Service Tax on serving food and beverages in AC restaurants: Delhi HC upholds constitutionality [Read Judgment]

Levy of service tax on the provision of short-term accommodation and the corresponding instructions/circulars seeking to operationalize the levy is held unconstitutional and invalid.

A Division Bench of Delhi High Court has upheld the constitutional validity of Section 65 (105)(zzzzv) read with Section 66E (i), Section 65 (22) of the Finance Act 1994 as well  as Rule 2C of the Service Tax (Determination of Value) Rules, 2006; whereby the provision to any person by a restaurant, by having the facility of air-conditioning in any part of its establishment serving food or beverage, including alcoholic beverages or both, in its premises has been made amenable to service tax.

However, the Court has struck down Section 65 (105) (zzzzw) of the Finance Act 1994 pertaining to levy of service tax on the provision of short-term accommodation and the corresponding instructions/circulars seeking to operationalize the levy as unconstitutional and invalid.

The Federation of Hotels and Restaurants Association of India had challenged the Constitutional Validity of these provisions of the Finance Act contending that it is only the State legislature that has the exclusive competence to legislate in respect of levy of tax on such sale or purchase of goods.

The Bench comprising of Justices S. Muralidhar and NajmiWaziri observed: “The Parliament has further made the legal position explicit by inserting Section 66 E (i) of the FA read as it were with Section 65 (22) and 65 (44) of the FA. It states that the "service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity” is a 'declared' service. The legislative carving out of the service portion of the composite contract of supply of food and drinks has sound constitutional basis as explained in the aforementioned decisions of the Supreme Court. Even if this is viewed as Parliament deploying a legal fiction, it is legally permissible.”

The Court also said that is not possible to accept the contention of the Petitioners that Parliament lacks the legislative competence to enact Section 65 (105) (zzzzv) of the FA with a view to bringing the service component of the composite contract of supply of food and drinks by an air-conditioned  restaurant within the service tax net.

Striking down Section 65 (105) (zzzzw) of the Finance Act 1994, the Court observed: “In the counter affidavit filed by the Respondent, it is simply asserted that service tax is a levy that is distinct from luxury tax levied by the States. But the basis for this assertion is not set out. On the other hand, while seeking to explain the exemption granted to rooms with a tariff of less than Rs. 1000 per day, reference is made to the threshold limits fixed in the luxuries tax legislation of the States like for e.g., Maharashtra and Delhi. It is, therefore, plain that there is not merely an overlap of luxury tax and service tax as far as accommodation provided in hotels is concerned. It is in fact the same levy but by different statutes: one enacted by the State and the other by the Union. This is indeed an instance of encroachment by the Union into a field that is completely covered by a State legislation.”

Read the Judgment here.