HOOKAH. WHETHER FOOD OR OTHER ARTICLE FOR HUMAN CONSUMPTION HOOKAH.

[Sadanand Bulbule]

HOOKAH. Whether food or any other article for human consumption?

Dear all experts

I solicit the experts' opinion on the following subject. I make it very clear, this is not a regular query. This is only for academic discussion on subject issue to take it to the logical end.

1. In metro and cosmopolitan cities, it is the modern trend of throwing weekend parties in restaurants, normally by affluent young guys, of course above 18 years, to experience inhaling of hookah in extremely mesmerizing ambiance from dusk till dawn. Generally such restaurants popularly called as “hookah bars” provide predominantly Hookah services besides ancillary food items in exclusive smoking zones. Secondly such restaurants opt for payment of GST @ 5% for supply of foods/drinks and Hookah.

2.From the highly reliable sources, it is gathered that the base vendors charge 28% GST and 72 % Cess on the supply price of Assorted Hookah Flavours packed in jars or tins which is classified under HSN Code 2403 11 10. The information is that, normally hookah contains tobacco, molasses, glycerine, honey, natural and nature identical flavouring substances and colours. Nicotine percentage is o.5% and tar is zero. The expiry period is generally within two years from the date of manufacture. However every package of such hookah carries a health warning that smoking is the main cause for lung, heart cancer etc. Most of the popular brands of hookah flavours are imported from abroad by the domestic base vendors and some are manufactured in India too.

3. It is my experience that, the principal supply in such posh restaurants is a supply of hookah flavours and therefore GST at 28% is liable to be paid on the supply value of assorted hookah flavours after classifying it under the appropriate heading HSN 2403 11 10 with applicable Cess at 72% on the supply price to the end customers. The principal goods being Assorted Hookah Flavours which is supplied to the end customers at premier price per session of say 45 minutes or per hour.

4.There is no ambiguity that “assorted hookah flavours” is classifiable under Heading 2403 11 10 and attracts GST @28% with Cess at 72% as supply of assorted hookah flavours.

5. However it is stated that some restaurants are manipulating the supply of “assorted hookah flavours” under the guise of supply of food and drinks in terms of following Notification and making payment of GST @ 5% only for sales of foods and Hookah. The GST @ 5% (CGST & SGST at 2.5% each)

Notification No. 46/2017-Central Tax (Rate) New Delhi, the 14th November, 2017

“(i) 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 drink, where such supply or service is for cash, deferred payment or other valuable consideration, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied, other than those located in the premises of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having declared tariff of any unit of accommodation of seven thousand five hundred rupees and above per unit per day or equivalent. Explanation.- “declared tariff” includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.

2.5

Provided that credit of input tax charged on goods and services used in supplying the service has not been taken [Please refer to Explanation no. (iv)].”;

6. In my understanding, the chief object of the above mentioned Notification is to provide the benefit of 5% GST only on the “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 drink”. As such it shall not include any sin goods like hookah, cigarettes, pan masala etc., nor is it intention of the Legislature and the Government.

7. Now coming back to core issue, the principal supply being hookah flavours, in my considered opinion, GST at 28% with 72% Cess will have to be paid on the supply value of assorted hookah flavours after classifying it under the appropriate HSN 2403 11 10. Because nowhere under the GST Act, there is any such Notification entitling the dealer to purchase the notified goods taxable at 28% GST coupled with 72% Cess and resupply the same goods at reduced rate of GST at 5%.

8.Therefore there is huge apprehension that such Notification is prone to abuse. In case of abuse of the said Notification by any one, the natural question is, if hookah can be considered as goods/articles for human consumption to be supplied in restaurants attracting reduced rate of GST @ 5%, then why not pan masala and cigarettes too?

9. So all the experts are requested to throw further floodlight on this topic so that the GST law works the way it is desired by its makers.

[Amit Agrawal]

RELEVANT EXTRACT FROM 'Model All India GST Audit Manual 2023' prepared by The Committee of Officers on GST Audits:

"(ii) 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 is a supply of service –

There were several judgements before the 46th amendment of the Constitution of India in this respect. Hon'ble Apex Court in the matter of State Of Punjab vs M/S. Associated Hotels Of India (1972 (1) TMI 80 - SUPREME COURT) analyzed the nature of contract where a customer stays in the hotel and meals are served as part of and incidental to that service.

Hon'ble Andhra High Court in the matter of Durga Bhavan And Ors. vs The Deputy Commercial Tax Officer - 1980 (9) TMI 260 - ANDHRA PRADESH HIGH COURT on 19th September, 1980 categorized the sale of food in restaurant into two parts -

The supply of food, etc., by restaurants may be made to customers who sit in the restaurants and consume the food. In such a case they enjoy the amenities provided by the owners of the restaurants.

The second class of cases comprise of supply of food-stuffs, snacks, drinks, etc., across the counter where there is practically no service rendered or amenities provided except in the manner of supplying the goods like packing, etc.

Finally, it was needed to make 46th Constitutional Amendment in the year 1981.

Key Elements of Article 366(29A)(f) "

"Tax on the sale or purchase of goods includes: (f) a tax on the 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 (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery of supply is made."

Thus, in the pre-GST regime both Service Tax and VAT was levied on this supply. This entry 6(b) of the Schedule II is expected to reduce any confusion in respect of determination of this particular nature of supply since entry 6(b) of the Schedule II specifies the supply as the supply of service.

However, there may still prevail some confusion regarding the nature of certain supplies.

Illustration - a. Whether tobacco consumed in hookah bars would get covered in the entry 6(b) of Schedule – II "as any other article for human consumption?

To analyse this, we need to take resort to a well-recognised and established principle of a law which is “Ejusdem Generis”. “Ejusdem Generis” is an aspect of the principle of "Noscitur a sociis”. The Latin word 'sociis' means 'society', 'Society' of the same nature. It is an established principle of law that when general words follow specific words, such cannot be read in isolation. Their colour and their contents are to be derived from the context of specific words. In this case "any other article for human consumption‖ can't be read in isolation. It must be read as "being food or any other article for human consumption‖.

The phrase 'any other article' takes its colour from the word 'food'. Now the question arises whether hookah is a food? Since it is not a food it will not be covered under this entry of Schedule II. In hookah bars, hookah paste is supplied with the right to use a smoking apparatus. So, it is a composite supply, where hookah paste is the principal supply.

[There is a very famous judgement in respect of the principle of “Ejusdem Generis”. Interested readers may go through the judgement in the case of McBoyle v. United States 283 U.S. 25 (1931)].

[Amit Agrawal]

Even though I do not agree with reasoning adopted by 'The Committee of Officers on GST Audits', I feel it is necessary to note & know these views of Dept. (which endorses stand taken by our Shri Sadanand Bulbule Ji!) in fairness to each & every visitor of TMI.

Congratulations to Shri Sadanand Bulbulde Ji!

Now, one can safely expect demand of taxes (& disputes / litigation thereon) all over India upon all these hookah bars.

As said in the beginning, I do not agree with said reasoning of 'The Committee of Officers on GST Audits'. And I continue to believe that such demand of gst taxes on hookah bar (by treating hookah paste' as 'principal supply' & supply is that of 'goods') are legally not sustainable specially considering 'facts' given in current Issue Id: - 118434 under discussion here.

I will share my reasoning for disagreement in next few days.

[Sadanand Bulbule]

Respected Amit Sir ji

I remain grateful for your heartfelt compliments. But in reality I don't deserve any congratulations. I am aware that, we all as a united team members[TM] on TMI doing constant research on most ticklish issues to rescue the honest tax payers from needless litigation.

Being citizens of this nation, it is everyone's fundamental duty to respect the levy of any taxes, provided it is legal and sustainable at all judicial forums including the Hon'ble Apex Court. Or else, legal war begins against the illegal and unsustainable foisting of taxes by the quasi-judicial authorities.

Having spent 35 years in the Karnataka Commercial Tax Department, I realise how meticulously the tax administration works in generating revenue from 360 degree angles, particularly during the present GST regime founded on digital platform.

Like you, I am also one of the trouble-shooters against the troublemakers. Let's continue our journey together in the right direction as usual.

Warm regards

[Amit Agrawal]

W.r.t. relevant extract from 'Model All India GST Audit Manual 2023' prepared by The Committee of Officers on GST Audits, as quoted by me in post at serial number 21, my views are as under:

A. Entire sequence of quoted extract starts with emphasising 'several judgements before the 46th amendment of the Constitution of India in this respect'. One can find lot many more judgements of Supreme Court if one starts even reading multiple judgements quoted / relied upon in these 2 judgements quoted in said manual. I invite & urge readers to go through as many such judgements as possible, covering period pre-46 amendment in the constitution, where restaurant / hotel is serving 'foods' to its customers is involved & where ambience / experience which customer seeks, is involved .

B. In each of these rulings, you will find that serving of 'food' by a hotel / restaurant was treated at Apex court as 'Service' and not 'Sale of foods'.

C. This has lead to insertion of Article 366(29A)(f) by way of 46th Constitutional Amendment in the year 1981, where deeming friction is created to allow states to levy sales tax / VAT on value of goods / services involved in specified six types of 'services'.

D. Even the Andhra Pradesh High Court in case of in the matter of Durga Bhavan And Ors. vs The Deputy Commercial Tax Officer - 1980 (9) TMI 260 - ANDHRA PRADESH HIGH COURT (which is quoted in said GST audit manual) has stated the followings:

"To summarise the position at the end of the three decisions of the Supreme Court discussed earlier appears to be as follows:

"1.. If there is no right to carry away the food there would be no sale in favour of the customer.

2. Even if there is a right to carry away if in essence the transaction is a transaction of service and not a transaction of sale it would not be exigible to tax.

3.. If, however, where the customer has a right to take away the food if the dominant object is the sale of food and the rendering of service is merely incidental, then the transaction would be a transaction of sale and not a service contract.

4.. The question whether the dominant object was the sale of food or rendering of service would depend upon the facts and circumstances of each case which has to be decided by the assessing authority in the light of the evidence before it."

E. NOW, lets check the 'facts' given in subject query under discussion here:- In metro and cosmopolitan cities, it is the modern trend of throwing weekend parties in restaurants, normally by affluent young guys, of course above 18 years, to experience inhaling of hookah in extremely mesmerizing ambiance from dusk till dawn. Generally such restaurants popularly called as “hookah bars” provide predominantly Hookah services besides ancillary food items in exclusive smoking zones. Secondly such restaurants opt for payment of GST @ 5% for supply of foods/drinks and Hookah.

F. Given facts are themselves proves that entire supply is treated as 'service' both by the restaurants (popularly called as “hookah bars”) and customers getting so-called hookah services.

F1. As far as I know, no customer has right to take away remaining 'tobacoo' (if any) in hookah, afterwards. (And I do not think anyone will be interested to do so, considering the entire process of generating smoke using tobacco & flavours for consumption)

G. Taking into account the series of judgements of apex Court (i.e. for period prior to 46th amendment of the Constitution of India) read with factual position as listed in Para E & F1 above, entire contract by these restaurants (popularly called as “hookah bars”) and its customers is in nature of 'service' and not as sale of goods.

H. Now, assuming - for sake of argument - that 'any other article for human consumption' used in Article 366(29A)(f) and Clause (6) in Schedule-II of the CGST Act, 2017 does NOT include 'tobacco' used in these hookah-bars, then also, in view of series of Apex Court rulings, entire contract is that of service and not 'sale of goods' in given facts.

H1. No customer - in given set of facts - is interested as buying 'tobacco' per se and no restaurant is selling 'tobacco' per se to its customers.

I. Summarising above, I believe that reasoning adopted by 'The Committee of Officers on GST Audits' in GST manual prepared by it is seriously faulty - both factually and legally - on multiple grounds and same is in total disregard to law settled by Apex Court in series of judgements. Said committee simply ignored the fact that customer is coming to the restaurants (popularly called as “hookah bars”) to get served and enjoy entire experience / ambiance of such restaurants (as per admitted 'facts' under discussion here) and not for buying 'tobacco' per se.

H1. Hence, these restaurants (popularly called as “hookah bars”) can not be charged as 'supplier of goods' while servings its customers for so-called hookah services in given set of facts.

I. As explained in my last post above, one can & should safely expect demand of taxes (& disputes / litigation thereon) all over India upon all these hookah bars. Hence, it is necessary for these hookah bars to prepare themselves with supporting documents / evidence to make their defence better and stronger against such illegal demands and to defend themselves judicially.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I respect contrary views.

[Sadanand Bulbule]

Dear Amit ji

While drawing your kind attention to your point raised at "F1", I wish to inform you that before placing this topic on discussion forum on TMI, I have visited couple of hookah bars to study and to have first hand experience on how this specific business practically runs there. No customer is allowed to carry unconsumed hookah nor is it carriable unlike it is quite common in food sector. So I suggest you to visit the nearest hookah bar and witness the business in reality.

Secondly this discussion forum is not a "court" to decide the legality of illegal demand of taxes.The hands of law are too long. Let it separate "milk from water". Since ancient times,legislation has no sympathy for sin goods like tobacco products in any forms. Such goods do not enjoy liberty like any generic goods but are strictly controlled/administered with high responsibility and accountability focusing top most priority for the protection of health of its smokers. As part of discouraging massive consumption of tobacco products ,there is conscious levy of higher rate of 28% GST plus 72% Cess . Universally it is the policy of every Government not to gift concessional rate of tax for tobacco products and other intoxicating drinks.

Thirdly assuming but not accepting that hookah falls under the banner of food article for human consumption, then why the boys and girls upto 18 years are strictly prohibited to have the so called food article for consumption in the form of hookah? It cannot be without valid reason.

Hard facts never wither.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, I agree with you in toto. I think 'friendly match' should be over now. Ball is already in the court of Govt.

Humble suggestion : We should devote our time and energy to some other burning and complicated issue.

[Sadanand Bulbule]

Respected Sethi sir ji

I respectfully accept your suggestion.

Warm regards.

[Amit Agrawal]

Dear Shri Sadanand Bulbule Ji,

I agree that I do not have first hand experience & my knowledge about this trade (i.e. hookah bar) is based on 'google search'.

W.r.t. Para F1, it is same as you said 'No customer is allowed to carry unconsumed hookah nor is it carriable unlike it is quite common in food sector'.

And it is precisely "the fact" on which Apex Court held that such goods cannot be said as 'sold' by the restaurant to its customers.

I also agree with you that 'this discussion forum is not a "court" to decide the legality of illegal demand of taxes'. But, one can never be prevented to gives own views on legal matters, as one see it, specially when same is backed by series of Supreme Court rulings resulting into 46th amendment to Constitutional of India.

Taxation matter needs to be analysed and decided as per application legal provisions & Supreme Court's rulings dealing about when can food (or any other article for human consumption, for that matter) be said as 'sold' by restaurant to its customers. Same cannot be twisted (& legal position, including SC rulings, ignored) just because subject trade (i.e. hookah bar) has ill-effects on health on its customers.

I do not see any reason to suggest to these hookah-bars to charge / pay higher rate of 28% GST plus 72% Cess etc. on its hookah services (i.e. by wrongly treating the transaction as 'supply of goods i.e. tobacco'), when law do not require them to do so in given set of facts read with series of Apex Court rulings.

As part of its policy of taxation or otherwise, Govt. can always change the "present" taxation & even other laws to get it's desired social & economic objectives (which may even include closing these hookah bars, non-allowing selling of cigarettes / pan masala / alcohol & so on). But, such policy-considerations are totally irrelevant, to my mind, while giving my views on given set of 'facts' as stated in your query and my understanding of "present" legal provisions and my application of 'series of Apex Court rulings' to given set of facts.

In summary, I stand by my views that the reasoning adopted by 'The Committee of Officers on GST Audits' in GST manual prepared by it is seriously faulty - both factually and legally - on multiple grounds and same is in total disregard to law settled by Apex Court in series of judgements. Said committee simply ignored the fact that customer is coming to the restaurants (popularly called as “hookah bars”) to get served and enjoy entire experience / ambiance of such restaurants (as per admitted 'facts' under discussion here) and not for buying 'tobacco' per se. Hence, these restaurants (popularly called as “hookah bars”) can not be charged as 'supplier of goods i.e. tobacco' while servings its customers for so-called 'hookah services' in given set of facts.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I respect contrary views.

AI Summary

Composite supply classification: determines whether on premises hookah is taxed as a restaurant service or as high rate tobacco goods.
The core legal issue is whether provision of hookah in restaurants is to be taxed as a supply of tobacco goods (HSN 2403.11.10 attracting the higher GST rate and cess) or as a composite supply treated as a restaurant service under Schedule II, thereby attracting the concessional restaurant tax. Resolution turns on factual characterisation (whether the principal supply is goods or a bundled on premises service), commercial parlance/common sense classification, and statutory construction principles such as ejusdem generis applied to the phrase "food or any other article for human consumption."