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2016 (8) TMI 502 - DELHI HIGH COURT

2016 (8) TMI 502 - DELHI HIGH COURT - 2016 (44) S.T.R. 3 (Del.) - Constitutional validity of levy of service tax - Section 65 (105) (zzzzv) of the Finance Act 1994 (FA) whereby the provision to any person by a restaurant, by having the facility of air-conditioning in any part of its establishment serving food or beverage, including alcoholic beverages or both, in its premises has been made amenable to service tax. - constitutional validity of Section 65 (105) (zzzzw) of the FA whereby the provis .....

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ring." What the decision therefore does is to highlight the possibility of splitting up of the composite transaction into the provision of service element and the supply of food. The Respondents are justified in contending that as far as the interpretation of Article 366 (29A) (f) of the Constitution is concerned, the decision in Tamil Nadu Kalyana Mandapam Association v. Union of India (supra) fully supports their stand. - The Parliament has further made the legal position explicit by inser .....

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ned decisions of the Supreme Court. Even if this is viewed as Parliament deploying a legal fiction, it is legally permissible. - Thus it is not possible to accept the contention of the Petitioners that Parliament lacks the legislative competence to enact Section 65 (105) (zzzzv) of the FA with a view to bringing the service component of the composite contract of supply of food and drinks by an air-conditioned restaurant within the service tax net. - Decided against the assessee and in favour .....

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ed tariff of less than ₹ 1,000 per day or equivalent is by Notification No. 12/2012 dated 17th March 2012. This is not provided in the Act or the Rules. - Taxation by way of administrative instructions which are not backed by any authority of law is unreasonable and is contrary to article 265 of the Constitution of India. - The court accordingly, strikes down Section 65 (105) (zzzzw) of the Finance Act 1994 pertaining to levy of service tax on the provision of short-term accommodation .....

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ar Singhal, Advocate for R-2 & R-3. J U D G M E N T Dr. S. Muralidhar, J.: 1.1 The challenge in this petition under Article 226 of the Constitution of India is to the constitutional validity of Section 65 (105) (zzzzv) of the Finance Act 1994 (FA) whereby the provision to any person by a restaurant, by having the facility of air-conditioning in any part of its establishment serving food or beverage, including alcoholic beverages or both, in its premises has been made amenable to service tax. .....

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articles as declared service to be bad in law. The Petitioners seek a declaration that Rule 2C of the Service Tax (Determination of Value) Rules, 2006 is invalid. Profile of the Petitioners 2.1 Petitioner No.1 is the Federation of Hotels and Restaurants Association of India, a registered association whose members are a number of hotels spread all over the country. Petitioner No.2, the Leela Palace, Chanakya Puri, New Delhi is a unit of Hotel Leela Venture Limited which runs 5-star hotels all ove .....

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airconditioned restaurants, serve meals to the visitors and also have licence to serve liquor. Case of the Petitioners 3. The case of the Petitioners in short is that after Constitution (Forty-Sixth Amendment) Act, 1982 which inserted clause 29A (f) in Article 366 defining tax on sale or purchase of goods to include 'a tax on the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration', all aspects of the transaction of .....

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the exclusive competence to legislate in respect of levy of tax on such sale or purchase of goods. It is contended that no part of the transaction of supply of food in a restaurant or hotel is now left out for being made amenable to service tax levied by a statute enacted by Parliament. Thus it is submitted that Section 65 (105) (zzzzv) of the FA is beyond the legislative competence of Parliament. 4. Further, it is pointed out that under Entry 62 of List II (State List) the States are empowered .....

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ion which is completely covered by Entry 54 of List II is challenged for lack of legislative competence. Relevant provisions 5. First, the relevant constitutional and statutory provisions require to be referred to. Articles 245, 246 and 248 of the Constitution read thus: "245. (1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. (2 .....

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with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the Concurrent List ). (3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the State List ). (4) Parliament has power to make laws with respect to any matter for any part of the terr .....

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s on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I. 62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling 7. By the Constitution (Forty-Sixth Amendment) Act, 1982, Article 366 (29A) was inserted and it reads as under: 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 valuab .....

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ons 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 .....

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h or for deferred payment or for other valuable consideration (not including a grant or subvention payment made by one government agency or department, whether of the central government or of any state government, to another) and includes- (i) to (vi).... (vii) 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 .....

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cense to serve alcoholic beverages, in relation to serving food or beverage, including alcoholic beverages or both, in its premises. (zzzzw)- to any person by a hotel, inn, guest house, club or camp-site by whatever name called, for providing of accommodation for a continuous period of less than three months." 10. The Tax Research Unit (TRU) of the Department of Revenue, Government of India explained the background and the purport of the above changes by a communication dated 28th February .....

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aiters, linen, cutlery and crockery, music live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP. 1.2 In certain restaurants the owners .....

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the restaurant separates a portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services it does not represent the full value of all the services rendered by the restaurants. 1.4 The new levy is directed at services provided by high-end restaurants that are air-conditioned and have license to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided ma .....

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ded 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. Finance Minister has announced in his budget speech 70% abatement on this service, which is, inter alia, meant to separate such portion of the bill as relates to the deemed sale of meals and beverages. The relevant notification will be issued when the levy is operat .....

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Minister had announced a 50% rebate from the value of the service which again was to be announced by a notification issued when the levy was operationalised. 12. The above amendments by which clauses (zzzzv) and (zzzzw) were introduced in Section 65 (105) of the FA have been challenged on the ground that they are beyond the legislative competence of Parliament. 13. Thereafter, Parliament enacted the Finance Act, 2012 amending the FA by inserting Sections 65B (22), 65 B (44), 66B and 66E. The re .....

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y activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely,- .......... (ii) such transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution; or .......... (F) after Section 66A, the following sections shall be inserted with effect from such date as the Central Government may, by notification, appoint, namely: Char .....

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tion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. 14. By a Notification No. 12/2012-Service Tax dated 17th March 2012 the Union of India exempted various taxable services from the whole of the service tax leviable under Section 66B of the Finance Act, 1994. The following two activities, which were taxable services were exempted by the said notification: 18. Servic .....

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lcoholic beverages. 15. On 20th June 2012 by Notification No. 25/2012-ST, the aforementioned notification dated 17th March 2012 was superseded. The two activities which were exempted read as under: 18. Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a unit of accommodation below rupees one thousand per day or equivalent. 19. Services provided in relation to serving of food or b .....

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ued. Rule 2C that was inserted by the said amendment it reads as under: 2C. Determination of value of service portion involved in supply of food or any other article of human consumption or any drink in a restaurant or as outdoor catering.- Subject to the provisions of Section 67, the value of service portion, in an activity wherein goods being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity at a restau .....

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y other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of such outdoor catering. 60 Explanation 1.- For the purposes of this rule, total amount means the sum total of the gross amount charged and the fair market value of all goods and services supplied in or in relation to the supply of food or any other article of human consumption or any drink (whether or not intoxicating), whether or not supplied under the same contract or any other .....

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22 of the Central Excise Tariff Act, 1985 (5 of 1986). 17. These further changes by the Finance Act, 2012 have also been challenged in the present writ petition. The additional prayers in the amended writ petition are for a declaration that Section 66E of the FA to the extent it seeks to constitute a service portion in an activity of supply of food or other articles as declared service to be bad in law. Further the Petitioners seek a declaration that Rule 2C of the 2006 Rules is also bad in law .....

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Petitioners 19. Mr. N. Venkataraman, learned Senior counsel appearing for the Petitioners, first traced the history of the Constitution (Forty-Sixth Amendment) Act, 1982 and in particular the insertion of clause (f) in 29A of Article 366A of the Constitution. He sought to draw a distinction between the entries in Article 366 (29A)(a), (b), (c) and (d) each of which began by describing a tax on the sale and purchase of goods as a tax on the transfer of property' in goods or on the 'deliv .....

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1972) 1 SCC 472 and Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (1978) 4 SCC 36 Mr. Venkataraman submitted that in both the aforementioned decisions the supply of food and drinks in a hotel was viewed by the Supreme Court to be a composite transaction providing a service which was indivisible and therefore, not amenable to sales tax. It was with a view to overcoming those decisions, Parliament brought the entire transaction which otherwise would constitute a service, within the .....

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at resort could not be had to the residue Entry 97 of List I (Union List) of the Seventh Schedule with respect to a matter fully covered by Entry 54 of List II (the State list). He pointed out that Entry 92C of List I which provides Taxes on Services is yet to be notified and in any event could not make any difference to the legal position. According to him, it is not possible to extricate and assign separate value of the various aspects associated with the provisions of service. 22. Referring t .....

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th VAT and luxury tax are collected by the State Governments. VAT is calculated on the sale of goods and luxury tax is payable by hotels, inn, guest houses, clubs and camp sites on provision of accommodation. Service tax on either of these aspects, therefore, cannot be levied as the two imposts were mutually exclusive. Referring to the decision in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes 2008 (9) STR 337 (SC), he submitted that the payment of service tax and VAT are mutually .....

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e Court in K. Damodarasamy Naidu v. State of Tamil Nadu (2000) 1 SCC 521 where the Supreme Court, according to him, clarified that while a customer in a fancy restaurant pays far more for the supply of the goods, the amount paid for such supply is amenable to sales tax notwithstanding that it may be part of rendering of service in the form of good furniture, furnishing and fixtures, linen, crockery, cutlery etc. He also relied on the decision of the Division Bench of the Kerala High Court dated .....

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in restaurant and the provision of service in a Mandapam. He referred to the decision in International Tourist Corporation v. State of Haryana AIR 1981 SC 774 which emphasised that before legislative competence can be claimed for Parliament by resort to the residuary power, the legislative incompetence of the State legislative must be clearly established. Emphasising the 'pith and substance' and the 'dominant nature' tests, he submitted that in the present case the transaction in .....

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value of the transaction to be attributable to the value of services was arbitrary and without any basis and was liable to be quashed. Likewise, there was no basis for fixing the figure of ₹ 1,000 per day tariff for the exemption from service tax on accommodation in terms of the notifications dated 17th March and 6th June 2012. 26. Mr. Venkataraman sought to distinguish the judgment of the Bombay High Court in Indian Hotels and Restaurant Association v. Union of India 2014 (34) S.T.R 522 ( .....

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s of counsel for the Respondents 27. In reply to the above submissions, it was urged by Mr. Dev Bhardwaj, learned Standing counsel for the Central Government and Mr. Harpreet Singh learned Senior Standing counsel for the Service Tax Department as under: (i) Service tax was collected on specific taxable services which would include catering contracts, which were composite contracts. The objective under the FA was to levy service tax only on the service component of a transaction, with abatement b .....

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n any manner is a declared service under Section 66E(i) of the Act. In the case of short-term accommodation (hotel) service, the abatement method is followed to arrive at the value of the service portion. Prior to 2012, as far as the restaurant services were concerned, the service portion was 30% with an abatement of 70% for the value for the goods portion. As far as the short-term accommodation service was concerned, the service portion was taken at 50%. These percentages after 2012 were change .....

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s not deemed to be a sale of goods but only the supply of goods as part of the service including the service provided in a restaurant. The State can levy sales tax only on the goods portion in the case of restaurant service and the Union is constitutionally entitled to tax the service portion. The stand of the Respondents is that if the State took cognizance of the meaning of tax on supply of goods and services under Article 366(29A) (f) and limited their taxation in the case of restaurant servi .....

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ompanies v. Union of India (2011) 2 SCC 352. (iv) By the notification dated 17th March 2012, as modified by the Notification dated 6th June 2012, there has been an increase in the value of the service portion of the composite contract of supply of goods and services in a restaurant from 30 to 40%. Further a limited exemption has been granted from the service tax leviable on short-term accommodation (hotel) service when the declared tariff per day for a hotel room is less than ₹ 1000. This .....

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providing restaurant service. Under the new approach the CENVAT credit has been liberalized to coincide with internationally followed GST principles and the value of the goods portion has been settled at the level of 60%. Likewise, in the case of short-term accommodation (hotel) service, CENVAT credit of input services has been allowed at the hands of the service provider. It is pointed out that therefore the additional burden of service tax arising out of rationalization of abatement percentage .....

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ciation of Leasing & Financial Services Companies v. Union of India (supra), it is emphasised that only the supply of goods as part of any service is amenable to tax/VAT under Article 366 (29A)(f) and that the service portion is excluded from the supply. (vii) Under the Central Product Classification ( CPC ) of United Nations Statistical Commission, the Food Serving Services' and 'Beverages Serving Services' for consumption on the premises are being categorized under Groups 632 a .....

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atute and sale for the purpose of another. The same activity could be treated as service in one situation and as sale in another. (ix) Levy of service tax falls under Entry 97 of List I read with Article 248 of the Constitution of India as held in Tamil Nadu Kalyana Mandapam Association v. Union of India (supra) Gujarat Ambuja Cements Ltd. v. Union of India (2005) 4 SCC 214 and All India Federation of Tax Practitioners v. Union of India (2007) 7 SCC 527. In terms of Tamil Nadu Kalyana Mandapam A .....

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of the 46th Amendment 28. Before discussing the scope of expression tax on the sale of goods' occurring in Article 366 (29A) of the Constitution, which was inserted by the Constitution with introduction of 46th Amendment Act, the legal history behind the said amendment requires to be noticed. 29. In State of Madras v. Gannon Dunkerley AIR 1958 SC 560, the Supreme Court was considering the question whether a works contract which was a composite one involving the supply of goods as well as su .....

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uld not have legislative competence to levy tax on such transaction. 30. The decision in Gannon Dunkerley (supra) recognized eight possible deductions from the value of the composite works contract. However, at that stage there was no machinery provision by which it was possible to bifurcate the expenses into the portion relating to supply of goods and the supply of labour and services, particularly if the contractor s accounts were not maintained in that manner. 31. The first instance of challe .....

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another for service in the absence of any intention to separately sell the food. The transaction was, therefore, held to be outside the purview of the State sales tax. 32. The issue was re-visited by the Supreme Court in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (supra). The Supreme Court examined whether under the Bengal Finance Sales Tax Act, 1941 the supply of food in a restaurant was exigible to tax as a sale. The Supreme Court followed the earlier decision in State of Hi .....

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y of meals was essentially in the nature of a service provided to them and could not be identified as a transaction of sale. The court declined to accept the proposition that the Revenue was entitled to split up the transaction into two parts, one of service and the other of sale of foodstuffs. If that be true in respect of hotels, a similar approach seems to be called for on principle in the case of restaurants. No reason has been shown to us for preferring any other. The classical legal view b .....

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Ltd. v. Lt. Governor of Delhi (1980) 2 SCC 167 (hereafter Northern India Caterers Review Order), the Supreme Court clarified that where food was supplied in an eating house or a restaurant and it is established upon the facts that the substance of the transaction, evidenced by its dominant object, was the sale of food and the rendering of services was merely incidental, the transactions would be exigible to sales tax. The Court further clarified as under: "It appears from the submissions n .....

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we have no hesitation in saying that where food is supplied in an eating-house or restaurant, and it is established upon the facts that the substance of the transaction, evidenced by its dominant object, is a sale of food and the rendering of services is merely incidental, the transaction would undoubtedly be exigible to sales-tax. In every case it will be for the tax authority to ascertain the facts on making an assessment under the relevant sales tax law and to determine upon those facts whet .....

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d as under: "2. By a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon Dunkerley held various other transactions, which resemble, in substance, transactions by way of sales, to be not liable to sales tax. As a result of these decisions, a transaction, in order to be subject to the levy of sales tax under Entry 92-A of the Union List or Entry 54 of the State List, should have the following ingredients, namely, parties competent to contract, mutual .....

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Central Sales Tax Act. While in the case of a works contract, if the contract treats the sale of materials separately from the cost of the labour, the sale of materials would be taxable but in the case of an indivisible works contract, it is not possible to levy sales tax on the transfer of property in the goods involved in the execution of such contract as it has been held that there is no sale of the materials as such and the property in them does not pass as movables… In the Associated .....

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d or drink by a hotelier to a person lodged in the hotel and that tax was leviable on the sale of foodstuffs by a restaurant. But over-ruling the decision of the Delhi High Court, the Supreme Court has held in the above case that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would n .....

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icle 366(29-A) introduced by the Forty-sixth Amendment was a result of a ruling of this Court which was sought to be neutralised or modified. Sub-clause (a) is the outcome of New India Sugar Mills Ltd. v. and Vishnu Agencies (P) Ltd. v. CTO 14 STC 316. Sub-clause (b) is the result of Gannon Dunkerley & Co. 1959 SCR 379. Sub-clause (c) is the result of K.L. Johar and Co. v. CTO 1965 (2) SCR 112. Sub-clause (d) is consequent to A.V. Meiyappan v. CIT 20 STC 115. Sub-clause (e) is the result of .....

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rt of a composite catering contract. The focus at that stage was not on capturing any portion of that composite contract for the purpose of levy of service tax. This was 1982 and service tax was not thought of till a decade later. Therefore, it is difficult to imagine that Parliament had in 1982 at the time of the 46th Amendment consciously decided that no portion of the composite contract of a catering contract would be amenable to levy of Union service tax. Validity of Section 65 (105) (zzzzv) .....

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International Tourist Corporation v. State of Haryana (supra): "7. Before exclusive legislative competence can be claimed for Parliament by resort to the residuary power, the legislative incompetence of the State legislative must be clearly established. Entry 97 itself is specific that a matter can be brought under that entry only if it is not enumerated in List II or List III and in the case of a tax if it is not mentioned in either of those lists. In a Federal Constitution like ours wher .....

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thereby destroy or belittle State autonomy must be rejected." 39. In Gujarat Ambuja Cements Ltd. v. Union of India (supra) the Court explained: This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in su .....

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tion under our Constitution. In the lists contained in the 7th Schedule to the Constitution, taxation entries are to be found only in lists I and II. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dicho .....

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property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm. 41. As regards the limitation on the legislative power of the States to levy sales tax on services the Court in Bharat Sanchar Nigam Limited v. Union of India (supra) observed: 80. … No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly dis .....

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to determine whether the composite catering contract is capable of being segregated into the portion pertaining to supply of goods and the portion pertaining to the service provided. 43. To revert to Article 366 (29A), the focus as far as the present petition is concerned is on Clause (f) which seeks to define tax on sale purchase of goods. The constituent elements as it were, of the definition are: (i) the supply of goods being food or any other article for human consumption or any drink (whet .....

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or supply is made. 45. The subject matter of transfer, delivery or supply are the goods , which in this case would be food or any other article fit for consumption whether or not intoxicated. The key expression is not just supply but supply of goods . It is arguable that the expression supply of goods connotes that the dominant nature of the transaction is the transfer, delivery or supply of goods and the provision of service is only incidental to such transfer, delivery or supply. The dominant .....

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s the rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if it otherwise has elements of works contract." 46. By the same logic even if some part of the composite transaction involves the rendering of service, there should be no difficulty in recognising the power of the Union to bring to tax that portion. Section 66 E (i) of the FA which defines 'declared service .....

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oth the said decisions therefore require to be examined in some detail. 48. In K Damodarasamy Naidu v. State of Tamil Nadu (supra) the Supreme Court was examining the validity of Second 3-D of the Tamil Nadu General Sales Tax Act 1959 which sought to levy sales tax on supply of food and drink in restaurants. The contention was that since the transaction was a composite one involving provision of service, the entire value of the transaction could not be subject to sales tax. This contention was r .....

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ates 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 restaurantowner to the customer though it may be a part of the service that he renders by providing good f .....

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be taxed . 49. The crucial sentence in the above passage is: "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 Court was careful to emphasise that the subject of the levy was supply of food and drink. The reluctance to recognise the splittin .....

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is what is the subject of the levy." Thus it reiterated that the subject of the levy is "the supply of food". The decision in K Damodarasamy Naidu (supra) did not engage with the question whether the service element involved in the supply of food and drink would be amenable to service tax. The only question was whether the entire transaction was exigible to sales tax even where the supply of food and drink was in the course of providing a service and that question that was answer .....

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ith Article 366 Clause 29A(f) and Entry 97 of List I which covers a tax on the service portion of such contract. The discernment of the service portion of a composite catering contract, different from the portion pertaining to supply of goods, is theoretically possible to be explained when the 'aspect doctrine' is applied. In Federation of Hotel & Restaurant Assn. of India v. Union of India, (1989) 3 SCC 634 a Constitution Bench of the Supreme Court observed: "31. Indeed, the la .....

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of concepts of Duties of Excise and Tax on Sale of Goods said: ... The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of, his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separated and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article lea .....

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n with one class of subjects and others are of a kind mostly dealt with in connection with another. As in the case of a pocket gadget compactly assembling knife blade, screwdriver, fishscaler, nailfile, etc., a description of it must mention everything but in characterising it the particular use proposed to be made of it determines what it is. (p. 116) ... I pause to comment on certain correlations of operative incompatibility and the aspect doctrine. Both grapple with the issues arising from th .....

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of India (supra) as under: "30. .....The object behind enactment of Article 366(29A) is to tax the composite price so that the full value of the hire-purchase price is taxed and to avoid the judgment in K.L. Johar's case whose implication was to narrow the tax base resulting in seepage of sales tax revenue. It is in that sense "splitting" of the contract needs to be understood. Thus, it cannot be said that Parliament divested itself of the power to levy service tax vide enact .....

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ponent of an outdoor catering contract was again emphasised in Tamil Nadu Kalyana Mandapam Association v. Union of India (supra) in the following passage: "43. 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 purch .....

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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. 53. Mr. Venkataraman, tried to distinguish the above decision in Tamil Nadu Kalyana Mandapam Association by pointing out that the question there arose in a different context. He relied on the following passage in the decision to urge that there was a difference between the provision of outdoor catering service in a Mandapam an .....

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food/eatables/drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant, the customer's choice of foods is limited to the menu card. Again in the case of outdoor catering, customer is at liberty to choose the time and place where the food is to be served. In the case of an outdoor caterer, the customer negotiates each element of the catering service, including the price to .....

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e only on 60% of the gross amount charged by the mandap-keeper to the customer. 54. The Court is unable to agree with the above submission of Mr. Venkataraman. While the Court in the above passage seeks to distinguish the services rendered by outdoor restaurant from the services rendered in a restaurant and points out that in outdoor catering there is an element of personalized service, it in no way suggests that there is no service element involved in the supply of food and drinks in a restaura .....

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ernment 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(29-A)(f) of the Constitution." 55. Therefore, the question whether in the context of Article 366 (29A) (f) of the Constitution the service portion of a composite catering contract can be made .....

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p-keeper in relation to use of a mandap in any manner including the facilities provided to a customer in relation to such use also the services, if any, rendered as a caterer. The nature and character of this service tax is evident from the fact that the transaction between a mandap-keeper and his customer is definitely not in the nature of a sale of hire purchase of goods. It is essentially that of providing a service. In fact, as pointed out earlier, the manner of service provided assumes pred .....

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s beyond its competence. Incidental encroachment does not invalidate such a statute on the grounds that it is beyond the competence of the legislature (Prafulla Kumar vs. Bank of Commerce). Article 246(1) of the Constitution specifies that the 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 enumerat .....

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Court held: "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." What the decision therefore does is to highlight the possibility of splitting up of the composite transaction into the provision of service element and the supply of food. The Respondents are justified in contending that as far .....

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ich had been held not to amount to sale in State of Punjab vs. M/s. Associated Hotels of India Ltd. (supra). That decision has by this clause been effectively legislatively invalidated. All the clauses of Article 366 (29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dun .....

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ntry 54 of List II in particular except to the extent that the clauses in Art. 366(29A)operate. By introducing separate categories of 'deemed sales', the meaning of the word 'goods' was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remains static. Courts must move with the times. But .....

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limited to the clauses of Article 366(29A). All other transactions would have to qualify as sales within the meaning of Sales of Goods Act 1930 for the purpose of levy of sales tax. Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same t .....

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r any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity is a 'declared' service. The legislative carving out of the service portion of the composite contract of supply of food and drinks has sound constitutional basis as explained in the aforementioned decisions of the Supreme Court. Even if this is viewed as Parliament deploying a legal fiction, it is legally permissible. In State of U.P. v. Hari Ram (2013) .....

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to accept the contention of the Petitioners that Parliament lacks the legislative competence to enact Section 65 (105) (zzzzv) of the FA with a view to bringing the service component of the composite contract of supply of food and drinks by an air-conditioned restaurant within the service tax net. 60. Next the challenge to Rule 2-C of the 2006 Rules requires to be examined. The case of the Petitioners is that the said rule is bad in law as it arbitrarily attributes 40% of the value of the compos .....

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the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any certainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity. 61. What Rule 2C does is to enable the assessing authority to put a definite value to t .....

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pra) wherein the abatement was 90% and the standard rate of service tax was applied on @ 10% of the cost of the leasing transaction which approximately represented the service element. It also requires to be kept in mind that the ready reckoner formula is useful where an assessee does not maintain accounts in a manner that will enable the assessing authority to clearly discern the value of the service portion of the composite contract. It hardly needs emphasis that when during the course of asse .....

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in Govind Saran Ganga Saran v. CST (supra) stand satisfied. 62. Indeed a perusal of one of the bills produced by the Petitioners themselves reveals that of the total sale of food for ₹ 2300, food tax (i.e. VAT) is levied @ 12.5% and works out to ₹ 287.50, service tax is @ 4.94% which works out to ₹ 113.71. An abatement has been provided in the rate of service tax. Where the service tax should be @ 12.36% it is, after abatement, 4.94%. Therefore it is not right that the measure .....

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ons, the Court upholds the constitutional validity of Section 65 (105) (zzzzv) and Section 66 E (i) of the FA read with Section 65 (22) and 65 (44) thereof and Rule 2 C of the 2006 Rules 2006. Challenge to the validity of Section 65 (105) (zzzzw) of the FA 64. Turning now to the challenge to Section 65 (105) (zzzzw) of the FA by which the service tax is sought to be levied on short-term accommodation provided in a hotel, it must be noticed at the outset that main contention of the Petitioners is .....

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plicable in the National Capital territory of Delhi. 66. Under Section 2 (i) of the Delhi Tax Luxuries Act, 1996 ('DTL Act'), the expression "luxury provided in a hotel" is defined to mean "accommodation and other services provided in a hotel, the rate or charges for which including the charges for air-conditioning, telephone, radio, music, extra beds and the like, is five hundred rupees per room per day or more; but does not include the supply of food, drinks or other ser .....

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s provided in a hotel in a given period." The expression "hotel" has been defined in Section 2 (g) of the DTL Act to include "a residential accommodation, a lodging house, an inn, a club, a resort, a farm house, a public house or a building or a part of a building where a residential accommodation is provided by way of a business." 67. Turning to Section 65 (105) (zzzzw) of the FA it contemplates a service provided "to any person by a hotel, inn, guest house, club o .....

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term" in Section 65 (105) (zzzzw) followed by the expression "for a period of less than three months". However, such provision of short-term accommodation of less than three months is by no means exempt from luxury tax under the DTL Act. The very same taxable event of providing service by way of accommodation in a hotel etc. is the subject matter of both levies viz., luxury tax under the DTL Act and service tax under the FA. 68. Consequently Section 65 (105) (zzzzw) of the FA fail .....

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e State is therefore competent to levy and collect luxury tax on such taxable event. 69. In Godfrey Phillips India Ltd. v. State of U.P., (2005) 2 SCC 515, the Constitution Bench of the Supreme Court considered at length the meaning of term 'luxuries' in Entry 62 of List II of the Seventh Schedule to the Constitution. The exercise was undertaken in the context of the challenge laid to State legislations seeking to levy tax on luxury goods or articles. Holding that the levies were invalid .....

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rt of the whole of the word preceding. The nature of the included items would not only partake of the character of the whole, but may be construed as clarificatory of the whole. 69. It has also been held that the word includes may in certain contexts be a word of limitation [South Gujarat Roofing Tiles Manufacturers Assn. v. State of Gujarat (1976) 4 SCC 601]. In the context of Entry 62 of List II this would not mean that the word luxuries would be restricted to entertainments, amusements, betti .....

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It is only derivatively and recently used to connote an article of luxury. One can assume that the coupling of these taxes under one entry was not fortuitous but because of these common characteristics. … 77. Hence on an application of general principles of interpretation, we would hold that the word luxuries in Entry 62 of List II means the activity of enjoyment of or indulgence in that which is costly or which is generally recognised as being beyond the necessary requirements of an ave .....

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ice tax and held that service tax is a value added tax ( VAT , for short) which in turn is a destination based consumption tax in the sense that it is levied on commercial activities and it is not a charge on the business but on the consumer. That, service tax is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of services are similar as they both satisfy human needs. Today with the technological advancement there is a very thin line .....

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n an activity. That, service tax is a value added tax." 71. In the counter affidavit filed by the Respondent, it is simply asserted that service tax is a levy that is distinct from luxury tax levied by the States. But the basis for this assertion is not set out. On the other hand, while seeking to explain the exemption granted to rooms with a tariff of less than ₹ 1000 per day, reference is made to the threshold limits fixed in the luxuries tax legislation of the States like for e.g., .....

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cial Taxes (supra) in the context of VAT and service tax would equally apply to a situation where luxury tax and service tax are sought to be levied on the same taxable event: "32. Payments of service tax as also VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract." 73. The levy of service tax on sho .....

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n other words there is no machinery for the computation of the taxable value of the service of providing accommodation. In Commissioner of Income Tax v. B. C. Srinivasa Setty AIR 1981 SC 972 in the context of the absence of a machinery provision for computation of tax on goodwill, in the context of Section 45 of the Income Tax Act 1961, for the it was observed: "The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging secti .....

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clared tariff of less than ₹ 1,000 per day or equivalent is by Notification No. 12/2012 dated 17th March 2012. This is not provided in the Act or the Rules. In Commissioner of Central Excise and Customs, Kerala v. Larsen and Toubro Ltd. (2016) 1 SCC 170, the Supreme Court affirmed the decision of the Orissa High Court in Larsen and Toubro Ltd. v. State of Orissa (2008) 12 VST 31 to the effect that the machinery provisions for levy of the tax could not be provided by instructions and circul .....

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