By Puloma Dalal, Jayesh Gogri, Mandar telang Chartered Accountants
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High Court upholds constitutional validity of section restaurant service and catering service u/s. 66E(i) of the Act – Issues direction to State Government to issue clarifications to avoid double taxation.
Facts:
The Petitioners challenged vires of section 66E(i) of the Finance 1994 Act, 1994. In view of Article 366(29A)(f) the service element in serving food and drinks in a restaurant is subsumed in the sale and as sale of food and drinks inside the restaurant is deemed to be sale, the Parliament has no legislative competence to enact the law to tax sale of food and drinks.
Held:
The Court observed that, u/s. 65B(44)(ii) supply of goods that is deemed sale under Article 366(29A) is not included in service and it refused to accept the proposition that there is anything in Article 366(29A)(f) to indicate that the service part is subsumed in the sale of goods and expressed a view that it rather separates sale of food and drinks from service. As regards the Finance Act 1994, it observed that section 65B(44) as well as section 66E(i) only charges service tax on the service part and not on the sale part and held that this would indicate, sale of food has been taken out from the service part. Accordingly, section 66E(i) of the Finance Act,1994 is intra-vires the Constitution. The provisions of Rule 2C of the Service Tax (Determination of Value) Rules, 2006, value of food is taken as 60% of the Bill in case of restaurant and 40% of the Bill in case of catering service. It is in this background the High Court recommended that the restaurant and caterer should not charge VAT on the entire bill value, but only upon the residual portion of 60% or as the case may be 40% of the Bill and directed State Government to issue clarification in this regard to ensure that the customers are not unnecessarily doubly taxed over the same amount.
