Carbonated drinks in restaurants held composite restaurant service, taxed as service under Clause 6(b) and Entry 7(vi).

The AAR held that supply of carbonated drinks by the applicant's restaurant, whether served alone or with food, constitutes part of "restaurant service" as "supply of any drink (other than alcoholic liquor for human consumption)" under Clause 6(b) of Schedule II. The Authority found that the drinks are opened, mixed, value-added, and served in glassware for on-premises consumption using the restaurant's infrastructure, thus forming a composite supply where the principal supply is restaurant service. Consequently, such supplies are treated as a supply of service taxable under Entry 7(vi) of Notification No. 11/2017-CT (Rate) at 18% GST.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether supply of carbonated drinks/aerated beverages by a hotel restaurant, when supplied independently (without food) to in-premises customers, constitutes a composite supply of service (restaurant service) under the GST Act, and what rate of tax is applicable.

1.2 Whether supply of carbonated drinks/aerated beverages by a hotel restaurant, when supplied along with food to in-premises customers, constitutes a composite supply of service (restaurant service) under the GST Act, and what rate of tax is applicable.

1.3 Whether, in the facts presented, preparation and service of aerated beverages within the hotel restaurant (including value-added drinks/mocktails and room service) is to be treated as supply of "goods" (aerated waters) or as part of "restaurant service" classifiable under Entry 7(vi) of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017.

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2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Characterisation and tax rate for supply of aerated beverages (alone or with food) by hotel restaurant

Legal framework discussed

2.1 The Court referred to:

(a) Section 2(30) of the GST Act defining "composite supply" as consisting of two or more taxable supplies of goods or services or both, naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

(b) Clause 6(b) of Schedule II to the CGST Act, providing that supply, by way of or as part of any service or in any other manner whatsoever, of goods being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration, shall be treated as a supply of services.

(c) Definition of "restaurant service" inserted in Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended, which covers supply by way of or as part of any service, of goods being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess or canteen, whether for consumption on or away from the premises.

(d) Entry 7(vi) of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended, prescribing the rate for restaurant services provided in "specified premises".

Interpretation and reasoning

2.2 The Tribunal noted the undisputed factual matrix:

(i) The applicant runs a restaurant from the premises of a hotel which is a "specified premises" for the relevant financial year.

(ii) There is no separate takeaway or over-the-counter sale of sealed bottles/cans; all supplies of aerated beverages are for consumption within the restaurant/hotel (including room service).

(iii) The restaurant menu includes food items and beverages, including aerated beverages/soft beverages; customers may order aerated beverages along with food or independently.

(iv) When aerated beverages are ordered, staff take sealed bottles/cans to the kitchen/bar, open them, and serve in restaurant glassware, often with additions such as ice cubes, lemon, sugar syrup, masala etc., and in many cases prepare value-added drinks such as masala coke and fresh lime soda according to a recipe.

(v) These preparations are served at table (or as room service) using restaurant facilities and ambience; they are consumed on the premises.

(vi) A single invoice is issued in cases where both food and drinks are ordered; historically, the applicant charged different GST rates on food (18%) and aerated beverages (28% plus cess) even in the same bill.

2.3 The Tribunal first clarified the ordinary meaning of "restaurant" as a place where food is prepared as per customer's choice and served at the premises, and noted that aerated beverages are "drinks" within the meaning of "restaurant service" under the relevant notification.

2.4 Reading clause 6(b) of Schedule II with the definition of "restaurant service" in Notification No. 11/2017-Central Tax (Rate), the Tribunal reasoned that where food or any drink (other than alcoholic liquor) is supplied by way of or as part of any service by a restaurant for consideration, such supply is a composite supply treated as a supply of service, and qualifies as restaurant service when provided by a restaurant/eating joint/canteen, whether for on-premise or off-premise consumption.

2.5 Applying these provisions to the facts, the Tribunal held that:

(a) The supply of aerated beverages in the applicant's restaurant is not a bare sale of "goods" (aerated waters) but a bundled transaction of goods plus restaurant services (use of premises, ambience, staff service, preparation/customisation, presentation, cleaning), naturally bundled and supplied in the ordinary course of restaurant operations.

(b) Whether aerated beverages are ordered along with food or independently, the customer is availing restaurant services, and the beverages are consumed using restaurant infrastructure and service; there is no distinct retail sale in the nature of over-the-counter sales in sealed condition.

(c) Accordingly, the supply of aerated beverages as described falls within clause 6(b) of Schedule II as a composite supply of service, the principal supply being restaurant service.

2.6 The Tribunal emphasised that the ruling is confined to the specific factual scenario summarised at paragraph 4.8 of the judgment, namely:

* Aerated drinks/mocktails (e.g., masala coke, fresh lime soda) are prepared by restaurant staff using aerated beverages and other ingredients as per recipes.

* They are served to customers seated in the restaurant or as room service to hotel guests.

* There is no takeaway; consumption occurs within the restaurant/hotel premises.

* The beverages are served as part of the restaurant service that customers are already availing, whether ordered with or without food.

2.7 On that basis, the Tribunal concluded that both situations described by the applicant-(i) aerated beverages supplied along with food and (ii) aerated beverages supplied alone-constitute composite supplies of service (restaurant service), and cannot be taxed separately at the higher rate applicable to aerated waters as "goods".

2.8 As the restaurant is located in a hotel which is a "specified premises" for the relevant financial year, the applicable classification of such composite supply is restaurant service under Entry 7(vi) of Notification No. 11/2017-Central Tax (Rate), taxable at 9% CGST + 9% SGST.

Conclusions

2.9 Supply of carbonated drinks/aerated beverages by the applicant's restaurant, when supplied independently (not along with food) to customers within the restaurant/hotel premises in the manner described, is a composite supply of service with restaurant service as the principal supply, classifiable under Entry 7(vi) of Notification No. 11/2017-Central Tax (Rate); GST at 9% CGST + 9% SGST is applicable.

2.10 Supply of carbonated drinks/aerated beverages by the applicant's restaurant, when supplied along with food to customers within the restaurant/hotel premises in the manner described, is likewise a composite supply of service with restaurant service as the principal supply, classifiable under Entry 7(vi) of Notification No. 11/2017-Central Tax (Rate); GST at 9% CGST + 9% SGST is applicable.

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