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HC : Upholds service-tax on restaurants applying 'aspect doctrine', but grants relief to hotel accommodations

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  • HC upholds constitutional validity of Sec. 65(105)(zzzzv) and Sec. 66E(i) r/w Sec. 65(22) & Sec. 65(44) of Finance Act and Rule 2C of Service Tax (Determination of Value) Rules 2006, inasmuch as serving of food or beverage, including alcoholic beverages, to any person by a restaurant, having facility of air-conditioning in any part of its establishment, has been made amenable to service tax;
  • Rejects assessee’s contention that even after insertion of Article 366(29A)(f) vide 46th Constitutional Amendment, all aspects of transaction of supply of food & beverages to the customers fall within the meaning of ‘sale of goods’ amenable to sales tax / VAT levied by the States; Notes the constituent elements of Article 366(29A)(f) viz. (i) supply of goods being food or any other article for human consumption or any drink, (ii) such supply could be by way of or as part of any service or in any other manner whatsoever, and (iii) such supply could be for cash, deferred payment or other valuable consideration;
  • Hence, subject matter of “transfer, delivery or supply” are “goods”, which in this case would be food or any other article fit for consumption whether or not intoxicated, observes HC; Referring to Apex Court ruling in Larsen & Toubro Limited vs. State of Karnataka and ‘aspect doctrine’, HC states that even if some part of composite transaction involves rendition of service, there should be no difficulty in recognizing the power of Union to tax that portion;
  • Observes that SC in case of K Damodarasamy Naidu vs. State of Tamil Nadu only dealt with exigibility of sales tax even where food and drink was in course of providing a service and hence, “is not an authority for proposition that in a catering contract, which is admittedly a composite contract, the service portion thereof cannot be made exigible to service tax levied by a Union legislation.”;
  • Rejecting assessee’s attempt to distinguish decision in Tamil Nadu Kalyana Mandapam Association vs. Union of India (relied on by Revenue) by pointing out the difference between outdoor catering & restaurant services, HC observes that same highlights the possibility of splitting up the composite transaction into the service element and supply of food;
  • Also rejects assessee’s contention that Rule 2C arbitrarily attributes 40% of value of composite contract of supply of food & drinks to service component, observes, “What Rule 2C does is to enable the assessing authority to put a definite value to the service portion of the composite contract… Correspondingly there is an abatement for that portion which pertains to the supply of goods in the form of food and drink” which has the approval of SC in Association of Leasing & Financial Service Companies v. Union of India; However, HC strikes down the levy of service tax on provision of short-term accommodation in hotel u/s 65(105)(zzzzw) of Finance Act, thereby accepting assessee’s contention that levy of tax on luxuries as contemplated under Article 246 r/w Entry 62 of List II of Constitution entirely covers the field and therefore, Parliament lacks legislative competence to levy service tax thereon;
  • Finding no discernible difference between the subject matter of levies under Delhi Tax Luxuries Act and Finance Act, HC observes that Sec. 65(105)(zzzzw) fails the foremost test of constitutionality of Union Tax as highlighted in International Tourist Corporation vs. State of Haryana that “before exclusive legislative competence can be claimed for Parliament by resort to the residuary power, the legislative incompetence of the State legislative must be clearly established.”;
  • Also observes that the Valuation Rules do not provide machinery for levy and collection of tax on accommodation, while refraining to discuss the decisions of Kerala HC in Union of India vs. Kerala Hotel Association, Bombay HC in Indian Hotels and Restaurant Association vs. Union of India and Karnataka HC in Ballal Auto Agency vs. Union of India as same are subject matter of appeal before SC  : Delhi HC
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