EXEMPTION TO RESTAURANT SERVICES

[Dr. Sanjiv Agarwal]

Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having (i) the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and (ii) a licence to serve alcoholic beverages, are exempt from levy of Service Tax.

It may be noted that the condition to have a licence to serve alcoholic beverages, are exempt from levy of service tax has been withdrawn w.e.f. 1-4-2013 vide Notification No. 3/2013-ST, dated 1-3-2013.

The term ‘restaurant’ has not been defined in the Finance Act. Oxford English Dictionary defines restaurant as a place where people pay to sit and eat meals that are cooked and served on the premises. This word has a French origin ‘restaurer’ which means ‘provide food for’. A restaurateur is a person who owns and manages a restaurant.

Thus, for any activity to be liable to Service Tax, following are the essential requirements:

1. The transaction should amount to a service.
2. The service should be in relation to service of providing/sale of food or beverages, whether alcoholic or otherwise.
3. The service should be provided or agreed to be provided to any person by any restaurant, eating joint or a mess fulfilling the criteria for levy of Service Tax.
4. Restaurant or any part of the restaurant should have the facility of air-conditioning (Centrally or otherwise but excluding air-cooling) or central air-heating in any part of the establishment at any time during the financial year.
5. Such restaurant should have a licence to serve alcoholic beverages in its premises, whether actually served or not.

It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year the conditions for the levy shall be met.

Serving of food or beverages in a air-conditioned premise or centrally air-heated premises will be taxed if its restaurant has a license to serve alcoholic beverages. However, those restaurants which do not have license to serve alcoholic beverages will be exempt from service tax. Serving of food or beverages outside the restaurant, say near the swimming pool, will be taxed if service is from a restaurant having license to serve alcoholic beverages.

Therefore, to attract the levy of service tax, it is necessary that the restaurant must be air-conditioned or centrally air-heated as well as have a licence to serve alcoholic beverages. Both the conditions must be simultaneously satisfied to fulfill the taxability criteria. The conditions are joint with conjunctive word i.e., ‘and’ and therefore, both conditions have to be fulfilled simultaneously.

Amendment w.e.f. 1.4.2013

W.e.f. 1.4.2013, vide Notification No. 3/2013-ST dated 1.3.2013, the exemption has been substituted as under:-

‘Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year’.

Exemption provided to restaurants other than those having (i) air-conditioning and (ii) license to serve liquor, has been rationalized. Condition regarding ‘license to serve liquor’ has been omitted. Therefore, with effect from 1st April, 2013, service tax will be leviable on taxable service provided in restaurants with air-conditioning or central air heating in any part of the establishment at any time during the year.

Exemption under S.No. 19 is now available only to non air-conditioned (non-centrally air-heated) restaurants. The dual requirement earlier that it should also have a license to serve alcohol has been done away with;

The levy 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 pick-up or home delivery, as also goods sold at MRP. However, tax will be levied on services provided by high-end restaurants that are airconditioned and have licence to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations.

Abatement

Under Notification No. 26/2012-ST dated 20.6.2012, abatement at the rate of 30 per cent is allowed w.e.f. 1.7.2012 to bundled services by way of supply of food or any other article of human consumption or any drink in a premises, including a hotel, convention centre, club etc. subject to condition of non availment of Cenvat Credit. Also, Rule 2C of Service Tax (Determination of Value) Rules, 2006, inserted vide Notification No. 24/2012-ST dated 6.6.2012 provides for determination of value of taxable services involved in supply portion of an activity wherein goods, being of food and other drinks (whether intoxicating or not) in a restaurant or as outdoor catering and the value for the purpose of Service Tax shall be 40 per cent and 60 per cent respectively.

Temporary Exemption

Vide Order No. 1/1/2013 dated 17.09.2013, Central Government has granted an ad-hoc exemption to following services provided in the State of Uttrakhand from whole of Service Tax –

1. Services by way of renting of a room in a hotel, inn, guest house, club, campsite or other commercial place meant for residential or lodging purposes;
2. Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess

However, it may be noted that this exemption was in force for the period from 17/09/2013 to 31/03/2014.

CBEC Clarification

Vide Circular No. 173/8/2013–ST dated 7^th October 2013, CBEC has clarified the exemption for services provided by specified restaurants extended vide serial number 19 of Notification 25/2012-ST vide Notification 3/2013-ST dated 01.03.2013  which is as follows:

“Doubt 1 : In a complex where air conditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, will service tax arise in the non-air conditioned restaurant?

Clarification: Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year (hereinafter referred as ‘specified restaurant’) attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned / non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.

Doubt 2 : In a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, will service tax arise?

Clarification: Yes. Services provided by specified restaurant in other areas of the hotel are liable to service tax.

Doubt 3 : Whether service tax is leviable on goods sold on MRP basis across the counter as part of the Bill/invoice.

Clarification: If goods are sold on MRP basis (fixed under the Legal Metrology Act) they have to be excluded from total amount for the determination of value of service portion.”

Taxability under different Scenarios

Hotel having non-AC restaurant                                                                    Exempt

Hotel having non-AC kitchen with non-AC restaurant                                      Exempt

Hotel having non-AC kitchen with  AC restaurant                                            Taxable

Coffee shop 24 x 7 - air-conditioned                                                               Taxable

Individual restaurant - air-conditioned                                                          Taxable

Non-AC restaurant                                                                                       Exempt

Pool-side restaurant                                                                                     Exempt

There may be hotel with common AC kitchen serving AC restaurant and non-AC restaurant. This Circular does not cover such a situation where the kitchen is AC. Non AC restaurants are exempt from service tax while the services of AC restaurant are taxable.              

Constitutional Validity

In Kerala Classified Hotels and Resorts Association v. Union of India 2013 (7) TMI 431 - KERALA HIGH COURT , Service Tax on serving of food or beverage including alcoholic beverages introduced by Finance Act, 2011 was held as constitutionally invalid. It held as under –

1. It was beyond legislative competence of Parliament as such transactions were covered by Entry No. 54 of List-II of Seventh Schedule of Constitution of India, and within exclusive competence of State Legislature.
2. Incidence of tax was on supply of any goods by way of or as part of any service, under the deeming provisions of article [366 (29A)(f)] of Constitution of India
3. Whenever any food or alcoholic beverages are supplied as a part of any service, such transfer would be deemed to be sale.
4.  In view of the fact that such transfer was during the course of service and deeming provision permitted State Government to impose tax on such transfer, there cannot be a different component of service which could be imposed with any service tax in exercise of residuary powers of Central Government under Entry No. 97 of List I of Constitution of India.
5. Service forms paid of sale of goods and State Government alone will have legislative competence to enact law imposing a tax on service element forming part of sale of goods i.e., service element embedded in price of goods is a part of sale of goods and it cannot be charged to Service Tax.
6. If any payments have been made by the petitioners under the clause 65(105)(zzzzv), they are entitled to seek refund of the same.

However, in Indian Hotels & Restaurant Association v. Union of India 2014 (4) TMI 447 - BOMBAY HIGH COURT, it was held that as per Entry 97 in List-I of Schedule VII of Constitution of India, Parliament may impose Service Tax and Entry 54 in List II of Constitution of India and Article 366 (29)(f) which enables levy of sales tax on 'deemed sale' of food cannot bar imposition of Service Tax on services rendered by a restaurant to any person. The court held that levy of Service Tax on service element in restaurant was constitutionally valid. However, issue of double taxation on same transaction i.e. VAT and Service Tax was not considered. It was further held that in KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION & OTHS. Versus UNION OF INDIA & OTHS. 2013 (7) TMI 431 - KERALA HIGH COURT , the Single Judge of Kerala High Court beyond referring to three Supreme Court judgments, namely, Associated Hotels of India Ltd. [1972 (1) TMI 80 - SUPREME COURT OF INDIA], Northern India Caterers Ltd. [1978 (12) TMI 157 - SUPREME COURT OF INDIA] 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 Single Judge and of the Constitutional definition, with respect, cannot be accepted. The attempt by the Single Judge to get over the judgments of the Supreme Court relied upon by the Additional Solicitor General, does not commend to us. The Single Judge has not underscored and noted the distinction, with respect, referred to supra. Hence, view of the Single Judge of Kerala High Court was disagreed with.