GST Caselaw

#GSTCase-74-Supply of Ice Cream by Outlets with no facility of serving/dining is supply of goods(AAR – MAHARASHTRA) – A Word of Caution for Food/Ice Cream Outlets in GST

#GSTCase-74-Supply of Ice Cream by Outlets with no facility of serving/dining is supply of goods(AAR – MAHARASHTRA) – A Word of Caution for Food/Ice Cream Outlets in GST

                                                                                                                                                By CA Arpit Haldia

 

Arihant Enterprises [2019] 104 taxmann.com 230 (AAR – MAHARASHTRA)

 

  1. Query

Whether supply of ice-cream by the applicant from its retail outlets would be treated as supply of “goods” or supply of” service” or a “composite supply” and subject to GST accordingly?

 

  1. Facts

The applicant is, inter alia, engaged in the business of reselling Ice-creams in wholesale as well as retail sale packages. The applicant purchases the said goods from its sole manufacturer, M/s Kamaths Ourtimes Icecreams Private Limited (“The franchisor”). The applicant sells the Ice-creams to their customers “as it is” without any further processing/alteration/structural or chemical change. “As it is” means in its exact form as it is acquired from the franchisor.

The supplies are made by the applicant from its retail store situated in Aurangabad. The only source of revenue generation by the store is by way of selling ice-creams by means of namely, 1) retail packs; and 2) by way of Ice cream scoops. The details of such sales and methodology is as follows:

 

a) Sale of ice-creamsin retail packs

The ice cream is sold as 500 grams retail packs. The sales mainly consist of sale of party packs or popularly known as “Tubs”. These are packed in plastic containers bearing the details of product including maximum retail price (MRP) of the product. The details of the product are printed on the packs in accordance with the provisions of the Legal Metrology Act, 2009.

 

b) Sale ofice-cream by way of scoops

Under this method, the ice-cream scoops are sold to the customers who wish to consume Ice-creams on a take away basis. The franchisor supplies Ice-creams to the applicant in a wholesale pack to sell the same in scoops. These wholesale packs are emptied in steel containers at the outlet. Thereafter the ice-creams are sold over the counter and supplied in scoops in paper cups, regular cones or waffle cones. Further, at times the customer prefers more than one flavor of ice cream in different combinations commonly known as “Double Scoop” or “Triple Scoop”. Accordingly, the ice creams are supplied in large cones or cups. In some cases, the ice cream is melted (semi liquid form) and sold in paper cups/ paper glasses to the customer based on their demand. In such cases, only the form changes. Sometimes, the ice cream is topped with fruits, again based on demand from the customer, The Price is charged on per Scoop basis. These prices are fixed and consistent at all the outlets of the applicant as well as other franchisee owners of the franchisor.

 

c) Methodology to sale the goods to the consumers

  • The applicant purchases ice creams from the franchisor. The franchisor supplies the same in retail and the whole sale pack of ice creams under a Tax Invoice and collects GST (CGST + SGST or IGST depending on the place of supply]. It quotes HSN code 2105 and charges GST @ 18% in terms of Notification No. 01/2017 -CT (Rate), dated 28.06.2017, as amended.
  • Due to the inherent nature of the product, the packages received from the manufacturer/franchisor are stored in a refrigerator located inside the retail store.
  • Typically for better performance and life of the refrigerator the temperature around the refrigerator needs to be maintained. Hence, the area of the store where the Ice-creams are stored and sold across the counter are Air Conditioned. This is similar to how most of the departmental stores like food land, reliance fresh or big bazaar sell their products,
  • The customer walks to the counter, goes through the menu available, selects the flavors and places the order to the cashier.
  • Once the order is placed, the customer pays the price for the order placed by him; the cashier prints two copies of the Tax Invoice and hands over the same to the customer.
  • The customer then moves to the delivery counter, hands over one copy of the Tax Invoice to the at the counter. In case the customer has purchased a retail pack the same is handed over to him/her against the copy of the Tax Invoice. On the other hand if the customer has purchased a scoop of ice cream, the same is handed over to him in a cup/ cone as per his desire. Likewise, the customer can also call the outlet and place the order, which gets hand delivered in retail pack to the customer’s location.
  • Thereafter, the ice cream is handed over to the customer. He either waits within or outside the store or takes it away as the case may be. Within the store/shop, there are a few tables/chairs/benches for customers to sit, while waiting.

 

  1. Observation by AAR

 

a) Sale of ice-creamsin retail packs

In the case of sale of ice creams in tubs of 500 gms and at the MRP, it is sale of goods with no service being involved.

 

b) Sale ofice-cream by way of scoops

  • Observation of AAR on Methodology

AAR observed that in case of sale of ice cream by scoops, customer places the order from the menu and the same is delivered to them. In case of scoop, flavor of choice is sold as per the customer preference i.e. in cup or cone. In either of the cases, the ice-cream received by the applicant from the franchisor is supplied as it is to the customer and is sold at agreed rates, as mentioned on menu cards.

 

  • No Extra facility given by the supplier for consuming the Ice Cream at its outlet

No extra money is charged from the customers who are free to consume the ice-creams inside or outside the outlet. No facility of serving/dining is provided by the applicant. Only a few outlets of the applicant offer seating facility. However as informed by the applicant, same is predominantly made for the convenience of old persons or persons with disability, ladies and children and not for rendering any service of a kid like a restaurant, eating house, joint, etc. 

  • Dominant Object is sale of ice-cream

The dominant object even in the case of ice cream in scoops as in the subject case, is a sale of goods. This transaction of selling ice cream received in bulk and selling them in scoops is akin to sales made by grocery shops in the case of sale of edible oil wherein the grocer sells such oil in various lesser quantities after receiving the same in bulk quantity of 20 litres, etc in tins/cans.

  • Decision of Rajasthan High Court in Govind Ram and ors. Vs. State of Rajasthan and orsreported as AIR 1982 Raj 265 

The decision of the Rajasthan High Court in the matter of Govind Ram and ors. Vs. State of Rajasthan and ors is applicable to the subject case in as much as there is a sale of goods i.e. ice cream which is made across the counter to the customers by the applicant.

  • Difference between Outlet of the Applicant and Restaurant

The applicant’s outlets differ from the conventional restaurants. In restaurants, generally the customers go with the intention of ordering articles of foods for the purpose of consuming the same there only, which are then prepared and served by waiters, etc to the customers. Here the ice creams are sold in the same form as received by them and at agreed rates not exceeding the MRP and in most of the case said ice creams appear to be consumed outside the premises of the applicant.

 

  1. Held

In the given subject matter there is a transfer of title in ice creams from the applicant to their customers and therefore as per entry no. 1(a) of the Schedule II of the CGST Act, the subject transaction is nothing but a supply of goods.

 

  1. Comment

The judgement is one in the long list of judgements to follow what would be supply of goods and supply of services by outlets. The issue is not free from litigation and ambiguity seems that would be taking long while before settling the matter. However, one thing which formed the very basic theme in deciding the matter as supply of goods was the observation of the AAR with regarding to the seating facility provided by the Ice Cream Outlet:

“No facility of serving/dining is provided by the applicant. Only a few outlets of the applicant offer seating facility. However as informed by the applicant, same is predominantly made for the convenience of old persons or persons with disability, ladies and children and not for rendering any service of a kind like a restaurant, eating house, joint, etc.”

 

Therefore, service element in such case was negligible. The borderline cases would be as follows:

  1. Seating Facility of 4-5 Persons provided alongwith Air-Conditioned Room
  2. Seating Facility provided but the order is made online through E-Commerce Operators by the Customer say for e.g. Swiggy. Now although the seating facility has been provided by the supplier but when one orders online, it is a given fact that there would be no case for consuming the goods at the site of the outlet

 

The relevant cases on the issue in hand before the AAR (some of them also followed by AAR) and on similar issues are as follows:

 

(Pre-GST Regime) Case-1: Northern India Caterers v. Lt. Governor of Delhi AIR 1980 SC 674:

“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 incidental, the transaction would undoubtedly be eligible 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.”

 

(Pre-GST Regime) Case-2: Andhra Pradesh in the matter of Durga Bhavan and Ors. (1981] 47 STC 104 (AP) wherein the Hon’ble High Court has summarized the ratio decedendi of the judgments of Apex court in the matter of State of Himachal Pradesh v. Associated Hotels of India (1972] 2 SCR 937 and Northern India Caterers v. Lt. Governor of Delhi AIR 1980 SC 674,:-

“13. To summarise the position at the end of the three decisions of the Supreme Court discussed earlier appears to be as follows:-

  1. If there is no right to carry away the food there would be no sale in favour of the customer.
  1. Even if there is a right to carry away if in essence the transaction is a transaction of service and not a transaction of sale it would not be exigible to tax.
  1. If, however, where the customer has a right to take away the food if the dominant object is the sale of food and the rendering of service is merely incidental, then the transaction would be a transaction of sale and not a service contract.
  1. The question whether the dominant object was the sale of food or rendering of service would depend upon the facts and circumstances of each case which has to be decided by the assessing authority in the light of the evidence before it.

 

High Court further went on to hold that:-

“14. we may observe that sales across the courter 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.”

 

(Pre-GST Regime) Case-3: Rajasthan High Court in the matter of Govind Ram and ors. Vs. State of Rajasthan and ors reported as AIR 1982 Raj 265 wherein the Hon’ble High court held that:

“5. In cases of sales of foodstuffs or eatables made across the counter”, they are obviously transactions of sale, even though some service may be rendered in packing the food-stuffs, yet it may be so insignificant or incidental that the transaction would essentially be one of sale. Similarly, if food stuffs or drinks are supplied to customers outside the hotel or restaurant, then also the transactions may amount to sale. In case where the owner of the hotel or restaurant or the eating house charges separate amount by way of service charge for the service rendered by him besides the cost of the food-stuff supplied to the customer, then it would obviously appear that the transaction of sale of foodstuffs and service rendered by the hotelier or the owner of the restaurant have been separately charged. Moreover, it would also be a question of fact as to whether the customer has a right to take away the foodstuffs and in that case the assessing authority will have to decide as to whether the transaction would amount to sale or not. If the dominant object is the sale of eatables and drinks and rendering of service is merely incidental then the transaction may, amount to sale. But if, on the other hand, there is a transaction in which service is coupled with supply of foodstuffs and supply of foodstuffs is part of and incidental to the service, then the transaction may not amount to sale”

 

(Pre-GST Regime) Case-4: Madras High Court in the matter of Sangu Chakra Hotels Private Limited vs, State of Tamil Nadu reported in [1985] 60 STC 125 wherein Hon’ble bench opined that:-

“12. It is common knowledge that in the case of a restaurant simpliciter, a person may either go to a restaurant merely for the purpose of buying articles of food and taking them home in a parcel, or he may go to the restaurant with the avowed object of ordering out articles of food for the purpose of consumption in the restaurant itself. The question as to whether any service is involved or not, if at all it arises, it will arise only in the second class of cases. In the first category of cases where articles of food are sold across the counter it is a sale, pure and simple, like any other commodity in any other shop with no element of service involved. If at all any service is involved, it is in no way different from the service involved in an ordinary transaction of sale of any other goods which are sold across the counter. It is difficult to see how such a transaction which is purely of sale and purchase of articles of food can be outside the taxing power of the State Legislature having regard to entry 54 of List ll of the Seventh Schedule to the Constitution.”

 

(Post-GST Regime) Case-5: In the case of Kundan Mishtan Bhandar, wherein AAAR overruled the decision of AAR. The issue before AAAR Uttarakhand was

(a) whether supply. of pure food items such as sweetmeats, nankeens, cold drink and other edible items from a sweetshop which also runs a–restaurant is a transaction of supply of goods or a supply of service;

(b) what is the nature and rate of tax applicable to the following items supplied from ground floor of a sweetshop in which restaurant is also located on the first floor..

It was held by AAAR that

When the goods such sweets, namkeens, cold drinks ‘and other edible items are supplied to customers in the restaurant or as takeaways from the restaurant counter . and which are being billed under restaurant sales head should fall under ‘composite supply’ with restaurant service being the principal supply., since supply of food in this case, is naturally bundled with the restaurant service. The taxability of all such goods supplied to or through the restaurant will be governed by the principal service Le restaurant service and GST rate with applicable conditions will also be applicable to all such goods also. Input credit will not be allowed in this case.

All goods which are supplied to customers through sweetshop counter have no direct or indirect nexus with restaurant service. Any-one can come and purchase any . item of any quantity from the counter without visiting the restaurant. The billings of such sales are also done separately. Thus such sales, by no stretch of imagination, can be clubbed with restaurant service. These sales do not satisfy the basic requirement-of `composite supply’ i.e.’ being naturally bundled and supplied in conjunction with each other’. These sales are completely independent of restaurant activity and will continue even when the restaurant is closed, either temporarily or permanently. Hence such sales will be treated as supply of goods with applicable GST rates on the items sold.

 

(Post-GST Regime) Case-6: Tax rate on Bakery under composition and having manufacturing/cooking facility along with eating place:

Vide Circular No. 27-GST clarifies that any service by way of serving of food or drinks including by a bakery qualifies for composition (subject to other conditions prescribed in Section 10(1) and 10(2) of CGST Act) and GST Rate would be 5%.

 

Our views on the issue can be accessed on the given link-https://gst-online.com/taxability-of-supply-of-food-stuck-between-supply-of-service-or-sale-of-goods/ (Article was written on December 10, 2018 wherein AAR has rendered the judgement in case of Kundan Mishthan Bhandar but Judgement of AAAR in the given matter was awaited)

The issue would take a long to settle.

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