TAXABILITY OF TAKE AWAYS AND HOME DELIVERIES

However, the scope of ACR Services, was substantially expanded w.e.f. 01-04-2013, whereby the condition of license to serve liquor was done away with. Far reaching implications of the amendment were discussed in April, 2013 issue of BCAJ. In this feature, the contentious of issue of taxability in case of take aways / home deliveries in regard to which inconsistent practices are being followed, is discussed.

Constitutional Validity of the levy
The constitutional validity of service tax levy on ACR was challenged before various Courts in the country. The Kerala High Court in the case of Kerala Classified Hotels and Resorts Association & others (2013) 31 STR 257 (KER) had held the levy constitutionally invalid. However, the Bombay High Court in India Hotels and Restaurant Association & Others vs. UOI (2014 – TIOL – 498 – HC – Mum – ST) and the Chhattisgarh High Court in Hotel East Park & Another vs. UOI (2014 – TIOL – 758 – HC – CHHATTISGRAH – ST) have upheld the constitutional validity of the levy.

Relevant Statutory Provisions
Section 65 B (44) of the Finance Act, 1994, as amended (Act)

“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include –

(a) an activity which constitutes merely, –

i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

ii) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of Clause (29A) of article 366 of the Constitution; or

iii) A transaction in money or actionable claim.

(b) A provision of service by an employee to the employer in the course of or in relation to his employment;

(c) Fees taken in any Court or Tribunal established under any law for the time being in force.

………………….

Declared Services (section 66E of the Act)

The following shall constitute declared services, namely
…………

(i) 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.

Article 366 (29A) (f) of the Constitution of India
Sale includes –

“Supply, by way of or as a part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration.”

Relevant Extracts from CBEC – Education Guide dated 20-06-2012

Para 8.4

Valuation of service portion involved in supply of food or any other article of human consumption or any drink in a restaurant or as outdoor catering.

In terms of article 366(29A) of the Constitution of India supply of any goods, being food or any other article of human consumption or any drink (whether or not intoxicating) in any manner as part of a service for cash, deferred payment or other valuable consideration is deemed to be a sale of such goods. Such a service therefore cannot be treated as service to the extent of the value of goods so supplied. The remaining portion however constitutes a service. It is a well settled position of law, declared by the Supreme Court in BSNL‘s case [2006(2)STR161(SC)], that such a contract involving service along with supply of such goods can be dissected into a contract of sale of goods and contract of provision of service. Since normally such an activity is in the nature of composite activity, difficulty arises in determining the value of the service portion. In order to ensure transparency and standardization in the manner of determination of the value of such service provided in a restaurant or as outdoor catering a new Rule 2C has been inserted in the Service Tax (Determination of Value) Rules, 116 2011, amended by the amendment Rules of 2012. This manner of valuation is explained in the points below.

Para 8.4.1 Are services provided by any kind of restaurant, big or small, covered by the manner of valuation provided in Rule 2C of the Valuation Rules?

Yes. Although services provided by any kind of restaurant would be valued in the manner provided in Rule 2C, it may be borne in mind that the following category of restaurants are exempted –

• Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air heating in any part of the establishment, at any time during the year, ……………..

• Below the threshold exemption.

Departmental Clarifications
Circular D.O.F NO. 334/3/2011 – TRU dated 28-02-2011 (Relevant extracts) Para 1.4

The new levy is directed at services provided by highend restaurant that are air-conditioned and have license to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations. It should not be confused with mere sale of goods at any eating house, where such services are materially absent or so minimal that it will be difficult to establish that any service in any meaningful way is being provided.

Para 1.6

The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP…………….

Circular No. 173/8/2013 dated 07-10-2013 (relevant extracts)

Taxability – Supply of food at outlets, take aways, delivery etc.
Various restaurants, hotels or coffee shops sell food items, beverages, ready-to-drink products, including food pre-packaged at their outlets. The arrangement may be sale at outlet for consumption within the premises or sale over the counter or sale of MRP products.

The scope of declared list entry (i) of section 66E of the Act is very wide and covers service portion of an activity of supply of food or any article of human consumption or any drinks in any manner. Hence, service tax will be payable whenever supply of food involves any service element and the transaction is not merely a “transfer of title” in goods. The issue which requires consideration is whether supply of food items and beverages is a transaction of

merely “transfer of title” in goods or involves any service element as part of supply of goods and beverages. As regards the determination of what is ‘sales’ under article 366(29A) of the Constitution of India, various judicial rulings have evolved a law to the following effect:

• the predominant transaction is a ‘sale’ or ‘service’ must be determined from the facts of each case;

• where supply is made in a restaurant and if the customer has the right to take away the food or dispose it off at his discretion, it may qualify as ‘sale’ and providing of services in this situation would be incidental;
•    further, in relation to “over the counter” sales, it may qualify as sale of goods, as the services are not significant.

Though the above evolution of law is before the introduction of negative list based taxation of services, the same would be relevant, to determine what constitutes ‘sale’ as contemplated in the exclusion clause in the definition of ‘service’. [section 65 B(44) of the Act] under the negative list regime.
The CBEC circulars issued at the time of introduction of levy as reproduced earlier, have clarified that mere sale of food by way of pick-up or home delivery as well as goods sold at MRP will not attract service tax. Though these circulars were issued in the context of “ACR Services” the principle contained therein would be relevant under the negative list based regime. Further, as ‘sale’ is covered under the exclusion clause in the definition of ‘service’, there can be no levy of service tax as “Declared Services”.

•    Whether the service tax is attracted even where the air-conditioning facility has operated for a part of the year or in any part of establishment. In particular, cases where A/c is not installed in the restaurant area where food is supplied for consumption by a customer but in Manager’s cabin or a Cold Storage area in a kitchen which is a part of the restaurant establishment.

•    Whether self–service or pick up or home delivery/ supply of food or beverages, ice cream/food served outside the area of restaurant/eating joints or mess having facility or air–conditioning etc. will come under the purview of service tax or not?

In terms of Clause (i) of section 66E of the Act, service portion in an activity wherein goods, being food or other articles 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.

Further, Entry No. 19 of the Notification No. 25/2012- S.T. dated 20-06-2012 as amended vide Notification No.3/2013–ST dated 01-03-2013 (w.e.f. 01-04-2013), has exempted services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air–heating in any part of the establishment, at any time during the year.

?    According to one school of thinking:

•    In light of the Exemption Notification No. 25/2012– S.T. (as amended) the specific exclusion of the premises which have or had air–conditioning facility in any part of the establishment (including Manager’s cabin or Cold Storage area in a restaurant) at any time during the year, it would appear that, exemption may not be available

•    The service tax has been levied on the activity    of supply of goods etc. in any manner and the exemption has been granted to the services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year. The exemption, is based on the condition of the restaurant, eating joint or the mess as to whether or not they are    or were having air-conditioning or central air– heating facility in any part of their establishment, at any time during the year. It is not based on the manner in which food, etc. is supplied. Therefore, it is appears that service tax could be leviable    on the food etc., supplied by a restaurant, eating joint or a mess if they have or had the facility of air-conditioning or central air-heating in any part of their establishment during any part of the year irrespective of the fact whether the food is served, outside the restaurant premises, delivered or taken away.

?    According to a second school of thinking :

•    Based on settled principles of harmonious & rational interpretation laid down from time to time, in order to attract service tax under ACR Services, it would appear that A/c /air heating facility should exist in the restaurant area where food is supplied.

•    In cases where, food is prepared by an A/c outlet, restaurant etc. and the customers have an option to consume food/beverages etc., within the premises of such A/c outlet, restaurant etc., supply of food may get covered under entry (i) of section 66E of the Act and hence become liable to service tax.

However, in cases where no particular place is provided by the A/c outlet, restaurant etc. where such food/beverage can be consumed, the activities could be considered as being in the nature of sale of goods and hence may not attract service tax.

•    In cases where, A/c outlets, restaurants sell goods  on MRP basis (like coffee packets, cold drinks etc.),  it would be a good case to hold that goods supplied under MRP are mere sale of goods and do not involve any service element so as to attract service tax.

•    In cases where, food items are supplied by A/c Outlets/Restaurants as take aways or home delivery, the activities can be regarded as being in the nature of sale of goods and hence would not attract service tax.

CONCLUSION:
It would reasonably appear that, second set of contentions reflects a better view. CBEC clarifications in the context of ACR services reinforce the same. However, considering the scenario that at a practical level  in  many  cases take aways & home deliveries are being subjected to service tax by owners of A/c outlets, restaurants etc. as a conservative measure to avoid prospect of tax liability at a future date, the matter needs to be appropriately clarified by the CBEC so as to reduce burden at the end Consumer.