Introduction and background Service tax is introduced on services provided by air-conditioned restaurants having a licence to serve liquor with effect from 1st May, 2011. The restaurants predominately serve food and as such, the dominant nature of the transaction is that of sale and the service is built-in or an integral part thereof and it is already subject to the levy of VAT. Whether a transaction is a sale or a service is determined with reference to facts of each case. At times, there may be a composite transaction consisting of both sale and service. The debate over this issue is ongoing and often a transaction is looked upon as ‘sale’ as well as ‘service’ under different statutes in India. There has been ongoing debate in relation to taxation of software, intellectual property rights or goods of incorporeal nature, telecommunication service, etc. as to whether these should be taxed as goods or services. Mutual exclusivity of service tax and VAT was recognised and a composite contract was distinguished from an indivisible contract in the case of Imagic Creative Pvt. Ltd., 2008 (9) STR 337 by the Supreme Court and accordingly held to the effect that the element of sale would attract VAT and element of service would attract service tax. In the context of provision of broadband connectivity, in the case of Bharti Airtel Ltd. v. State of Karnataka, 2009 TIOL 99 HC Kar-VAT, the High Court upheld the order of the Assessing Authority that activity of providing connectivity to the subscribers amounted to sale of light energy and taxable under the Karnataka VAT Act, whereas the company had paid due service tax. On filing SLP however, the Supreme Court set aside the order and directed the company to file statutory appeal and further passed an order to dispose of the appeal on merits. The controversy thus is not closed. It is however relevant to note that in the context of supply of food and beverages on board trains in the case of Indian Railways C&T Corporation Ltd. v. Govt. of NCT of Delhi 2010 (20) STR 437 (Del.), the Delhi High Court held that the said transaction did not amount to service of outdoor catering as passengers have no choice of articles served or time and place of service of food. The element of service is incidental and bare minimum of heating food and serving it. The state was empowered to levy VAT on the transaction and incidental element of service was not relevant and the petitioner was at liberty to challenge the levy of service tax. Further citing the case of Bharat Sanchar Nigam Ltd., 2006 (2) STR 161 (80), it was observed that in respect of composite transactions other than those covered by Article 366(29A) of the Constitution, if no intention is found to segregate the element involving sale of goods from the element involving providing of service or if the transaction does not involve two distinct contracts, one for sale of goods and the other for providing of service, it is not permissible to disintegrate such composite contract so as to levy VAT/sales tax and service tax. In the context of outdoor catering service, distinguishing it from food served in a restaurant, the Supreme Court in Tamil Nadu Kalyana Mandap Assn. v. UOI, 2006 (3) STR 260 (SC) noted, “In the case of an outdoor caterer, the customer negotiates each element of catering service including the price to be paid to the caterer. Outdoor catering has an element of personalised service provided to a customer. Clearly the service element is more weighty, visible and predominant in the case of outdoor catering, it cannot be considered a case of sale of food and drink as in restaurant”. Amidst the controversy as to whether food served in a restaurant is an indivisible contract where dominant objective is sale of food or a composite contract of sale of food and providing services of ambience of air-conditioning, furniture, etc. and other personalised services, service tax is introduced on the service provided by restaurants.
Services provided by restaurants Statutory provisions in relation to the new levy, as contained in the Finance Act, 1994 (the Act) are reproduced below: Section 65(105)(zzzzv) of the Act “ ‘Taxable service’ means any service provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises.”
Criteria for taxability The definition in relation to a restaurant indicates the following criteria for taxability:
- Services provided by a restaurant or any establishment providing such services and known by any name such as a fast-food centre, a lunch home, a dhaba, a coffee-shop, a club, etc. The term ‘restaurant’ is not defined in the Act, therefore only the common parlance meaning of the term is to be applied. Any establishment or an eating house serving food and/or beverages whether in a hotel or otherwise to public or a class of public for consumption on the premises is known as a restaurant and is covered in the scope.
- Air-conditioning facility may be available for the whole or partial premises of the restaurant or the establishment and at any time during a financial year.
- The other concurrent requirement is having a licence to serve alcoholic beverages. However, there is no requirement as to the actual servicing of alcohol using the said licence. The existence of licence to serve is the requirement and any kind of alcoholic beverage such as beer, rum, gin, vodka, whisky, wine, etc. if licensed to serve is covered in the scope.
- Service is to be provided to any person in relation to food or beverages including any alcoholic beverages.
- The food and/or beverages are served on the premises of the restaurant.
The Government Instruction vide DOF No. 334/3/2011-TRU, dated 28-2-2011 has clarified as follows:
“1. Services provided by a restaurant 1.1 Restaurants provide a number of services normally in combination with the meal and/ or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalised service by indicating his preference for certain ingredients, e.g., salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP. 1.2 In certain restaurants the owners get into revenue-sharing arrangements with another person who takes the responsibility of preparation of food, with his own materials and ingredients, while the owner takes responsibility for making the space available, its decoration, furniture, cutlery, crockery and music, etc. The total bill, which is composite, is shared between the two parties in terms of the contract. Here the consideration for services provided by the restaurants is more clearly demarcated.
1.3 Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services, it does not represent the full value of all services rendered by the restaurants.
1.4 The new levy is directed at services provided by high-end restaurants that are air-conditioned and have licence 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 food 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.
1.5 It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year, the conditions for the levy shall be met.
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. The Finance Minister has announced in his budget speech 70% abatement on this service, which is, inter alia, meant to separate such portion of the bill as relates to the deemed sale of meals and beverages. The relevant Notification will be issued when the levy is operationalised after the enactment of the Finance Bill.”
Further to the above, the Circular No. 139/8/2011-TRU, dated 10-5-2011, clarified the following issues as summarised below:
- When there are more than one restaurant belonging to a common entity in a complex and if they are demarcated by separate names, service tax would be levied on the restaurant which is air-conditioned in any part of the establishment and has a licence to serve alcohol and as such, satisfies both the conditions for its coverage.
- Taxable services provided by a restaurant in other parts of the hotel such as swimming pool or an open area attached to the restaurant also attract service tax as they are extension of the restaurant.
- When food is served as a part of ‘room service’ of a hotel, no service tax is leviable as service is not provided in the premises of air-conditioned restaurant with a licence to serve liquor. It is not chargeable even under short-term accommodation service if the bill for the food is raised separately and does not form part of the declared tariff.
- For the levy of service tax, State Value Added Tax (VAT) charged in the invoice would be excluded from the taxable value.
Food picked up at counter or delivered at home
Many a time, food is picked up at the counter of the restaurant and not consumed while sitting in the restaurant or is delivered at home as most food chain outlets or even speciality restaurants provide home delivery service. In these situations, only food is sold and the facility of restaurant not enjoyed. DOF letter dated 28-2-2011 reproduced above has clarified this point.
Valuation of restaurant service
In the context of catering service provided by outdoor caterers and/or mandap-keepers, the Hon. Supreme Court in the case of Tamil Nadu Kalyana Mandapam Association (supra) observed “it is well settled that the measure of taxation cannot affect the nature of taxation and therefore the fact that service tax is levied as a percentage of gross charges for catering cannot alter or affect the legislative competence of the Parliament in the matter”. In the said backdrop, exemption Notification No. 34/2011-ST of 25-4-2011 has amended Notification 1/2006-ST and granted abatement of 70% on the gross value of taxable service provided by a restaurant. The Ministry vide its Circular dated 25-4-2011 has also clarified that the exemption is available on the gross price charged by the restaurant for the taxable service including any portion shown separately, for instance some restaurants recover service charge separately. This would also form part of the value for determining service tax. However, any amount paid ex-gratia e.g., tip to any staff does not amount to consideration paid for the service of the restaurant and therefore would not be included in the value.
Some issues
(i) A non-air-conditioned restaurant having a licence to sell alcoholic beverage is partly being made air-conditioned and will be functional from 1st January, 2012. Whether and when would service tax be attracted? Whether the entire sale i.e., even the non-air-conditioned part sale would attract tax liability?
Ans. (i) Service tax would be attracted from 1st January, 2012 and on the entire value of billing including billing for serving meals and/or drinks in the non-a/c part of the restaurant. The use of the words ‘at any time during the financial year’ makes it clear. However, prior to 1st January, 2011, the food was served without the facility of air-conditioning, therefore service tax would not be attracted. It may also be noted that service tax is introduced for the first time on the restaurant service from 1st May, 2011 and therefore threshold exemption would be available to the restaurant, subject to other conditions of threshold exemption of rupees ten lakh under Notification 6/2005-ST, dated 1-4-2005.
(ii) Mr. A went to Restaurant M, a state-of-the art air-conditioned restaurant which would also service alcoholic beverages, but Mr. A does not have alcohol. Whether Mr. A can insist on not charging service tax in the invoice as he did not consume alcohol?
Ans. (ii) Consumption of alcohol is not envisaged in the definition of restaurant service. So long as the restaurant is air-conditioned and has a licence to servce alcoholic beverages, the restaurant is liable to pay service tax.
(iii) Whether air-conditioned liquor shops having a licence to sell alcohol would be covered by the above provisions?
Ans. (iii) Liquor shops are not restaurants. They sell alcohol but do not serve the same in their premises. It is the service of restaurant facility i.e., having tables, chairs and other furniture along with a bar and/or waiters, etc. along with food and/or beverages including non-alcoholic beverages or both, is covered by the service tax provisions and not the shops selling alcohol.
(iv) Are coffee-shop chain of restaurants with state-of-the art ambience in air-conditioned halls liable for service tax?
Ans. (iv) If the coffee-shop does not have licence to serve alcoholic beverages, it is not covered by the service tax provisions.
(v) Whether a restaurant having a mere beer bar where only that part is air-conditioned would be liable for service tax?
Ans. (v) The part of the restaurant is air-conditioned and beer is an alcoholic beverage. Therefore, the value of the food and all beverages served in any part of the restaurant is liable for service tax.
(vi) An air-conditioned restaurant in Mahabaleshwar uses air-conditioning facility only during the months of March – May. Rest of the year being very cool, air-conditioning is not operated. If the restaurant’s value of taxable sale during May, 2011 was well below the threshold limit of 10 lakh, would it be out of the scope of the levy till March 2012 or so.
Ans. (vi) No. The restaurant would be liable for service tax when it crosses the limit of Rs.10 lakh, even if it does not operate air-conditioning as it has used it for some part of the year. The condition is to have a facility of air-conditioning at anytime during the financial year is satisfied.
