1990 (2) TMI 286 - HC - VAT and Sales Tax

Court upholds constitutionality of tax exemption for small businesses, affirms sales tax on hotels/restaurants.

The court upheld the constitutionality of G.O.P. No. 198, which exempted hotels/restaurants with a turnover below Rs. 10 lakhs from sales tax on food and ... Levy of sales tax on supply of food and drinks as sale - deeming provision in Article 366(29A)(f) of the Constitution - state legislative competence under Entry 54, List II of the Seventh Schedule - application of charging provision in section 3 of the Tamil Nadu General Sales Tax Act to supplies covered by amended definitions - separation of service element and need for rules/guidelines to determine taxable turnover - reasonableness of classification under Article 14 (hotels with total turnover exceeding Rs. 10 lakhs)Application of charging provision in section 3 of the Tamil Nadu General Sales Tax Act to supplies covered by amended definitions - Section 3 of the TNGST Act authorises levy of sales tax on supply of food and drinks in hotels/restaurants once the definitions were amended. - HELD THAT: - The Court held that, after incorporation of the expanded definitions (mirroring clause (29A)(f) of article 366) into the TNGST Act, the words defined in the definition section must be understood consistently throughout the Act. Read with the amended definitions of 'dealer', 'sale' and 'turnover', section 3 (the charging section) clearly covers supplies of food and drinks in hotels and restaurants. The contention that there is no charging provision for such supplies was therefore rejected. [Paras 16, 20, 25]Section 3 authorises taxation of the supplies of food and drinks in hotels/restaurants as included within the amended statutory definitions.Deeming provision in Article 366(29A)(f) of the Constitution - state legislative competence under Entry 54, List II of the Seventh Schedule - The Forty-sixth Amendment (clause (29A)(f) of article 366) validly empowered State legislatures to treat supply of food and drinks (including where supplied as part of a service) as 'sale' for sales-tax purposes; Entry 54 and the Sale of Goods Act do not preclude such legislation. - HELD THAT: - The Court observed that sub-clause (f) of clause (29A) gives an inclusive, clear and unambiguous deeming definition enabling States to levy tax on supplies of food and drink even when supplied as part of a service. The Amendment was introduced to overcome prior Supreme Court decisions which had treated such supplies as primarily services. Once the constitutional deeming clause is read into the State Act's definitions, there is no residual circumscription by Entry 54 or the Sale of Goods Act that prevents taxation of such supplies. [Paras 15, 17, 18]The constitutional amendment validly expanded the meaning of 'tax on the sale or purchase of goods' so as to empower the State to levy sales tax on supplies of food and drinks even when rendered as part of a service.Separation of service element and need for rules/guidelines to determine taxable turnover - Absence of a specific rule or guideline to apportion the service element does not invalidate the levy of tax on the entire turnover of supplies of food and drinks after the constitutional amendment and corresponding statutory amendments. - HELD THAT: - Petitioners' argument that taxation of the entire turnover is illegal unless rules (analogous to rule 6-B for works contracts) are prescribed to separate the value of service was rejected. The Court reasoned that the deeming clause does not distinguish between supply and service and that the Amendment was enacted to permit taxation of such supplies; therefore the lack of a separate apportionment rule does not render the levy invalid. The Court referred to precedents and to Division Bench observations in Sangu Chakra Hotels and Sree Annapoorna supporting that effect of the Amendment. [Paras 18, 19]No requirement of a statutory apportionment rule invalidates the State's levy on supplies of food and drinks under the amended law.Reasonableness of classification under Article 14 (hotels with total turnover exceeding Rs. 10 lakhs) - The G.O.P. exempting hotels/restaurants with total turnover not exceeding Rs. 10 lakhs from tax does not violate Article 14; the classification is reasonable. - HELD THAT: - The Court rejected the challenge that the exemption notification's classification was irrational or arbitrary. Relying on established principles that legislative classification based on turnover is permissible where it bears an intelligible relation to legislative objectives (capacity to pay), the Court found precedent supporting graded taxation and state discretion in framing exemptions. Earlier decisions cited by petitioners were held distinguishable. Consequently the selective exemption for dealers below the specified turnover was held constitutionally sustainable. [Paras 21, 23, 24]The classification in the impugned G.O.P. is reasonable and does not offend Article 14.Final Conclusion: All writ petitions were dismissed as devoid of merits; the Court upheld the validity of the constitutional amendment's effect on the State sales-tax law, held section 3 of the TNGST Act applicable to supplies of food and drinks in hotels/restaurants, rejected the need for a separate apportionment rule, and upheld the turnover-based exemption classification in the impugned notification. Issues Involved:1. Constitutionality of G.O.P. No. 198.2. Levy of sales tax on the supply of food and drinks in hotels/restaurants.3. Classification of hotels based on turnover for tax purposes.4. Separation of service and supply elements in the supply of food and drinks.5. Legislative competence post the Constitution (Forty-sixth Amendment) Act, 1982.Issue-wise Detailed Analysis:1. Constitutionality of G.O.P. No. 198:The petitioners sought a declaration that G.O.P. No. 198, dated 25th March 1989, was unconstitutional, invalid, and illegal as it affected them. The court examined G.O.P. No. 198, which exempted hotels/restaurants with a turnover below Rs. 10 lakhs from sales tax on food and drinks. The court found that this classification was reasonable and did not violate Article 14 of the Constitution. The classification based on turnover was deemed rational, aiming to proportion the tax burden according to the capacity to pay.2. Levy of Sales Tax on the Supply of Food and Drinks in Hotels/Restaurants:The petitioners argued that there was no charging section in the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act) authorizing the levy of sales tax on the supply of food and drinks. The court rejected this contention, stating that the definitions of 'dealer,' 'sale,' and 'turnover' in the TNGST Act, as amended, clearly included the supply of food and drinks in hotels/restaurants. Section 3 of the TNGST Act, read with these definitions, authorized the levy of sales tax on such supplies.3. Classification of Hotels Based on Turnover for Tax Purposes:The petitioners contended that the classification of hotels based on a turnover of Rs. 10 lakhs and above for tax purposes was arbitrary and violated Article 14. The court disagreed, citing Supreme Court precedents that upheld the classification of dealers based on turnover for tax purposes. The court found that the classification was reasonable and aimed at achieving genuine equality by proportioning the tax burden according to the capacity to pay.4. Separation of Service and Supply Elements in the Supply of Food and Drinks:The petitioners argued that the supply of food and drinks in hotels/restaurants consisted of two elements: supply of material and service. They contended that without guidelines to separate these elements, taxing the entire turnover was illegal. The court rejected this argument, noting that the Constitution (Forty-sixth Amendment) Act, 1982, specifically enabled the States to levy sales tax on the supply of food and drinks without excluding the service part. The court emphasized the deeming clause in sub-clause (f) of clause (29A) of Article 366, which treated the entire supply as a sale.5. Legislative Competence Post the Constitution (Forty-sixth Amendment) Act, 1982:The petitioners questioned whether the State Legislature, after the Forty-sixth Amendment, was empowered to widen the definition of 'sale' beyond that in the Sale of Goods Act. The court clarified that the Amendment Act explicitly allowed the State Legislature to levy sales tax on the supply of food and drinks in hotels/restaurants. The court found that the definitions in the TNGST Act were in consonance with the constitutional provisions, and the State Legislature was competent to enact such laws.Conclusion:The court dismissed all the writ petitions, upholding the constitutionality and validity of G.O.P. No. 198 and the levy of sales tax on the supply of food and drinks in hotels/restaurants. The court found the classification based on turnover rational and rejected the arguments regarding the separation of service and supply elements and the legislative competence post the Forty-sixth Amendment. The petitions were dismissed without any order as to costs.