GST LOOKS AT THE SUPPLY, NOT THE SMOKE AND SETTING

A Restaurant Setting Is Not the Classification Test

The West Bengal Appellate Authority for Advance Ruling has delivered an important ruling in the matter of In Re: M/s. Indian Wire Products Company. - 2026 (7) TMI 1249 - APPELLATE AUTHORITY FOR ADVANCE RULING, WEST BENGAL. The appellant proposed to serve tobacco and non-tobacco or herbal hookah in its restaurant, along with food and beverages, under the restaurant name 'Pappu Chaiwala'. The appellant sought to have the supply of hookah treated as part of restaurant service.

The issue was commercially simple but legally significant. If hookah served inside a restaurant is treated as restaurant service, it may fall under the restaurant-service framework. If it is treated as a separate supply of goods, or as a composite supply where the principal supply is the hookah product, the tax treatment may change substantially. The Appellate Authority has confirmed that hookah flavours, whether tobacco-based or herbal, do not become restaurant service merely because they are supplied in a restaurant. The real question is whether the item supplied falls within paragraph 6(b) of Schedule II to the CGST Act, which deals with food, any other article for human consumption, or any drink. Hookah consumed by inhalation does not fall within that expression merely because it is supplied in a restaurant environment.

Paragraph 6(b) Has a Food-and-Drink Boundary

Paragraph 6(b) of Schedule II to the CGST Act, 2017 treats certain supplies as supplies of services. It covers the supply, by way of or as part of any service, of food or any other article for human consumption, or any drink, where such supply is for consideration. This provision is the statutory basis for treating restaurant supplies as services. However, it does not cover every item supplied in a restaurant. It is confined to food, drink and articles belonging to the same class.

The appellant argued that hookah supplied through an apparatus, along with food and beverages, should be treated as a restaurant service because the customer receives a lounge or dining experience, not merely a product. The Authority has not accepted this approach. The expression 'any other article for human consumption' cannot be read in isolation. It must be read with the surrounding words 'food' and 'drink'. Food and drink are consumed by eating or drinking. Hookah is consumed by inhalation. It may be enjoyed in a restaurant-like setting, but it does not become food or drink. Therefore, paragraph 6(b) cannot be stretched to include hookah merely because the supply takes place inside a restaurant.

Composite Supply Cannot Rewrite the Goods Being Supplied

A key aspect of the ruling concerns composite supply, as defined in Section 2(30) of the CGST Act: a supply of two or more goods or services that are naturally bundled and supplied together in the usual course of business, with one being the principal supply. Section 2(90) defines 'principal supply' as the main or dominant element, with other parts serving as support or accessories.

Section 8(a) of the CGST Act, 2017 states that a composite supply is taxed as the principal supply, meaning the tax treatment depends on the dominant component. However, these provisions do not allow altering the fundamental nature of the goods supplied. Before applying Section 8(a), it is essential to identify what is actually being supplied. For example, if the primary element is hookah flavour and the apparatus, staff support, and ambience are incidental, the supply cannot be categorised as restaurant service solely because it occurs within a restaurant.

This understanding is crucial for senior officers and professionals, as composite supply analysis should be based on actual facts, not convenience. One must determine the real supply, the principal component, and the supportive elements. Sections 2(30), 2(90), and 8(a) guide the tax treatment but do not allow artificially changing the nature of the supply.

Common Parlance Still Guides Classification

The Authority has applied the common parlance approach. In tax classification, statutory words are often understood as they are commonly understood by persons dealing with the goods. In Ramavatar Budhaiprasad Versus The Assistant Sales Tax Officer, Akola and Another - 1961 (3) TMI 55 - Supreme Court, the Supreme Court held that words used in taxing entries should ordinarily be understood in their popular sense. In Commissioner of Sales Tax, Madhya Pradesh, Indore Versus Jaswant Singh Charan Singh - 1967 (2) TMI 65 - Supreme Court, the same principle was applied to the classification of goods according to ordinary commercial understanding.

This principle was also reflected in COLLECTOR OF CENTRAL EXCISE Versus PARLE EXPORTS (P) LTD. - 1988 (11) TMI 108 - Supreme Court where the Supreme Court emphasised that classification and exemption entries must be read in their proper context. The Bombay High Court in Commissioner of Sales Tax Versus VL. Industries - 1998 (9) TMI 634 - BOMBAY HIGH COURT, also followed the broad approach that expressions in taxing statutes should not be divorced from ordinary understanding.

Applying this principle, hookah is not commonly treated as food. Tobacco or herbal hookah flavour is not ordinarily understood as an article of food or drink. It may be consumed by a person in a broad physical sense, but that is not enough. The expression 'human consumption' in paragraph 6(b) must be read in the context of food and drink. If every item used or consumed by a customer inside a restaurant were treated as a restaurant service, the statutory expression would lose its boundary.

Strict Interpretation Works Both Ways

The appellant relied on the principles of strict interpretation and harmonious construction, citing Hira Lal Rattan Lal & Others Versus Sales Tax Officer, Section III Kanpur and Another  - 1972 (10) TMI 84 - Supreme Court;Shiv Shakti Coop. Housing Versus M/s. Swaraj Developers & Ors - 2003 (4) TMI 563 - Supreme Court; Union of India Versus Hansoli Devi And Others - 2002 (9) TMI 799 - Supreme Court; SULTANA BEGUM Versus PREM CHAND JAIN - 1996 (12) TMI 388 - Supreme Court , AJMERA HOUSING CORPORATION & ANR. ETC. Versus COMMISSIONER OF INCOME TAX - 2010 (8) TMI 35 - Supreme Court; UNION OF INDIA AND ANR. Versus DEOKI NANDAN AGGARWAL - 1991 (9) TMI 344 - Supreme Court ; and GWALIOR RAYONS SILK MFG. (WVG.) CO. LTD. Versus CUSTODIAN OF VESTED FORESTS PALGHAT - 1990 (4) TMI 281 - Supreme Court. The broad submission was that taxing entries must be construed according to their language and that words cannot be added by interpretation.

The principle is correct, but it did not help the appellant. Strict interpretation requires the authority to respect the statutory boundary. If paragraph 6(b) of Schedule II speaks of food, articles for human consumption, and drinks in a food-service context, the expression cannot be expanded to include hookah by implication. Strict interpretation is not a one-sided doctrine. It does not always favour the taxpayer or the Department. It favours the text of the law. If the text covers the transaction, tax follows. If the text does not cover it, the entry cannot be expanded merely because the commercial setting appears similar.

Tobacco Has a Separate Statutory Identity

The ruling is also supported by the separate statutory treatment of tobacco. Tobacco and manufactured tobacco substitutes fall under Chapter 24 and may be subject to separate tax treatment, including compensation cess in appropriate cases. This separate identity makes it difficult to merge the tobacco hookah with restaurant food service. The question was not whether hookah can be lawfully served or regulated under other laws, but whether it falls within the restaurant-service entry under GST.

The Authority also referred to Uppara Veerendra v. State of Andhra Pradesh, Andhra Pradesh High Court, Crl.P. No. 2966 of 2021 and batch, dated 28.12.2021, in which chewing tobacco was not treated as food under the Food Safety and Standards Act, 2006. The broader principle is that tobacco is ordinarily regarded as a separately regulated product rather than as food.

The appellant referred to Sanjay Anjay Stores v. Union of India and Others, 2017 SCC OnLine Cal 16323; S. Harichandran v. Commissioner of Police, Chennai, Madras High Court, Crl.O.P. No. 23188 of 2025, dated 26.08.2025; Harikrishna N.V. v. Commissioner of Police, Madras High Court, Crl.O.P. No. 23193 of 2025, dated 26.08.2025; FFL Cuisines Private Limited v. Assistant Commissioner of Police, Nungambakkam Range, Chennai, Madras High Court, Crl.O.P. No. 2863 of 2026, dated 09.02.2026; Godawat Pan Masala Products I.P. Versus Union Of India & Ors - 2004 (8) TMI 692 - Supreme Court; and M/s. Dhariwal Industries Limited and another Versus The State of Maharashtra and others - 2012 (9) TMI 1121 - BOMBAY HIGH COURT.

These decisions broadly addressed tobacco products, hookah-related permissions, regulatory restrictions, and the scope of other legal regimes, such as the Food Safety Law and the Tobacco Control Law. However, they could not decide the GST classification issue by themselves. The GST question had to be answered by applying the CGST Act, Schedule II, the concept of composite supply and the relevant rate notifications.

Herbal Hookah Does Not Automatically Get a Different Answer

The appellant also dealt in non-tobacco or herbal hookah. At first glance, one may think that herbal hookah should receive different treatment because it does not contain tobacco. However, the ruling does not rest solely on tobacco-control considerations. The core reasoning is that hookah, whether tobacco-based or herbal, is consumed by inhalation and does not become food, drink, or an article of the same class merely because it is supplied in a restaurant.

This distinction is useful. The difference between tobacco and non-tobacco products may matter for classification and rate, but it does not necessarily alter the basic conclusion that hookah served through an apparatus is not food or drink. The restaurant-service entry cannot be invoked merely because the product is non-tobacco or herbal.

Service Elements Do Not Always Decide the Principal Supply

The appellant emphasised that the hookah is supplied with apparatus, staff support, and a restaurant ambience. The customer does not merely take away a packet of flavour. The customer uses the hookah apparatus on the restaurant premises, and staff may prepare and serve it. These facts show that service elements are present. However, the presence of service elements does not automatically make the supply a restaurant service.

Many supplies of goods involve some service support. Demonstration, installation, use of equipment, staff assistance or provision of facilities may accompany a supply. The legal question is whether those elements change the principal nature of the supply. In this case, they did not. The Authority has recognised that modern supplies may contain mixed elements, but the service element cannot swallow the goods element where the real object is the supply of hookah flavour through apparatus.

Advance Rulings Are Limited, Yet Useful

Under Section 103(1) of the CGST Act, an advance ruling pronounced by the Authority or the Appellate Authority is binding only on the applicant who sought it and on the concerned or jurisdictional officer in respect of that applicant. Therefore, this ruling does not have binding force for all taxpayers across India.

However, advance rulings still have persuasive value. They help taxpayers, officers and professionals understand how authorities may approach similar classification issues. For restaurants, lounges and hospitality businesses, this ruling signals that adding a product to a restaurant menu does not automatically make it a restaurant service. The product must fit the statutory description. If it does not, separate classification, rate analysis and invoicing may be required.

The Final Takeaway: Ambience Cannot Override Classification

The central message of In Re: M/s. Indian Wire Products Company. - 2026 (7) TMI 1249 - APPELLATE AUTHORITY FOR ADVANCE RULING, WEST BENGAL is clear. GST classification follows the real nature of the supply, not merely the ambience in which the supply is made. A restaurant setting may explain the commercial environment, but it cannot expand paragraph 6(b) of Schedule II beyond food, drink and similar articles for human consumption.

The ruling also reinforces the doctrine of composite supply. Sections 2(30), 2(90) and 8(a) are important provisions, but they cannot rewrite the identity of goods. The principal supply must be identified from the facts. If the principal supply is hookah flavour supplied through an apparatus, the supply cannot be brought under restaurant service merely because food and beverages are also available.

For senior officers and professionals, the ruling offers a practical caution. Bundled or multi-element supplies require careful analysis. One must examine the statutory entry, the common understanding of the product, the role of service elements, the principal supply and the applicable rate notification. The answer cannot be determined by the business's label or by where the customer consumes the product. A restaurant may provide the setting, but the statute decides the classification.

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CA. RAJ JAGGI