Indian Hotels and Restaurant Association vs. Union of India (2014) 34 STR 522 (Bom)

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kps
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.2159 OF 2011
1 Indian Hotels and Restaurant
Association. Represented by its
Treasurer Girish B. Salian,
B2,
Wadala Shri Ram Ind. Estate,
Ground Floor, G.D. Ambedkar Marg,
Near Wadala Telephone Exchange,
Wadala, Mumbai400031.
2 Vishwavihar Bar & Restaurant,
31/A, Opp. Cotton Green Railway
Station, J.B. Road,
Mumbai 400 033. ..PETITIONERS
Versus1
Union Of India
Through Joint Secretary,
Ministry of Law and Justice,
Aaykar Bhavan, M.K.Road,
Churchgate, Mumbai 400 021.
2 Secretary, Ministry of Finance,
Govt. of India, North Block,
Loak Nayak Bhavan No.1
New Delhi.
3 Joint Secretary,
Tax Research Unit,
Ministry of Finance,
Department of Revenue.
4 Central Board of Excise and
Customs, North Block,
New Delhi 110 001.
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5 Commissioner of Service Tax
4th Floor, Central Excise Bldg.,
115, M.K.Road, Churchgate,
Mumbai 400 020.
6 The Commissioner of
Sales Tax having his office
Vikrikar Bhavan,
Mazgaon 400 010.
7 The State of Maharashtra.
Through the Government Pleader,
Ground Floor, High Court,
Mumbai400001.
..RESPONDENTS
.............
Mr.V.Sridharan, Senior Advocate i/by Ms.Beena Pillai, for the Petitioners.
Mr.Kevik Setalwad, Additional Solicitor General of India a/w Mr.Pradeep
Jetly, Mr.Awais Ahmedji, Ms.Sushma Nagraj, for the Respondent Nos.1 to
5.
Mr.B.B.Sharma, for the Respondent Nos.7 and 8.
............

CORAM : S.C.DHARMADHIKARI
&
GIRISH S. KULKARNI, JJ.
Reserved on : 14th March, 2014
Pronounced on : 08th April, 2014
Judgment (Per S.C.Dharmadhikari, J.):
1 Rule.
2 The Respondents waive service. By consent of parties, Rule is
made returnable forthwith.
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3 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, 2010 as ultravires
the Constitution of India, null, void and of no legal affect. It is prayed that
the said provision be struck down as violative of the mandate of Articles
14, 19(1)(g), 245, 246, 265, 300A and 366(29A)(f) of the Constitution of
India. Consequently, the relief restraining the Respondents from giving
effect to the said provision directly or indirectly, so also, levying or
attempting to levy any service tax under the impugned provision is also
claimed.
4 Few facts which are necessary for appreciating the rival
contentions are that the Petitioner No.1 before us is an Association
registered under the Trade Union Act, 1926 and claims that it has 2000
Hotels in Greater Mumbai and 500 Associate members outside Greater
Mumbai and within the State of Maharashtra. They are all holding
licences to serve the foreign liquor (FLIII
licence). The Petitioner No.2 is
one of the Restaurant serving food and drinks. It is a member of the
Petitioner No.1 Association. After tracing the history as to how the
licences to serve foreign liquor are issued, what the Petitioners contend is
that the Respondent No.1 is the Union of India. The Respondent Nos.2 to
6 are the Authorities exercising powers for levying, assessing and
recovering, so also, collecting service tax.
5 It is then stated that the service tax was introduced in India
by the Finance Act, 1994. The Service Tax was legislated by the
Parliament under the residuary entry i.e. Entry 97 of List I of the Seventh
Schedule to the Constitution of India. Section 65 of the Finance Act deals
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with taxable services. A number of services were sought to be made
exigible to service tax by way of amendments to Section 65 of the Finance
Act. While so, the Central Government by the Finance Act, 2011 made an
amendment to Chapter V of the Finance Act 1994, relating to service tax,
inserting sub clause (zzzzv) to clause 105 of Section 65, thereby,
including one more category within the Service tax net. Annexure P2
to
the Writ Petition is a copy of the relevant provision as inserted by the
Finance Act, 2011. The relevant provision in Section 65 of the Finance Act
in relation to air conditioned restaurants which has license to serve
alcoholic beverages as it stood after the Finance Act 2011, reads as
follows:“
Sub clause – (zzzzv) of clause (105) of Sec. 65:
In this chapter, unless the context otherwise requires a
taxable service means any service provided or to be
provided to any person by a restaurant, by whatever
name called, having the facility of airconditioning
in
any part of the establishment, at any time during the
financial year, which has license to serve alcoholic
beverages, in relation to serving of food or beverage,
including alcoholic beverages or both, in its premises”.
6 It is stated that in exercise of the powers conferred under
Section 93(1) of the Finance Act 1994, the Government of India,
amended with effect from 1.5.2011 the Notification number 1/2006
Service Tax dated 1.3.2006, exempting the taxable services of the
description specified in column 3 of the table in the Notification from so
much of the service tax leviable thereon under Section 66 of the Finance
Act 1994, as is in excess of the service tax calculated on a value which is
equivalent to the percentage specified in column number 5 of the said
table, of the gross amount charged by the service provider for providing
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the taxable service. Annexure P3
to the petition is a copy of the
notification number 1/2006 – Service Tax dated 1.3.2006 issued by the
Ministry of Finance Government of India and AnnexureP4
is a
Notification No. 34/2011 dated 25.04.2011 issued by the Government of
India, Ministry of Finance, Department of Revenue. The Government of
India vide notification No. 31/2011 dated 25.04.2011 also exempted the
“taxable service” as referred to in subclause
(zzzzw) of clause 105 of
Section 65 of the Finance Act, when the declared tariff for providing of
such accommodation is less than Rs. 1,000/per
day from the whole of
the service tax leviable under Section 66 of the said Act. Annexure P5
to
the petition is a copy of the notification No. 31/2011 dated 25.04.2011
issued by the Government of India, Ministry of Finance, Department of
Revenue. According to the Petitioners, the Notifications at Annexures P3
to P5
came into force with effect from 01.05.2011.
7 It is stated by the Petitioners that the scope and ambit of the
Annexures P2, P4 and P5, the amendments in relation to service tax, was
clarified by the Ministry of Finance, Government of India, by the
communication bearing D.O.F. No. 334/3/2011TRU
dated 28.2.2011
(annexed at Annexure P6).
It has been stated therein that the levy of
service tax is intended to be confined to the value of services contained in
the composite contract and shall not cover either the meal portion in the
composite contract or mere sale of food by way of pickup
or home
delivery, as also goods sold at MRP and that the Finance Minister has
announced 70% abatement on this service which inter alia meant to
separate such portion of the bill as it relates to deemed sale of meals and
beverages. By the said Notification No. 29/2011 dated 25.04.2011, the 1st
May 2011 was made the appointed date on which the provisions of
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Finance Act, 2011 came into force. Annexure P7
to the petition is a copy
of the Notification No. 29/2011 dated 25.04.2011 issued by the Ministry
of Finance. The circular number No. 139/8/2011TRU
dated 10.5.2011
(Annexure P8
to the petition) was issued by the Ministry of Finance,
Government of India purporting to clarify the scope of the said
amendment. The circular referred herein states that the taxable services
provided by a restaurant in other parts of the hotel for example swimming
pool or an open area attached to the restaurant are also liable to service
tax as these areas become extensions of the restaurant, inspite of the fact
that the amendment does not say so.
8 It is stated that Chapter V of the Finance Act provides for levy
of service tax. It is levied on "taxable services" as defined in Section
65(105) thereof. Section 66 is the charging section and Section
68 provides for payment of service tax. The Central Government inserted
a new clause (zzzzv) to Section 65(105) of the Finance Act, 1994, by the
Finance Act, 2011. According to the aforesaid clause, the service provided
by restaurants having specified facilities such as, airconditioning
and
license to serve liquor, is liable to service tax with effect from 01.5.2011.
9 It is urged that the definition of “taxable services” does not
require that the service receiver must consume the alcoholic beverages. As
long as the restaurant has airconditioned
area and a license to serve
alcoholic beverages, any service provided by the restaurant will become
taxable service. The term "Goods" has been defined in Section 65(50) as
under:“
Section 65(50) "goods" has the meaning assigned to it in Clause
(7) of Section 2 of the Sale of Goods Act, 1930.”
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Section 2(7) of the Sale of Goods Act, 1930 defines "goods" to
mean:
“Goods means every kind of movable property
other than actionable claims and money; and includes
stock and shares, growing crops, grass, and things
attached to or forming part of the land which are
agreed to be severed before sale or under the contract
of sale.”
10 It is stated that the Restaurants under the Excise law are
supposed to sell and serve liquor within a restricted area (being 40% of
the total constructed area) in the Restaurant. The Excise law does not
allow the restaurants to serve liquor in any place other than in the area
demarcated on the plan which has been specifically carved out for the
purposes of serving liquor. The Excise department approves the plan and
the license is issued to restaurant, specifying the demarcated area, where
the liquor is permitted to be sold.
11 According to the Petitioners, the members of the 1st Petitioner
association who are running bar hotels are paying Value Added Tax (VAT)
under the Maharashtra Value Added Tax (MVAT) Act at the rate of 12.5%
on the gross amount paid for food items sold and also VAT as per the
provisions of MVAT Act at the rate of 5% on the amount paid for liquor
sold. Value Added Tax on the amount paid on food and beverages sold
and the turnover tax on the amount of alcoholic beverages sold are levied
and collected by the State as the said transactions are sale exigible to tax
under the said Acts which exclusively fall under Entry 54 of the List II of
the Seventh Schedule to the Constitution of India.
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12 It is stated that the Constitution (Fortysixth
Amendment)
Act, 1982 amended Article 366 of the Constitution of India by inserting
Clause (29A) therein. By reason of this amendment the States became
entitled to levy a tax on the supply of food and drink.
13 It is stated that in the eye of law, the tax on food served in
restaurants could not be levied on the sum total of the price charged to
the customer. The, restaurants provide services in addition to food, and
these had to be accounted for. Thus, restaurants provided an elegant
decor, uniformed waiters, good linen, crockery and cutlery. It could even
be that they provided music, recorded or live, a dance floor and a cabaret.
The bill that the customer pays in the restaurant, therefore, needs to be
split up between what was charged for such service and what was
charged for the food.
14 It is then stated that the provisions of Subclause
(f) of Clause
(29A) of Article 366 of the Constitution of India need to be analysed.
Subclause
(f) permits the States to impose a tax on the supply of food
and drink. The supply can be by way of a service or as part of a service or
it can be in any other manner whatsoever. The supply or service can be for
cash or deferred payment or other valuable consideration.
15 According to the Petitioners, the tax, therefore, is on the
supply of food or drink and it is not of relevance that the supply is by way
of a service or as part of a service. Thus, the price that the customer pays
for the supply of food and beverages in a restaurant cannot be split up.
The supply of food by the restaurant owner to the customer, though it
may be a part of the service that he renders by providing good furniture,
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furnishing and fixtures, linen, crockery and cutlery, music, a dance floor
and a floor show, is what is the subject of the levy. The patron of a fancy
restaurant who orders a plate of cheese sandwiches whose price is shown
to be Rs. 50 on the bill of fare knows very well that the innate cost of the
bread, butter, mustard and cheese in the plate is very much less, but he
orders it all the same. He pays Rs. 50 for its supply and it is on Rs. 50 that
the restaurant owner must be taxed.
16 It is stated that the Petitioners are already paying VAT on
100% of the value in respect of food and/or alcohol served in its
premises. It is this value which has been taken by the Respondents as the
basis of calculation of service tax. The Respondents allows abatement
@70% and on the balance 30% the Service has been charged. The net
result is that two taxes are recovered in respect of the same service.
17 It is, therefore, stated that the Courts have always held sale of
food and beverages in a restaurant as a subject matter of sales tax within
the perview of the state. They have expressly upheld that the amount paid
by the customer in a restaurant includes payment for the services
rendered and both are indivisible.
18 Mr.Sridharan, learned Senior Counsel appearing for the
Petitioners, submits that the scheme of the Constitution of India and as
enumerated by Articles, Lists I and II of the Seventh Schedule and Entries
therein, all of which have been extensively referred in the Petition, reveals
that the Parliament may have by the Constitution (Eightyeighth
Amendment) Act, 2003 inserted Entry92C
in ListI
relating to “Taxes on
services” from the date to be notified. However, no such notification has
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been issued. It may be that the Parliament is taking aid of Entry97
of ListI
and the Constitutional Articles read therewith so as to levy service tax,
but levy of sales tax on Hoteliers for sale of food or beverages to the
guests demonstrates that the State's power does not extend to splitting of
transactions in two parts, one of service and other of sale of foodstuff with
a view to bring the later under the purview of the sales tax. This was the
position emerging from the judgment of the Honourable Supreme Court
in the case of the State of Punjab v/s M/s Associated Hotels of India Limited,
reported in (1972) 1 SCC 472.
19 Equally, the service of meals served to casual visitors to a
Restaurant, was not liable to sales tax, whether, the charges are imposed
for the meal as a whole or according to the dishes separately ordered. The
position continued even after the Review Petition was filed by the State
before the Honourable Supreme Court seeking review of the judgment in
the case of M/s Northern India Caterers (India) Limited. That was
dismissed and with some observations on which Mr.Sridharan places
reliance.
20 Mr.Sridharan submitted that subsequently, the Parliament
amended the Constitution of India vide the Constitution (FortySixth
Amendment) Act, 1982. The Statement of Objects and Reasons appended
to the Bill specifically noted the aforesaid judgments holding that sale of
food and beverages at a restaurant is a transaction in service not exigible
to sales tax under Entry 54 of the List II. Thereafter, new Clause (29A)
was inserted in Article 366 vide the Constitution (FortySixth
Amendment) Act, 1982. The Parliament also validated the laws levying
tax on the supply of food or drinks by the State. Thus, the Parliament
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consciously amended the Constitution to include a tax on the supply of
food or drinks by way of service or as a part of service within the
exclusive power of the State Legislatures under Entry 54 of the List II.
21 Relying on a judgment in the case of K.Damodarasamy Naidu
& Bros. and others v/s State of T.N. and another reported in (2000) 1 SCC
521, Mr.Sridharan submits that the Honourable Supreme Court upheld
the contention of one Assessee from Maharashtra that in case where the
residential hotels provided for lodging and boarding comprising of full
board i.e. breakfast, lunch and dinner, the State Government shall make
rules which set down the formula for determining the component of the
composite charge relatable to supply of food and drink excluding the
portion relating to lodging i.e. stay in a hotel.
22 Mr.Sridharan submitted that in view of the settled law in the
case of 20th Century Finance Corporation Limited and another v/s State of
Maharashtra reported in (2000) 6 SCC 12, a tax on supply by way of
service or as a part of service of food or any other article for human
consumption or any drink, is within the exclusive power of the State
Legislature under Entry 54 of the State List.
23 Mr.Sridharan submitted that the provisions of the Finance
Act, 1994 were amended by the Finance Act, 2011. The Circular
No.334/3/2011TRU
dated 28.02.2011 was issued by the Central
Government at the time of introduction of the Finance Bill, 2011. The
Circular sought to explain the scope of restaurant services. The Circular
clarified that the restaurants provide a number of services in combination
with the meal and beverages for consolidated charge. The services related
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to the use of restaurant space and furniture, airconditioning,
welldressed
waiters, linen, cutlery, crockery, music on a dance floor, etc.. Thus, a new
clause (zzzzv) was inserted to Section 65(105) of the Finance Act, 1994
by the Finance Act, 2011. According to the said clause, the service
provided by a restaurant having specified facilities such as airconditioning
and licence to serve liquor, was liable to service tax with
effect from 01.05.2011. According to Mr.Sridharan, further abatement of
70% deemed to be towards sale of meals and beverages was given vide
the Notification No.34/2011ST
dated 25.04.2011 issued by the Central
Government i.e. the delegatee. Thus, a service tax was payable on 30% of
the gross amount charged by the restaurants to its customers. A tax levied
under Section 65(105)(zzzzv) read with Section 66 and Section 67 of the
Finance Act, 1994 is a service tax on supply of food and beverages in a
restaurant falling under subclause
(f) of Clause 29A of Article 366 read
with Entry 54 of List II.
24 Mr.Sridharan submitted that the Finance Act, 2012 carried
out major changes to the Finance Act, 1994 with effect from 01.07.2012.
New regime is called negative list of taxation of services. Even after the
introduction of negative list with effect from 01.07.2012, Section 66E
relating to declared services vide Clause (I) provides that the declared
services shall include service portion in an activity wherein goods being
food or any other article of human consumption or any drink is supplied
in any manner as a part of the activity. Rule 2C was inserted in the Service
Tax (Determination of Value) Rules, 2006 with effect from 01.07.2012
which provides that a service tax would be levied on 40% of the gross
amount charged by a restaurant to its customers and give abatement for
so much of the value which relates to sale of food and drinks. A tax levied
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by Section 65B(44) of the Finance Act, 1994 read with Section 66E(i),
66B and 67 is a tax covered by or falling within Article 366(29A)(f) read
with Entry 54 of the State List and beyond powers of the Parliament, levy
of service tax under the residuary Entry 97 of the List I is nothing but a
tax falling within or covered by Article 366(29A)(f) read with Entry 54 of
the State List and thus, unconstitutional. The service tax on supply of food
and beverages in a restaurant is in pith and substance a tax falling under
subclause
(f) of clause (29A) of Article 366 read along with Entry 54 of
List II. Thus, the State Legislature alone shall have the exclusive
jurisdiction to levy the tax in question.
25 Mr.Sridharan then submitted that Rule 2C framed under the
Finance Act, 1994 giving abatement in value towards sale of food and
beverages cannot be of any assistance while judging the validity of levy of
service tax under Entry 97 of the Union List. It is a well settled law that
the Rules providing for deduction, etc. are not relevant in judging the
validity of the levy under the Finance Act. The nomenclature of levy will
not be decisive of the true character and nature of a particular levy. For
deciding the true character and nature of a particular levy, with reference
to the legislative competence, the Court has to look into the pith and
substance of the legislation. Mr.Sridharan submitted that it is a well
settled principle of law that the measure of tax should not be confused
with the nature of tax. For example, excise duty is levied on the
manufacture of goods, whereas the value and time for discharge of tax is
as provided under the provisions of the Central Excise Act. The Courts
have upheld the validity of the levy of tax not confined to manufacturing
cost or profit, but considering the sale price of the manufacturer for the
reason that the measure has reasonable nexus with the nature of levy. The
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measure of tax is not determinative of its essential character or of the
competency of the legislature to levy the tax. What is to be seen is the pith
and substance or the real nature and character of the levy which has to be
adjudged, with reference to the charge, viz., the taxable event and the
incidence of the levy. The measure of levy can be upheld on two possible
grounds, namely, (i) where the measure has reasonable nexus with the
nature of levy and (ii) where the nature of levy is wide enough to cover
the measure i.e. the measure is concomitant with the nature of levy.
26 In support of the above submissions, Mr.Sridharan has placed
reliance on the following decisions:(
1) (2001) 3 SCC 654
Municipal Council, Kota, Rajasthan v/s Delhi Cloth &
General Mills Co. Ltd., Delhi and others.
(2) (1972) 1 SCC 472
The State of Punjab v/s M/s Associated Hotels of India
Ltd.
(3) (1980) 2 SCC 167
M/s Northern India Caterers (India) Ltd. v/s Lt.
Governor of Delhi.
(4) (2000) 1 SCC 521
K.Damodarasamy Naidu & Bros. and others v/s State of
T.N. and another.
(5) (2002) 127 STC 475
Cosmopolitan Club v/s Tamil Nadu Taxation Special
Tribunal.
(6) (1978) 4 SCC 36
Northern India Caterers (India) Ltd. v/s Lt. Governor of
Delhi.
(7) (1989) 3 SCC 634
Federation of Hotel & Restaurant Association of India
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v/s Union of India.
(8) (1989) 3 SCC 677
Express Hotels Private Ltd. v/s State of Gujarat
(9) (1989) 3 SCC 698
Elel Hotels and Investments Limited v/s Union of India
(10) (2005) 2 SCC 515
Godfrey Philips India Ltd. v/s State of Uttar Pradesh.
(11) 2013 TIOL 533HCKeralaST
Kerala Classified Hotels and Resorts Association v/s
Union of India.
(12) 2010 (20) STR 437 (Del.)
Indian Railways C. & T. Corporation Ltd. v/s
Government of NCT of Delhi.
(13) (2011) 46 VST 35 (Karn)
Sky Gourmet Catering Private Limited v/s Assistant
Commissioner of Commercial Taxes, Bangalore and
others.
(14) (2011) 46 VST 57 (Karn)
Commissioner of Service Tax, Bangalore v/s LSG Sky
Chef India Pvt.Ltd..
(15) (2000) 6 SCC 12
20th Century Finance Corporation Ltd. v/s State of
Maharashtra.
(16) (1993) 1 SCC 364
M/s Gannon Dunkerley and Co. and others v/s State of
Rajasthan and others.
(17) (1969) 72 ITR 203 (SC)
Income Tax Officer v/s Mani Ram and others.
27 On the other hand, Mr.Setalwad, learned Additional Solicitor
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General of India, submitted that there is absolutely no merit in the
challenge of the Petitioners. The Petitioners have not been able to
substantiate, in any manner, their challenge that the Parliament is not
competent to legislate on service tax. The argument that the service tax
cannot be imposed by the Parliament and therefore, the relevant provision
in the Finance Act is beyond competence of the Parliament, deserves to be
rejected. It is submitted by Mr.Setalwad that under Entry 8 of List II and
Entry 54 of List II, the State Legislature has been given the power to
legislate in the matter of manufacture, possession, transport, purchase
and sale of intoxicating liquors and sale and purchase of goods, but there
is no restriction on the Parliament to legislate in relation to levy a tax on
services provided by highend
restaurants that are airconditioned
and
have the license to serve liquor. The Parliament has the power to make
law relating to service tax by virtue of its residuary powers vested under
Articles 246 and 248 read with Entry 97 of List I of the Seventh Schedule
to the Constitution of India. Article 366(29A)(f) of the Constitution of
India permits the States to tax the supply of food, drink or any article for
human consumption, as part of any service or any other manner.
28 By placing heavy reliance upon a judgment of the
Honourable Supreme Court in the case of Tamil Nadu Kalyana Mandapam
Association v/s Union of India, reported in (2004) 5 SCC 632/ AIR 2004
SC 3757, Mr.Setalwad submits that the controversy before us is squarely
covered by this decision. He submits that the judgment of the Honourable
Supreme Court analyzes all the Entries and relevant Articles of the
Constitution of India and holds that a tax cannot be struck down on the
ground of lack of legislative competence by inquiring, whether, the
definition accords with the layman's view of “service”. It is submitted by
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Mr.Setalwad that a levy of service tax on a particular kind of service
cannot be struck down on the ground that it does not conform to a
common understanding of the word “service” so long as it does not
transgress any specific restriction contained in the Constitution of India.
Mr.Setalwad submits that this principle applies squarely to the case of the
present Petitioners. It is submitted that Article 366(29A) and specially
subclause
(f) thereof cannot be interpreted to mean that there was
waiver/ exclusion of the Parliament's right to levy service tax on the
transactions/ dealings of the nature referred to in the present Writ
Petition. Mr.Setalwad submits that the Honourable Supreme Court has
consistently held that merely because the State Legislature is competent
to impose a tax on sale, does not take away the competence of the
Parliament to impose tax on service component. Mr.Setalwad, therefore,
submits that the Writ Petition be dismissed.
29 Mr.Setalwad has relied upon the following decisions in
support of his above contentions:(
1) AIR 2004 SC 3757
Tamil Nadu Kalyana Mandapam Association v/s
Union of India.
(2) (2011) 2 SCC 352
Association of Leasing and Financial Service
Companies v/s Union of India.
(3) (2007) 7 SCC 527
All India Federation of Tax Practitioners and others
v/s Union of India.
(4) (2009) 225 CTR (Mad) 289
Madras Hire Purchase Association v/s Union of
India.
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30 We have with the assistance of Mr.Sridharan and
Mr.Setalwad, carefully perused the Writ Petition and all its annexures. We
have also perused the relevant Constitutional provisions. We have also
perused the Statutes in question and all judicial pronouncements brought
to our notice.
31 The first Petitioner is an Association of hotel owners and has
submitted that it provides facilities of lodging and boarding to their guests
or casual visitors. It provides a facility like restaurant. The Petitioners are
also permitted to sell and provide foreign liquor. Thus, the Association is
of the owners of restaurants and hotels. The grievance is that the
Parliament has enacted the Finance Act and in the same, vide Section
65(105)(zzzzv), it has purported to define “taxable service”. It is defined
to mean any service to be provided or to be provided to any person,
by a restaurant, by whatever name called, having the facility of airconditioning
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. Thus, any service provided by a restaurant and
having the above facility, so also, the licence is termed as “taxable service”
on which the service tax can be imposed in terms of Chapter V of the
Finance Act, 1994. The controversy is that this tax cannot be imposed by
the Parliament and this tax is, therefore, beyond its competence. Insofar
as the present Petitioners are concerned, the service tax cannot be
imposed, levied, assessed and recovered.
32 The foundation for this argument is that Entry54
in List II
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(State List) of the Seventh Schedule to the Constitution of India
empowers the States to impose taxes on the sale or purchase of goods
other than newspapers, subject to the provisions of Entry 92A of List I
(Union List). The further foundation is that such an Entry has not been
inserted in List I (Union List). Therefore and by virtue of clause (29A) of
Article 366 of the Constitution of India which is definition of the term “tax
on the sale or purchase of goods” and particularly by subclause
(f)
thereof, a tax as imposed in the instant case is a tax on sale or purchase of
goods. Once the tax in question is included in the tax on sale or purchase
of goods other than newspapers, then, the Parliament is not competent to
impose it. If the Entries in the Seventh Schedule are understood thus,
then, the Parliament is incompetent to impose the service tax on the
establishments of the members of the Petitioner No.1 Association.
33 The whole emphasis is 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. It is not possible to accept this contention and for
more than one reason. Article 366(29A)(f) is inserted by the Constitution
(Fortysixth
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. This controversy arose on account of the
judgments of the Honourable Supreme Court in the cases of Northern
India Caterers (India) Limited (supra) and Associated Hotels of India
Limited (supra).
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34 In the State of Punjab v/s M/s Associated Hotels of India
Limited reported in (1972) 1 SCC 472, the Respondents before the
Honourable Supreme Court carried on business as hoteliers and
conducted several hotels including the “Cecil Hotel” at Simla. Besides
conducting hotels, it also carried on restaurant business. As part of its
business as hoteliers, the Respondents received guests in its several hotels
to whom, besides furnishing lodging, it also served several other
amenities such as public and private rooms, bath with hot and cold
running water, linen, meals during stated hours, etc.. The bill tendered to
the guest is an all inclusive one, namely, a fixed amount for the stay in the
hotel for each day was included and did not contain different items of
each of the above amenities. This is not the case in its restaurant business
where a customer takes his meal consisting either of items of food of his
choice or a fixed menu. The primary function of such restaurant was to
serve meals desired by a customer although along with the food, the
customer got certain other amenities also such as service, linen, etc.. The
bill, therefore, takes into account the food items which are consumed and
the services and other related amenities. The Respondent before the
Honourable Supreme Court had been registered as a Dealer under the
Punjab General Sales Tax Act, XLVI of 1948. The RespondentCompany,
therefore, applied for a declaration that it was not liable to pay sales tax
in respect of meals served in the said Cecil Hotel to the guests coming
there for stay. The argument was that the hotel received guests primarily
for the purpose of lodging and that when so received, the Management
provided them with a number of amenities incidental to such lodging and
with a view render his stay in the hotel comfortable. The Honourable
Supreme Court referred to all such amenities in paragraph 3 and
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thereafter, analyzes the challenge of the Respondents before it, the
judgment of the High Court impugned before it and the contentions of the
State of Punjab. In dealing with them, the Honourable Supreme Court has
observed as under:“
6. The High Court, on a consideration of the arguments
urged before it and relying mainly upon the decision
of this Court in Madras v. Gannon Dunkerley and Co.
Ltd. to the effect that where a transaction is one and
indivisible it cannot be split up so as to attract the
Sales Tax Act to a part of it, allowed the writ petition.
It held that a transaction between a hotelier and his
resident visitor did not involve a sale of food when the
former supplied meals to the latter as one of the
amenities during his residence, and that if there was
one inclusive bill, it was incapable of being split up in
the absence of any rates for the meals agreed to
between the parties as part of the transaction between
the two. The High Court also held that the
transaction was primarily one for lodging, that the
board supplied by the management amounted to an
amenity considered essential in these days in all
properly conducted hotels, and that when so supplied,
it could not be said to constitute a sale every time a
meal was served to such a resident visitor. This
appeal, by special leave, is filed against this view of
the High Court.
13. What precisely then is the nature of the transaction
and the intention of the parties where a hotelier
receives a guest in his hotel? Is there in that
transaction an intention to sell him food contained in
the meals served to him during his stay in the hotel?
It stands to reason that during such stay a well
equipped hotel would have to furnish a number of
amenities to render the customer's stay comfortable.
In the supply of such amenities do the hotelier and his
customer enter into several contracts every time an
amenity is furnished? When a traveller, by plane or by
steamship,
purchases his passageticket,
the
transaction is one for his passage from one place to
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another. If, in the course of carrying out that
transaction, the traveller is supplied with drinks or
meals or cigarettes, no one would think that the
transaction involves separate sales each time any of
those things is supplied. The transaction is essentially
one of carrying the passenger to his destination and if
in performance of the contract of carriage something
is supplied to him, such supply is only incidental to
that services, not changing either the pattern or the
nature of the contract. Similarly, when clothes are
given for washing to a laundery, there is a transaction
which essentially involves work or service, and if the
laundryman stitches a button to a garment which has
fallen off, there is no sale of the button or the thread.
A number of such cases involving incidental uses of
materials can be cited, none of which can be said to
involve a sale as part of the main transaction.
14. The transaction in question is essentially one and
indivisible, namely, one of receiving a customer in the
hotel to stay. Even if the transaction is to be
disintegrated, there is no question of the supply of
meals during such stay constituting a separate
contract of sale, since no intention on the part of the
parties to sell and purchase food stuff supplied during
meal times can be realistically spelt out. No doubt, the
customer, during his stay, consumes a number of food
stuffs. It may be possible to say that the property in
those food stuffs passes from the hotelier to the
customer at least to the extent of the food stuffs
consumed by him. Even if that be so, mere transfer of
property, as aforesaid, is not conclusive and does not
render the event of such supply and consumption a
sale, since there is no intention to sell and purchase.
The transaction essentially is one of service by the
hotelier in the performance of which meals are served
as part of and incidental to that service, such
amenities being regarded as essential in all well
conducted modern hotels. The bill prepared by the
hotelier is one and indivisible, not being capable by
approximation of being split up into one for residence
and the other for meals. No doubt, such a bill would
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be prepared after consideration of the costs of meals,
but that would be so for all the other amenities given
to the customer. For example, when the customer uses
a fan in the room allotted to him, there is surely no
sale of electricity, nor a hire of the fan. Such
amenities, including that of meals, are part and
parcel of service which is in reality the transaction
between the parties.
15. Even in the case of restaurants and other such places
where customers go to be served with food and drink
for immediate consumption at the premises, two
conflicting views appear to prevail in the American
courts. According to one view, an implied warranty of
wholesomeness and fitness for human consumption
arises in the case of food served by a public eating
place. The transaction, in this view, constitutes a sale
within the rules giving rise to such a warranty. The
nature of the contract in the sale of food by a
restaurant to customers implies a reliance, it is said,
on the skill and judgment of the restaurantkeeper
to
furnish food fit for human consumption. The other
view is that such an implied warranty does not arise
in such transactions. This view is based on the theory
that the transaction does not constitute a sale
inasmuch as the proprietor of an eating place does not
sell but "utters" provisions, and that it is the service
that is predominant, the passing of title being merely
incidental. The two conflicting views present a choice
between liability arising from a contract of implied
warranty and for negligence in tort, a choice
indicative of a conflict, in the words of Dean Pound,
between social interest in the safety of an individual
and the individual interest of the supplier of food. The
principle accepted in cases where warranty has been
spelt out was that even though the transaction is not
a sale, the basis for an implied warranty is the
justifiable reliance on the judgment or skill of the
warrantor and that a sale is not the only transaction
in which such a warranty can be implied. The
relationship between the dispenser of food and one
who consumes it on the premises is one of contractual
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relationship, a relationship of such a nature that an
implied warranty of wholesomeness reflects the reality
of the transaction involved and an express obligation
understood by the parties in the sense that the
customer does, in fact, rely upon such dispenser of
food for more than the use of due care. (see Cushing v
Rodman). A representative case propounding the
opposite view in the case of F. W. Woolworth Co. v.
Wilson, citing Nisky v. Childs Co., wherein the
principle accepted was that such cases involved no
sales but only service and that the dispenser of food,
such as a restaurant or a drug store keeper serving
food for consumption at the premises did not sell and
warrant food but uttered and served it and was liable
in negligence, the rule in such cases being caveat
emptor.
16. In England, a hotel under the Hotel Proprietors Act,
1956 is an establishment held out by the proprietor as
offering food, drink, and if so required, sleeping
accommodation, without special contract, to any
traveller presenting himself and who appears able and
willing to pay a reasonable sum for the services and
facilities provided. This definition, which is also the
definition of an inn, still excludes, as formerly,
boarding houses, lodging houses and public houses
which are merely alehouses
and in none of which
there is the obligation to receive and entertain guests.
An innkeeper,
that is to say, in the present days a
hotel proprietor, in his capacity as an inkeeper
is, on
the other hand, bound by the common law or the
custom of the realm to receive and lodge in his inn all
comers who are travellers and to entertain them at
reasonable prices without any special or previous
contract unless he has some reasonable ground of
refusal. The rights and obligations of hotel proprietors
are governed by statute which has more or less
incorporated the common law. The contract between
such a hotel proprietor and a traveller presenting
himself to him for lodging is one which is essentially a
contract of service and facilities provided at
reasonable price.
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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.”
35 All these observations, conclusions and findings in this
judgment are heavily relied upon by the Petitioners before us.
36 In the second judgment in the case of M/s Northern India
Caterers (India) Limited v/s Lt. Governor of Delhi, reported in (1980) 2
SCC 167, the Honourable 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. The Honourable Supreme Court relied on several
facts and circumstances in that case and in the judgment which is
reported and cited before us. It has dismissed the Review Petition seeking
review of its main judgment, by confirming the view taken earlier.
37 Mr.Sridharan, therefore, submits that the amendment made
by the Constitution (FortySixth
Amendment) Act, 1982 is to get over the
above two judgments of the Honourable Supreme Court. Once the
Constitutional provisions and particularly subclauses
(a) to (f) under
Article 366(29A) clarified the position, then, the basis of the Supreme
Court's judgments itself was altered or taken away. By introduction of this
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Constitutional amendment, the Parliament clarified that the tax on sale or
purchase of goods would include a tax on the supply of goods being 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. Thus, the element of service in the supply of goods, whether
by way of or as part of or in any other manner whatsoever, is included in
the tax on sale or purchase of goods, contends Mr.Sridharan by relying on
this definition.
38 Mr.Sridharan has taken us through all clauses of Article
366(29A) of the Constitution of India to submit 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. Therefore, a
separate tax on service cannot be imposed, levied, assessed or recovered
by the Parliament.
39 We are unable to agree as stated above simply because each
of these judgments of the Honourable 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 Honourable 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,
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but only provide services. The Parliament, therefore, inserted an inclusive
definition in the Constitution vide Article 366(29A) which reads thus:“
366 (29A) “tax on the sale or purchase of goods” includes—
(a) a tax on the transfer, otherwise than in pursuance
of a contract, of property in any goods for cash, deferred
payment or other valuable consideration;
(b) a tax on the transfer of property in goods
(whether as goods or in some other form) involved in
the execution of a works contract;
(c) a tax on the delivery of goods on hirepurchase
or
any system of payment by instalments;
(d) a tax on the transfer of the right to use any goods
for any purpose (whether or not for a specified period)
for cash, deferred payment or other valuable
consideration;
(e) a tax on the supply of goods by any
unincorporated association or body of persons to a
member thereof for cash, deferred payment or other
valuable consideration;
(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.”
40 This inclusive definition was inserted so as not to leave any
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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 Honourable Supreme Court and to get over the
basis of its judgments or to alter them that the Parliament stepped in.
Beyond that 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.
41 In elaborating our reasons for the aforesaid conclusions, we
may rely on the settled principles of interpretation which have to be
applied for construing and interpreting the Entries in the Seventh
Schedule to the Constitution of India. In the judgment in Criminal Writ
Petition No.4049/2012 (Pragyasingh Thakur v/s State of Maharashtra)
decided on 11th October, 2013, this Court observed as under:“
87. What the argument of Mr.Jethmalani overlooks is
that while examining the legislative competence of the
Parliament to make a law, what is required to be seen
is whether the subject matter falls in the State List in
which the Parliament cannot enter. If the law does not
fall in the State List, then, the Parliament would have
legislative competence to enact a law by virtue of the
residuary powers under Article 248 read with Entry
97 of the Union List and it would not be necessary to
go into the lis whether it falls in entry of the Union
List or in concurrent list. Somewhat similar argument
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was being considered by the Constitution Bench of the
Honourable Supreme Court in the case of Naga
People's Movement of Human Rights v/s Union of
India reported in AIR 1998 SC 431 and the
Honourable Supreme Court held as under:“
20. While examining the legislative
competence of parliament to make a law what is
required to be seen is whether the subject matter
falls in the State List which Parliament cannot enter.
If the law does not fall in the State List, Parliament
would have legislative competence to pass the law by
virtue of the residuary powers under Article 248 read
with Entry 97 of the Union List and it would not be
necessary to go into the question whether it falls
under any entry in the Union List or the Concurrent
List. [See : Union of India v. H.S. Dhillon, 1972(2)
SCR 33 at pp. 61 and 6768
: (AIR 1972 SC 1061 at
pp. 107475
and 1078); S.P. Mittal v. Union of
India, 1983(1) SCR 729 at pp.769770
: (AIR 1983
SC 1 at pp.1819)
and Kartar Singh v. State of
Punjab, 1994 (3) SCC 569 at pp. 629630].
What is,
therefore, required to be examined is whether the
subject matter of the Central Act falls in any of the
entries in the State List. ….....”
88. …....
89. It is by now well settled that various entries in three
lists are not powers of legislation, but fields of
legislation. The power to legislate is given by Article
246 and other Articles of the Constitution of India.
The entries in the Lists are mere legislative heads and
are of an enabling character. They are designed to
define and delimit the respective areas of legislative
competence of the Union and State Legislatures. They
neither impose any implied restrictions on the
legislative power conferred by the Article nor prescribe
any duty to exercise that legislative power in any
particular manner. The language of these Entries
should be given the widest scope of which their
meaning is fairly capable because they set up a
machinery of Government and each general word
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should be accordingly held to extend to all ancillary or
subsidiary matters which can fairly and reasonably be
comprehended in it.
90. …........
91. It is also well settled that there is no prohibition
against the Legislature enacting a single statute in
exercise of powers conferred by several entries in the
list which is within its competence. [see AIR 1966 SC
619 (Hari Krishna Bargav v/s Union of India) and
AIR 1972 SC 1061 (Union of India v/s Harbhajan
Singh Dhillon)].
92. Further, in case of apparent overlapping between two
entries, the doctrine of Pith & Substance has to be
applied to find out the true nature and character of
the legislation and the entry within which it would
fall. The NIA Act does not create any offence by itself.
It only provides for creation of a machinery for
investigation and prosecution of certain offences and
which are carved out in the laws made by the
Parliament. Pertinently the Acts in the schedule to the
NIA Act are the Acts of the Parliament. They are
referable to different entries in ListI.
Therefore, if the
doctrine of Pith & Substance is applied, the NIA Act
would squarely fall under Entry2
in ListIII
of the
Concurrent List, namely, Criminal Procedure
including all matters included in the Code of Criminal
Procedure at the commencement of the Constitution.
Further, reliance by Mr.Mariarputham on Entry93
of
ListI
is also appropriate in the context of competence
of the Parliament to enact the NIA Act. If the offences
under the Acts specified in the Schedule to the NIA
Act, are under the Acts of the Parliament and when
the Parliament was competent to create offence under
or by virtue of the provisions of the Scheduled Acts,
then, all the more those powers would take within
their fold and import the power to create a machinery
for investigation and prosecution of these offences.
Therefore, apart from the entries relied upon by the
learned Additional Solicitor General, we find that in
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addition thereto, Entry93
also could be taken
assistance of.”
42 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. The tax on
sale or purchase of goods and a tax on service are, thus, two distinct
concepts. The tax on sale or purchase of goods which is envisaged by
Entry 54 of List II (State List) is a tax on the transfer of property in any
goods, otherwise than in pursuance of a contract. It is a tax on the
transfer of property (whether as goods or in some other form) involved in
the execution of a works contract. It is a tax on the delivery of goods on
hirepurchase
or any system of payment by instalments. It is a tax on the
transfer of the right to use any goods for any purpose (whether or not for
a specified period). It is a tax on the supply of goods by any
unincorporated association or body of persons to a member thereof and
equally, it is 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). This
is how the Constitution of India envisages a tax on sale or purchase of
goods. That such a tax is fully within the competence of the State
Legislature. In imposing, levying, assessing or recovering such tax, the
State Government does not tax the services. That entry enables the State
to impose a tax on sale or purchase of goods and in doing so, the State is
enabled to tax the above aspect or matter in the course of sale or purchase
of goods. In order to enable the State to levy, assess and recover the sales
tax that the Parliament inserted the inclusive definition of a tax on sale or
purchase of goods, as above. When the State imposes or levies the sales
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tax on goods, it is not charging or taxing the services, but sale thereof.
The service tax does not charge or tax the sale of goods. It charges or
taxes the services and which may or may not be provided in sale of goods.
It was argued and prior to the Constitution (FortySixth
Amendment) Act,
1982 that the State cannot impose the sales tax on the establishments like
restaurants or hotels because they do not sell goods. They only provide
services and while rendering and providing such services, they may be
incidentally selling the goods. However, their predominant activity is
rendering services and not selling the goods. It is that argument or stand
which is taken care of vide the above Constitutional definition.
43 The above aspect becomes clear if one peruses the judgment
in the case of K.Damodarasamy Naidu & Bros. and others v/s State of T.N.
and another, reported in (2000) 1 SCC 521. Pertinently, there also the
argument was that the State cannot levy tax on sale of food and drink.
The argument was elaborated by relying on the decisions in the cases of
Associated Hotels of India Limited and Northern India Caterers Limited
(supra). The Honourable Supreme Court referred to the Constitution
(FortySixth
Amendment) Act, 1982 and particularly the definition noted
above and held as under:“
8. Learned Counsel next contended, relying upon the
judgments aforementioned, that, in the eye of the law,
the tax on food served in restaurants could not be
levied on the sum total of the price charged to the
customer. In his submission, restaurants provided
services in addition to food, and these had to be
accounted for. Thus, restaurants provided an elegant
decor, uniformed waiters, good linen, crockery and
cutlery. It could even be that they provided music,
recorded or live, a dance floor and a cabaret. The bill
that the customer paid in the restaurant had,
therefore, to be spilt up between what was charged for
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such service and what was charged for the food.
9. The provisions of Subclause
(f) of Clause (29A) of
Article 366 need to be analysed. Subclause
(f)
permits the States to impose a tax on the supply of
food and drink. The supply can be by way of a service
or as part of a service or it can be in any other
manner whatsoever. The supply or service can be for
cash or deferred payment or other valuable
consideration. The words of Subclause
(i) have found
place in the Sales Tax Acts of most States and, as we
have seen, they have been used in the said Tamil
Nadu Act. The tax, therefore, is on the supply of food
or drink and it is not of relevance that the supply is
by way of a service or as part of a service. In our view,
therefore, the price that the customer pays for the
supply of food in a restaurant cannot be split up as
suggested by learned Counsel. The supply of food by
the restaurant owner to the customer, though it may
be a part of the service that he renders by providing
good furniture, furnishing and fixtures, linen,
crockery and cutlery, music, a dance floor and a floor
show, is what is the subject of the levy. The patron of
a fancy restaurant who orders a plate of cheese
sandwiches whose price is shown to be Rs. 50 on the
bill of fare knows very well that the innate cost of the
bread, butter, mustard and cheese in the plate is very
much less, but he orders it all the same. He pays Rs.
50 for its supply and it is on Rs. 50 that the
restaurant owner must be taxed.
10. ….......
11. Learned Counsel for the owners of residential hotels
in the State of Maharashtra (Writ Petition No. 9901
of 1983) raised much the same contention, but in the
context of residential hotels. He pointed out that
residential hotel provided only lodging or lodging and
boarding. The boarding could comprise full board,
i.e., breakfast, lunch and dinner or breakfast and one
meal or breakfast alone. In Mr. Salve's submission,
the composite charge that the hotel owner levied for
lodging and such boarding had to be split up and only
the element thereof that related to the supply of meals
could be subjected to the tax. The tax could not be
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levied on the composite charge for boarding and
lodging unless the State made Rules which set down
formulae for determining that component of the
composite charge which was exigible to the tax on
food and drink.
12. It was not disputed by learned Counsel for the State
of Maharashtra that the tax on food and drink could
be imposed only upon that component of the
composite charge for lodging and boarding at a
residential hotel as related to the supply of food and
drink. But, in his submission, no Rules in this behalf
were necessary; the Sales Tax Officers would make
assessments depending upon the facts of each
individual case.
13. There are several hundred residential hotels in the
State of Maharashtra. They provide lodging and
boarding to several thousands of customers in every
assessment year. It is in practical terms impossible for
the sales tax authorities to make assessments upon
the basis of the facts relevant to each individual
customer in each individual hotel. Generalisations
are, therefore, inevitable and there is every likelihood
that the basis of the generalisation made by one Sales
Tax Officer would differ from the basis of the
generalisation made by another, leading to
unacceptable arbitrariness. Rules that indicate to
Sales Tax Officers how to treat composite charges for
lodging and boarding would eliminate substantial
differences in their approach and, thus, arbitrariness.
14. We, therefore, direct that the State of Maharashtra
shall henceforth not make assessments of the tax on
the supply of food and drink on hotel owners who
provide lodging and boarding for a composite sum
until it frames Rules that set out formulae for such
assessment which take account of the fact that
residential hotels may provide lodging and full or part
board as set out above. If the Rules are framed by 1st
June, 2000 the assessments that are not completed
only by reason of this order may be proceeded with. If
the Rules are not framed by the said date, these
assessments shall lapse. No proceedings for
assessments shall be commenced hereafter until the
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Rules have been framed. At the same time, completed
assessments as of today shall not be affected by this
order, and the assessees would be entitled to adopt
proceedings there against, subject to the law.”
44 The Honourable Supreme Court, thus, negatived the
challenge and dismissed the Writ Petitions.
45 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”. Once the
observations of the Honourable Supreme Court and the Constitutional
definition is understood in this context, then, we do not feel that any
assistance can be derived by the Petitioners from the judgment in
K.Damodarasamy Naidu (supra). This judgment of the Honourable
Supreme Court in no way decides the controversy before us far from
holding that the Parliament is incompetent to impose and levy a tax on
services provided in an airconditioned
Restaurant.
46 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. To enable imposition thereof, a “taxable service”
has been defined to mean any service provided or to be provided to
any person, by a restaurant, by whatever name called, having the
facility of airconditioning
in any part of the establishment, at any
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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. 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. That 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, therefore, has to be levied on a restaurant
having airconditioning
facility in any part at any time during the
financial year.
47 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.
The ordinary and plain meaning of the term “sale” as found in “Advanced
Law Lexicon, by P. Ramanatha Aiyar, 3 rd Edition, Reprint 2007” , is as
under:“
A sale, in its broadest sense, may be defined as
the transfer of the property in a thing for a price in
money, usually the term “sale” is confined to a personal
property. A sale may be defined as an agreement
whereby one party, called the seller, transfers to the
other party, called the buyer pays or agrees to pay. A
sale of goods is also termed a “bargain and sale” and an
“executed contract of sale”.
A sale, as defined by Blackstone, is a
transmutation of property from one man to another in
consideration of some price or recompense in value.”
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48 A “service” has been defined to mean the action of serving,
helping or benefiting. This is conceptualized as a public service. 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. The other category of
service means any benefit or any act resulting in promoting interest or
happiness. It may be contractual, professional, public, domestic, legal,
statutory, etc.. In this context, a reference can usefully be made to the
judgment of the Honourable Supreme Court in the case of Lucknow
Development Authority v/s M.K. Gupta reported in AIR 1994 SC 787.
While interpreting Section 2(o) of the Consumer Protection Act, 1986, the
Honourable Supreme Court held as under:“
4. …....... The answer to all this shall depend on
understanding of the word “service”. The term has
variety of meanings. It may mean any benefit or any act
resulting in promoting interest or happiness. It may be
contractual, professional, public, domestic, legal,
statutory etc.. The concept of service thus is very wide.
How it should be understood and what it means depends
in the context in which it has been used in an
enactment. .......”
49 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. It is not 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). By the Finance
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Act, 1994, the Constitutional provisions and entries in the Seventh
Schedule, a service tax is understood as a tax on varied services rendered
and by several entities in several ways. The taxable service in this case is
provided or to be provided to any person by a restaurant, having the
facility of airconditioning
in any of its part 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. An airconditioned
restaurant or a restaurant having the
facility of airconditioning
in any of its part at any time during the
financial year and licenced to serve alcoholic beverages, if it is serving
alcoholic beverages to any person, is identified and named in this case.
Any service provided or to be provided by the above restaurant is defined
as taxable service. It is a tax on the establishment which is a restaurant
having the facility of airconditioning
in any part of the same and any
time during the financial year. It is a tax in relation to serving of food or
beverage by the said restaurant in its premises. If this definition is
carefully perused and analyzed, it is clear that a taxable service in relation
to serving of food or beverage including alcoholic beverages or both, is
stated to be rendered to any person by a restaurant and by whatever
name called. It should be having the facility of airconditioning
in any
part of the establishment. Such airconditioning
facility may be functional
at any time during the financial year. The services provided ought to be in
relation to serving of food or beverages including alcoholic beverages or
both. That should be in the premises of the restaurant.
50 We fail to understand as to how this tax can be equated with
a tax on sale or purchase of goods. The definition in the Constitution of
India and which we have referred to above, does not make a tax on sale
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or purchase of goods a service tax. All the incidental or ancillary acts
which have been performed during the course of sale or purchase of
goods have been included in the definition (Article 366(29A)(f)). Such
incidental or ancillary act being performed during the course of sale or
purchase of goods would not mean that a tax on sale or purchase of goods
is not on sale of goods. The sale of goods may include supply by way of or
as part of any service or in any other manner whatsoever, of goods which
may be 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. Such 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 of such goods is made.
Thus, by a deeming fiction, the supply of goods is sale thereof by the
person making the supply and purchase of those goods by the person to
whom the supply is made. By a deeming fiction, a tax on the supply thus,
includes a tax on sale or purchase of goods. That is a component or
concomitant of sales tax or tax on sale or purchase of goods. However,
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
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service tax when a service is rendered by a restaurant to any person and
noted as above.
51 In these circumstances we are of the view that 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.
Therefore, we see no substance in the argument of Mr.Sridharan that the
Parliament lacks competence to impose a service tax. Equally, we do not
see any force in his argument that in imposing such service tax the
Parliament has encroached upon the taxing powers of the State
Legislature vide Entry 54 of the State List (List II).
52 Mr.Sridharan contends that the Parliament has so encroached
because in his submission a service tax can be imposed by the Parliament
vide Entry 92C in List I (Union List) inserted by the Constitution (Eightyeighth
Amendment) Act, 2003. However, this Amendment Act has not
been brought into force or effect. Once it is not brought into effect, the
Parliament lacks competence to impose a service tax, is the submission of
Mr.Sridharan. We do not see any force or substance therein simply
because the wording of Entry 97 in List I enables the Parliament to impose
the tax in question so long as the said tax is not mentioned in either List II
(State List) or List III (Concurrent List). Mr.Sridharan concedes that there
is no entry in relation to a tax in the concurrent list. The Entry 54 in List II
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(State List) alone is pressed into service. We have already held that same
does not envisage a service tax or tax on service rendered by a restaurant
to any person and which restaurant is of the nature referred to in Section
65(105)(zzzzv) of the Finance Act. For these reasons, we are of the
opinion that the foundation or basis for the challenge fails. The challenge,
therefore, cannot be upheld. The Parliament by the Finance Act, 2011
specified or expanded the scope of the taxable services by amending
Chapter V of the then prevailing Finance Act, 1994. (see clause 71 of the
Bill to amend the Finance Act published on 28th February, 2011). Thus, the
Entry 92C of List I being not brought into force cannot be of any
consequence.
53 Reliance placed by Mr.Sridharan on the judgments which we
have noted above is totally misplaced. We have elaborately discussed the
judgments rendered prior to insertion of Article 366(29A)(f) and
thereafter. The only other judgment and stated to be dealing with this
controversy is that of the learned Single Judge of Kerala High Court in the
case of Kerala Classified Hotels and Resorts Association v/s Union of India
reported in 2013TIOL533HCKeralaST.
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
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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 learned Single Judge of Kerala High Court.
54 There is much substance in the contentions of the learned
Additional Solicitor General. His reliance on the decision of the
Honourable Supreme Court in Tamil Nadu Kalyana Mandapam (supra) is
well founded. There, the Honourable Supreme Court was considering an
identical controversy. The Association of various Kalyana Mandapam and
providing facilities during the course of letting out Mandapam to their
clients, challenged the Constitutional validity of Sections 66, 67(o) of the
Finance Act, 1994 and Rule 2(1)(d)(ix) of the Service Tax Rules, 1994
and other provisions related to Kalyana Mandapams. In dealing with the
challenge, so also, the definition of the term “taxable service” in relation
to such Kalyana Mandapams, the Honourable Supreme Court held thus:“
40. In the present case, service tax levied on services
rendered by MandapKeeper
as defined in the said Act
under Sections 65, 66 and 67 of the Finance Act has
been challenged by the appellants on the following
two grounds:
a) That it amounts to the tax on land and,
therefore, by reason of Entry 49 of List 2 of the
Seventh Schedule of the Constitution, only the State
Government is competent to levy such tax and;
b) Insofar as it levies a tax on catering services, it
amounts to a tax on sale and purchase of goods and,
therefore, is beyond the competence of Parliament,
particularly in view of the definition of tax on sale
and purchase of goods contained in Article 366 (29A)
(f) of the Constitution.
41. …...
42. …...
43. As far as the above point is concerned, it is well settled
that for the tax to amount to a tax on sale of goods, it
must amount to a sale according to the established
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concept of a sale in the law of contract or more
precisely the Sale of Goods Act, 1930. Legislature
cannot enlarge the definition of sale so as to bring
within the ambit of taxation transactions, which
could not be a sale in law. The following judgments
and the principles laid down therein can be very well
applied to the case on hand.
1. M/s. J.K. Jute Mills Co. Ltd. vs. The State of
U.P. & Anr. [1962] 2 SCR 1;
2. M/s Gannon Dunkerley & Co. and Ors. vs.
State of Rajasthan & Ors. (1993) 1 SCC 364;
3. The State of Madras vs. Ganon Dunkerley &
Co. (Madras) Ltd. [1959] SCR 379;
4. The Sales Tax Officer, Pilibhit vs. M/s. Budh
Prakash Jai Prakash, [1955] 1 SCR 243;
5. M/s George Oakes (P) Ltd. vs. State of Madras,
[1962] 2 SCR 570.
44. In regard to the submission made on Article
366(29A)(f), we are of the view that it does not
provide to the contrary. It only permits the State to
impose a tax on the supply of food and drink by
whatever mode it may be made. It does not
conceptually or otherwise includes the supply to
services within the definition of sale and purchase of
goods. This is particularly apparent from the
following phrase contained in the said subarticle
"such transfer, delivery or supply of any goods shall be
deemed to be a sale of those goods." In other words,
the operative words of the said subarticle
is supply of
goods and it is only supply of food and drinks and
other articles for human consumption that is deemed
to be a sale or purchase of goods.
45. The concept of catering admittedly includes the
concept of rendering service. The fact that tax on the
sale of the goods involved in the said service can be
levied does not mean that a service tax cannot be
levied on the service aspect of catering. Mr. Mohan
Parasaran, learned senior counsel for the appellant
submitted that the High Court before applying the
aspect theory laid down by this Court in the case of
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Federation of Hotel and Restaurant vs. Union of India
& Ors. (supra) ought to have appreciated that in that
matter Article 366 (29A)(f) of the Constitution was
not considered which is of vital importance to the
present matter and that the High Court ought to have
differentiated the two matters. In reply, our attention
was invited to paras 31 and 32 of the judgment of the
High Court in which service aspect was distinguished
from the supply aspect. In our view, reliance placed by
the High Court on Federation of Hotel and Restaurant
(supra) and, in particular, on the aspect theory is,
therefore, apposite and should be upheld by this
Court. In view of this, the contention of the appellant
on this aspect is not well founded.
46. It is well settled that the measure of taxation cannot
affect the nature of taxation and, therefore, the fact
that service tax is levied as a percentage of the gross
charges for catering cannot alter or affect the
legislative competence of Parliament in the matter.
51. Taxable services, therefore, could include the mere
providing of premises on a temporary basis for
organizing any official, social or business functions,
but would also include other facilities supplied in
relation thereto. No distinction from restaurants,
hotels etc which provide limited access to property for
specific purpose.
52. It may be noted that in recent times the service sector
has grown phenomenally all over the world and,
therefore, it was recommended by Dr. Raja Chelliah
Committee in the early 90s that it should be taxed.
Pursuant thereto, service tax was first levied in 1994
by way of the Finance Act. The power to levy such tax
can be traced to Sl.No. 97 of List I of Seventh
Schedule and this Court in Laghu Udyog Bharati vs.
Union of India (supra) found no lack of legislative
competence as far as the levy of service tax was
concerned.
53. It is also emphasized that a tax cannot be struck
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down on the ground of lack of legislative competence
by enquiring whether the definition accords what the
layman's view of service. It is well settled that in
matters of taxation laws, the court permits greater
latitude to pick and chose objects and rates for
taxation and has a wide discretion with regard there
to. We may in this context refer to the decision of
Mafatlal Industries Ltd. and Others vs. Union of India
and Others (1997) 5 SCC 536 para 343 at page 740.
"…..In the matter of taxation laws, the court
permits a great latitude to the discretion of the
legislature. The State is allowed to pick and choose
districts, objects, persons, methods and even rates for
taxation, if it does so reasonably. The courts view the
laws relating to economic activities with greater
latitude than other matters."
54. Therefore, a levy of service tax on a particular kind of
service could not be struck down on the ground that it
does not conform to a common understanding of the
word "service" so long as it does not transgress any
specific restriction contained in the Constitution.”
55 There is no substance in the contentions of Shri Sridharan
that Kalyana Mandapams cannot be equated with restaurants. We are
bound by the above conclusions because of the distinction and
differentiation made in paragraph 45 by the Honourable Supreme Court.
In our view, the problem or controversy can be approached from a slightly
different angle bearing in mind this binding judgment of the Honourable
Supreme Court. The Honourable Supreme Court, with respect, held that
the concept of catering admittedly includes a concept of rendering service.
The fact that the tax on sale of goods involved in the said service can be
levied, does not mean that the service tax cannot be levied on the service
aspect of catering. With respect, this means that when a restaurant
renders to any person a service, the tax on sale of goods involved in the
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said service can be levied. That does not mean that a service tax cannot be
levied on the act of serving food at a restaurant. That is the tax in this
case imposed by the Parliament. There could be a sale during the course
of rendering of service at a restaurant and therefore, a sales tax could be
imposed by the State Legislature. So long as there is no prohibition
against imposition of service tax on the services rendered, then it must be
held that the Parliament is competent to impose a service tax in question.
Mr.Sridharan has not pointed out any provision which would enact a
prohibition against the imposition of service tax by the Parliament. It is
not his argument that the levy in question is hit by Double taxation. If
only the lack of competence in the Parliament is the argument, then, that
can be dealt with and disposed of by holding that the Honourable
Supreme Court does not rule out, but rather permits imposition of a tax
on service even if during rendering of the same, the sale of goods takes
place.
56 For the reasons aforestated, we are of the view that there is
no merit in the Writ Petition.
57 Before parting, in all fairness, we must also refer to the
decisions cited by the learned Additional Solicitor General. He has
referred to the case of Association of Leasing and Financial Service
Companies v/s Union of India reported in (2011) 2 SCC 352. That
judgment elaborately discussed the imposition of tax on hirepurchase/
leasing of goods. Equally, same also discussed the imposition of service tax
on the services rendered by the Banks and Financial Institutions during
the course of such leasing. In doing so, the Honourable Supreme Court,
with approval, refers to the judgment in the case of Tamil Nadu Kalyana
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Mandapam (supra). The Honourable Supreme Court held thus:“
67. Lastly, we may state that this Court has on three
different occasions upheld the levy of service tax with
reference to Entry 97 of List I in the face of challenges
to the competence of Parliament based on the entires
in List II and on all the three occasions, this Court has
held that the levy of service tax falls within Entry 97
of List I. The decisions are in T.N.Kalyana Mandapam
Assn., Gujarat Ambuja Cements Ltd. and All India
Federation of Tax Practitioners.”
58 The same reasoning is applied in the case of All India
Federation of Tax Practitioners and others v/s Union of India reported in
(2007) 7 SCC 527. However, we do not make any reference to the same
as Mr.Sridharan submits that the attention of the Honourable Supreme
Court was not invited to the fact that the Constitution (Eightyeighth
Amendment) Act, 2003 has not been brought into effect.
59 The Writ Petition is, accordingly, dismissed. Rule is
discharged. No costs.
(Girish S. Kulkarni, J) (S.C. Dharmadhikari, J)
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