The Bombay High Court recently dismissed a petition filed by Indian Hotels and Restaurant Association (IHRA), comprising 2,000 air-conditioned restaurants (AC) serving foreign liquor in the city, challenging the levy of service tax by the central government.
The court’s decision means that patrons at AC restaurants serving alcohol will continue to have to pay 30 per cent service tax on their bills.
The association, that also includes 500 restaurants outside the city, had challenged the constitutional validity of a clause under section 65(105) of the Finance Act, 2010, under which such restaurants were held eligible for the levy of service tax.
According to the IHRA, they already paid the state government-levied Value Added Tax (VAT) on the sale of food and alcohol served in their premises. While the VAT was levied on 100 percent of the bill amount, the Union Finance Ministry had sought to impose service tax on 30 percent of the bill amount.
“The net result is that two taxes are recovered in respect of the same service,” the IHRA’s counsel argued. A circular issued by the Centre on February 28, 2011, prior to introducing the Finance Bill, 2011, clarified that restaurants provide a number of services in combination of meal and beverages for consolidated charge. These include: use of restaurant space and furniture, air-conditioning, well-dressed waiters, linen, cutlery , crockery and music on a the dance floor.
Additional solicitor-general Kevic Setalvad argued that the state has been given the power to legislate in the matter of manufacture, possession,transport,purchase and sale of intoxicating liquors and sale and purchase of goods, but there is no restriction on the Parliament to legislate in relation to levy of a tax on services provided by high-end restaurants that are air-conditioned and have the license to serve liquor.
“The fact that the tax on sale of goods (food and beverages) involved in the said service can be levied, does not mean that the service tax cannot be levied on the service aspect of catering,” the court observed. The court stated that the Supreme Court, in its earlier decisions, does not rule out, but rather permits imposition of a tax on service even if during rendering of the same, the sale of goods takes place.