Services of restaurants, hotels, inns, guest houses or clubs with air conditioning facility are liable to service tax and Parliament is competent to levy it.

The appellant is engaged in business of running hotels and restaurants. They are registered under Karnataka VAT Act, 2003 and paid regular VAT on the said transactions. It was contended that the said transaction is covered under Article 366(29A) and therefore no service tax would be leviable as it is beyond the powers of the Parliament and the State Government is authorised to tax this transaction. Further, the Parliament has no legislative competence to amend the Finance Act, 1994 to include restaurant services in taxable services. The Respondent argued that service tax is leviable under entry 97, which deals with matters not enumerated in List II and III, which derives its power from Article 248.

Held

The High Court confirmed the legislative competence of Union by placing relevance on “aspects theory” whereby the same transaction can have two taxable events of different nature. Under this theory, the taxes are imposed by two different statutes for two different reasons. Therefore, in transactions of composite nature like restaurant service, both legislatures have power to tax it and not solely the State Government. Relying also on Bombay High Court’s decision in case of India Hotel and Restaurants Association, it is held that service tax is leviable on such transaction.