Service tax on Restaurants & Hotels; States alone have power to impose tax-Kerala HC

Division Bench of Kerala High Court struck down Service tax on Restaurants and Hotels, held that only States alone have power to impose tax

Union of India and Others Vs. Kerala Bar Hotels Association and Others [2014-TIOL-1913-HC-KERALA-ST]

The Hon’ble High Court of Kerala (“Kerala HC”) in the case of Kerala Classified Hotels and Resorts Association and others Vs. Union of India and others [2013-TIOL-533-HC-KERALA-ST]held that levy of Service Tax on Restaurants and hotels is beyond legislative competence of Parliament. It was declared that sub-clauses (zzzzv) and (zzzzw) to Section 65(105) of the Finance Act, 1994 (“the Finance Act”) as amended by the Finance Act, 2011 is beyond the legislative competence of the Parliament as the said sub-clauses are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule. The Court also allowed refund of Service tax paid by the Petitioners in the stated case. Being aggrieved, the Department filed a Writ Appeal before the Division Bench of the Kerala HC.

The Department placed reliance on the subsequent decision of the Hon’ble High Court of Bombay (“Bombay HC”) in the case of Indian Hotels and Restaurant Association and others Vs. Union of India and others [2014-TIOL-498-HC-MUM-ST]wherein the BombayHC gave contrary judgment denying the decision of the Kerala HC and upheld the constitutional validity of levy of Service tax on AC Bar Restaurants. It was held by the Bombay HC that:

• Service tax or tax on a service, which is made taxable by the Finance Act, is a completely distinct tax. It should not be and cannot be equated with a tax on sale or purchase of goods;
• The Parliament cannot be said to have transgressed upon the power of the State Legislature to impose a tax on sale or purchase of goods vide Entry 54 of List II. The taxing power of the Parliament and traceable to Article 248 of the Constitution of India read with Entry 97 of List I of the Seventh Schedule of the Constitution enable it to impose a Service tax.

Recently, the Division Bench of Kerala HC disposed of the Writ Appeal filed by the Department against the Single Judge’sOrder and emphatically endorsed the view of the Single Judge and distinguished the Bombay HC order.

The Division Bench of Kerala HC held as under:

Service Tax on restaurants under sub-clause (zzzzv) of Section 65(105) of the Finance Act:

• After the Constitution (46^thAmendment), the Restaurant activity is deemed as sale of goods and it cannot be said that it is an activity of service. When the said activity is deemed to be a sale of the food and other articles of human consumption, by a constitutional definition, tax on the said activity can be imposed only by the States in view of Entry 54 in List II of the Seventh Schedule;
• Since the whole of the consideration received by a Restaurant owner for supply of food and other articles of the human consumption, including the service part of the transaction, is exigible to tax by the State by virtue of the constitutional definition, it is not open to the Union to characterise the same transaction as a service for imposition and levy of Service tax;
• Evidently, Section 65(105)(zzzzv) of the Finance Act is a matter enumerated in Entry 54 of List II of Seventh Schedule and the States alone have the legislative competence to enact any law imposing tax on the said matter.

Service Tax on Hotel accommodation under sub-clause (zzzzw) of Section 65(105) of the Finance Act:

• The Constitution Bench of the Apex Court in Godfrey Philips India Ltd Vs. State of U.P. [2005-TIOL-10-SC-LT-CB], held that the word ‘luxuries’in Entry 62 of List II means the activity of enjoyment of or indulgence in something which is costly or which is generally recognized as being beyond the necessary requirements of an average member of society;
• It is not disputed that invoking Entry 62 of List II, the State legislature had enacted the Kerala Tax on Luxuries and as per the terms of the said statute, the State Government is levying tax on matters covered by Section 65(105)(zzzzw) of the Finance Act;
• Thus, the matter covered by Section 65(105)(zzzzv) of the Finance Act, is a matter enumerated in Entry 62 of List II of Seventh Schedule and the States alone have the legislative competence to enact any law imposing tax on the said matter.

Accordingly, the Division Bench of the Kerala HC dismissed the Writ Appeal filed by the Department.