Bakery with AC dining qualifies as restaurant service under GST attracting 5% tax without input credit

AAAR Odisha ruled that the petitioner's supply of cakes, bakery items, ice creams, chocolates, and drinks prepared on-premises with facility to consume in air-conditioned premises constitutes composite supply qualifying as restaurant services, attracting 5% GST without input tax credit. Birthday accessories like stickers, candles, caps, and sprays sold as bought-out goods are taxed separately as goods under applicable rates with input tax credit eligibility. The petitioner was held ineligible for composition scheme due to ice cream manufacturing activities.

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1. ISSUES PRESENTED and CONSIDERED

The legal judgment presented revolves around the following core legal questions:

• Whether the supply of cakes, bakery items, ice creams, chocolates, drinks, and other eatable products by the petitioner, which are prepared and supplied to customers from the counter with the facility to consume the same in the air-conditioned premises, qualifies as 'restaurant services' under the CGST Act, 2017Rs.
• Whether the supply of items such as birthday stickers, candles, birthday caps, snow sprays, etc., which are essentially used in birthday celebrations, can be classified as a 'Composite Supply' under Section 2(30) of the CGST Act, 2017Rs.
• Whether the sale of handmade chocolates manufactured in the petitioner's workshop and utilized for providing other services such as shakes and brownies, and retailed by packing in different containers, falls under 'restaurant services'Rs.
• What is the nature and rate of tax applicable to items such as birthday caps, knives, and decorative items bundled with cakes, whether utilized in the premises or taken away by customersRs.
• Whether the petitioner is eligible for the 'Composition Scheme' under the CGST Act, given their status as a manufacturer of ice creamsRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Restaurant Services Classification

• Relevant Legal Framework and Precedents: The court considered the definition of 'Composite Supply' under Section 2(30) of the CGST Act and the classification of 'Restaurant Services' under Schedule II, Entry 6(b).
• Court's Interpretation and Reasoning: The court determined that the supply of food items with options for consumption on-premises constitutes a composite supply, with the principal supply being a service.
• Key Evidence and Findings: Evidence showed that the petitioner provided both goods and services, with facilities for dining in the premises.
• Application of Law to Facts: The court applied the definition of 'Restaurant Services' to the petitioner's operations, concluding they qualify under this category.
• Treatment of Competing Arguments: The court dismissed the jurisdictional officer's argument that the petitioner was not operating a restaurant, emphasizing the facilities and services provided.
• Conclusions: The supply of food items in the petitioner's premises is classified as 'Restaurant Services' and taxed at 5% GST.

Issue 2: Composite Supply Classification for Birthday Items

• Relevant Legal Framework and Precedents: Section 2(30) of the CGST Act defines 'Composite Supply'.
• Court's Interpretation and Reasoning: The court found that the supply of birthday items does not constitute a composite supply as they are sold as goods, not services.
• Key Evidence and Findings: Birthday items were purchased and sold without further processing.
• Application of Law to Facts: The court applied the legal definition of composite supply, determining these items are not bundled with services.
• Treatment of Competing Arguments: The petitioner's argument that these items were part of a composite supply was rejected.
• Conclusions: Birthday items are taxed as individual goods, not under composite supply.

Issue 3: Handmade Chocolates and Restaurant Services

• Relevant Legal Framework and Precedents: The court referred to the definition of 'Restaurant Services' and 'Composite Supply'.
• Court's Interpretation and Reasoning: Handmade chocolates, when part of a service such as shakes or brownies, qualify under restaurant services.
• Key Evidence and Findings: Chocolates were processed and customized for sale in the outlets.
• Application of Law to Facts: The court concluded these sales are part of a composite supply, taxed as restaurant services.
• Treatment of Competing Arguments: The jurisdictional officer's view that these were mere sales of goods was not upheld.
• Conclusions: Sale of handmade chocolates is classified under restaurant services.

Issue 4: Tax Rate on Bundled Items

• Relevant Legal Framework and Precedents: Notification No. 1/2017-Central Tax (Rate) applies to goods.
• Court's Interpretation and Reasoning: Items bundled with cakes are taxed as goods, not services.
• Key Evidence and Findings: These items were sold as goods, not processed further.
• Application of Law to Facts: The court applied the notification to determine tax rates.
• Treatment of Competing Arguments: The petitioner's argument for composite supply was rejected.
• Conclusions: Tax rates for these items follow Notification No. 1/2017-Central Tax (Rate).

Issue 5: Eligibility for Composition Scheme

• Relevant Legal Framework and Precedents: The CGST Act's provisions on the Composition Scheme.
• Court's Interpretation and Reasoning: The petitioner, as an ice cream manufacturer, is ineligible for the Composition Scheme.
• Key Evidence and Findings: The petitioner's business activities include manufacturing ice creams.
• Application of Law to Facts: The court applied the CGST Act's provisions, confirming ineligibility.
• Treatment of Competing Arguments: The court upheld the jurisdictional officer's position on ineligibility.
• Conclusions: The petitioner cannot opt for the Composition Scheme.

3. SIGNIFICANT HOLDINGS

• Restaurant Services: The court affirmed that the petitioner's operations qualify as 'Restaurant Services', taxed at 5% GST.
• Composite Supply: "Composite Supply" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with such other in the ordinary course of business, one of which is a principal supply."
• Tax on Goods: Items like birthday caps and decorative items are taxed as goods per Notification No. 1/2017-Central Tax (Rate).
• Composition Scheme Ineligibility: The petitioner is ineligible for the Composition Scheme due to ice cream manufacturing.

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