1980 (9) TMI 260 - HC - VAT and Sales Tax

Court Rules Food Service in Restaurants Not Taxable under A.P. Sales Tax Act

Durga Bhavan and Others Versus The Deputy Commercial Tax Officer, Anantapur and Another

Durga Bhavan and Others Versus The Deputy Commercial Tax Officer, Anantapur and Another - [1981] 47 STC 104 (AP) Issues Involved:1. Whether the State is entitled to levy and collect sales tax under the A.P. General Sales Tax Act on the supply of foodstuffs, drinks, etc., by restaurants to customers.2. Whether the supply of food and drinks by restaurants, whether attached to hotels or not, constitutes a sale under the A.P. General Sales Tax Act.3. The dominant object test for determining whether a transaction is a sale or a service.4. The burden of proof in establishing whether a transaction constitutes a sale or a service.Issue-Wise Detailed Analysis:1. Levy and Collection of Sales Tax by the State:The primary issue in this batch of writ petitions is whether the State is entitled to levy and collect sales tax under the A.P. General Sales Tax Act on the supply of foodstuffs, drinks, etc., by restaurants to customers. The court examined previous judgments, particularly the Supreme Court's decisions in State of Himachal Pradesh v. Associated Hotels of India and Northern India Caterers v. Lt. Governor of Delhi, which held that the supply of meals in hotels and restaurants does not amount to a sale but is a service. The court concluded that the service of meals, foodstuffs, snacks, drinks, etc., to visitors in restaurants is not a sale and therefore not taxable under the A.P. Sales Tax Act.2. Supply of Food and Drinks by Restaurants:The court analyzed whether the supply of food and drinks by restaurants, whether attached to hotels or not, constitutes a sale under the A.P. General Sales Tax Act. The court referred to the definition of 'sale' under section 2(1)(n) of the Andhra Pradesh General Sales Tax Act, which is almost identical to the definition in the Bengal Finance (Sales Tax) Act. The court concluded that the supply of food by restaurants to customers does not constitute a sale as there is no intention to transfer property in the food to the customer. The transaction is essentially one of service by the restaurant.3. Dominant Object Test:The court considered the dominant object test to determine whether a transaction is a sale or a service. The Supreme Court in Northern India Caterers v. Lt. Governor, Delhi (1980) observed that if the dominant object of the transaction is the sale of food and the rendering of services is merely incidental, the transaction would be exigible to sales tax. However, if the dominant object is the rendering of service, the transaction would not be a sale. The court emphasized that the dominant object test must be applied on a case-by-case basis, considering the facts and circumstances of each case.4. Burden of Proof:The court addressed the burden of proof in establishing whether a transaction constitutes a sale or a service. The court noted that the normal rule is that the burden is on the revenue to prove that a transaction is taxable. However, since the question of whether a customer has a right to take away foodstuffs is within the knowledge of the dealer, the initial burden is on the dealer to prove that the customer has no right to take away the foodstuffs. The court clarified that the observations of Krishna Iyer, J., in the review petition should be understood in light of these principles.Conclusion and Orders:The court concluded that:1. If there is no right to carry away the food, there would be no sale in favor of the customer.2. Even if there is a right to carry away, if the transaction is essentially a service, it would not be exigible to tax.3. If the dominant object is the sale of food and the rendering of service is merely incidental, the transaction would be a sale.4. The determination of whether the dominant object is the sale of food or rendering of service depends on the facts and circumstances of each case, to be decided by the assessing authority.The court set aside all existing assessment orders and directed the assessing authorities to reassess the cases in light of these principles. The writ petitions were allowed to the extent indicated, without costs. The court granted leave to appeal to the Supreme Court on the substantial question of law regarding the taxability of foodstuffs supplied by restaurants. However, the application for leave to appeal regarding sales across the counter was dismissed.