC-CT-LB, that such a contract involving service along with supply of such goods can be dissected into a contract of sale of goods and contract of provision of service. This declared list entry is has been incorporated to capture this position of law in simple terms."

In view of the above, it can be said that the entire activities of restaurants are not subject to service tax but only 'service portion' of the activities attracts levy of service tax and the value of service portion is 40% of the total amount charged by restaurant as per Rule 2C. Though it is not written anywhere, it appears that the remaining 60% value represents the value of deemed sale of goods so far as indirect taxes imposed by Central Government are concerned.

(3) Trading of goods (exempted service):

Restaurants are generally engaged in purchase and sale of some items like bottled water, soft drinks, liquor, pouches of snacks like wafers, etc. If such items are sold at MRP across the counter, service tax is not leviable as per CBEC's Circular No. 173/8/2013-ST dated 07.10.2013. This activity amounts to trading.

If the bought out items have been sold as such by restaurants at a price higher than MRP or if such items have not been sold across the counter but served in the restaurant, whether such activity is to be considered as trading or not? I am unable to offer views on this issue, but interested readers may like to refer DDT 2205 dated 08.10.2013 where the issue has been deliberated in detail.

The activity of 'trading of goods' is covered under the definition of 'Negative List of services' and so, it is also covered under the definition of 'exempted service', as defined at Rule 2(e)(2) of CENVAT Credit Rules, 2004, being a service on which no service tax is leviable under Section 66B. As the activity of trading of goods is an exempted service, provisions of Rule 6 of CCR, 2004, are applicable to trading also.

Further discussion regarding reversal of credit:

As discussed hereinabove, most of the air-conditioned restaurants are engaged in manufacture of exempted goods, provision of taxable service and provision of exempted service.

As Rule 2C disallows CENVAT credit only for the goods falling under Chapter 1 to 22, some assessees are of the view that they can avail CENVAT credit on input services without requirement of reversal or payment of amount under Rule 6(3) of CCR, 2004. However, this view is not correct as per my understanding.

No doubt, restaurants can take CENVAT credit on common input services like Renting of immovable property, Telephone, General Insurance, Chartered Accountant, Security etc. which are used for aforesaid three types of activities. As maintenance of separate accounts for such common input services are not possible, restaurants have to pay/reverse the amount EITHER @7% (earlier 6%) of value of exempted goods and exempted services under rule 6(3)(i) OR to pay/reverse the amount proportionate to value of exempted goods & services under rule 6(3)(ii) read with rule 6(3A) of the CCR, 2004.

This view has also been expressed in CBEC Education Guide, which is as under:

"8.4.3. What are the restrictions, if any, on availment of CENVAT credit by such service providers?

In terms of the Explanation 2 to Rule 2C of the Valuation Rules any goods meant for human consumption classifiable under chapters 1 - 22 of Central Excise Tariff are not 'inputs' for provision of such service. CENVAT Credit is, therefore, not available on these items. Availability of CENVAT credit on other inputs, input services and capital goods would be subject to the provisions of the CENVAT Credit Rules, 2004 including the provisions relating to reversal of credits contained in rule 6 of the said rules. It may be noted the sale of food in the restaurant would amount to clearance of exempt goods and thus the provisions of Rule 6 of CENVAT Credit Rules will be applicable."

In view of the above, it is very clear that restaurants availing CENVAT credit on common input services are required to reverse the credit or pay the amount as per the Rule 6(3) of the CCR, 2004.

Now, another question arises as to what would be the value of exempted goods and exempted service?

As per Section 4 of the Central Excise Act, 1944, where the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of goods, such value shall be the transaction value in case where the goods are sold by the assessee, for delivery at the time and place of removal, the assessee and the buyer are not related and the price is the sole consideration for the sale. As per the Explanation I(a) appearing after Rule 6(3D) of the CCR, 2004, "value" for the purpose of sub-rules (3) and (3A) of rule 6 should have to be determined under Section 3, 4 or 4A of the Central Excise Act, 1944 (for goods) and as per the Explanation I(c) the value of the exempted service of trading shall be the difference between the sale price and the cost of goods sold or 10% of the cost of goods sold, whichever is more.

In view of the above, can it be said that the value of the exempted goods would be transaction value i.e. the total amount charged in the bill raised by restaurant? There is no explicit provision in Central Excise law for deduction of 40% amount attributable to the service portion. However, this will lead to an absurd situation that out of the bill value of Rs.100 raised by a restaurant, Rs.100 represents value of goods (being transaction value) and Rs.40 represents value of service (as per Rule 2C), totaling to Rs.140! So, this view may not be sustainable. If we think that the price is not the sole consideration for sale of food, as service is also being provided by restaurants, then the provisions of the Central Excise (Determination of Price of Excisable Goods) Rules, 2000, will be attracted. Under rule 6 of the said rules, there is a provision for addition of money value of additional consideration flowing directly or indirectly from the buyer to assessee. But, there is no provision for deduction of money value of consideration (service) flowing from the assessee to buyer. So, value of service cannot be deducted under this rule to arrive at assessable value of goods. However, it is felt that in terms of rule 11 covering residual situations, the value of exempted goods can be determined reasonably as 60% of the bill amount charged by restaurants leaving 40% amount as value of service.

Illustration:

Air-conditioned restaurant - F.Y. 2014-15

In the above situation, if the CENVAT credit on common input services available to the assessee is less than Rs.1.98 lakh, the amount payable @6% under Rule 6(3)(i) will exceed the amount of total credit taken. However, if the same assessee has opted for reversal as per the ratio of value of exempted goods & service to total value of goods & service under Rule 6(3)(ii) as per the formula prescribed under Rule 6(3A), taxable value in the above illustration would be Rs.20 lakh and exempted value of goods & service would be Rs.33 lakh and total value for the purpose of Rule 6(3A) would be Rs.53 lakh. In that case, the assessee is required to reverse the credit or pay an amount equal to amount of total credit availed multiplied by 33 divided by 53. So, if the assessee had availed CENVAT credit on common input services amounting to Rs.1 lakh, he is required to reverse Rs.0.62 lakh (1 lakh * 33/53) under the option of Rule 6(3)(ii) of CCR, 2004.

Suggestions:

For restaurant service, amount of CENVAT credit available on input services is generally smaller as compared to their turnover. If they opt for payment of 6% (now 7%) amount on value of exempted goods and exempted service, it is quite possible that such amount payable/reversible would be greater than the amount of total CENVAT credit taken. So, it is advisable that restaurants availing CENVAT credit should opt for Rule 6(3)(ii) for reversal of credit based on the ratio of value of exempted goods & services to total value of goods and services, so that the amount required to be reversed will not exceed the amount of credit taken.

For banking company and financial institutions, provisions of Rule 6(1) to 6(3) are not applicable, but there is a special provision for reversing/paying 50% amount of CENVAT credit availed on inputs and input services every month under Rule 6(3B) of CCR, 2004.

In line of this rule and as a measure of simplification, it is suggested that a similar formula be devised for restaurateurs allowing 40% of total credit(including credit on goods falling under Chapter 1 to 22) for utilization. This will leave them with more time for churning out mouth-watering dishes rather than churn out occasions for receiving demand notices!

(The views expressed by the author are strictly personal.)