Composite catering contracts: separately identifiable food supplies taxed by VAT were kept of service tax liability.

In a composite catering arrangement for airlines, the food and beverage component, being separately identifiable and already subjected to VAT, was treated as a sale of goods under Article 366(29A) and not brought to service tax. Only the service element remained taxable as outdoor catering service, so the demand could not extend to the value of the supplies. The separable sale component also qualified for Notification No. 12/2003-ST, and the bona fide belief that tax was not payable on that component negatived extended-period invocation and penalties.

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Issues: (i) Whether service tax was leviable on the food and beverages supplied to airlines under the category of outdoor catering services, and whether the value of such supplies could be subjected to service tax when VAT had been paid; (ii) Whether the assessee was entitled to the benefit of Notification No. 12/2003-ST and whether the demand and penalties could be sustained.

Issue (i): Whether service tax was leviable on the food and beverages supplied to airlines under the category of outdoor catering services, and whether the value of such supplies could be subjected to service tax when VAT had been paid.

Analysis: The supply arrangement involved both service elements and supply of food and beverages, with the food component being separately identifiable and already subjected to VAT. The principle of Article 366(29A) was applied to treat the food supply as sale of goods, and it was held that service tax and VAT operate on distinct taxable components in a composite contract. The demand could not extend to the value attributable to the food and beverages supplied.

Conclusion: Service tax was not leviable on the value of the food and beverages supplied, though the activity remained classifiable as outdoor catering service for the service component.

Issue (ii): Whether the assessee was entitled to the benefit of Notification No. 12/2003-ST and whether the demand and penalties could be sustained.

Analysis: Since the value of the food and beverages constituted a separable sale component, the exemption notification was applicable to that extent. The assessee's belief that service tax was not payable on the food component was accepted as bona fide, and the reasoning negatived invocation of the extended period and penalties.

Conclusion: The benefit of Notification No. 12/2003-ST was available, and the demand with penalties was unsustainable.

Final Conclusion: The impugned order was set aside and the appeal succeeded with consequential relief to the assessee.

Ratio Decidendi: In a composite catering arrangement, the value attributable to separately identifiable food supplies on which VAT has been paid cannot be subjected to service tax, and exemption relief under the relevant notification must follow for that component.

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