2011 (4) TMI 1267 - HC - VAT and Sales Tax

Outdoor Catering Contracts: Service Tax Applies to Services, Sales Tax to Goods

The court held that in outdoor catering contracts, sales tax cannot be levied on the entire amount as it would result in double taxation. The contract ... Composite contract - outdoor catering - article 366(29A)(f) - deemed sale - service tax versus VAT - dominant nature test - pith and substanceComposite contract - outdoor catering - article 366(29A)(f) - service tax versus VAT - deemed sale - Whether, in an outdoor catering contract where invoices separately state the value of goods and the value of services (on which service tax is paid), sales tax/VAT can be levied on the entire consideration including the service component - HELD THAT: - The court held that outdoor catering is a composite contract and, by virtue of sub-clause (f) of clause (29A) of article 366, the sale element is a deemed sale separable from the service element. Legislative competence permits the State to tax the sale aspect and Parliament to tax the service aspect; consequently the entire consideration cannot be taxed twice. Reliance was placed on Supreme Court authorities establishing that (i) where article 366(29A) applies the sale element may be isolated and subjected to sales tax, and (ii) for other composite/indivisible contracts the dominant nature test applies. Applying these principles to the contractual bills produced (which separately recorded the price for food and beverages and the charges for handling, transportation and related services), the court found that the parties had contracted for a separable sale element and a separable service element and that VAT is not leviable on the service component for which service tax has been paid. The court rejected the Revenue's contention that the contract was indivisible and that VAT must include pre-delivery expenditures, noting that earlier precedents relied upon by the Revenue did not deal with the coexistence of service tax on a clearly segregated service component. The court therefore set aside the reassessment and related orders insofar as they sought to tax the service component.The appeals are allowed; the consolidated assessment/reassessment orders are set aside; outdoor catering is declared a composite contract under article 366(29A)(f) with service tax payable on the service aspect and sales tax/VAT payable only on the deemed sale aspect, and VAT cannot be levied on the component on which service tax has been paid.Alternative remedy - statutory appeal - Whether the High Court should decline to entertain the writ petitions on the ground of availability of the statutory alternative remedy - HELD THAT: - Although the learned single judge had declined to examine merits and advised pursuing the statutory appeal path, this court exercised discretion to entertain the writ appeals notwithstanding the existence of an alternative statutory remedy. The court observed that the matter involved interpretation of constitutional provisions and binding Supreme Court decisions governing the respective spheres of sales tax and service tax, and that a definitive ruling would promote conformity in future assessments. Accordingly, the court proceeded to hear and decide the appeals on merits.The High Court entertained the writ appeals despite availability of the statutory remedy and decided the constitutional and tax law issues on merits.Final Conclusion: The appeals are allowed and the impugned assessing and appellate orders are set aside. It is declared that out-door catering is a composite contract within article 366(29A)(f): service tax applies to the service component and sales tax/VAT to the deemed sale component only; VAT cannot be levied on amounts on which service tax has been paid. The Revenue is directed to refund the sum deposited by the assessee pursuant to earlier proceedings within four months with interest at six per cent per annum, failing which higher interest as ordered will apply; parties to bear their own costs. Issues involved:1. Whether the sales tax authorities can levy sales tax on both the value of goods and the value of services rendered in a catering contract.2. Legal position regarding the interpretation of composite contracts under the Finance Act and the Constitution.3. Distinction between composite and indivisible contracts.4. Validity of reassessment proceedings under Section 39(2) of the Karnataka Value Added Tax Act.5. Availability and efficacy of alternative statutory remedies.Issue-wise Detailed Analysis:1. Levy of Sales Tax on Goods and Services in Catering Contracts:The primary issue was whether, in a catering contract, the sales tax authorities could levy sales tax on both the value of goods and services rendered. The court held that in the case of outdoor catering, the contract is composite, involving both the supply of goods and services. The service element is predominant and visible, making it distinct from a mere sale of goods. The court concluded that the entire amount mentioned in the bill cannot be subjected to sales tax as it would amount to double taxation. The consideration received under such a contract must be apportioned between the supply of goods and the provision of services, with sales tax applicable only to the goods component and service tax to the service component.2. Legal Position Regarding Composite Contracts:The court referred to various provisions of the Finance Act, 1994, and the Constitution, particularly Article 366(29A)(f), which allows the supply of food and drinks as part of a service to be taxed as a sale of goods. The court cited several Supreme Court judgments, including Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi and Tamil Nadu Kalyana Mandapam Assn. v. Union of India, to emphasize that catering services are taxable as services and not merely as sales of goods. The court reiterated that the supply of food in outdoor catering is a composite contract involving both sale and service, and the service element is more significant.3. Distinction Between Composite and Indivisible Contracts:The court distinguished between composite and indivisible contracts, noting that a composite contract involves both service and deemed sale of goods. The court emphasized that the entire consideration under such a contract cannot be subjected to sales tax, as it includes a significant service component. The court referred to the Supreme Court's judgment in Bharat Sanchar Nigam Ltd. v. Union of India, which clarified that in composite contracts, the sale elements are separable and can be subjected to sales tax, while the service elements are subject to service tax.4. Validity of Reassessment Proceedings Under Section 39(2):The court examined the reassessment proceedings initiated under Section 39(2) of the Karnataka Value Added Tax Act. It noted that the initial assessment had accepted the segregation of goods and services, with VAT paid on the goods component and service tax on the service component. The court found that the reassessment proceedings lacked jurisdiction as there was no new evidence to justify reopening the assessment. The court set aside the reassessment order, declaring it invalid.5. Availability and Efficacy of Alternative Statutory Remedies:The court addressed the issue of alternative remedies, noting that the learned single judge had advised the assessee to bypass the first appellate authority and directly approach the Karnataka Appellate Tribunal. The court held that the right to appeal is a statutory creation, and the court cannot create new appellate forums or advise parties contrary to statutory provisions. Given the constitutional issues involved, the court deemed it proper to entertain the writ appeal and decide the matter on merits, providing clarity on the scope and levy of service tax and sales tax for future assessments.Conclusion:The court allowed the appeals, set aside the impugned orders, and declared that outdoor catering contracts are composite contracts involving both service and deemed sale of goods. It held that service tax is payable on the service aspect, and sales tax is payable on the goods aspect, preventing double taxation. The court ordered the refund of the amount deposited by the assessee with interest.Order:(a) Appeals allowed.(b) Impugned orders set aside.(c) Declared that outdoor catering contracts are composite contracts, with service tax on services and sales tax on goods.(d) Refund of Rs. 25 lakhs deposited by the assessee with interest.(e) Parties to bear their own costs.