2013 (7) TMI 431 - HC - Service Tax

Court rules service tax provisions unconstitutional, petitioners can seek refunds.

KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION & OTHS. Versus UNION OF INDIA & OTHS.

The court held that sub-clauses (zzzzv) and (zzzzw) of Section 65 of the Finance Act, 1994, as amended by the Finance Act, 2011, imposing service tax on ... Constitutional validity of levy of service tax on restaurants - Validity of sub clause (zzzzv) of clause 105 of Section 65 of the Finance Act, 1994 - Legislative competency of Parliament - Sale of food and drinks - Whether 'taxes on the sale and purchase of goods' in Entry 54 of List II of the seventh schedule covers service in the light of the definition of 'tax on sale and purchase of goods' under Article 366 (29A) (f) of the Constitution of India - Held that:- The supply can be by way of a service or as part of a service or it can be in any other manner whatsoever. The supply or service can be for cash or deferred payment or other valuable consideration. 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 - price that the customer pays for the supply of food in a restaurant cannot be split up - under Article 246(1) of the Constitution, 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 enumerated in List II - first limb of the Article 366(29-A) says that the tax on sale or purchase of goods includes a tax on transactions specified in sub Clauses (a) to (f). It was also found that the said Article is brought in to expand the tax base which should narrow down because of certain judgments of the Court. The deemed sale is therefore brought into effect as a concept in the constitutional definition. Very purpose of incorporating the definition of tax on sale or purchase of goods in Article 366 was to empower the State Governments to impose tax on the supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink either intoxicating or not intoxicating whether such supply or service is for cash, deferred payment or other valuable consideration - transfer is during the course of a service and when the deeming provision permits the State Government to impose a tax on such transfer, there cannot be a different component of service which could be imposed with any service tax in exercise of the residuary power of the Central Government. If the constitution permits sale of goods during service as taxable, necessarily Entry 54 has to be read giving the meaning of sale of goods as stated in the Constitution - service forms part of sale of goods and State Government alone will have the legislative competence to enact the law imposing a tax on the service element forming part of sale of goods as well, which they have apparently imposed - Follpwing decision of K. Damodarasamy Naidu & Bros. v. State of T.N. [1999 (10) TMI 598 - SUPREME COURT OF INDIA] - Decided in favour of assessee. Validity of sub clause (zzzzw) of clause 105 of Section 65 of the Finance Act, 1994 - Legislative competency of Parliament - Service in hotel, inn, guest house, club - Whether the service provided in a hotel, inn, guest house, club etc. imposed with luxury tax under State Act in terms of Entry 62 of List II can be separately assessed and imposed by the Union with service tax, invoking the residuary powers at Entry 97 of List I of the Constitution - Held that:- luxuries is an activity of enjoyment or indulgence which is costly or which is generally recognised as being beyond the necessary requirements of an average member of the society - service tax is imposed on services provided in a hotel and other similar establishments when State Legislature had enacted the Kerala Tax on Luxuries Act by exercising their legislative power under Entry 62 of List II - Amendment now made to the service tax trenches upon the legislative function of the State under Entry 62 of List II - Following decision of Godfrey Phillips India Ltd. v. State of U.P. [2005 (1) TMI 391 - SUPREME COURT OF INDIA] - Decided in favour of assessee. Issues Involved:1. Legislative competence of Parliament to impose service tax on the sale of goods.2. Imposition of service tax on services provided by hotels, inns, guest houses, etc., under Entry 62 of List II.Issue-wise Detailed Analysis:1. Legislative Competence of Parliament to Impose Service Tax on the Sale of Goods:The petitioners challenged the validity of sub-clauses (zzzzv) and (zzzzw) of clause 105 of Section 65 of the Finance Act, 1994, and Section 66 of the Finance Act, 1994, as amended by the Finance Act, 2011, which relate to the levy of service tax on services provided by air-conditioned restaurants serving alcoholic beverages and accommodation services for less than three months.The main contention was that the imposition of service tax on the serving of food or beverages, including alcoholic beverages, represents a sale of goods, which falls under Entry 54 of List II (State List) of the 7th schedule to the Constitution of India. Thus, the state legislature has exclusive competence in this domain. The petitioners argued that the Parliament, by introducing service tax under sub-clauses (zzzzv) and (zzzzw), encroached upon the legislative powers of the state under Entries 54 and 62 of List II.The respondents countered that the legislation was enacted under Article 248 of the Constitution read with Entry 97 of List I of the 7th schedule, and service tax can be imposed on the service involved during the sale of a product. The respondents cited various Supreme Court judgments to support their stance that service tax does not transgress any constitutional restrictions.The court examined the constitutional provisions and relevant Supreme Court judgments, including the principles laid out in State of M.P. v. Rakesh Kohli, Assn. of Leasing & Financial Service Companies v. Union of India, All-India Federation of Tax Practitioners v. Union of India, BSNL v. Union of India, Godfrey Phillips India Ltd. v. State of U.P., T.N. Kalyana Mandapam Assn. v. Union of India, K. Damodarasamy Naidu & Bros. v. State of T.N., and Federation of Hotel & Restaurant Assn. of India v. Union of India.The court concluded that Article 366(29-A)(f) of the Constitution includes service in the sale of goods, and if the Constitution permits the sale of goods during service as taxable, Entry 54 must be read to include the meaning of the sale of goods as stated in the Constitution. Therefore, the state government has exclusive legislative competence to impose a tax on the service element forming part of the sale of goods.2. Imposition of Service Tax on Services Provided by Hotels, Inns, Guest Houses, etc.:The petitioners argued that the imposition of service tax on services provided by hotels, inns, guest houses, clubs, or camp-sites under sub-clause (zzzzw) falls under Entry 62 of List II, which pertains to taxes on luxuries, including taxes on entertainments, amusements, betting, and gambling. The state legislature has enacted the Kerala Tax on Luxuries Act, which already imposes a tax on accommodation services.The court referred to the judgment in Godfrey Phillips India Ltd. v. State of U.P., which defined 'luxuries' as an activity of enjoyment or indulgence that is costly or beyond the necessary requirements of an average member of society. The court found that the service tax imposed on services provided by hotels and similar establishments under sub-clause (zzzzw) encroaches upon the legislative function of the state under Entry 62 of List II.Judgment:The court declared that sub-clauses (zzzzv) and (zzzzw) to clause 105 of Section 65 of the Finance Act, 1994, as amended by the Finance Act, 2011, are beyond the legislative competence of Parliament as they are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule. The court also ruled that petitioners are entitled to seek a refund of any payments made based on the impugned clauses.