State List limits Union taxing power over restaurant supplies and hotel accommodation; impugned service tax provisions were struck down.
Supply of food and beverages in air-conditioned restaurants was treated as a deemed sale under Article 366(29A)(f), placing the transaction within the State's sales-tax field; service tax under Section 65(105)(zzzzv) was therefore beyond Union legislative competence and unenforceable. Accommodation provided for less than three months in hotels and similar establishments was treated as luxury falling within Entry 62 of List II, and Section 65(105)(zzzzw) was likewise beyond Union competence and unenforceable. The document states that Union taxing power under the residuary entry cannot recast a subject already assigned to the State List by constitutional deeming fiction or specific enumeration.
Issues: (i) Whether service tax could be levied on the supply of food and beverages in air-conditioned restaurants serving alcoholic beverages under Section 65(105)(zzzzv) of the Finance Act, 1994; (ii) Whether service tax could be levied on accommodation provided for a continuous period of less than three months in hotels, inns, guest houses, clubs or camp-sites under Section 65(105)(zzzzw) of the Finance Act, 1994.
Issue (i): Whether service tax could be levied on the supply of food and beverages in air-conditioned restaurants serving alcoholic beverages under Section 65(105)(zzzzv) of the Finance Act, 1994.
Analysis: After the Forty-Sixth Amendment, supply of food and beverages in a restaurant is treated by Article 366(29A)(f) of the Constitution of India as a deemed sale. The constitutional fiction enables the States to tax the entire consideration for such supply, and the transaction cannot be recharacterised by the Union as a taxable service under the residuary entry. The subject falls within the field of sales taxation under Entry 54 of List II.
Conclusion: Section 65(105)(zzzzv) of the Finance Act, 1994 was held to be beyond the legislative competence of the Union and unenforceable; the challenge succeeded in favour of the assessee.
Issue (ii): Whether service tax could be levied on accommodation provided for a continuous period of less than three months in hotels, inns, guest houses, clubs or camp-sites under Section 65(105)(zzzzw) of the Finance Act, 1994.
Analysis: Luxury in a hotel or similar establishment is an activity of enjoyment or indulgence in something costly or beyond ordinary necessity. The subject matter covered by the impugned clause was already within the State field under Entry 62 of List II, and the Kerala Tax on Luxuries Act operated on the same field. The Union could not invoke Entry 97 of List I to tax a matter specifically enumerated in the State List.
Conclusion: Section 65(105)(zzzzw) of the Finance Act, 1994 was held to be beyond the legislative competence of the Union and unenforceable; the challenge succeeded in favour of the assessee.
Final Conclusion: The impugned service tax provisions were struck down as trenching upon subjects reserved to the States, and the appellate challenge failed.
Ratio Decidendi: A subject expressly covered by the State List cannot be recast as a service and brought within the Union's residuary taxing power merely by legislative description; where the Constitution deems a transaction to be a sale or places it within a State entry, Union taxation on the same subject is incompetent.