Shaleen Shah[By Shaleen Shah (Partner), VNCA]
The Kerala High Court recently declared the imposition of service tax by the Centre on supply of food and beverages by restaurants and services of lodging provided by hotels as "unconstitutional".
A single bench of Justice AM Shafique passed the order while allowing a batch of petitions filed by the Kerala Classified Hotels and Restaurants Association, challenging the imposition of service tax.
The Kerala High Court, relying on the Supreme Court decision in K Damodarasamy Naidu & Bros, held that the Constitution empowers the state government to impose tax on supply of food and beverages whether it is by way of service or as a part of a service. Such transfer delivery or supply is deemed to be a sale of those goods and the provision of service is only incidental to such sale. Accordingly, it was held that the price paid by the customer for supply of foods in a restaurant cannot be split up.
Again, the Constitution exclusively empowers the State Government to impose tax on `luxuries’. Relying on another landmark decision of the Supreme Court in Godfrey Phillips India Ltd, wherein the apex court defined the word `luxuries’ as the activities of enjoyment of or indulgence in that which is costly or which is generally recognised as being beyond the necessary requirements of an average member of society. Keeping in view of the extended meaning of luxuries provided by the apex court, the high court was of the view that by imposing service tax on hotels, etc, the central government has departed from its Constitutional mandate and accordingly, liable to be held unconstitutional.
It also said that if any payment was made by the petitioners on the basis of amendment to Finance Act, they were entitled for a refund.
The court verdict has come as a shot in the arm for hoteliers in other States, who have been raising a hue and cry over the levy of tax demanding its immediate withdrawal.
Members of the South Indian Hotels and Restaurants’ Association (SIHRA) have decided to take a cue from Kerala and move their respective High Courts on the issue. Such Associations of other states may not lag behind.
