Service tax levy on short-term accommodation in hotel is unconstitutional: Delhi HC

Facts:

‘Federation of Hotels and Restaurants Association of India’ filed a writ before the Delhi High Court challenging the constitutional validity provision whereby, service tax is levied on supply of food items by restaurants having AC facility. It also challenged constitutional validity of provision, whereby service tax is levied on short-term accommodation by hotels. 

The Delhi High held as under:

I. It upheld the constitutional validity of service tax levy on foods items served in AC restaurants and made following observations:

- Rule 2C of the Service Tax (Determination of Value) Rules, 2006 enables the assessing authority to put a definite value to the service portion of the composite contract of supply of goods and services in an air-conditioned restaurant.

- Correspondingly there is an abatement for that portion which pertains to the supply of goods in the form of food and drink which would be amenable to sales tax or value added tax.

- It is to be kept in mind that the ready reckoner formula is useful where an assessee does not maintain accounts in a manner that will enable the assessing authority to clearly discern the value of the service portion of the composite contract. With the machinery provision for the levy and determination of service tax on the service portion clearly being spelt out in the Rules themselves, the legal requisites stand satisfied.

II. It held that levy of service tax on short-term accommodation in hotel is unconstitutional

- Section 65(105)(zzzzw) contemplates a service provided "to any person by a hotel, inn, guest house, club or camp-site by whatever name called, for providing of accommodation for a continuous period of less than three months." When the above definition is placed alongside the above extracted provisions of the Delhi Tax on Luxuries (DTL) Act of 1996, it is difficult to discern any real difference in the subject matter of the two levies.

- In other words, what is defined under the DTL Act is an identical service of providing accommodation in a hotel. The only additional prefix in the FA is the hyphenated word "short-term" in Section 65 (105) (zzzzw) followed by the expression "for a period of less than three months". However, such provision of short-term accommodation of less than three months is by no means exempt from luxury tax under the DTL Act.

- Consequently, Section 65 (105) (zzzzw) of the FA failed the foremost test of constitutionality of a Union tax that "before exclusive legislative competence could be claimed by Parliament by resort to the residuary power, the legislative incompetence of the State legislative must be clearly established."- [2016] 72

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