2025 (3) TMI 1099 - AT - Service Tax

Hotel operator wins: retention charges from cancelled bookings are damages, not taxable services under Section 66E(e)

Principal Commissioner, CGST, Delhi South Commissionerate Versus M/s The Indian Hotels company Ltd. (Unit Taj Palace Hotels)

CESTAT New Delhi dismissed Revenue's appeal regarding service tax demand on hotel operator. The tribunal held that retention charges from cancelled ... Levy of service tax - amounts which the respondent had retained from the customers who cancelled their reservation for stay with a shorter period - amounts recovered by the respondents from its own employees towards the food provided to them. Amounts which the respondent had retained from the customers who cancelled their reservation for stay with a shorter period - HELD THAT:- What is covered under Section 66E (e) of the Finance Act is only a situation where there is a contract itself to tolerate an act. In such a case tolerating the act becomes a consideration from one side and the consideration paid for tolerating so becomes the consideration from other side. However, a situation is dealt where there is no agreement to renege from a contract between the respondent and its guests. Therefore, there was no consideration. The amounts which were paid to the respondent were in the form of damages/compensation. Thus, no service tax can be charged on the retention charges received by the respondent. Amounts recovered by the respondents from its own employees towards the food provided to them - HELD THAT:- Labour laws require the respondent to provide subsidized food to its employees and workers. The respondent made an arrangement to cook food and supply it through its own canteen to its employees. It must be noted that the canteen for its employees was different from the restaurant in which it serves the guests - there was no service whatsoever in the respondent supplying food at subsidized rate to its own employees as part of its legal obligations. No service tax can therefore be charged. Conclusion - The demand of service tax on the retention charges and also amounts collected from its own employees cannot be sustained. Consequently, the demand of interest and penalties also cannot be sustained. The appeal filed by the Revenue is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the amounts retained by the respondent as cancellation charges are exigible to service tax under Section 66E(e) of the Finance Act, 1994.Whether the amounts recovered from employees for subsidized food provided in the company's canteen are subject to service tax as restaurant services.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Exigibility of Service Tax on Cancellation ChargesRelevant legal framework and precedents: The relevant legal provision is Section 66E(e) of the Finance Act, 1994, which categorizes certain services as 'declared services,' including 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.' The Tribunal also referenced the case of Shiv Vilas Resorts (P) Ltd. for guidance.Court's interpretation and reasoning: The Tribunal found that the retention of amounts by the respondent was not an agreement to tolerate an act but rather a compensation for potential business loss due to cancellations. The agreement was for providing accommodation, and the retention of charges was a deterrent against cancellations, not a service rendered.Key evidence and findings: The Tribunal noted that the respondent retained a portion of the advance as a deterrent to cancellations, which was not an agreement to tolerate an act but a contractual compensation mechanism.Application of law to facts: The Tribunal applied Section 66E(e) and concluded that the cancellation charges did not constitute a service as defined under this section, as there was no agreement to tolerate an act.Treatment of competing arguments: The Revenue argued that the retention charges were for tolerating cancellations, thus taxable. However, the Tribunal found this interpretation incorrect, as the charges were compensatory, not service-related.Conclusions: The Tribunal concluded that no service tax could be levied on cancellation charges as they were compensatory in nature, not a service under Section 66E(e).Issue 2: Service Tax on Amounts Recovered for Subsidized FoodRelevant legal framework and precedents: The Tribunal considered the nature of services under the Finance Act and referenced the case of Bhimas Hotels Pvt. Ltd., which dealt with similar issues of subsidized food services.Court's interpretation and reasoning: The Tribunal found that providing subsidized food to employees was a legal obligation under labor laws and was not akin to restaurant services. The canteen was separate from the hotel's restaurant, further distinguishing the service nature.Key evidence and findings: The Tribunal emphasized that the food was provided as part of legal obligations and was not a commercial service offered to the public.Application of law to facts: The Tribunal applied the relevant provisions and determined that the service provided through the canteen was not taxable as restaurant services, as it was part of fulfilling legal obligations rather than a commercial activity.Treatment of competing arguments: The Revenue contended that the subsidized food service was taxable as restaurant services. The Tribunal disagreed, emphasizing the legal obligation and non-commercial nature of the service.Conclusions: The Tribunal concluded that no service tax was applicable on the amounts collected for subsidized food, as it was not a taxable service under the Finance Act.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'What is covered under Section 66E (e) of the Finance Act is only a situation where there is a contract itself to tolerate an act. In such a case tolerating the act becomes a consideration from one side and the consideration paid for tolerating so becomes the consideration from other side.'Core principles established: The Tribunal established that cancellation charges retained as compensation for potential business loss do not constitute a taxable service under Section 66E(e). Additionally, providing subsidized food to employees as a legal obligation does not qualify as a taxable restaurant service.Final determinations on each issue: The Tribunal upheld the Commissioner (Appeals)'s decision, dismissing the Revenue's appeal. It concluded that neither the cancellation charges nor the amounts collected for subsidized food were subject to service tax.