By Puloma Dalal, Jayesh Gogri, Mandar Telang; Chartered Accountants
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I. High Court
Constitutional validity of restaurant service along with Rule 2(C) of the Service Tax (Determination of Value) Rules, 2006 is upheld and entry 65(105)(zzzzw) pertaining to levy of service tax on short term accommodation is held unconstitutional and invalid.
Facts:
The petitioner challenges the constitutional validity of section 65(105)(zzzzv) viz. restaurant service and section 66E(i) of the Finance Act, 1994 seeking to constitute service portion in an activity of supply of food as a declared service. Further it is claimed that Rule 2C of the Service Tax (Determination of Value) Rules, 2006 arbitrarily determining 40% as the value of service is invalid. Further the constitutional validity of section 65(105)(zzzzw) viz. Hotel, Inn, Club and Guest House service is also challenged. It was stated that with the insertion of clause 29(f) in Article 366 of the constitution, the state legislatures have the exclusive competence to legislate in respect of levy of tax on sale or purchase of goods and no part of the transaction of supply of food in a restaurant is amenable to service tax. Further in respect of hotel accommodation it was submitted that Entry 62 of the State List imposes tax on entertainment, amusement, betting and gambling and moreover state legislatures have enacted statutes for levy of luxury tax on hotel accommodation and therefore levy of service tax lacks legislative competence.
Held:
The High Court relied on the decision of Larsen and Toubro [2015-TIOL-187-SC-ST] and BSNL vs. Union of India [2006-TIOL-15-SC-CT-LB] wherein it has been observed that the taxation powers of the Centre and States are mutually exclusive under the constitution and therefore the moment a levy enters into a prohibited exclusive field it is liable to be struck down. Accordingly Parliament can only tax the service element and the states can only tax the transfer of property in goods. Therefore the Court noted that in the present writ it is essential to examine whether the composite catering contract is capable of being segregated into a portion pertaining to supply of goods and that pertaining to services provided. Relying on the decision of Larsen and Toubro vs. State of Karnataka [2013-TIOL-46-SC-CT-LB] it was held that even if some part of the composite transaction involves rendering of service, there should be no difficulty in recognizing the power of the Union to bring to tax that portion. Since the Parliament has made the legal position explicit by taxing the service portion of a composite contract of supply of food and drinks the same has sound constitutional basis and therefore section 65(105)(zzzzv) and section 66E(i) are constitutionally valid. In the matter of Rule 2C the Court relying on the decision of Association of Leasing and Financial Services Companies vs. Union of India [2010-TIOL-87-SC-ST-LB] observed that the grant of abatement has the approval by the Supreme Court more so when the assessee does not maintain accounts to determine the service portion. However it was pointed out that if an assessee is able to demonstrate on the basis of accounts and records that the value of service is different than that provided in the Rule, the assessing authority is obliged to consider such submission and give a decision thereto. In respect of Hotel accommodation, however the Court noted that the “Delhi Tax on Luxuries Act, 1996” which provides for levy of luxury tax on provision of service of hotel accommodation is traceable to entry 62 of the State list and therefore the State is competent to levy tax on such taxable event. Thus, this is a case of encroachment by the Union in the domain of the State and therefore the Court strikes down section 65(105)(zzzzw) of the Finance Act 1994 pertaining to levy of service tax on provision of short-term accommodation.
