2024 (3) TMI 283 - AT - Service Tax

Food supply to airlines constitutes sale of goods not taxable service under section 65B(44) Finance Act

The CESTAT New Delhi held that supply of meals and food items by respondent to airlines constitutes sale of goods, not taxable service under section ... Declared service - outdoor catering service - sale of goods deemed to be sale under Article 366(29A) - composite contract - bifurcation of sale and service - service portion ascertainable - Rule 2C not applicable - negative list regimeOutdoor catering service - declared service - sale of goods deemed to be sale under Article 366(29A) - Liability to service tax on supply of meals and food items to airlines - HELD THAT: - The Tribunal held that the respondent supplied food to airlines which was loaded on the aircraft at the airport and the actual catering service on board was provided by the airline crew; accordingly the transaction in respect of the supply of food is a sale of goods and not an 'outdoor catering' service or other declared service. The Court applied the definition of 'service' in section 65B(44) and the legal fiction in Article 366(29A) to conclude that where the supply of food is a distinct sale (with VAT/sales tax discharged), that supply is excluded from the definition of service and is not liable to service tax. Earlier decisions of the Tribunal, High Court and this Court cited in the judgment were followed to the same effect for post 01.07.2012 period under the negative list regime. [Paras 28, 29, 30]Supply of food items to airlines is a sale of goods (not an outdoor catering/declared service) and service tax is not leviable on such supply.Composite contract - bifurcation of sale and service - service portion ascertainable - Rule 2C not applicable - Whether the contract was divisible and whether Rule 2C of Service Tax (Determination of Value) Rules, 2006 applies - HELD THAT: - The Tribunal accepted the Commissioner's finding that the agreements expressly allocated separate consideration for supply of food and ancillary services (transportation, handling, laundry), and that clients could choose ancillary services, demonstrating a divisible contract with identifiable sale and service portions. Because the service portion was separately ascertainable and separate invoices were raised (with VAT paid on the sale portion and service tax on service portions), the mechanism under Rule 2C - which applies where the service portion is not ascertainable - does not apply. The Court therefore upheld the view that segregated invoicing and contractual allocation preclude applying Rule 2C to treat the whole as service. [Paras 19, 21]The contract is divisible with identifiable sale and service components; Rule 2C is not applicable where the service portion is separately ascertainable.Final Conclusion: The appeal is dismissed: the Tribunal upheld the Commissioner's order dropping proceedings, holding that supply of food to airlines during 01.07.2012 to March 2016 was a sale of goods (not leviable to service tax) and that the contract was divisible with identifiable service portion so Rule 2C did not apply. Issues Involved:1. Whether the supply of meals and other food items by the respondent to the airlines constitutes a 'declared service' under section 66E of the Finance Act.2. Whether the ancillary services provided by the respondent, such as handling and transportation, are naturally bundled with the supply of food.3. Applicability of section 66E(i) of the Finance Act to the respondent's activities.4. Applicability of Rule 2C of the Service Tax (Determination of Value) Rules, 2006.Summary of Judgment:Issue 1: Declared ServiceThe Commissioner concluded that the respondent had not provided any service in relation to the supply of food. The quality check and packing of the food were done by the Airlines staff, indicating that the respondent either made a direct sale of food to the airlines or sold the food on a BOB (Buy on Board) basis through the airline's staff to the passengers. Therefore, the respondent did not provide 'outdoor catering service' as alleged in the show cause notice.Issue 2: Bundled ServicesThe Commissioner found that the agreements between the respondent and the airlines referred to the contracts as 'inflight catering agreements' but provided separate prices for the supply of food and ancillary services like transportation and handling. The terms of the contract represented a divisible contract for the supply of food and provision of ancillary services. The clients were not obliged to take ancillary services mandatorily, indicating that these were separate activities and not naturally bundled.Issue 3: Applicability of Section 66E(i) of the Finance ActThe Commissioner noted that ordering food as per the client's requirement does not affect the nature of the transaction, which remains a sale transaction. The preparation of food as per the order of the clients is not a service and would not be covered under entry (i) of section 66E of the Finance Act.Issue 4: Applicability of Rule 2C of the Service Tax (Determination of Value) Rules, 2006The Commissioner held that Rule 2C would apply in situations where the service portion in the activity envisaged in section 66E(i) is not ascertainable. Since the service portion and sale portion were separately identifiable in this case, Rule 2C was not applicable.Conclusion:The appeal was dismissed, and the Commissioner's order dated 31.01.2018, which dropped the proceedings against the respondent, was upheld. The Tribunal found that the supply of food items to the airlines did not constitute 'outdoor catering service' and that service tax was not leviable on these transactions. The ancillary services were also considered separate from the supply of food and not naturally bundled.