2026 (3) TMI 186 - AAR - GST

Composite supply principle: hookah supplied in restaurants treated as goods by principal-element test; food remains restaurant service.

The AAR addressed whether serving hookah in a restaurant is a service under Clause 6(b) Schedule II or a supply of goods, applying ejusdem generis to ... Supply of food or any other article for human consumption or any drink (other than alcoholic liquor) - Composite supply - principal supply - ejusdem generis - any other article for human consumption - tax liability on composite and mixed supplies - Whether or not serving of non-tobacco hookah / tobacco-based hookah in the restaurant along with food will be termed as supply of goods or services within the ambit of Clause 6(b) of Schedule II to the CGST Act? and consequently be taxable at the rate applicable to restaurant services, that is 5 percent. Composite supply - principal supply - any other article for human consumption - Characterisation of serving hookah (tobacco and non-tobacco) in a restaurant under Clause 6(b) of Schedule II to the CGST Act. - HELD THAT: - The Authority examined whether hookah, served within restaurant premises, falls within sub-clause (b) of Clause 6 of Schedule II which treats supply, by way of or as part of any service, of goods being food or any other article for human consumption or any drink (other than alcoholic liquor) as supply of service. Applying ejusdem generis, the phrase 'any other article for human consumption' must be read in the context of 'food' and 'drink' and thus refers to substances ingested and digested via the alimentary canal. Smoke inhaled from hookah (tobacco or non tobacco) is inhaled into the respiratory tract and not ingested for nutritional purposes; its purpose (including delivery of nicotine) differs fundamentally from food or drink. Although serving hookah involves restaurant infrastructure and service elements (apparatus, ambience, attendance), the Authority found that these constitute a composite supply in which the goods used for smoking are the principal supply because the customer's basic purpose is to obtain the smoking product and the apparatus/service merely facilitates consumption. Consequently, the supply of hookah does not fall within Clause 6(b) and cannot be treated as restaurant service merely because it is supplied in a restaurant setting. [Paras 4] Serving hookah in a restaurant is not covered by Clause 6(b) of Schedule II; the supplies are separate and the principal supply in the hookah transaction is the goods used for smoking. Tax liability on composite and mixed supplies - principal supply - Tax treatment and applicable rates for tobacco-based and non-tobacco-based hookah supplied in a restaurant. - HELD THAT: - Having characterised the hookah supply as a composite supply where the goods (tobacco or non tobacco products) are the principal supply, the Authority applied Section 8 which requires a composite supply to be treated as supply of the principal supply. For tobacco based hookah the principal goods fall under the HSN heading applicable to tobacco products and the Authority ruled they attract the rate applicable to that heading. For non tobacco preparations described by the applicant (dried tea leaves, mint, rose petals, etc.), the Authority found no specific exemption or entry in the exempt or taxable schedules that would render them nil rated; accordingly such non tobacco products supplied for smoking are to be treated as supply of goods and taxed at the rates applicable to that classification. The Authority also clarified that food supplied by the restaurant continues to be taxable as restaurant service under Clause 6(b) and subject to the concessional rate applicable to restaurant services where relevant, but the hookah supplies are taxed separately in accordance with their classification as goods. [Paras 4] Food served in the restaurant remains taxable as restaurant service at the applicable concessional rate; tobacco based hookah is taxable as supply of goods under the relevant tobacco HSN at the corresponding rate; non tobacco hookah ingredients, as described, are taxable as goods under the appropriate HSN and rates. Final Conclusion: The Authority ruled that serving hookah in a restaurant does not fall within Clause 6(b) of Schedule II and therefore is not taxable as restaurant service; the supplies are to be treated separately - food as restaurant service (taxed at the applicable concessional rate) and hookah as a composite supply whose principal element is goods, taxed according to the classification and rates applicable to tobacco and non tobacco products respectively. Issues: (i) Whether serving non-tobacco or tobacco-based hookah in a restaurant along with food is a supply of goods or services within the ambit of Clause 6(b) of Schedule II to the Central Goods and Services Tax Act, 2017; (ii) If so, what rate of tax applies to such supply(s)?Issue (i): Whether serving hookah (non-tobacco or tobacco-based) in a restaurant constitutes supply within Clause 6(b) of Schedule II and is therefore to be treated as a supply of service.Analysis: Clause 6(b) of Schedule II treats supply of food or any other article for human consumption or any drink (other than alcoholic liquor) as supply of service when supplied by way of or as part of any service. The ejusdem generis principle requires construing 'any other article for human consumption' with reference to 'food' and 'drink,' which are ingested and digested. Smoke inhaled from hookah (tobacco or non-tobacco) is inhaled into the respiratory tract and not ingested for nutritional purposes. The composite supply definition (Section 2(30)) and practical aspects of preparation and service show that hookah involves both goods (tobacco/non-tobacco product) and service (use of apparatus and ambience), but the principal element is the goods used for smoking. The fact that hookah is served within restaurant infrastructure does not convert the goods element into a restaurant service under Clause 6(b).Conclusion: Serving hookah in a restaurant is not covered by Clause 6(b) of Schedule II as a restaurant service; it is a composite supply in which the principal supply is goods (tobacco or non-tobacco hookah products).Issue (ii): The rate of tax applicable on the supplies identified (food service and hookah supplies).Analysis: Section 8 determines tax treatment of composite and mixed supplies by reference to the principal supply. Food supplied in a restaurant that falls within Clause 6(b) continues to be treated as restaurant service and attracts rates specified for restaurant services under Notification No. 11/2017-CT (Rate) dated 28.06.2017. Hookah supplies, being supplies of goods with the goods element as principal, are taxable under the applicable HSN/notification entries: tobacco-based hookah products under HSN 2403 at the rate and cess prescribed by relevant notifications; specified non-tobacco ingredients classified under applicable entries with the corresponding rates in Notification No. 01/2017-Central Tax (Rate) as amended.Conclusion: Food served in the restaurant is taxable as restaurant service at the rates under Notification No. 11/2017-CT (Rate) dated 28.06.2017. Tobacco-based hookah supplies are taxable as goods under HSN 2403 at the rates and cess prescribed by Notification No. 01/2017-Central Tax (Rate) and Notification No. 19/2025 - Central Tax (Rate) dated 31.12.2025. Non-tobacco hookah ingredients are taxable as goods at the rates applicable under Notification No. 01/2017-Central Tax (Rate) as amended.Final Conclusion: The supplies are to be treated as two separate composite supplies: (a) supply of food in the restaurant treated as restaurant service under Clause 6(b) of Schedule II and taxed under Notification No. 11/2017-CT (Rate); and (b) supply of hookah (tobacco or non-tobacco products) treated as supply of goods, taxed under the relevant HSN entries and rate notifications. The Authority accordingly rules on classification and applicable rates for each supply.Ratio Decidendi: Where a supply comprises both goods for smoking and ancillary use of restaurant infrastructure, the phrase 'any other article for human consumption' in Clause 6(b) of Schedule II must be read ejusdem generis with 'food' and 'drink,' excluding inhaled smoke products; the tax character of a composite supply is determined by its principal element under Section 8 and Section 2(30) of the Central Goods and Services Tax Act, 2017.