2025 (6) TMI 456 - AT - Service Tax

Calculation of service tax - differential service tax along with interest demanded on the entire value of food and service charges is correct or service tax liability is required to be calculated only on the service charges? - inclusion of reimbursable expenditure for purchase of Flowers and Posters in the value of Outdoor Catering Service - requirement to pay service tax on the marketing leads provided to M/s. Epicurean under Business Auxiliary Services. Whether the differential service tax of Rs.3, 51, 313/- along with interest demanded on the entire value of food and service charges is correct or whether the service tax liability is required to be calculated only on the service charges? - HELD THAT - The issue is decided in the case of M/S. GOLDLINE HOSPITALITY SOLUTIONS (P) LTD. VERSUS THE COMMISSIONER OF G.S.T. CENTRAL EXCISE CHENNAI SOUTH COMMISSIONERATE 2019 (1) TMI 1309 - CESTAT CHENNAI where it was held that The issue is no longer res integra and is covered by the decision of the Hon ble Karnataka High Court alluded to by the Ld. Advocate in C.S.T. Bangalore Vs. The Grand Ashok 2011 (4) TMI 210 - KARNATAKA HIGH COURT . The Hon ble High Court of Karnataka has held that Outdoor Catering is a composite but divisible contract of service under Article 366(29)(a)(f) of the Constitution of India; hence sale of goods has to be bifurcated from service provided. The demands of service tax of Rs.3, 51, 313/- and also of Rs.1, 650/- on reimbursable expenditure are not sustainable. Whether the Appellant is required to pay service tax on the marketing leads provided to M/s. Epicurean under Business Auxiliary Services? - HELD THAT - The Appellant has promoted or marketed the services of M/s. Epicurean to Nokia and obtained the contract favoring M/s. Epicurean and for such services M/s. Epicurean was paying 1% fee of the gross sales of M/s. Epicurean to Nokia. As such the Appellant is providing a marketing service to M/s. Epicurean which is appropriately classifiable under BAS and so liable to pay service tax thereon - As such the Appellant is liable to pay service tax of Rs.83, 863/- along with interest under Business Auxiliary Service. Conclusion - The service tax demands related to valuation and reimbursable expenses set aside while upholding the BAS-related service tax demand upheld. The Appeal is partly allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are threefold: (i) whether the differential service tax demand on the entire value of food and service charges under outdoor catering service is justified or whether service tax liability should be confined only to the service charges; (ii) whether reimbursable expenditure incurred by the appellant for purchase of flowers and posters should be included in the taxable value of outdoor catering service; and (iii) whether the appellant is liable to pay service tax on marketing leads provided to a third party under the category of Business Auxiliary Services (BAS).

The first issue revolves around the proper valuation of outdoor catering services for service tax purposes, specifically the applicability of Notification No. 12/2003-ST dated 20.06.2003 and Notification No. 1/2006-ST dated 01.03.2006. The appellant contended that since the food items supplied are goods subject to VAT and the conditions of Notification No. 12/2003-ST were complied with by separately showing the value of goods and service charges, the demand for service tax on the entire value including food cost is unsustainable. The Department, however, argued that the supply of food is integral and inseparable from the catering service, thus the entire value should be subject to service tax without exemption.

The Tribunal relied heavily on binding judicial precedents, notably the decision of the Karnataka High Court in a case dealing with outdoor catering services, which held that such contracts are composite but divisible contracts under Article 366(29A)(f) of the Constitution of India. This reasoning was supported by a Division Bench ruling that bifurcated the contract into two components: (a) sale of goods (food items) subject to state sales tax/VAT, and (b) provision of service (including transportation and catering service) subject to service tax. The Court emphasized that the State Legislature is competent to levy sales tax only on the sale aspect (food items), and the service tax is payable only on the service component. The Tribunal reproduced this reasoning verbatim from a prior order in the appellant's own case, affirming that the contract is not indivisible and the value of goods and service must be bifurcated.

Applying this legal framework, the Tribunal found that the appellant had correctly paid service tax only on the service charges or on 50% of the consolidated value where invoices did not bifurcate the amounts, availing the respective notifications. Consequently, the demand for differential service tax on the entire value of food and service charges was held to be unsustainable. The Tribunal also noted the appellant's compliance with VAT on the food items and the absence of any contrary evidence from the Department to justify the demand. Thus, the Tribunal set aside the demand of Rs. 3,51,313/- along with interest.

Regarding the inclusion of reimbursable expenditure on flowers and posters in the taxable value, the appellant relied on the Supreme Court decision in Union of India vs. Intercontinental Consultants & Technocrats Pvt. Ltd., which held that reimbursable expenses are not includible in the taxable value under Rule 5 of the Service Tax Valuation Rules, as these provisions were declared ultravires prior to 14.05.2015. The Tribunal accepted this argument, holding that the amount of Rs. 15,087/- accounted as reimbursement and the related service tax demand of Rs. 1,650/- could not be sustained and were accordingly set aside.

The third issue concerned whether the appellant's receipt of 1% commission from a third party for providing marketing leads to another entity, which procured a contract with Nokia, falls within the ambit of Business Auxiliary Services under Section 65(19)(ii) of the Finance Act. The appellant argued that merely providing marketing leads for mutual benefit does not amount to promotion or marketing of the client's services, and hence does not attract service tax under BAS. The Department contended that the appellant had effectively marketed the services of the third party to Nokia, securing the contract and earning commission, thus constituting a taxable BAS.

The Tribunal analyzed the contractual arrangement and found that the appellant did indeed provide a marketing service by promoting the third party's services to Nokia and facilitating the procurement of the contract. This service attracted BAS classification and was liable to service tax. The Tribunal rejected the appellant's contention that the arrangement was not a tripartite agreement or that mere provision of leads fell outside BAS. The Tribunal's reasoning was grounded in the statutory definition of BAS, which includes promotion or marketing of services provided by the client. Consequently, the demand of Rs. 83,863/- along with interest under BAS was upheld.

In addressing competing arguments, the Tribunal gave due weight to judicial precedents and statutory definitions, carefully distinguishing between the nature of services and goods involved in outdoor catering and the scope of Business Auxiliary Services. The appellant's reliance on prior favorable orders and Supreme Court rulings was acknowledged and applied where appropriate, particularly on valuation and reimbursable expenses. The Department's contentions were examined against evidentiary records and found lacking on the first two issues but accepted on the third.

The Tribunal's final determinations are as follows: (i) the service tax demand on the entire value of food and service charges under outdoor catering service is not sustainable; service tax is payable only on the service component, thus the demand of Rs. 3,51,313/- with interest is set aside; (ii) reimbursable expenditure for flowers and posters is not includible in taxable value, and the related demand of Rs. 1,650/- is set aside; and (iii) the appellant is liable to pay service tax of Rs. 83,863/- under Business Auxiliary Services on commission received for marketing leads, and this demand is upheld.

Significant legal principles affirmed include the recognition of outdoor catering contracts as composite but divisible contracts, necessitating bifurcation of value for sales tax and service tax purposes, and the exclusion of reimbursable expenses from taxable value in line with Supreme Court precedent. Additionally, the Tribunal underscored the expansive scope of Business Auxiliary Services to include marketing and promotion activities that facilitate procurement of contracts on behalf of clients.

Verbatim from the Tribunal's reasoning: "The outdoor catering contract is a composite but divisible contract of service under Article 366(29A)(f) of the Constitution of India; hence, sale of goods has to be bifurcated from service provided... The service so rendered by the assessee, which also includes the cost of transporting the food articles constitutes service. Therefore, to this extent alone, the assessee is liable for service tax and not for the entire cost received... The contract for outdoor catering is a composite contract which falls under sub-clause (f) of clause (29-A) of Article 366 of the Constitution of India and service tax is payable on service aspect and sales tax is payable on deemed sales aspect and it is not an indivisible contract."

In conclusion, the appeal was partly allowed, setting aside the service tax demands related to valuation and reimbursable expenses, while upholding the BAS-related service tax demand, consistent with the statutory framework and judicial precedents.