GST Caselaw

Taxability of Supply of Food:-Stuck between Supply of Service or Sale of Goods

Taxability of Supply of Food:-Stuck between being a composite supply and Sale of Goods 

 

Tax Rate on Supply of Food has been a bone of contention since the era when Supreme Court delivered its land mark judgement in Associated Hotels and Northern Caterers.. There has been a huge controversy regarding when supply of food would be considered as supply of service being in the nature of composite supply and when supply of food would be treated as sale of food having minimal or negligible service component. Some of the examples are supply of food across live counter, pick-up food, supply of food at the door step of customer, supply of food in restaurant, catering services, supply of food in hotel. The article tries to decipher complexity regarding nature of transaction and treatment thereof.

 

  1. Entry 6(b) of Schedule II of CGST Act, 2017 is as follows:

 

  1. Composite supply

The following composite supplies shall be treated as a supply of services, namely:—

 

(a)…..; and

(b) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

 

It is this entry which needs to be analyzed before arriving at the conclusion regarding taxability of transactions involving supply of food. The scope of the entry is covered by the term supply, by way of or as part of any service or in any other manner whatsoever, of goods..” can be bifurcated for better understanding as follows:

a) supply by way of any service of goods, being food or any other article for human consumption or any drink

b) supply as part of any service of goods, being food or any other article for human consumption or any drink

c) supply in any other manner whatsoever of goods, being food or any other article for human consumption or any drink

“Emphasis Supplied”

The critical question now arises that when supply of food is by way of service or as part of service. Therefore, for understanding the scope of Entry 6(b) of Schedule II of the CGST Act, we would have to revisit the history from the inception and the definition of sale as was prevalent prior to 46th Constitutional Amendment and subsequent to that. Revisit is also required since the entry in Article 366(29A)(f) has been imported under Entry 6(b) of Schedule II of CGST Act, 2017. Let’s start with the definition of sale prior to 46th Constitutional Amendment Act which read as follows:

 

  1. Definition of Sale prior to 46th Constitutional Amendment Act

For the sake of understanding, definition of “sale” under section 2(1)(n) of the Andhra Pradesh General Sales Tax Act reads as under:

 

“Section 2. (1)(n) ‘Sale’ with all its grammatical variations and cognate expressions means every transfer of the property in goods by one person to another in the course of trade or commerce, for

cash, or for deferred payment, or for any other valuable consideration …..”

The definition as reproduced above was more or less present at that time in the same form in all the State Sales Tax Act. Transaction of sale of goods was being taxed under the relevant Sales Tax Act of states under the given definition.

 

  1. Changing times required evolved definition of sale of goods

 

The murmurs were being felt that definition of sale under the sales tax law and constitutional framework as prevalent at that time was inadequate to cover the transactions under the changing and complex scenarios of business. The purpose behind insertion of Article 366(29A) of Constitution and effect of amendment was detailed out by Hon’ble Apex Court in the matter of Bharat Sanchar Nigam Ltd. &Anrvs Union Of India &Ors on 2 March, 2006 (145 STC 91) as follows:

 

Having noted the various decisions of the Supreme Court as well as of the High Courts excluding certain transactions from the scope of sale for the purpose of levy of sales tax, it was said that the position had resulted in scope for avoidance of tax in various ways. In the circumstances, it was considered desirable to put the matter beyond any doubt. Article 366 was therefore amended by inserting a definition of “tax on the sale or purchase of goods” in Clause (29A). 

 

Hon’ble Apex Court then observed

 

Clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale.

 

Clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome.

 

Clause (c) deals with hire purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale.

 

Similarly the title to the goods under Clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary to A.V. Meiyappan’s decision a lease of a negative print of a picture would be a sale.

 

Clause (e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales.

 

Clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab vs. M/s. Associated Hotels of India Ltd. (supra). That decision has by this clause been effectively legislatively invalidated.

 

  1. Tax on Sale of Food-Decision of Hon’ble Apex Court hit the nail in the coffin

Hon’ble Apex Court vide its decisions in State Of Punjab vs M/S. Associated Hotels Of India … on 4 January, 1972 and Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi hit the final nail in the coffin and held that revenue does not have power to the levy tax on food sold in Restaurant and Hotels as it’s a contract of service and not of sale of goods and they do not have the power under the given constitutional framework at that time to split the transaction between transaction of goods and transaction of services. The two judgement are being reproduced herewith

a) Hon’ble Apex Court in the matter of State Of Punjab vs M/S. Associated Hotels Of India … on 4 January, 1972 analyzed the nature of contract while a customer stays in the hotel as follows:

The transaction essentially is one of service by the hotelier in the performance of which meals are served as part of and incidental to that service, such amenities being regarded as essential in all well conducted modem hotels. The bill prepared by the hotelier is one and indivisible, not being capable by approximation of being split up into one for residence and the other for meals. No doubt, such a bill would be prepared after consideration of the costs of meals, but that would be so for all the other amenities given to the customer. For example, when the customer uses a fan in the room allotted to him, there is surely no sale of electricity, nor a hire of the fan. Such amenities, including that of meals, are part and parcel of service which is in reality the transaction between the parties.

                                                                                                                                                                “Emphasis Supplied”

The Court finally held that

The transaction between a hotelier and a visitor to his hotel is thus one essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals at stated hours. The Revenue, therefore, was not entitled to split up the transaction into two parts, one of service and the other of sale of food stuffs and to split up also the bill charged by the hotelier as consisting of charges for lodging and charges for food stuffs served to him with a view to bring the latter under the Act.

                                                                                                                                                                “Emphasis Supplied”

Therefore it can be clearly observed that Hon’ble Apex Court observed that supply of food by the Hotel was as part of service or essentially in the nature of service whereby incidentally food I served by the hotelier. The same terms which have been used in Clause 6(b) of Second Schedule II of CGST Act, 2017.

b) The issue was re-visited by the Supreme Court in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi(supra). The Supreme Court examined whether under the Bengal Finance Sales Tax Act, 1941 supply of food in a restaurant was exigible to tax as a sale. The Hon’ble Apex Court first analyzed as follows:

 

Like the hotelier, a restaurateur provides many services in addition to the supply of food. He provides furniture and furnishings, linen, crockery and cutlery, and in the eating places of today he may add music and a specially provided area for floor dancing and in some cases a floor show. 

 

The Hon’ble Apex Court further observed that

 

“6. It has already been noticed that in regard to hotels this Court has in M/s. Associated Hotels of India Limited adopted the concept of the English law that there is no sale when food and drink are supplied to guests residing in the hotel. The court pointed out that the supply of meals was essentially in the nature of a service provided to them and could not be identified as a transaction of sale. The court declined to accept the proposition that the Revenue was entitled to split up the transaction into two parts, one of service and the other of sale of food- stuffs. If that be true in respect of hotels, a similar approach seems to be called for on principle in the case of restaurants. No reason has been shown to us for preferring any other. The classical legal view being that a number of services are concomitantly provided by way of hospitality, the supply of meals must be regarded as ministering to a bodily want or to the satisfaction of a human need.”

 

Hon’ble Court finally held that

 

In the result, we hold that the service of meals to visitors in the restaurant of the appellant is not taxable under the Bengal Finance (Sales Tax) Act, 1941, as extended to the Union Territory of Delhi, and this is so whether a charge is imposed for the meal as a whole or according to the dishes separately ordered.

Hon’ble Apex Court affirmed the view taken in Associated Hotels Case and observed both supply of food by Restaurant and supply of food by Hotel is of service or essentially in the nature of service. The same terms which have been used in Clause 6(b) of Second Schedule II of CGST Act, 2017.

The review petition filed against the said judgement was dismissed by the Apex Court in Northern India Caterers (India) … vs Lt. Governor Of Delhi on 21 December, 1979 and held as follows:

 

Indeed, we have no hesitation in saying that where food is supplied in an eating-house or restaurant, and it is established upon the facts that the substance of the transaction, evidenced by its dominant object, is a sale of food and the rendering of services is merely incidential, the transaction would undoubtedly be exigible to sales-tax. In every case it will be for the taxing authority to ascertain the facts when making an assessment under the relevant sales tax law and to determine upon those facts whether a sale of the food supplied is intended.

We are of the view that these review petitions must fail. They are, accordingly, dismissed. There is no order as to costs.

  1. Did the above three decisions impacted power of the legislatures to levy tax on transaction wherein only sale and purchase of goods was involved without involving supply of service:

 a) Situation Prior to 46th Constitutional Amendment Act

 

It has to be highlighted here that challenge to the power of the revenue was only affirmed by Hon’ble Apex Court in cases where there was supply of goods being food as service or as part of service. However, for cases other than that involving only sale of food, there was no challenge to the power of revenue and tax was being levied and recovered by the revenue.

 

Hon’ble Andhra High Court in the matter of Durga Bhavan And Ors. vs The Deputy Commercial Tax … on 19 September, 1980 categorized sale of food in restaurant in two parts and briefed about levy of tax as follows:

 

In this connection it has to be noticed that broadly speaking there are two types of transactions in restaurants. The supply of food, etc., by restaurants may be made to customers who sit in the restaurants and consume the food. In such a case they enjoy the amenities provided by the owners of the restaurants. The amenities may vary from restaurant to restaurant. In some cases the restaurants may provide air-conditioned halls and in others they may provide only fans. In some they provide costly furniture whereas in others they may provide only tables and chairs. The second class of cases consists of supply of food-stuffs, snacks, drinks, etc., across the counter where there is practically no service rendered or amenities provided except in the manner of supplying the goods like packing, etc.

 

                                                                                                                                                                Emphasis Supplied

Hon’ble Court finally concluded as follows:

 

  1. In this connection, we may observe that sales across the counter will obviously be transactions of sale. It may be that in doing so some services are rendered by packing the food-stuffs, etc., but this part of the service is so infinitesimal and insignificant that the transaction would nevertheless be one of sale. Even in a case where a customer is asked to sit down in a chair or a more comfortable seat while the food-stuff is packed and handed over to him, still we consider that the transaction would be one of sale.

 

                                                                                                                                                                Emphasis Supplied

Therefore, transaction of sale or purchase of goods wherein there was either no or minimal service involved was not impacted by the decision of the Apex Court but the transactions wherein supply of service was prevalent alongwith the sale of goods were directly impacted by the decision of the Apex Court as the legislature could not levy the tax on such transactions.

 

 b) Situation Subsequent to 46th Constitutional Amendment Act

 

Hon’ble Andhra High Court in the matter of Amba Bhavani And Ors. vs The Government Of Andhra Pradesh … on 29 January, 1986 held that

 

  1. On consideration of the provisions of the Constitution Amendment Act, 1982, in the light of the judgments of the Supreme Court in Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipalityand Tirath Ram Rajindra Nath v. State of Uttar Pradeshthis Court came to the conclusion that by enacting section 6, the Parliament removed the defect pointed out by the court in the then existing law thereby nullifying the effect of the judgment in Northern India Caterers’ case .

 

The High Court further held that

 

Even in Durga Bhavan’s case when this Court pointed out the defect in the Andhra Pradesh General Sales Tax Act and held that transactions by way of supply or service of food or drinks in hotels or restaurants will not be transactions of sale exigible to tax, it was categorically laid down that so far as counter sales were concerned they were exigible to tax. 

 

Hon’ble Delhi High Court in the matter of Indian Railways Catering & … vs Govt Of Nct Of Delhi & Ors on 19 July, 2010 observed that

 

In fact, even in a shop- cum-restaurant, the meals are heated and beverages refrigerated and then served to the customer on his table in the crockery and cutlery provided by the shop-cum-restaurant. Even while selling a meal/snack/beverage off the counter, the seller heats the meal/snack and delivers cold/hot beverage to the customer. No one will buy meals/snacks if they are not hot, a soft drink, if it is not cold or a tea/coffee if it is not hot.

 

Therefore, in sale of food over the counter, the only service provided is selling of cooked and hot food which is incidental for selling the food. Other than that no service is involved in the supply of food over the counter.

 

Therefore Hon’ble Court held that

 

  1. Since these is transfer of goods, by the petitioner company to Indian Railways, for consideration and the property in the goods also passes to Indian Railways, the transaction between them is no doubt a case purely of sale of goods under the provisions of Sale of Goods Actas well as Delhi Value Added Tax Actand the element of service by way of heating the food, heating/freezing the beverages and then serving them to the passengers is purely incidental and minimal required for sale of food and beverage in a transaction of this nature.

 

In the given case, the contract between the petitioner company and Indian Railways was for supply of food and there was no privity of contract between the Company and the customer of Indian Railway and the Hon’ble Court held that element of service by way of heating the food, heating/freezing beverages and then serving them to the passengers is purely incidental and minimal required for sale of food and beverage in a transaction of this nature.

 

Hon’ble Court also held that when transaction is purely of sale of goods and is not a case of composite supply, therefore contention that since service tax is being paid on 50% of value of the contract and therefore VAT should be payable on balance 50%. The relevant part is  as follows:

 

  1. For the reasons given in the preceding paragraphs, we hold that the transaction between the petitioner-company and Indian Railways for providing food and beverages to the passengers, on board the trains, is a transaction of sale of goods by the petitioner-company to Indian Railways. It is neither a contract for providing services nor a composite contract for supply of goods and providing of services.

 

  1. Was 46th Constitutional Amendment brought to impact levy of tax on sale of food wherein service is negligible or minimal for supply of food

 

It can be clearly observed from the above para that not every supply of food is a composite supply involving supply of food as service or as part of service. It has to be checked and if service part is minimal or negligible for supply of food then it would be a case of sale of food. Levy of Tax on such transactions was always held to be as sale of goods prior to 46th Constitutional Amendment and subsequent to the 46th Constitutional Amendment Act. Therefore, 46th Constitutional Amendment was never intended to cover transactions involving sale of goods.

 

It is further highlighted that in case of food there are two type of services involved i.e. first being services used for manufacturing of food and second being services like amenities being provided alongwith the food or food being supplied being a part of service. Preparation of Food is considered as Manufacturing and therefore services used in manufacturing of food are covered under the ambit of sale of goods. Therefore service provided till the goods are manufactured is incidental to sale of goods. However, it’s the cost of amenities which are provided alongwith food or food being supplied as part of service like hotel or catering which have necessitated Article 366(29A)(f).

 

  1. Reason behind Insertion of Article 366(29A) to Constitution of India and transactions covered by the 46th Constitutional Amendment Act

 

In the backdrop of the three landmark Supreme Court Cases, wherein it was held that where supply of foods is service or as part service like catering contracts, service of food in room, supply of food in restaurant; revenue does not have the power to levy sales tax as it lacks the power in the given Constitutional Framework to split transaction between supply of goods and supply of service. However, it can continue to levy tax on transactions involving only supply goods being foods wherein part of service is minimal or negligible.

 

Therefore, to plug the loophole as envisaged above for levy of tax involving transaction of supply of goods being food as supply of service or part of service, 46th Constitutional Amendment inserted Article 366(29A)(f). The understanding is important as firstly not all transactions of supply of food fall in the ambit of this Article but only specified transactions as other transactions were already under the ambit of levy of sales tax under the erstwhile definition of sales and secondly Entry 6(b)of Schedule II of CGST Act, 2017 has been bodily imported from Article 366(29A)(f). Therefore, understanding the scope of Article 366(29A)(f) would directly lead to understanding of Entry 6(b)of Schedule II of CGST Act, 2017.

 

The fact is further clear from the judgement of Hon’ble Apex Court in the matter of Bharat Sanchar Nigam Ltd. &Anrvs Union Of India &Ors on 2 March, 2006 (145 STC 91) which held as follows:

 

All the clauses of Article 366 (29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerly limited. The amendment especially allows specific composite contracts viz. works contracts (Clause (b)), hire purchase contracts (Clause (c)), catering contracts (Clause (e)) by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax.

 

The reason for the insertion of the 366(29A)(f) was to overcome the aforementioned decisions in State of Himachal Pradesh v. Associated Hotels of India (supra) and Northern India Caterers (India) Ltd. v. Lt. Governor(supra) and other decisions, Parliament inserted Article 366 (29 A) (a) to (f) by the 46th Amendment to the Constitution. This is apparent from the Statement of Objects and Reasons (SOR) for the 46th Amendment, the relevant portions of which read as under:

 

In the Associated Hotels of India case (AIR 1972 SC 1131), the Supreme Court held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel. …

  1. Besides the above mentioned matters, a new problem has arisen as a result of the decision of the Supreme Court in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi(AIR 1978 SC 1591). States have been proceeding on the basis that the Associated Hotels of India case was applicable only to supply of food or drink by a hotelier to a person lodged in the hotel and that tax was leviable on the sale of foodstuffs by a restaurant. But over-ruling the decision of the Delhi High Court, the Supreme Court has held in the above case that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately.
  2. It is, therefore, proposed to suitably amend the Constitution to include in article 366a definition of “tax on the sale or purchase of goods” by inserting a new clause (29A)… “

 

In para 13 of the Statement of Reasons for the 46th Amendment to the Constitution it was observed that the “proposed amendments would help in the augmentation of the State revenues to a considerable extent.” The focus was on ensuring that State sales tax was leviable on the portion of supply of food and drinks even where it was as a part of a composite catering contract.

 

Hon’ble Bombay High Court in the matter of  Indian Hotels and Restaurant Association vs  The State Of Maharashtra on 8 April, 2014 observed the intent of Article 366(29)(f) as follows:

Article 366(29A)(f) is inserted by the Constitution (Forty-sixth Amendment) Act, 1982 so as to take care of the continuing controversy, namely, that while taxing sale or purchase of goods the State Legislature cannot impose a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration.

The challenge was to several State Acts and particularly levying, assessing and recovering sales tax on the food and meals served in a restaurant. The argument was that this is a service and not a sale of goods and particularly food items or drink. It is in that context and when the Honorable Supreme Court rendered the decisions so as not to empower the States to impose such a sales tax, that the Parliament clarified that the food or drink may have been served in the restaurant or hotel, but it is nothing but a sale of goods within the meaning of the Sales Tax Act. Therefore, it will not be possible for the hoteliers or restaurants to say and urge that they do not sell goods, but only provide services. The Parliament, therefore, inserted an inclusive definition in the Constitution vide Article 366(29A.)

This inclusive definition was inserted so as not to leave any room for argument that a tax on sale or purchase of goods does not include a tax on the supply of goods which may be food or any other article for human consumption or any drink (whether or not intoxicating), by way of or as part of any service or in any other manner whatsoever. It is for that limited purpose and to put an end to the controversy, which was dealt with by the Honorable Supreme Court and to get over the basis of its judgments or to alter them that the Parliament stepped in.

It was argued and prior to the Constitution (Forty-Sixth Amendment) Act, 1982 that the State cannot impose the sales tax on the establishments like restaurants or hotels because they do not sell goods. They only provide services and while rendering and providing such services, they may be incidentally selling the goods. However, their predominant activity is rendering services and not selling the goods. It is that argument or stand which is taken care of vide the above Constitutional definition.

Hon’ble Andhra High Court in the matter of Amba Bhavani And Ors. vs The Government Of Andhra Pradesh … on 29 January, 1986 held that

“9. The Division Bench of this Court disposed of the batch of writ petitions by its decision in Hotel Dwaraka v. Union of India [1985] 58 STC 241 holding that the exercise of the constituent power for validation of the State laws was lawful, section 6 of the Constitution (Forty-sixth Amendment) Act, 1982, did not affect the basic structure of the Constitution, it was intended to remove the causes for ineffectiveness or invalidity of the law and alter the conditions on the basis of which the judgment of the Supreme Court in Northern India Caterers’ case was rendered and thereby to nullify the effect of that judgment..”

It’s pretty much clear that 46th Constitutional Amendment was brought in to nullify the argument that while selling goods in restaurant predominant activity is rendering services and not sale of goods and such transactions would be exigible to tax on sale of goods.

Like for levy of Tax under Article 366(29A)(b) which provided for tax on transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract; there has to be transfer of property of goods in execution of works contract and not all supply of goods would fall under the ambit of the given clause. In the same way there has to be supply of food by way of service or as part of service for a transaction to fall under this clause and not supply of food will fall under the given clause.

Therefore, under the GST regime what would be important is that the language of Article 366(29A)(f) which has been imported in clause 6(b) of Schedule II of CGST Act, 2017 covers only such transactions wherein supply of goods being food is by way of supply of service or part of service and not all transactions involving supply of food wherein supply of service is minimal or negligible. The clause never intended to cover transactions of pure sale of food and nor it would cover under GST Era. It is only wherein service is involved alongwith the supply of food that Article 366(29A)(f) would be applicable and would continue to be covered under clause 6(b) of Second Schedule II of CGST Act, 2017.

  1. Key Elements of Article 366(29A)(f)

The Constitution Forty-sixth Amendment Act, 1982 amended Article 366 of the Constitution thereafter by inserting clause (29A) therein. So far it is relevant for our purposes, it read :

 

“Tax on the sale or purchase of goods includes:

(a) xxxx

(b) xxxx

 (c) xxxx

(d) xxxx

(e) xxxx

(f) a tax on the supply, by way of or, as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by

the person to whom such transfer, delivery of supply is made.”

 

Hon’ble Delhi High Court in the matter of Federation of Hotels And … vs Union Of India And Ors on 12 August, 2016 observed key requirements in Article 366(29A)(f). The requirements which have to be fulfilled before the transactions fall under the ambit of Article 366(29A)(f).

 

  1. To revert to Article 366 (29A), the focus as far as the present petition is concerned is on Clause (f) which seeks to define tax on sale purchase of goods. The constituent elements as it were, of the definition are:

 

(i) the supply of goods being food or any other article for human consumption or any drink (whether or not intoxicating);

(ii) the supply of goods could by way of or as part of any service or in any other manner whatsoever; and

(iii) such supply or service could be for cash, deferred payment or other valuable consideration.

 

  1. If the above three elements are present then “such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

 

  1. The subject matter of “transfer, delivery or supply” are the „goods‟, which in this case would be food or any other article fit for consumption whether or not intoxicated. The key expression is not just „supply‟ but „supply of goods‟.

In K.Damodarasamy Naidu & Bros. and others v/s State of T.N. and another, reported in (2000) 1 SCC 521 Honourable Supreme Court referred to the Constitution (Forty-Sixth Amendment) Act, 1982 and particularly the definition noted above and held as under:-

“9. The provisions of Sub-clause (f) of Clause (29A) of Article 366 need to be analysed. Sub-clause (f) permits the States to impose a tax on the supply of food and drink. The supply can be by way of a service or as part of a service or it can be in any other manner whatsoever. The supply or service can be for cash or deferred payment or other valuable consideration. The words of Sub-clause (i) have found place in the Sales Tax Acts of most States and, as we have seen, they have been used in the said Tamil Nadu Act. The tax, therefore, is on the supply of food or drink and it is not of relevance that the supply is by way of a service or as part of a service. In our view, therefore, the price that the customer pays for the supply of food in a restaurant cannot be split up as suggested by learned Counsel. 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, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor and a floor show, is what is the subject of the levy. The patron of a fancy restaurant who orders a plate of cheese sandwiches whose price is shown to be Rs. 50 on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs. 50 for its supply and it is on Rs. 50 that the restaurant owner must be taxed.

 

  1. Service Tax was to be levied on service portion involved in supply of food by way or as part of service or any other manner whatsoever and not transactions wherein it was pure sale of food

 

Hon’ble Apex Court in the matter of Bharat Sanchar Nigam Limited v. Union of India (supra) the Supreme Court analysed the various clauses of Article 366 (29- A) and observed inter alia, that

 

“Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been Constitutionally permitted in clauses (b) and (g) of Clause 29A of Art. 366, there is no other service which has been permitted to be so split.”

                                                                                                                                                                Emphasis Supplied

 

Hon’ble Apex Court clearly observed that Article 366(29A)(f) intended to cover transaction in case of supply of food wherein service and sale are involved at the same time.

 

Hon’ble Delhi High Court in the matter of Federation of Hotels And … vs Union Of India And Ors on 12 August, 2016 observed that Section 66E(i) of Finance Act, 1994 sought to levy transaction on service portion of the contract wherein supply of food is by way of service or part of service.

“46. By the same logic even if some part of the composite transaction involves the rendering of service, there should be no difficulty in recognising the power of the Union to bring to tax that portion. Section 66 E (i) of the FA which defines ‘declared service’ to be the “service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.”

Thus Section 66E(i) clearly provides specifically for levy tax on “service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity” and therefore has been provides as a ‘declared’ service. The legislative has specifically carved out service portion of the composite contract of supply of food and drinks.

Tax Research Unit (TRU) of the Department of Revenue, Government of India explained the background and the purport of levy of service tax by a communication dated 28th February 2011 and clarified that it does not seek to levy tax on transactions involving pure sale of food.

 

1.4 The new levy is directed at services provided by high-end restaurants that are air-conditioned and have license 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.

 

1.6 “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.

 

It would be worthwhile to highlight abatement chart under Service Tax Regime for various services wherein supply of food was involved by way of service or as part of service. This abatement chart also affirms that for a transaction falling under Entry 366(29A)(f) i.e. supply of food by ay of or as part of service, there has to be service component and cannot be a merely sale of food where minimal or negligible service component is involved.

 

Nature of servicesAbatement
Bundled services by way of supply of food or any other article of human consumption or any drink, in a premises together with renting of such premises30%
Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity, at a Restaurant60%
Service portion in outdoor catering wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of such outdoor catering40%

 

The above clearly establishes that under the service tax regime as well entry under clause (i) of Section 66E of Finance Act, 1994 which provided an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity did not intend to cover transactions of pure sale and only intended to cover transactions involving service as part of sale.

 

  1. Levy of Tax Pre 46th Constitutional Amendment Act, Post 46th Constitutional Amendment Act, Post Service Tax Regime and Post GST Regime.

a) Pure sale of Food

 

Pure sale of food was leviable to Sales Tax Prior to 46th Constitution has been held by the Hon’ble Andhra Pradesh High Court in the matter of  Durga Bhavan And Ors. vs The Deputy Commercial Tax.

 

Post 46th Constitutional Amendment there has been no change as the Constitutional Amendment was never intended to impact such transactions as the law regarding levy of tax as sale of goods was fairly settled on the issue.

 

Post VAT and Service Tax Regime no service tax was leviable as no or minimum Service was involved and only VAT was leviable on such transactions.

 

Under the GST Regime, these transactions are not covered under Entry 6(b) of Schedule II of CGST Act, 2017 as the entry covers only such transactions wherein supply of food is by way or service or part of service. This is a transaction of sale of goods and not covered under composite supply Under Entry 6(b) as service element is minimal or negligible.

b) Supply of Food by way of service or as part of service; For e.g. Restaurant, Catering Services and Hotel:

 

This transaction was not leviable to Sales Tax Prior to 46th Constitutional Amendment Act as it was treated as transaction of service and not of sale of goods and constitutional framework did not allow splitting up of consideration between sale of goods and service. Therefore the three judgments of Hon’ble Apex Court held that the legislature does not have the power to levy taxes.

 

Post 46th Constitutional Amendment Act, since the law was amended to cater such situations it was leviable to Sales Tax.

 

Under the Post Service Tax and VAT Regime, there was a controversy regarding levy of VAT and Service tax on same transaction and value upon which it would be levied.  The validity was challenged and levy of VAT on such transactions was upheld by Hon’ble Apex Court in the matter of K. Damodarasamy Naidu And Bros. … vs State Of Tamil Nadu And Anr. Etc. and Levy for service Tax on such transactions was upheld by  Hon’ble Apex Court in the matter of Tamil Nadu Kalyana Mandapam Assn vs Union Of India & Ors on 15 April, 2004.

 

Under the post GST Era, Entry 6(b) covers such transaction and are taxable as supply of service as falling under Composite Supply.

 

  1. Scenarios where there is a thin line differentiating the transactions between supply of service and supply of goods:

 

The below mentioned situations are subjective ones and the scenario may change on a case to case basis and a straightjacket formula cannot be devised for the same. However, in the broader context, the below-mentioned situations can be analysed as follows:

a) Sale of Food across Live Counters i.e. Pick Up Food: Hon’ble Andhra High Court prior to insertion of 46th Constitutional Amendment, held in the matter of Durga Bhavan And Ors. vs The Deputy Commercial Tax … on 19 September, 1980 that supply of food-stuffs, snacks, drinks, etc., across the counter where there is practically no service rendered or amenities provided except in the manner of supplying the goods like packing, etc would be treated as sale of goods. This would still hold good wherein there are no facilities or amenities being provided and customer has to take the packed food and eat the same as per his convenience without any facility being provided by the supplier.

 

The important issue is that sale of food by the supplier is not by way or as part of service to the customer and charges charged by him do not include any charges for the services supplied. In such case, as held by Hon’ble Delhi high Court in the matter of Indian Railways Catering & … vs Govt Of Nct Of Delhi & Ors on 19 July, 2010 would hold good that such transaction are purely of sale of goods and the element of service by way of heating the food, heating/freezing the beverages and then serving them to the passengers is purely incidental and minimal required for sale of food and beverage in a transaction of this nature.

 

However, if unit starts providing amenities to the customer, then the supply could be treated as supply of service. It is immaterial whether customer choses to eat the food at the premises or opts to takeaway, because the amenities have been offered to have been provided by the supplier and the price charged for the food somewhere includes price for the amenities.

 

Therefore, if the facilities are offered, then the supply would fall in the ambit of the supply of food by way of service or as part of service, irrespective of the fact that the customer avails the service or not and that’s why Notification No. 11/2017 dated 28th June 2017 provides the rider of “supply of food by way or part of service …whether for consumption on or away from the premises”. But if no such services are provided by the supplier, then it would be difficult to fall within the ambit and could be classified as supply of goods. Further, if price charged for the two i.e. price for takeaway without being consumed or being served at the premises is different, the price charged might be the yardstick to arrive at the nature of supply and whether being a supply of food by way of service or part of service or pure sale of food.

 

Supposedly, a shop owner who provides snacks across the counter and generally people consumes it across the counter but he has not provided any or little facility or amenity cannot be said to have supplied food by way of service or part of service. If these case would be treated as supply of food by way of or as part of service then a kirana shop owner selling packed goods with no facility can also be held to falling under the composite supply. However, the magnitude of arrangements and amenities to be provided would be subjective and would have to be assessed on a case to case basis as the critical factor to be covered under Entry 6(b) is supply of food should be by way of or as part of service.

b) Delivery of Food to the Customer premises: At the time of levy of service tax it was clarified by TRU that levy of service tax was never intended to mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. If we look at the contact of the delivery of food to the place of the customer, it is clear that it is a contract for sale of goods and fall under the same category of supplies wherein the supplier has agreed to deliver the finished good to the premises of the customer. It might just fall in the ambit of supply of goods and the s the example has been quoted for definition of composite supply under clause 2(30) of the CGST Act, 2017

 

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

 

c) Supply of Food in Sweetshop-Cum-Restaurant: In a Sweet Shop Cum Restaurant, there may be multiple supplies i.e. Supply of Food in Restaurant, Supply of Jalebi and snacks across the live counter and supply of sweets. All the three can be takeaway or can be consumed at the shop. The question now arises that out of three which can be considered as supply of food byway of service or as part of service. Supply of Food in restaurant is surely supply as part of service and therefore a composite supply. Supply of Jalebi and Snacks across the live counter has been discussed in Para 11(a) above.

 

Supply of Sweet is the trickiest of all. Can it be said that the sweets have been supplied for consumption at the premises or only away from the premises. In a general scenario, sweets are packed and taken away from the sweet shop and most rarely it is consumed at the premises.

 

For help in understanding, let’s go back into the service tax regime and take similar case of sweetshop cum restaurant supplying sweets. Would like to highlight that under Service Tax Regime, service portion in the activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) was supplied in any manner as a part of the activity, at a Restaurant was taxable @ 40% of the entire sales value. Here again point to be emphasized is that the entry sought to tax service portion in the activity wherein food is supplied by way of or as part of service just like entry 6(b) of Schedule II of CGST Act, 2017. Under that regime as well, whereas VAT was charged on the entire value of sweets being supplies but service tax was not charged @ 40% of value of sale of goods treating the same as sweets could have been consumed at the shop and the amenities are being provided to consume the sweets. It was a pure case of sale of goods. Therefore, in such cases, sale of sweets would be a case favoring levy of tax of sale of food treating as supply of goods unless a strong case can be made showing that primarily the sweets are consumed at the premises using the amenities provided and not taken away as  a packed food, which would be a bit tough.

 

Further in Kundan Mishthan Bhandar, AAR Uttarakhand held that in the instant case the nature of restaurant services is such that it may be treated as the main supply and the other supplies combined with such main supply are in the nature of incidental or ancillary services. Thus restaurant services get the character of predominant supply over other supplies. The view might need reconsideration as composite and mixed supply are looked for each transaction and supply individually and cannot be looked from the point of view of a person as a whole wherein supply of restaurant services are main and other supplies are ancillary.

 

Conclusion: The key factor to be falling under the composite supply is to fall within the ambit of supply of food by way of or as part of service i.e. amenities and services being provided alongwith the supply of food. The facilities should be such which are not purely incidental and minimal required for sale of food and beverage in a transaction of this nature. How one satisfies the equation is the key factor in deciding the question. It would not be wrong also to state that it’s a subjective question but the Decisions of Apex Court, High Court, CBEC Circular gives the clue in how to interpret cases.

               

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

To Top