2014 (11) TMI 393 - HC - Service Tax

Court Declares Certain Finance Act Clauses Illegal - State's Taxing Authority Clarified

The court upheld the decision declaring sub-clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, ... Constitutional definition of 'tax on the sale or purchase of goods' under Article 366(29A) - deemed sale of supply of food and drink in restaurants - legislative competence under Entry 54 of List II - taxes on sale or purchase of goods - legislative competence under Entry 62 of List II - taxes on luxuries - residuary power under Entry 97 of List I - service tax levy on services falling within Clause 105 of Section 65 of the Finance ActDeemed sale of supply of food and drink in restaurants - legislative competence under Entry 54 of List II - taxes on sale or purchase of goods - service tax levy on services falling within Clause 105 of Section 65 of the Finance Act - constitutional definition of 'tax on the sale or purchase of goods' under Article 366(29A) - Validity of sub clause (zzzzv) of Clause 105 of Section 65 (taxation of services by air conditioned restaurants serving alcoholic beverages) in light of Entry 54, List II and Article 366(29A). - HELD THAT: - The Court examined pre and post Forty Sixth Amendment precedents and held that Article 366(29A)(f) constitutionally deems the supply of food and drink (including where supplied as part of a service) to be a sale of goods so that the whole consideration charged to the customer is exigible to tax as sale. Applying that constitutional deeming provision and K. Damodarasamy Naidu (which held the bill cannot be split between service and food), the Court concluded that after the Forty Sixth Amendment the supply of food and other articles for human consumption in restaurants is not to be treated as a service for purposes of imposition of tax by the Union. Consequently the subject matter of sub clause (zzzzv) falls within Entry 54 of List II and is within the State's exclusive competence to tax; it cannot be validly brought within Union service tax by invoking Entry 97 of List I. [Paras 5, 6, 7, 8, 10]Sub clause (zzzzv) is a matter enumerated in Entry 54 of List II and the Union's levy under Clause 105 is beyond competence; the impugned provision is illegal and unenforceable.Legislative competence under Entry 62 of List II - taxes on luxuries - service tax levy on services falling within Clause 105 of Section 65 of the Finance Act - Validity of sub clause (zzzzw) of Clause 105 of Section 65 (taxation of short term accommodation) in light of Entry 62, List II (luxury tax). - HELD THAT: - Having regard to the meaning of 'luxuries' in Entry 62 (activity of enjoyment or indulgence beyond ordinary needs) and the existing State enactment (Kerala Tax on Luxuries Act) which levies tax on accommodation and related amenities, the Court held that the matters covered by sub clause (zzzzw) fall within Entry 62 of List II. In view of the State's legislative competence over luxuries, the Union's attempt to characterise and tax the same as a service under Clause 105 is impermissible. [Paras 11]Sub clause (zzzzw) is a matter enumerated in Entry 62 of List II and the Union's levy under Clause 105 is beyond competence; the impugned provision is illegal and unenforceable.Final Conclusion: Writ appeals dismissed; the High Court's declaration that sub clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994 (as amended by the Finance Act, 2011) are beyond the legislative competence of the Union and are illegal and unenforceable is upheld. Issues Involved:1. Legality and enforceability of sub-clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011.2. Legislative competence of the Union to impose tax on services enumerated in sub-clauses (zzzzv) and (zzzzw).3. Interpretation of 'sale of goods' and 'service' in the context of the Constitution (Forty-Sixth Amendment) Act.Detailed Analysis:1. Legality and Enforceability of Sub-clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994:The appeals challenge the common judgment that declared sub-clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, illegal and unenforceable. These sub-clauses pertain to services provided by air-conditioned restaurants serving alcoholic beverages (zzzzv) and accommodation services provided by hotels, inns, guest houses, etc., for less than three months (zzzzw). The Union introduced these amendments under the residuary power of Entry 97 of List I of the Seventh Schedule to the Constitution, which includes any tax not mentioned in List II or List III.2. Legislative Competence of the Union to Impose Tax on Services Enumerated in Sub-clauses (zzzzv) and (zzzzw):The petitioners, hoteliers running air-conditioned restaurants, argued that the matters covered by the new sub-clauses fall under Entries 54 and 62 of List II of the Seventh Schedule, thus falling within the State's legislative competence. Entry 54 pertains to taxes on the sale or purchase of goods, while Entry 62 relates to taxes on luxuries, including taxes on entertainments, amusements, betting, and gambling. The petitioners contended that Article 366 (29A) of the Constitution, introduced by the Constitution (Forty-Sixth Amendment) Act, deems the supply of food and beverages in restaurants as a sale, enabling States to tax under Entry 54 of List II. Similarly, the accommodation services in hotels are covered under Entry 62 of List II, already taxed by the Kerala Tax on Luxuries Act.The learned single Judge concluded that the matters covered by sub-clauses (zzzzv) and (zzzzw) are indeed enumerated in Entries 54 and 62 of List II, respectively, making the Union's imposition of service tax beyond its legislative competence.3. Interpretation of 'Sale of Goods' and 'Service' in the Context of the Constitution (Forty-Sixth Amendment) Act:The judgment delves into the interpretations given by the Apex Court on the concept of 'sale of goods' in the context of works contracts and the supply of food in restaurants, both before and after the Constitution (Forty-Sixth Amendment) Act. The Amendment Act introduced Article 366 (29A), which includes a tax on the supply of goods, including food and beverages, as a deemed sale, thereby enabling States to impose tax on such transactions.The Apex Court's decision in State of Madras v. Gannon Dunkerley & Co. (1958) established that a building contract, being indivisible, could not be taxed as a sale of goods. Similarly, in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (1978), it was held that the supply of food in a restaurant is a service, not a sale. The Constitution (Forty-Sixth Amendment) Act changed this by deeming such transactions as sales, enabling States to tax the entire consideration received for the supply of food and beverages.The petitioners argued that post the Constitution (Forty-Sixth Amendment) Act, the supply of food and beverages in a restaurant, deemed a sale, cannot be treated as a service for service tax purposes. The Union's invocation of Entry 97 of List I for imposing service tax on these transactions was thus challenged.Conclusion:The court upheld the learned single Judge's decision, affirming that the matters covered by sub-clauses (zzzzv) and (zzzzw) are indeed enumerated in Entries 54 and 62 of List II, respectively. Therefore, the Union lacks the legislative competence to impose service tax on these matters. The Writ Appeals were dismissed, maintaining that the entire consideration received by a restaurant for the supply of food and beverages, including the service part, is taxable by the State, not the Union.