Service Tax on Hotels and Restaurants - Division Bench of Kerala High Court holds States alone have power to impose tax - Dismisses revenue appeal

ERNAKULAM, NOV 07, 2014: VIDE - 2013-TIOL-533-HC-KERALA-ST, the Kerala High Court (Single Judge), 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 Clause 105 of Section 65 of the Finance Act 1994 as amended by the Finance Act 2011 is beyond the legislative competence of the Parliament as the 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. Department filed an appeal against this order before the Division Bench.

Subsequently the High Court of Bombay vide - 2014-TIOL-498-HC-MUM-ST did not endorse the view taken by the Single Judge of the Kerala High Court and held that Parliament is competent to impose Service Tax on Restaurants and hotels.

Recently the Division Bench of Kerala High Court disposed of the appeal filed by revenue against the single judge order and emphatically endorsed the view of the Single Judge and distinguished the Bombay High Court order.

The High Court held:

After the Constitution (Forty Sixth Amendment) Act, the activity is deemed as a sale of goods. After the Constitution (Forty Sixth Amendment) Act, 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. In K. Damodarasamy Naidu, the Constitution Bench of the Apex Court had also held that in view of the words used in article 366(29A) (f), the bill raised on the customer cannot be split as charged for the service part and as charged for the food part and that the supply of food by the restaurant owner to the customer, though it may be a part of the service that he renders by providing good furniture, furnishings and fixtures, linen, crockery and cutlery, music etc., tax is leviable for the whole amount of the consideration received by the restaurant owner. In other words, in view of the aforesaid constitutional amendment, it cannot be said that there is any service involved in the supply of food and other articles of human consumption in a restaurant. It is thus evident that the matter covered by sub-clause (zzzzv) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011 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.

Coming to sub-clause (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, as found by the learned single Judge, the Constitution Bench of the Apex Court in Godfrey Philips India Ltd v. 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 that 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 Act and as per the terms of the said statute, the State Government is levying tax on matters covered by sub-clause (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994. The matter covered by sub-clause (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, 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 High Court dismissed the Writ Appeal filed by the department.