SALE/SERVICE CONUNDRUM IN RESTURANTS

Service tax on outdoor catering has long been a controversy in indirect tax regime. Law defines outdoor caterer as

“65(76a)     “outdoor caterer” means a caterer engaged  in  providing services in connection with catering at a place other than his own but including a place provided by way of tenancy or otherwise by the person receiving such services.”

“65(24)       “caterer” means any person who supplies, either directly or indirectly, any food, edible preparations, alcoholic or non-alcoholic beverages or crockery and similar articles or accoutrements for any other purpose or occasion.”

The taxable service u/s 65(105)(zzt) means any service provided or to be provided “to any person by an outdoor caterer”. Up to 16.5.2008, the expression was “service provided or to be provided to a client”. In Tamil Nadu Kalyana Mandapam Association vs Union of India (2004) 135 STC 480 (SC), the hon’ble Supreme Court has held that the outdoor catering is predominantly a service. This coincides with the view of the review judgment of Hon’ble Supreme Court in the judgment reported in 45 STC 212 (SC) (Northern India Caterers (India) Limited  vs Lt .Governor of Delhi). The Judgment goes on to point out what can be a service and what not.  In a restaurant if the purchaser of food cannot take away the food as and when he wishes, the activity is merely a service and not sale. Forty Sixth Amendment seeks to rectify what has been proposed and brings supply, delivery and transfer of food and beverages for human consumption under the purview of sales tax. The constitutional amendment which sought to eliminate the confusion only further increased the problems. What happens to the service element during the transfer of goods. Who can tax the service aspect? Whether State as “deemed sale” or Centre as “service”?

If the recent judgments given by various High Courts are observed, we can be sure of only one point. No one concurs on the issue in hand. When Kerala High Court though its judgment dated dated 3.07.2013, reported as   2013 (31) STR 257 (Ker.) (Kerala Classified Hotels and Resorts Association vs Union of India) expresses it as a deemed sale and State, as, only having power to levy tax, Bombay High Court choose to depart from Kerala High Court decision in the judgment reported in 2014 (34) STR 522 (Bom.) (Indian Hotels and Restaurant Association vs. Union of India). Bombay High Court out-rightly rejected the idea that parliament was denuded of its competence to legislate and impose tax provided, in this case, service provided by restaurants and hotels.

Karnataka High Court, in the judgment reported in (2011) 46 VST 57 (Kar.) (Commissioner of Service Tax vs. LSG Sky Chef India Private Ltd) has gone a step beyond and held that there should be bifurcation of the sales component and service component. Though this view might be the only practical scenario available, the judgment failed to provide sufficient reasons on the query of whose prerogative whether Parliament or State Legislature. Further the legality to levy of service tax on outdoor catering has been upheld in the judgment, dated 10^th April 2014, reported as [2014] 72 VST 191 (All.) (Indian Coffee Workers’ Co-operative Society Limited vs Commissioner of Central Excise and Service Tax Allahabad).

The High Courts have given various view point’s that can be taken. Each one more precarious than the other, if not careful. Hence we can wait for the One Supreme Court Judgment that will certainly put to rest the controversy. However it is rather curious as to which route will Apex Court chose to end the debate. My bet is on Karnataka High Court since that is the easiest way out and probably the right one.