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 65B(44) of Finance Act. The tribunal found that respondent merely supplied food loaded onto aircraft at airports without providing catering services, which were actually performed by airline crew. Relying on constitutional provisions under Article 366(29A) and precedents including Haldiram Marketing case, the tribunal concluded activities involving preparation, packaging and delivery of food items amount to sale rather than service. Service tax demand for period July 2012 to March 2016 was therefore unsustainable. Appeal dismissed, confirming Commissioner's order dated 31.01.2018.

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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 Service
The 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 Services
The 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 Act
The 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, 2006
The 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.

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