SERVICE PORTION IN A TRANSACTION OF SUPPLY OF FOODS- A DUBLE TAXATION A DISCUSSION.

[CA.Tarun Agarwalla]

Food is a basic need for a living being and any levy of additional cost on the same is always a matter of dispute. Taxation levied or collected directly or indirectly on the food even though collected by state is always a matter of discussion. Food articles till it reach at the stage of consumption have passed through different processes and stages. Each process, stage add certain cost to it because of the value added and each stage as per the law also pay certain amount of tax to the government whether state or centre as per the jurisdiction and power entrusted to the such government as per the constitution of India. For the limited purpose of this article we will confined our discussion to taxations only.Often disputes were brought before the courts with respect to jurisdiction, constitutionality, double taxation etc in relation to incidence, levy, valuation, etc . In recent time the food and beverage served at hotels and restaurants attract more number of disputes with respect to applicability VAT and/or Service tax. Though other levy also applicable like excise duty, custom duty, we will confined our discussion to VAT as major and Service tax as minor.Since 46th amendment of the constitution since 01-03-1983 and respective insertion of similar provisions in the state label sales tax act, all the sates start taxing all type sale of food article for human consumption. In those times disputes are brought before courts with respect to the service elements present in the sale of such articles. A classic case decided by Supreme Court in this aspect is . On the other hand Service tax on food articles was levied very recently by finance act 1994. Here in the disputes have shifted to the reverse side of the argument, where the oblivions question before the court were “

As VAT is levied on the price of supply of food, whether levy of service tax on same price is unconstitutional, or fit case of double taxation.

A classic case decided by Kerala high court in case of KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION & OTHS. Versus UNION OF INDIA & OTHS. [2013 (7) TMI 431 - KERALA HIGH COURT] . However contrary view also being pronounced in different court later on. As per the constitution of India article 366 covers definitions and clause 29A is being inserted by 46th amendment to the constitution. The said clause was inserted since 1983 where certain type of transactions could not be taxed by state governments due to pronouncement of orders of different court. The said clause 29A is having 6 limbs and the relevant limb of the said clause is being reproduced here as“(29A) "tax on the sale or purchase of goods" includes-......... (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 ...... supply of any goods shall be deemed to be a sale of those goods by the person making the ........... supply and a purchase of those goods by the person to whom such ........ supply is made;after insertions of the clause 29A in to the article 366 of the constitution of India, almost all the states of India have amended the definition of sale in the sales tax act of respective states then to bring effect the changes in to the constitution and to bring to tax certain transaction of transfer, supply and delivery to be regarded as sales. Later on while the VAT act is being implemented similar provisions also were made for the definition of sale.

As per the relevant part of the provision of Orissa Value Added Tax Act 2004 section 2 (45) sale with respect to goods being food are defined as follows SALE with all its grammatical variations and cognate expressions, means every transfer of the property in goods, other than by way of mortgage, hypothecation, charge or pledge, by one person to another in the course of trade or business for cash, deferred payment or other valuable consideration, and includes -..............................(e) a 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........supply of any goods shall be deemed to be a sale of those goods by the person making the .......supply and a purchase of those goods by the person to whom such ....... or supply is made, but does not include a mortgage, hypothecation, charge or pledge. Some Relevant Case decisions with respect to applicability of VAT on supply of food articles can be enumerated below:-

A. In this context a classic example would be a case pronounced by honourable Supreme court in case of K. Damodarasamy Naidu & Bros. Versus State of Tamil Nadu and Another [1999 (10) TMI 598 - SUPREME COURT OF INDIA] it is observed that” para 9.. The provisions of sub-clause (f) of clause (29A) of article 366 need to be analysed. Sub-clause (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 sub-clause (f) have found place in the Sales Tax Acts of most States. 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.

B. Further apex court also observed that para 11... Learned counsel for the owners of residential hotels in the State of Maharashtra raised much the same contention, but in the context of residential hotels. He pointed out that residential hotels 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 the submission, the composite charge that the hotel owner levied for lodging and such boarding had to be split up and only the element there of that related to the supply of meals could be subjected to the tax. The tax could not be levied on the composite charge for boarding and lodging unless the State made Rules which set down formula for determining that component of the composite charge which was eligible to the tax on food and drink.

C. Further honourable Kerala high court in case of KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION & OTHS. Versus UNION OF INDIA & OTHS. [2013 (7) TMI 431 - KERALA HIGH COURT] . while deciding a case on constitutional aspect of levy of service tax on hotels and restaurants for supply of food , it is observed that” 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 - price that the customer pays for the supply of food in a restaurant cannot be split up - under Article 246(1) of the Constitution, Parliament has exclusive powers to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to the Constitution. As per Article 246(3), the State Government has exclusive powers to make laws with respect to matters enumerated in List II - first limb of the Article 366(29-A) says that the tax on sale or purchase of goods includes a tax on transactions specified in sub Clauses (a) to (f). It was also found that the said Article is brought in to expand the tax base which should narrow down because of certain judgments of the Court. The deemed sale is therefore brought into effect as a concept in the constitutional definition.

D. Honourable Bombay high court in case of Indian Hotels and Restaurant Association And Others Versus Union of India And Others [2014 (4) TMI 447 - BOMBAY HIGH COURT] Held that:- When the State imposes or levies the sales 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 (Forty-sixth 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 goods. “

E. The apex court further held –“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”.

F. M/s. Indian Coffee Workers Co-operative Society Limited Versus Commissioner of Central Excise & Service Tax, Allahabad, 2014 (4) TMI 407 - ALLAHABAD HIGH COURT , court had observed that “The charge of tax in the cases of VAT is distinct from the charge of tax for service tax. Entry 54 of the State List to the Seventh Schedule to the Constitution empowers the state legislatures to impose a tax on the sale of goods. Article 366 (29A) was introduced by the Forty Sixth Constitutional Amendment so as to provide a deeming definition of the expression sale to comprehend situations within the purview of its several sub-clauses including the sale of goods involved in the execution of a works contract. The charge of service tax is not on the sale of goods but on a taxable service provided. Unlike a tax which is imposed on the sale of goods, the charge of service tax is on the provision of a taxable service provided by the assessee. Hence, the fact that the assessee may be paying VAT on the sale of goods on the supply of food and beverages to those who consume them at the canteen, would not exclude the liability of the assessee for the payment of service tax in respect of a taxable service provided by the assessee as an outdoor caterer.”

G. However in a recent case Honourable Uttarakanda high court have pronounced a judgment on the same date that of Allahabad high court as mentioned vide supra where contrary view is being given and the decision is completely depart from the recent orders of courts. In the case of Valley Hotel & Resorts, (Through its partner Shri Arun Goyal) Versus The Commissioner, Commercial Tax, Dehradun [2014 (5) TMI 97 - UTTARAKHAND HIGH COURT] it is under question that Whether supply of cooked food in the restaurant are covered under Uttarakanda VAT Act, 2005 – Held that:- VAT can be imposed on sale of goods and not on service - Service can be taxed by Service Tax Laws - The authority competent to impose service tax has also assumed competence to declare what is service - The State has not challenged the same - Therefore, where element of service has been so declared and brought under Service Tax vide Government of India notification dated 06.06.2012 (i.e. 40 percent of bill amount to customers having food or beverage in the restaurant was made liable to service tax) no VAT can be imposed thereon Matter remitted back–

H. More specifically after amendments in service tax provision since 1st July 2012 where Declared services has been enacted under section 66E the scope of service tax with respect to service portion in an activity of supply of goods being food for human consumption is being specifically included. It is pertinent to mention here that the cases discussed above were matter with respect to pre 2002 era of service taxation where the applicability were drawn vide section 65(105) which define “taxable service”.

I. In the new declared service regime vide finance act 1994, the service with respect to activity in relation to food is being dealt with section 66E (i) of the act. The section 66E covering declared service consists of clause (a) to (i) and it take the colour of deemed provision. Similarly vide supra Orissa Value added tax act 2004 section 2(45) also consists of similar provisions of deemed sale. With these enactments the jurisdiction and power to levy is being established vide deeming provisions. The disputes with respects to the fact that the service portion of the price of the food is being taxed doubly by both the authorities centre and state is being lightened.

J. The pronouncement of courts were at this time not settled the issue with respect to the jurisdction for taxing as well as constitutional validity of the provisions and valuations by both the taxing statue. In this respect a classic decision of Chhattisgarh High court is very recent case M/s HOTEL EAST PARK & ANOTHER Vs UNION OF INDIA & OTHERS [2014 (5) TMI 652 - CHHATTISGARH HIGH COURT] had specifically cover the new provisions of service tax after July 2012 with respect to section 65B(44) and 66E(i) vis –a vis VAT. The issues raised in the writ petition was threea. Whether any service tax can be charged on a sale of an item or vice versa;b. Whether in view of Article 366 (29A)(f) service is subsumed in sale of food and drinks;c. Whether section 66E(i) of the 1994-Act is vaiolative of Article 366 (29A)(f) of the Constitution.

K. Honourable high court have gone through the Union and sate list of the constitution and there form it also conclude that the service tax through finance act 1994 is being enacted through residuary entry. Apex courts have categorically expressed their view in negative to the 1st ground. While expressing the observations apex court had said” A tax on the sale and purchase of food and drinks within a State is in exclusive domain of the State. The Parliament cannot impose a tax upon the same. Similarly, there is no entry in List II or List III under which service tax can be imposed. There is no legislative competence with the States to impose a tax on any service.” Apex court also said that” The Parliament cannot impose tax on sale and purchase within a State (except on newspapers). Similarly State cannot tax a service.

L. Further while deciding the other two grounds honourable Chhattisgarh high court have observed the back ground of the provisions of article 366(29A) (f) of the constitution held that” The objects and reasons as well as historical background of Article 366 (29A) (f) of the Constitution show that the intention behind substituting this sub-article was to separate the value of sale of food and drinks from the service part. It was neither the intention that the service part should be subsumed in the definition of sale nor interpretation of Article 366(29A)(f) leads to this conclusion”

M. Further apex court have differentiate the issues raised in the K. Damodarasamy Naidu & Bros. Versus State of Tamil Nadu and Another [1999 (10) TMI 598 - SUPREME COURT OF INDIA] vis- a- vis T.N.Kalyan Mandapan Assn. v. Union of India & Others [2004 (4) TMI 1 - SUPREME COURT OF INDIA]. It is held that The issue involved in the Damodarsamy case related to power of the State to levy tax on the food or drinks. The court after referring to insertion of article 366 (29A) held that by reason of that amendment, the States were entitled to levy tax on the supply of food and drinks. This case is not relevant on the question whether the Parliament can impose service tax on the service element of the sale or not. However the Kalyan-Mandapan case is relevant to the case in hand. In this case, the validity of sections 67(o) of the Finance Act, 1994 and Rule 2(1)(d)(ix) of the Service Tax Rules, 1994 have been upheld. The court says,In regard to the submission made on Article 366 (29-A) (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 include the supply of services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article “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 sub-article are 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.

N. Further while observing section 66E (i) as intra vires the constitution it is being held that “Article 366(29A)(f) of the Constitution does not indicate that the service part is subsumed in the sale of the food; it rather separates sale of food and drinks from service.”. Further it is held that “Section 65B (44) as well Section 66E(i) only charges service tax on the service part and not on the sale part. It indicates that the sale of the food has been taken out from the service part as was interpreted by the Supreme Court in the Associated-Hotel case and the Northern-Caterers case.”

O. The Apex court have concluded the matter with the observation by way of recommendation to the state government as

"41. There is no provision in the VAT-Act to bifurcate the amount. The State Government will do well to frame such rules to this effect. These rules may be in conformity with the bifurcation as provided under the 1994-Act or ensure that the Commercial Tax authorities do not charge VAT on that part of the value of the food and drink on which the service tax is being assessed.

42. The restaurant and caterer are also normally charging VAT on the bill value. This is not proper. They may charge service tax on 40 percent or 60 percent as the case may be of the bill value and charge VAT at the rate of 60 percent or 40 percent of the bill value, but not on the entire bill value.

43. The State Government will be well advised to issue a clarification/ direction in this regard and will ensure that the consumers are not unnecessarily doubly taxed over the same amount.”P. The order given by the honourable High court is a clear directions goes towards non applicability of VAT on service portion as a double taxation and suitable valuation rules may be drafted by the state government. The apex court case is a classic case as it clarifies more on the subject and analyses all the earlier cases decided for applicability to the situation. Similar issues may be raised by before other state governments where valuation aspect of sale value of food and other articles in restaurants or caterers can be reviewed and suitable clarification or abatement may be given to avoided anomalies."

Q. Further in the case of Jindal Stainless Ltd. Vs State of Haryana [2006 (4) TMI 120 - SUPREME Court] has held that “levy of tax is a part of common Burdon based on the principle of ability or capacity to pay”. SC relied on the definition of Tax given in Mathews Vs Chicory Marketing Board (60 CLR 263) “Tax is a compulsory exaction of money by public authority for public purpose enforceable by law and is not a payment for service rendered”. Though the law may be clear in these aspects but the burden of cost by way of tax is being levied on the consumer though not intentionally but effectively. The proposed GST regime could able to minimize the burden of cost of tax and assure less number of litigation.