Thursday, August 22, 2013

Service tax on restaurants and hotel accommodations is unconstitutional; HC sets aside levy of ST

Levy of service tax on service forming part of supply of goods in a restaurant, as well as short-term accommodation services in hotels, inns, etc. is unconstitutional

In the instant case the assessee challenged the levy of service tax on AC restaurants licensed to serve alcoholic beverages and short-term accommodation provided by hotel, inn,  guest house, club or camp-site under sections 65(105)(zzzzv) and 65(105)(zzzzw)] as unconstitutional.

The High Court held the impugned levy as unconstitutional with the following observations:

1) Article 366(29A)(f) empowers State Governments to impose tax on supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink, intoxicating or not. Incidence of sales-tax is on supply of any goods by way of or as part of any service;

2) When food is supplied or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale and there cannot be a different component of service which could be charged to service tax by Central Government;

3) In view of judgment in K. Damodarasamy Naidu & Bros. v. State of Tamil Nadu [2000] 1 SCC 521, it held that service formed part of sale of goods and State Government alone had legislative competence to enact law imposing a tax on service element forming part of sale of goods as well;

4) In view of judgment in Godfrey Philips India Ltd. v. State of U.P [2005] 2 SCC 215, it held that luxuries were activities of enjoyment or indulgences which were costly or generally recognised as being beyond necessary requirements of an average member of society;

5) Service tax imposed on services provided in a hotel and other similar establishments, which fall within extended meaning of word "luxuries", trenches upon legislative function of State under Entry 62 of List II;

6) Hence , sub-clauses (zzzzv) and (zzzzw) to clause 105 of section 65 of the Finance Act, 1994 as amended by the Finance Act, 2011 were beyond the legislative competence of the Parliament as the sub-clauses were covered by Entry 54 and Entry 62 of List II of the Seventh Schedule - Kerala Classified Hotels & Resorts Association v. Union of India [2013] 35 568 (Kerala)