Service Tax On Hotel

ST : Levy of service tax on : (1) service forming part of suppIy of goods in
a restaurant, as weII as, (2) short-term accommodation services in hoteIs,

inns, etc. is unconstitutionaI being vioIative of Entries 54 and 62,
respectiveIy, of State List
uuu
[2013] 35 taxmann.com 568 (KeraIa)
HIGH COURT OF KERALA
KeraIa CIassified HoteIs & Resorts Association
;
Union of India*
A.M. SHAFFQUE, J.
W.P.C. NOS. 14045,14130,15867
& 15938 OF 2011 AND 1918 OF 2013
JULY 3, 2013
I. Section 65(105)(zzzzv), read with Section 66E(i), of the Finance Act, 1994 and
ArticIe 366(29A)(f) of the Constitution of India - Services by AC restaurants having
Iicense to serve Iiquor - ArticIe 366(29A)(f) empowers State Governments to
impose tax on suppIy, whether it is by way of or as a part of any service, of goods
either being food or any other articIe for human consumption or any drink either
intoxicating or not intoxicating - Incidence of saIes-tax is on suppIy of any goods
by way of or as part of any service - When food is suppIied or aIcohoIic beverages
are suppIied as part of any service, such transfer is deemed to be a saIe and there
cannot be a different component of service which couId be charged to service tax
by CentraI Government - In view of K. Damodarasamy Naidu & Bros. v. State of
TamiI Nadu [2000] 1 SCC 521 (TamiI Nadu KaIyana Mandapam Assn. v. Union of
India [2004] 136 Taxman 596/[2006] 4 STT 308 (SC) distinguished), service forms
part of saIe of goods and State Government aIone wiII have IegisIative
competence to enact Iaw imposing a tax on service eIement forming part of saIe
of goods as weII - Levy of service tax on service forming part of suppIy of goods
in a restaurant was heId unconstitutionaI [Paras 15 to 22] [In favour of assessee]
II. Section 65(105)(zzzzw) of the Finance Act, 1994 - Short-term accommodation
services in hoteIs, inns, etc. - As per Entry 62 of State List, tax on Iuxuries faIIs
within excIusive competence of State Government - In view of judgment in
Godfrey PhiIips India Ltd. v. State of U.P [2005] 2 SCC 215, Iuxuries is an activity
of enjoyment or induIgence which is costIy or which is generaIIy recognised as
being beyond necessary requirements of an average member of society - Service
tax imposed on services provided in a hoteI and other simiIar estabIishments,
2013] 35 taxmann.com 568 (Kerala)
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which faII within extended meaning of word "Iuxuries", trenches upon
IegisIative function of State under Entry 62 of List II - Hence, said Ievy of
service tax was heId unconstitutionaI [Paras 21 & 22] [In favour of assessee]
Words and Phrases : Luxuries as appearing in Entry 62 of List II of ScheduIe
VII of the Constitution of India
FACTS
Facts
Assessee's arguments
Revenue's Arguments
Issue Involved
HELD
Parliament cannot legislate on any topic falling under List :
Concept of deemed sale - Deemed sale is not service - K. Damodarasamy Naidu & Bros.
u The assessee challenged levy oI service tax on -
u AC restaurants licensed to service alcoholic beverages |Section 65(105)(zzzzv)| ; and
u Short-term accommodation provided by hotel, inn, guest house, club or camp-site
|Section 65(105)(zzzzw)|,
u introduced by the Finance Act, 2011, as unconstitutional.
u Serving oI Iood or beverage including alcoholic beverages represents only sale oI
goods which transaction squarely Ialls under Entry 54 oI List II (State List) oI the 7th
Schedule to the Constitution oI India and thereIore within the exclusive competence oI
the State Legislature.
u Similarly the State Legislature had enacted Kerala Tax on Luxuries Act, by which tax
was levied Ior accommodation. Levy oI service tax on accommodation amounted to
encroachment upon the legislative powers oI the State under Entry 62 oI List II.
u Service tax can be imposed on the service involved during the sale oI a product and so
long as the Statute does not transgress to any restriction contained in the Constitution,
contentions regarding lack oI legislative power cannot be sustained.
u Sales Tax Act and the Kerala Tax on Luxuries Act are Iramed by the State
Government. Service tax levied by the Government oI India is not Ior serving alcoholic
beverages and it is a tax on the services provided by restaurants and hotels. ThereIore,
challenge to the provisions was absolutely baseless.
u Whether levy oI service tax on impugned transactions was constitutional ?
u Under Article 246(1) oI the Constitution, Parliament has exclusive powers to make
laws with respect to any oI the matters enumerated in List I in the Seventh Schedule to
the Constitution. As per Article 246(3), the State Government has exclusive powers to
make laws with respect to matters enumerated in List II (the State List). |Para 15|
v. State of Tamil Naidu [2j 1 SCC 521 applied :
Effect of Article 3(29A)(f) - Service element embedded in price of goods is a part of
sale of goods - Cannot be charged to service tax :
u The Iirst limb oI the Article 366(29A) says that the tax on sale or purchase oI goods
includes a tax on transactions speciIied in sub-Clauses (a) to (I). Said Article is brought
in to expand the tax base which should narrow down because oI certain judgments oI
the Court. The deemed sale is thereIore brought into eIIect as a concept in the
constitutional deIinition.
u AIter the 46th Amendment to the Constitution, the sale element oI those contracts
which are covered by six sub-clauses oI Clause (29A) oI Article 366 are separable and
may be subjected to sales tax by the States under Entry 54 oI List II and there is no
question oI the dominant nature test being applied.
u In Tamil Nadu Kalvana Mandapam Assn v. Union of India |2004| 136 Taxman 596/
|2006| 4 STT 308 (SC), the question involved was in relation to services rendered by
mandap-keepers. While upholding the imposition oI service tax, it was held that in
regard to Article 366(29A)(I), it only permits State to impose tax on the supply oI Iood
and drink by whatever mode it may be made whereas it does not conceptually or
otherwise include the supply oI service within the deIinition oI sale and purchase oI
goods. It is observed that the operative words oI the sub Article that supply oI Iood and
drink and other articles oI human consumption alone is deemed to be sale or purchase
oI goods.
u In K. Damodarasamv Naidu& Bros. (supra), the Constitution Bench oI the Supreme
Court held that when the tax is on supply oI Iood and drink, it is not oI relevance that
the supply is by way oI service or as part oI a service. The price that the customer pays
Ior the supply oI Iood in restaurant cannot be split up though it may be a part oI the
service that he renders. The Supreme Court has considered the impact oI the words oI
sub-Clause (I) oI Clause (29A) oI Article 366. |Para 16|
u In Tamil Nadu Kalvana Mandapam Assn. (supra), the question was with reIerence to
services rendered by mandap-keepers which is not the situation here. Here the Iactual
situation is almost similar to the statement oI law as held by the Supreme Court in K.
Damodarasamv Naidu& Bros. (supra). |Para 18|
u As per Article 366(29A)(I) oI the Constitution oI India, a deeming provision has been
incorporated by way oI 46th Amendment to the Constitution oI India. The very purpose
oI incorporating the deIinition oI tax on sale or purchase oI goods in Article 366 was to
empower the State Governments to impose tax on the supply, whether it is by way oI or
as a part oI any service oI goods either being Iood or any other article Ior human
consumption or any drink either intoxicating or not intoxicating whether such supply or
service is Ior cash, deIerred payment or other valuable consideration. The words "and
such transIer delivery or supply oI goods" is deemed to be a sale oI those goods by the
person making the transIer. ThereIore the incidence oI tax is on the supply oI any
goods by way oI or as part oI any service. When Iood is supplied or alcoholic
beverages are supplied as part oI any service, such transIer is deemed to be a sale. |Para
19|
u Apparently, the transIer is during the course oI a service and when the deeming
provision permits the State Government to impose a tax on such transIer, there cannot
Hotel accommodation - Cannot be charged to service tax being a 'luxury' :
Conclusion - Levy of service tax held unconstitutional :
EDITOR'S NOTE
be a diIIerent component oI service which could be imposed with any service tax in
exercise oI the residuary power oI the Central Government under Entry 97 oI List I oI
the Constitution oI India. |Para 19|
u ThereIore, it can be seen Irom Article 366(29A) (I) that service is also included in the
sale oI goods. II the Constitution permits sale oI goods during service as taxable,
necessarily Entry 54 has to be read giving the meaning oI sale oI goods as stated in the
Constitution. II read in that Iashion, necessarily service Iorms part oI sale oI goods and
State Government alone will have the legislative competence to enact the law imposing
a tax on the service element Iorming part oI sale oI goods as well, which they have
apparently imposed. This view is in the light oI the Constitution Bench judgment in K.
Damodarasamv Naidu& Bros. (supra). |Para 20|
u It was held by the Constitution Bench judgment oI the Supreme Court in Godfrev
Philips India Ltd. v. State of U.P. |2005| 2 SCC 215, that luxuries is an activity oI
enjoyment or indulgence which is costly or which is generally recognised as being
beyond the necessary requirements oI an average member oI the society.
u In view oI the above, iI we look at the sub-clause (zzzzw), the service tax is imposed on
services provided in a hotel and other similar establishments when State Legislature
had enacted the Kerala Tax on Luxuries Act by exercising their legislative power under
Entry 62 oI List II.
u When applying the dictum laid down in Godfrev Philips India Ltd. (supra) which gives
an extended meaning to the word "luxuries", sub-clause (zzzzw) trenches upon the
legislative Iunction oI the State under Entry 62 oI List II. |Para 21|
u Sub-Clauses (zzzzv) and (zzzzw) to Clause 105 oI section 65 oI the Finance Act, 1994
as amended by the Finance Act, 2011 is beyond the legislative competence oI the
Parliament as the sub-clauses are covered by Entry 54 and Entry 62 respectively oI List
II oI the Seventh Schedule.
u II any payments have been made by the assessee on the basis oI the impugned clauses,
they are entitled to seek reIund oI the same. |Para 22|
1. Restaurant Services : As regards restaurant services, a similar view was
expressed in the Article titled 'Restaurant Transactions - Levy oI Service Tax as
a percentage oI value oI goods is unconstitutional' as reported in |2013| 39 STT
85 (Mag.). The readers may have a go through oI that Article along with the
Query No. 1 reported in |2013| 39 STT 114 (Mag.) along with Query Nos. 2 and
3 reported in |2013| 39 STT 194 (Mag.).
However, any service charges recovered over and above the charges Ior supply
oI Iood/drinks can, very well, be subjected to service tax.
The position oI law would remain same under section 65B(44) read with section
66E(i) oI the Finance Act, 1994 making provisions similar to those challenged
CASE REVIEW
Association of Leasing & Financial Service Companies v. Union of India |2010| 29 STT
316 (SC) (para 6) and Bharat Sanchar Nigam Ltd. v. Union of India |2006| 3 STT 245 (para
16) relied on.
K. Damodarasamv Naidu & Bros. v. State of Tamil Nadu |2000| 1 SCC 521 (paras 16, 18
and 20) and Godfrev Philips India Ltd. v. State of U.P |2005| 2 SCC 215 (para 21)
followed.
Tamil Nadu Kalvana Mandapam Assn. v. Union of India |2004| 136 Taxman 596/|2006| 4
STT 308 (SC) and Federation of Hotel & Restaurant Assn. of India v. Union of India,
|1989| 3 SCC 634 (para 17) distinguished.
CASES REFERRED TO
State of M.P v. Rakesh Kohli |2012| 113 SCL 550/21 taxmann.com 255 (SC) (para 6),
Karnataka Bank Ltd. v. State of A.P. |2008| 2 SCC 254 (para 6), Govt. of A.P. v. Smt. P.
Laxmi Devi |2008| 4 SCC 720 (para 6), Greater Bombav Coop. Bank Ltd. v. United Yarn
Tex (P.) Ltd. |2007| 6 SCC 236 (para 6), Association of Leasing & Financial Service
Companies v. Union of India |2010| 29 STT 316 (SC) (para 8), All-India Federation of Tax
Practitioners v. Union of India , |2007| 10 STT 166 (SC) (para 9), Bharat Sanchar Nigam
Ltd. v. Union of India |2006| 3 STT 245 (SC) (para 10), Godfrev Phillips India Ltd. v. State
of U.P., |2005| 2 SCC 215 (para 11), Tamil Nadu Kalvana Mandapam Assn. v. Union of
India |2004| 136 Taxman 596/|2006| 4 STT 308 (SC) (para 12), K. Damodarasamv Naidu
& Bros. v. State of Tamil Nadu |2000| 1 SCC 521 (para 13), Federation of Hotel &
Restaurant Assn. of India v. Union of India |1989| 3 SCC 634 (para 14) and Gufarat
Ambufa Cements Ltd. v. Union of India |2005| 1 STT 41 (SC) (para 16).
Dr. K.B. Muhamed Kutty and S. Arun Raj for the Appellant. P. Parameswaran Nair,
Tojan 1. Vathikulam, Thomas Mathew Nellimoottil, Noushad Thottathil and Sebastian
Chempappilly for the Respondent.
1UDGMENT
1. The petitioners in the above writ petitions are challenging the validity oI sub clauses
(zzzzv) and (zzzzw) oI clause 105 oI Section 65 oI the Finance Act, 1994 and Section 66 oI
the Finance Act, 1994 as amended by the Finance Act 2011 relating to levy oI service tax
on taxable services reIerred there and Ior consequential relieIs. The relevant portion reads
as under:
"(zzzzv) services provided or to be provided to any person, by a restaurant, by
successIully in this judgment.
2. Short-term accommodation services : As regards service tax on hotel
accommodation, the view expressed in this judgment is doubtIul because the
Court did not go into aspect doctrine whereby one Iace oI transaction, being
luxury, is chargeable to luxury tax and another aspect is renting service, which is
chargeable to service tax. In Iact, in Tirumala Tirupati Devasthanams, Tirupati
v. Superintendent of Customs, Central Excise & Service Tax |2013| 30
taxmann.com 343/39 STT 94 (AP), the High Court had asked assessee to seek
registration under this service.
whatever name called, having the Iacility oI air-conditioning in any part oI the
establishment, at any time during the Iinancial year, which has licence to serve
alcoholic beverages, in relation to serving oI Iood or beverage, including alcoholic
beverages or both, in its premises;
(zzzzw) Services provided or to be provided to any person, by a hotel, inn, guest
house, club or camp-site, by whatever name called, Ior providing oI accommodation
Ior a continuous period oI less than three months;"
The main contention urged by the petitioners is that the imposition oI service tax in
relation to serving oI Iood or beverage including alcoholic beverages represents only sale
oI goods which transaction squarely Ialls under Entry 54 oI List II (State List) oI the 7th
schedule to the Constitution oI India and thereIore within the exclusive competence oI the
State Legislature. The service tax was originally introduced by the Parliament in exercise
oI the residuary power under Entry 97 oI List I. Though Entry 92 C has been introduced to
List I oI the 7th schedule which enables the Union to levy "Taxes on Services", the said
entry had not come into eIIect as it was not notiIied by the Government. Similarly the State
Legislature had enacted Kerala Tax on Luxuries Act, by which tax is levied Ior
accommodation. By introducing service tax on the basis oI sub-clauses (zzzzv) and (zzzzw)
to clause 105 oI Section 65 the Parliament has encroached upon the legislative powers oI
the State under Entry 54 and 62 oI List II. The main contention oI the petitioners is with
reIerence to the legislative competence oI the Parliament to impose a tax on sale oI goods
which is absolutely the domain oI the state legislation.
Counter aIIidavit is Iiled by respondents 1 to 3 inter alia contending that the legislation
has been brought in terms oI Article 248 oI the Constitution read with Entry 97 oI List I oI
the 7th schedule. ThereIore according to the respondent, on a perusal oI judgments cited by
them it is all the more clear that service tax can be imposed on the service involved during
the sale oI a product and so long as the Statute does not transgress to any restriction
contained in the Constitution, contentions regarding lack oI legislative power cannot be
sustained. It is Iurther contended that the Sales Tax Act and the Kerala Tax on Luxuries
Act are Iramed by the State Government. Service tax levied by the Government oI India is
not Ior serving alcoholic beverages and it is a tax on the services provided by restaurants
and hotels. In that view oI the matter, according to them, the challenge to the provisions
aIoresaid are absolutely baseless and seeks Ior dismissal oI the writ petitions. Reliance is
placed on various judgments oI the Supreme Court which I shall deal with herein aIter.
Heard the learned senior counsel Sri. N. Venkataraman, learned senior counsel Dr. K.B.
Mohamed kutty, Sri. Thomas Mathew Nellimoottil and Sri. John Varghese, learned
Standing Counsel Ior Central Board oI Excise. Having regard to the contentions urged by
either side, the Iollowing questions arise Ior consideration:
The relevant entries oI List I and II oI the seventh schedule reads as under:
(i) Whether "taxes on the sale and purchase oI goods" in Entry 54 oI List II oI the
seventh schedule covers service in the light oI the deIinition oI "tax on sale and
purchase oI goods" under Article 366 (29A) (I) oI the Constitution oI India.
(ii) Whether the service provided in a hotel, inn, guest house, club etc. imposed with
luxury tax under State Act in terms oI Entry 62 oI List II can be separately
assessed and imposed by the Union with service tax, invoking the residuary
powers at Entry 97 oI List I oI the Constitution.
List I -- Union List
97. Any other matter not enumerated in List II or List III including any tax not
mentioned in either oI those Lists.
List II -- State List
54. Taxes on the sale or purchase oI goods other than newspapers, subject to the
provisions oI Entry 92-A oI List I.|
62. Taxes on luxuries, including taxes on entertainments, amusements, betting and
gambling.
8. Article 246 and 366 (29A) reads as under:
246. Subject-matter oI laws made by Parliament and by the Legislatures oI States.
(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to
make laws with respect to any oI the matters enumerated in List I in the Seventh
Schedule (in this Constitution reIerred to as the "Union List").
(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the
Legislature oI any State |* * *| also, have power to make laws with respect to any oI
the matters enumerated in List III in the Seventh Schedule (in this Constitution
reIerred to as the "Concurrent List").
(3) Subject to clauses (1) and (2), the Legislature oI any State |* * *| has exclusive
power to make laws Ior such State or any part thereoI with respect to any oI the
matters enumerated in List II in the Seventh Schedule (in this Constitution reIerred to
as the "State List").
(4) Parliament has power to make laws with respect to any matter Ior any part oI the
territory oI India not included |in a State| notwithstanding that such matter is a matter
enumerated in the State List.
366. DeIinitions.--In this Constitution, unless the context otherwise requires, the
Iollowing expressions have the meanings hereby respectively assigned to them, that is
to say (29-A) "tax on the sale or purchase oI goods" includes--
(a) a tax on the transIer, otherwise than in pursuance oI a contract, oI
property in any goods Ior cash, deIerred payment or other valuable
consideration;
(b) a tax on the transIer oI property in goods (whether as goods or in some
other Iorm) involved in the execution oI a works contract;
(c) a tax on the delivery oI goods on hire-purchase or any system oI
payment by instalments;
(d) a tax on the transIer oI the right to use any goods Ior any purpose
(whether or not Ior a speciIied period) Ior cash, deIerred payment or
other valuable consideration;
(e) a tax on the supply oI goods by any unincorporated association or body
The judgment in State of M.P v. Rakesh Kohli |2012| 113 SCL 550/21 taxmann.com 255
(SC) is relied upon by the learned counsel Ior respondent to highlight the principles to be
kept in mind by Courts while considering constitutionality oI a statute and the Supreme
Court held as under:
"32. While dealing with constitutional validity oI a taxation law enacted by Parliament
or State Legislature, the court must have regard to the Iollowing principles:
Similar views were expressed by the Supreme Court in Karnataka Bank Ltd. v. State of A.P.
|2008| 2 SCC 254, Govt. of A.P. v. Smt. P. Laxmi Devi |2008| 4 SCC 720 and Greater
Bombav Cooperative Bank Ltd. v. United Yarn Tex (P.) Ltd. |2007| 6 SCC 236. There is no
dispute regarding the proposition as held in the above judgments and hence the only enquiry
is to Iind out whether the impugned legislation has trenched upon the legislative powers oI
the State Government, keeping in mind the limitations as held in the aIoresaid judgments.
The Supreme Court had occasion to consider the constitutional validity oI service tax in
various instances. It is not disputed that the validity oI the impugned amendments have been
considered earlier. I would thereIore, beIore proceeding to consider the validity oI the
amendments reIer to the judgments relied upon by either side.
In Association of Leasing & Financial Service Companies v. Union of India |2010| 29
STT 316 , Supreme Court was considering the imposition oI service tax on Iinancial leasing
services including equipment leasing and hire purchase and while upholding the amendment
oI persons to a member thereoI Ior cash, deIerred payment or other
valuable consideration;
(f) a tax on the supply, by way oI or as part oI any service or in any other
manner whatsoever, oI goods, being Iood or any other article Ior human
consumption or any drink (whether or not intoxicating), where such
supply or service, is Ior cash, deIerred payment or other valuable
consideration, and such transIer, delivery or supply oI any goods shall
be deemed to be a sale oI those goods by the person making the transIer,
delivery or supply and a purchase oI those goods by the person to whom
such transIer, delivery or supply is made;
(i) there is always presumption in Iavour oI constitutionality oI a law made
by Parliament or a State Legislature,
(ii) no enactment can be struck down by just saying that it is arbitrary or
unreasonable or irrational but some constitutional inIirmity has to be
Iound,
(iii) the Court is not concerned with the wisdom or unwisdom, the justice or
injustice oI the law as Parliament and State Legislatures are supposed to
be alive to the needs oI the people whom they represent and they are the
best judge oI the community by whose suIIrage they come into
existence,
(iv) hardship is not relevant in pronouncing on the constitutional validity oI
a Iiscal statute or economic law, and
(v) in the Iield oI taxation, the Legislature enjoys greater latitude Ior
classiIication."
considered the entire history oI service tax and held as under:
"38. In All-India Federation oI Tax Practitioners case this Court explained the concept
oI service tax and held that service tax is a value added tax ("VAT", Ior short) which
in turn is a destination based consumption tax in the sense that it is levied on
commercial activities and it is not a charge on the business but on the consumer. That,
service tax is an economic concept based on the principle oI equivalence in a sense
that consumption oI goods and consumption oI services are similar as they both satisIy
human needs. Today with the technological advancement there is a very thin line
which divides a "sale" Irom "service". That, applying the principle oI equivalence,
there is no diIIerence between production or manuIacture oI saleable goods and
production oI marketable/saleable services in the Iorm oI an activity undertaken by the
service provider Ior consideration, which correspondingly stands consumed by the
service receiver. It is this principle oI equivalence which is inbuilt into the concept oI
service tax under the Finance Act, 1994. That service tax is, thereIore, a tax on an
activity. That, service tax is a value added tax. The value addition is on account oI the
activity which provides value addition, Ior example, an activity undertaken by a
chartered accountant or a broker is an activity undertaken by him based on his
perIormance and skill. This is Irom the point oI view oI the proIessional. However,
Irom the point oI view oI his client, the chartered accountant/broker is his service
provider. The value addition comes in on account oI the activity undertaken by the
proIessional like tax planning, advising, consultation, etc. It gives value addition to the
goods manuIactured or produced or sold. Thus, service tax is imposed every time
service is rendered to the customer/client. This is clear Irom the provisions oI Section
65(105)(zm) oI the Finance Act, 1994 (as amended). Thus, the taxable event is each
exercise/activity undertaken by the service provider and each time service tax gets
attracted."
"Scope oI Article 366(29-A)
49. II one examines Artic le 366(29-A) careIully, one Iinds that clause (29-A) provides
Ior an inclusive deIinition and has two limbs. The Iirst limb says that the tax on sale or
purchase oI goods includes a tax on transactions speciIied in sub-clauses (a) to (I). The
second limb provides that such transIer, delivery or supply oI goods reIerred to in the
Iirst limb shall be deemed to be a sale oI those goods by the person making the
transIer, delivery or supply and purchase oI those goods by the person to whom such
transIer, delivery or supply is made. Now, in K.L. Johar case, this Court held that the
States can tax hire-purchase transactions resulting in sale but only to the extent to
which tax is levied on the sale price. This led Parliament to say, in the Statement oI
Objects and Reasons to the Constitution (Forty-sixth Amendment) Act, "though
practically the purchaser in a hire-purchase transaction gets the goods on the date oI
entering into the hire-purchase contract, it has been held by the Supreme Court in K.L.
Johar case that there is a sale only when the purchaser exercises the option to purchase
which is at a later date and thereIore only the depreciated value oI the goods involved
in such transaction at the time the option is exercised becomes assessable to sales tax
which position has resulted in avoidance oI tax in various ways".
Thus, we Iind Irom the Statement oI Objects and Reasons that the concept oI "deemed
sale" is brought in by the Constitution (Forty-sixth Amendment) Act only in the
context oI imposition oI sales tax and that the words "transIer, delivery or supply" oI
goods is reIerred to in the second limb oI Article 366 (29-A) to broaden the tax base
and that as indicated in the Report oI the Law Commission prior to the judgment oI
this Court in Gannon Dunkerley case, works contract was always taxed by the States as
part oI the word "sale" in Entries 48/54 oI List II."
"54. One must also bear in mind that Article 366(29-A) is essentially sales tax speciIic.
It was brought in to expand the tax base which stood narrowed down because oI certain
judgments oI this Court. That is the reason Ior bringing in the concept oI "deemed sale"
under which tax could be imposed on mere "delivery" on hire purchase |see clause (c)|
which expression is also there in the second limb oI the said artic le."
"63. In our view, the judgment in BSNL case has no application to the present case. As
stated above, what is challenged in this case is the service tax imposed by Section 66 oI
the Finance Act, 1994 (as amended) on the value oI taxable services reIerred to in
Section 65(105)(zm) read with Section 65(12) oI the said Act, insoIar as it relates to
Iinancial leasing services including equipment leasing and hire purchase as beyond the
legislative competence oI Parliament by virtue oI Article 366(29-A) oI the Constitution.
In short, the legislative competence oI Parliament to impose service tax on Iinancial
leasing services including equipment leasing and hire purchase is the subject-matter oI
challenge. Legislative competence was not the issue beIore this Court in BSNL case. In
that case, the principal question which arose Ior determination was in respect oI the
nature oI the transaction by which mobile phone connections are enjoyed. The question
was whether such connections constituted a sale or a service or both. II it was a sale then
the States were legislatively competent to levy sales tax on the transaction under Entry
54, List II oI the Seventh Schedule to the Constitution. II it was service then the Central
Government alone had the legislative competence to levy service tax under Entry 97,
List I and iI the nature oI the transaction partook oI the character oI both sale and
service, then the moot question would be whether both the legislative authorities could
levy their separate taxes together or only one oI them. It was held that the subject
transaction was a service and, thus, Parliament had legislative competence to levy
service tax under Entry 97, List I."
"66. In the circumstances and Ior the reasons given hereinabove, the question oI splitting
up oI transactions, as contended on behalI oI the appellant(s), does not arise. As held
hereinabove, equipment leasing and hire-purchase Iinance constitute long-term
Iinancing activity. Such an activity was not the subject-matter oI the discussion in BSNL
case. The service tax in the present case is neither on the material nor on sale. It is on the
activity oI Iinancing/Iunding oI equipment/asset within the meaning oI the words
"Iinancial leasing services" in Section 65(12)(a)(i).
67. Lastly, we may state that this Court has on three diIIerent occasions upheld the levy
oI service tax with reIerence to Entry 97 oI List I in the Iace oI challenges to the
competence oI Parliament based on the entries in List II and on all the three occasions,
this Court has held that the levy oI service tax Ialls within Entry 97 oI List I. The
decisions are in T.N. Kalyana Mandapam Assn., Gujarat Ambuja Cements Ltd. and All-
India Federation oI Tax Practitioners."
In All-India Federation of Tax Practitioners v. Union of India |2007| 10 STT 166 (SC) the
question was regarding the competence oI Parliament to levy service tax on practising
chartered accountants and architects having regard to Entry 60, List II oI the Seventh
** ** **
** ** **
Schedule to the Constitution and Article 276 oI the Constitution, and the Supreme Court
held as under:
"46. In the present matter, as stated hereinabove, the State Legislature is empowered to
levy tax on proIessions, trades, callings, etc., as such and, thereIore, the word
"services" cannot be read as synonymous to the word "proIession" in Entry 60.
ThereIore, tax on services do not Iall under Entry 60, List II. That, service tax would
Iall under Entry 92-C/Entry 97 oI List I."
"48. OI course, in the present case, we are not concerned with the services rendered by
a mandap-keeper, who perIorms what is called as property based services. In this case,
we are concerned with perIormance based services. However, both the categories Iall
within the ambit oI the word "services".
49. In Gufarat Ambufa Cements Ltd. v. Union of India it was held that service tax is
not a tax on goods or on passengers but it was on the transportation itselI and,
thereIore, it Ialls under residuary power oI Parliament under Entry 97 oI the Seventh
Schedule to the Constitution. In the present case, as stated above, we are concerned
with Entry 60 oI List II. As stated above, service tax is on perIormance based services
itselI. It is on proIessional advice, tax planning, auditing, costing, etc. On each oI the
exercise undertaken tax becomes payable. ThereIore, the above judgment has no
application.
50. In Bharat Sanchar Nigam Ltd. v. Union of India the question which arose Ior
determination beIore this Court was whether a telephone service (mobile or Iixed)
would attract liability to service (sic sales) tax. It was held that in order to attract the
liability under the sales tax there has to exist what is called as "goods". Since goods in
question consisted oI electromagnetic waves or radio Irequencies, which carries voice,
messages or other data, a telephone service was nothing but a service. We are not
concerned with such a controversy in the present case. In the present case, we are
concerned with the legislative competence oI Parliament to legislate in respect oI
service tax under Entries 97/92-C oI List I. In the present case, we are concerned with
the period covered by the Finance Acts oI 1994 and 1998. However, learned counsel
Ior the appellants has relied upon para 82 oI the said judgment in Bharat Sanchar
Nigam Ltd. in which it is observed that the residuary powers oI Parliament under
Entry 97 oI List I cannot swamp away the legislative entries in the State List. Entry 54,
List II read with Article 366(29-A), thereIore, cannot be whittled down by reIerring to
the residuary provision. As stated above, we are concerned with the application oI the
above principles. In the present case, as stated above, we are concerned with the
constitutional status oI the levy. As stated above, we have to examine the nature oI the
levy. We have done so and we have come to the conclusion that the word proIession in
Entry 60, List II cannot be made synonymous with the word service and, thereIore,
service tax would Iall under the residuary Entry 97 read with Entry 92-C aIter 2003.
This position is also made clear by Article 268-A, inserted by the Constitution
(Eighty-eighth Amendment) Act, 2003.
In Bharat Sanchar Nigam Ltd. v. Union of India |2006| 3 STT 245 a three judges bench
oI the Supreme court while considering the question whether the providing mobile phone
connections is a sale and the States are legislatively competent to levy sales tax on the
transaction under Entry 54 List II oI the Seventh Schedule to the Constitution or is a
service when the Central Government alone can levy service tax under Entry 97, List I (or
Entry 92-C oI List I aIter 2003) or iI the nature oI the transaction partakes oI the character
oI both sale and service, whether both legislative authorities could levy their separate taxes
together or only one oI them posed the Iollowing questions:
"32.These broadly speaking are the respective contentions and in our opinion, the issues
which arise Ior consideration in these matters are:
The Supreme Court Iurther held as Iollows:
"41. Sub-clause (I) pertains to contracts which had been held not to amount to sale in
State oI Punjab v. Associated Hotels oI India Ltd. That decision has by this clause been
eIIectively legislatively invalidated."
"44. OI all the diIIerent kinds oI composite transactions the draIters oI the Forty-sixth
Amendment chose three speciIic situations, a works contract, a hire-purchase contract
and a catering contract to bring them within the Iiction oI a deemed sale. OI these three,
the Iirst and third involve a kind oI service and sale at the same time. Apart Irom these
two cases where splitting oI the service and supply has been constitutionally permitted
in sub-clauses (b) and (I) oI clause (29-A) oI Article 366, there is no other service which
has been permitted to be so split. For example, the sub-clauses oI Article 366(29-A) do
not cover hospital services."
"49. We agree. AIter the Forty-sixth Amendment, the sale element oI those contracts
which are covered by the six sub-clauses oI clause (29-A) oI Article 366 are separable
and may be subjected to sales tax by the States under Entry 54 oI List II and there is no
question oI the dominant nature test applying. ThereIore when in 2005 C.K. Jidheesh v.
Union of India held that the aIoresaid observations in Associated Cement were merely
obiter and that Rainbow Colour Lab was still good law, it was not correct. It is necessary
to note that Associated Cement did not say that in all cases oI composite transactions the
Forty-sixth Amendment would apply.
50. What are the "goods" in a sales transaction, thereIore, remains primarily a matter oI
contract and intention. The seller and such purchaser would have to be ad idem as to the
subject-matter oI sale or purchase. The court would have to arrive at the conclusion as to
what the parties had intended when they entered into a particular transaction oI sale, as
being the subject-matter oI sale or purchase. In arriving at a conclusion the court would
have to approach the matter Irom the point oI view oI a reasonable person oI average
intelligence."
(A) What are "goods" in telecommunication Ior the purposes oI Article 366
(29-A)(d)?
(B) Is there any transIer oI any right to use any goods by providing access or
telephone connection by the telephone service provider to a subscriber?
(C) Is the nature oI the transaction involved in providing telephone
connection a composite contract oI service and sale? II so, is it possible
Ior the States to tax the sale element?
(D) II the providing oI a telephone connection involves sale, is such sale an
inter-State one?
(E) Would the "aspect theory" be applicable to the transaction enabling the
States to levy sales tax on the same transaction in respect oI which the
Union Government levies service tax?"
"81. ThereIore the deemed sales included in Entry 54, List II (sic) would also be subject
to the limitations oI Article 286 and Article 366 (29-A).
82. Being aware oI the dangers oI allowing the residuary powers oI Parliament under
Entry 97 oI List I to swamp the legislative entries in the State List, we have interpreted
Entry 54, List II together with Article 366(29-A) without whittling down the
interpretation by reIerring to the residuary provision."
In Godfrev Phillips India Ltd. v. State of U.P., |2005| 2 SCC 215 the Supreme Court held
as under:
"83. Hence on an application oI general principles oI interpretation, we would hold that
the word "luxuries" in Entry 62 oI List II means the activity oI enjoyment oI or
indulgence in that which is costly or which is generally recognised as being beyond the
necessary requirements oI an average member oI society and not articles oI luxury.
"93. Given the language oI Entry 62 and the legislative history we hold that Entry 62 oI
List II does not permit the levy oI tax on goods or articles. In our judgment, the word
"luxuries" in the entry reIers to activities oI indulgence, enjoyment or pleasure.
Inasmuch as none oI the impugned statutes seek to tax any activity and admittedly seek
to tax goods described as luxury goods, they must be and are declared to be legislatively
incompetent. However, Iollowing the principles in Somaiva Organics (India) Ltd. v.
State of U.P. while striking down the impugned Acts we do not think it appropriate to
allow any reIund oI taxes already paid under the impugned Acts. Bank guarantees iI any
Iurnished by the assessees will stand discharged."
In Tamil Nadu Kalvana Mandapam Assn. v. Union of India |2004| 136 Taxman 596/
|2006| 4 STT 308 the Supreme Court was considering whether the imposition oI service tax
on the services rendered by the mandap-keepers was intra vires the Constitution, and held as
under:
"44. In regard to the submission made on Article 366(29-A)(I), we are oI the view that it
does not provide to the contrary. It only permits the State to impose a tax on the supply
oI Iood and drink by whatever mode it may be made. It does not conceptually or
otherwise include the supply oI services within the deIinition oI sale and purchase oI
goods. This is particularly apparent Irom the Iollowing phrase contained in the said sub-
article "such transIer, delivery or supply oI any goods shall be deemed to be a sale oI
those goods". In other words, the operative words oI the said sub-article are supply oI
goods and it is only supply oI Iood and drinks and other articles Ior human consumption
that is deemed to be a sale or purchase oI goods."
In K. Damodarasamv Naidu & Bros. v. State of Tamil Nadu |2000| 1 SCC 521 while
considering the entitlement oI the States to levy tax on the sale oI Iood and drink a
Constitutional Bench oI the Supreme Court held as under:
"9. The provisions oI sub-clause (I) oI clause (29-A) oI Article 366 need to be analysed.
Sub-clause (I) permits the States to impose a tax on the supply oI Iood and drink. The
supply can be by way oI a service or as part oI a service or it can be in any other manner
whatsoever. The supply or service can be Ior cash or deIerred payment or other valuable
consideration. The words oI sub-clause (I) have Iound place in the Sales Tax Acts oI
most States and, as we have seen, they have been used in the said Tamil Nadu Act. The
** ** **
tax, thereIore, is on the supply oI Iood or drink and it is not oI relevance that the supply
is by way oI a service or as part oI a service. In our view, thereIore, the price that the
customer pays Ior the supply oI Iood in a restaurant cannot be split up as suggested by
learned counsel. The supply oI Iood by the restaurant-owner to the customer though it
may be a part oI the service that he renders by providing good Iurniture, Iurnishing and
Iixtures, linen, crockery and cutlery, music, a dance Iloor and a Iloor show, is what is the
subject oI the levy. The patron oI a Iancy restaurant who orders a plate oI cheese
sandwiches whose price is shown to be Rs 50 on the bill oI Iare knows very well that the
innate cost oI the bread, butter, mustard and cheese in the plate is very much less, but he
orders it all the same. He pays Rs 50 Ior its supply and it is on Rs 50 that the restaurant-
owner must be taxed."
In Federation of Hotel & Restaurant Assn. of India v. Union of India |1989| 3 SCC 634 a
constitution bench oI the Supreme Court while considering the constitutional validity oI the
Expenditure Tax Act, 1987 (Central Act 35 oI 1987) held as under:
"31. Indeed, the law "with respect to" a subject might incidentally "aIIect" another
subject in some way; but that is not the same thing as the law being on the latter subject.
There might be overlapping; but the overlapping must be in law. The same transaction
may involve two or more taxable events in its diIIerent aspects. But the Iact that there is
an overlapping does not detract Irom the distinctiveness oI the aspects. Lord Simonds in
Governor General-in-Council v. Province of Madras in the context oI concepts oI
Duties oI Excise and Tax on Sale oI Goods said:
"... The two taxes, the one levied on a manuIacturer in respect oI his goods, the other on
a vendor in respect oI, his sales, may, as is there pointed out, in one sense overlap. But
in law there is no overlapping. The taxes are separated and distinct imposts. II in Iact
they overlap, that may be because the taxing authority, imposing a duty oI excise, Iinds
it convenient to impose that duty at the moment when the excisable article leaves the
Iactory or workshop Ior the Iirst time on the occasion oI its sale...."
"54. In the present case, the bases oI classiIication cannot be said to be arbitrary or
unintelligible nor as being without a rational nexus with the object oI the law. A hotel
where a unit oI residential accommodation is priced at over Rs 400 per day per
individual is, in the legislative wisdom, considered a class apart by virtue oI the
economic superiority oI those who might enjoy its custom, comIorts and services. This
legislative assumption cannot be condemned as irrational. It is equally well recognised
that judicial veto is to be exercised only in cases that leave no room Ior reasonable
doubt. Constitutionality is presumed."
"62. A taxing statute is not, per se, a restriction oI the Ireedom under Article 19(1) (g).
The policy oI a tax, in its eIIectuation, might, oI course, bring in some hardship in some
individual cases. But that is inevitable, so long as law represents a process oI abstraction
Irom the generality oI cases and reIlects the highest common Iactor. Every cause, it is
said, has its martyrs. Then again, the mere excessiveness oI a tax or even the
circumstance that its imposition might tend towards the diminution oI the earnings or
proIits oI the persons oI incidence does not, per se, and without more, constitute
violation oI the rights under Article 19(1)(g)."
It is not in dispute that under Article 246(1) oI the Constitution, Parliament has exclusive
powers to make laws with respect to any oI the matters enumerated in List I in the Seventh
** ** **
Schedule to the Constitution. As per Article 246(3), the State Government has exclusive
powers to make laws with respect to matters enumerated in List II (the State List).
In Association of Leasing & Financial Service Companies (supra), the Supreme Court
has considered the scope oI Article 366(29-A) oI the Constitution oI India and had Iormed
an opinion that the Iirst limb oI the said Article says that the tax on sale or purchase oI
goods includes a tax on transactions speciIied in sub-Clauses (a) to (I). It was also Iound
that the said Article is brought in to expand the tax base which should narrow down because
oI certain judgments oI the Court. The deemed sale is thereIore brought into eIIect as a
concept in the constitutional deIinition. The Supreme Court also observed that Bharat
Sanchar Nigam Ltd. (supra) had no application to the Iactual situation as it was only
concerned with the question as to whether the mobile connections constituted a sale or
service or both. In Iact, in Bharat Sanchar Nigam Limited (supra) the Supreme Court held
that providing mobile phone connections is only a service. In All-India Federation of Tax
Practitioners (supra), the question involved was whether the services rendered by
Chartered Accountants could be imposed with service tax in the light oI Entry 60 oI List II.
In that case also, Supreme Court had occasion to consider the judgments in Gufarat Ambufa
Cements Ltd. v. Union of India |2005| 1 STT 41 and also Bharat Sanchar Nigam Limited
(supra). In Bharat Sanchar Nigam Limited (supra) as already held, the Supreme court had
occasion to consider the scope oI Article 366 (29-A) it is held that aIter the 46th amendment
the sale element oI those contracts which are covered by six sub clauses oI Clause (29-A) oI
Article 366 are separable and may be subjected to sales tax by the States under Entry 54 oI
List II and there is no question oI the dominant nature test being applied. In Tamil Nadu
Kalvana Mandapam Assn. (supra) the question involved was in relation to services
rendered by mandap-keepers. While upholding the imposition oI service tax the Supreme
Court held that in regard to Article 366(29-A)(I) it only permits State to impose tax on the
supply oI Iood and drink by whatever mode it may be made whereas it does not
conceptually or otherwise include the supply oI service within the deIinition oI sale and
purchase oI goods. It is observed that the operative words oI the sub Article that supply oI
Iood and drink and other articles oI human consumption alone is deemed to be sale or
purchase oI goods. Whereas in K. Damodarasamv Naidu & Bros. (supra) the Constitution
Bench oI the Supreme Court held that when the tax is on supply oI Iood and drink, it is not
oI relevance that the supply is by way oI service or as part oI a service. The price that the
customer pays Ior the supply oI Iood in restaurant cannot be split up though it may be a part
oI the service that he renders. The Supreme Court has considered the impact oI the words oI
sub-Clause (I) oI Clause (29-A) oI Article 366.
In regard to the judgment in Federation of Hotel & Restaurant Assn. of India (supra), it
related to the constitutional validity oI the Expenditure Tax Act, 1987.
On a consideration oI the aIoresaid law laid down by the Supreme Court, I am oI the
view that there are two judgments which throws light on the subject matter in issue. Those
are K. Damodarasamv Nadu & Brothers (supra) and Tamil Nadu. Kalvana Mandapam
Assn. (supra). In Iact, the eIIect oI Article 366(29-A)(I) has been considered by the
Supreme Court in Assciation ofLeasing & Financial Service Companies (supra) and other
judgments reIerred above including Bharat Sanchar Nigam Ltd. (supra). But the Iactual
situation with reIerence to the case on hand is available only in the cases reIerred above.
But it could be seen that in Tamil Nadu. Kalvana Mandapam Assn. (supra). the question
was with reIerence to services rendered by mandap-keepers which is not the situation here.
Here the Iactual situation is almost similar to the statement oI law as held by the Supreme
Court in K. Damodarasamv Naidu& Bros. (supra).
Now coming to Article 366(29-A)(I) oI the Constitution oI India one could see that a
deeming provision has been incorporated by way oI 46th amendment to the Constitution oI
India and the history oI such a legislation has been clearly dealt with in the judgments cited
above. The very purpose oI incorporating the deIinition oI tax on sale or purchase oI goods
in Article 366 was to empower the State Governments to impose tax on the supply, whether
it is by way oI or as a part oI any service oI goods either being Iood or any other article Ior
human consumption or any drink either intoxicating or not intoxicating whether such
supply or service is Ior cash, deIerred payment or other valuable consideration. The words
"and such transIer delivery or supply oI goods" is deemed to be a sale oI those goods by the
person making the transIer. ThereIore the incidence oI tax is on the supply oI any goods by
way oI or as part oI any service. When Iood is supplied or alcoholic beverages are supplied
as part oI any service, such transIer is deemed to be a sale. Apparently, the transIer is
during the course oI a service and when the deeming provision permits the State
Government to impose a tax on such transIer, there cannot be a diIIerent component oI
service which could be imposed with any service tax in exercise oI the residuary power oI
the Central Government under Entry 97 oI List I oI the Constitution oI India.
ThereIore it can be seen Irom Article 366(29-A) (I) that service is also included in the
sale oI goods. II the constitution permits sale oI goods during service as taxable,
necessarily Entry 54 has to be read giving the meaning oI sale oI goods as stated in the
Constitution. II read in that Iashion, necessarily service Iorms part oI sale oI goods and
State Government alone will have the legislative competence to enact the law imposing a
tax on the service element Iorming part oI sale oI goods as well, which they have
apparently imposed. I am supported to take this view in the light oI the Constitution Bench
judgment in K. Damodarasamv Naidu & Bros.(supra).
T Coming to the next question regarding the imposition oI service tax in respect oI
hotel, inn, guest house, club or camp site etc., the contention oI the petitioners is based on
Entry 62 oI List II. What exactly is the meaning oI the expression "luxuries" in Entry 62 oI
List II has been held by the Constitution Bench judgment oI the Supreme Court in Godfrev
Philips India Ltd. (supra), wherein it is held that luxuries is an activity oI enjoyment or
indulgence which is costly or which is generally recognised as being beyond the necessary
requirements oI an average member oI the society. While giving the said meaning to Entry
62 and iI we look at the sub-Clause (zzzzw), the service tax is imposed on services
provided in a hotel and other similar establishments when State Legislature had enacted the
Kerala Tax on Luxuries Act by exercising their legislative power under Entry 62 oI List II.
When applying the dictum laid down in Godfrev Philips India Ltd. (supra) which gives an
extended meaning to the word "luxuries", I am oI the view that the amendment now made
to the service tax trenches upon the legislative Iunction oI the State under Entry 62 oI List
II.
Having come to the aIoresaid Iindings, these writ petitions are allowed as Iollows:
(i) It is declared that sub-Clauses (zzzzv) and (zzzzw) to Clause 105 oI Section 65
oI the Finance Act 1994 as amended by the Finance Act 2011 is beyond the
legislative competence oI the Parliament as the sub-Clauses are covered by Entry
54 and Entry 62 respectively oI List II oI the Seventh Schedule.
(ii) That iI any payments have been made by the petitioners on the basis oI the
impugned clauses, they are entitled to seek reIund oI the same.
VINEET
*In Iavour oI assessee.

Service Tax On Hotel

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ST : Levy of service tax on : (1) service forming part of suppIy of goods in

a restaurant, as weII as, (2) short-term accommodation services in hoteIs,

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