No Service Tax on Short Term Accommodation in Hotel

Service Tax on restaurants levied under Section 65(105)(zzzzv) or Section 66E(i) of the Finance Act, 1994 is constitutional and rule 2C of the Service Tax (Determination of Value) Rules, 2006 determining value of service portion at 40 per cent of amount charged is also valid/constitutional; however, if assessee maintains records determining actual value of service portion, then, rule 2C cannot be applied

Service Tax : Service Tax on 'short-term accommodation' under Section 65 (105) (zzzzw) of the Finance Act, 1994 is unconstitutional, as it falls in domain of States under word 'Luxuries' of State List of Constitution

I. Restaurant Services
• 66E(i) of the Finance Act, 1994 states that 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" is a 'declared' service. The legislative carving out of the service portion of the composite contract of supply of food and drinks has sound constitutional basis.

• Rule 2C of the Service Tax (Determination of Value) Rules, 2006 enables the assessing authority to put a definite value to the service portion of the composite contract of supply of goods and services in an air-conditioned restaurant. Correspondingly there is an abatement for that portion which pertains to the supply of goods in the form of food and drink which would be amenable to sales tax or value added tax. It also requires to be kept in mind that the ready reckoner formula is useful where an assessee does not maintain accounts in a manner that will enable the assessing authority to clearly discern the value of the service portion of the composite contract. It hardly needs emphasis that when during the course of assessment proceedings an assessee is able to demonstrate, on the basis of the accounts and records maintained by it for that purpose, that the value of the service component is different from that obtained by applying Rule 2C the assessing authority would be obliged to consider such submission and give a decision thereon. With the machinery provision for the levy and determination of service tax on the service portion clearly being spelt out in the Rules themselves, the legal requisites stand satisfied.
No Service Tax on Short Term Accommodation in Hotel

• A perusal of one of the bills reveals that —

■  of the total sale of food for Rs. 2300,
■ tax (i.e. VAT) is levied @ 12.5% and works out to Rs. 287.50,
■ service tax is @ 4.94% which works out to Rs. 113.71. An abatement has been provided in the rate of service tax. Where the service tax should be @ 12.36% it is, after abatement, 4.94%.

• Therefore it is not right that the measure of tax is the same. This is notwithstanding the settled legal position that value of taxable service is not determinative of the character of the levy.

II. Short-term accommodation services
• Section 65(105)(zzzzw) contemplates a service provided "to any person by a hotel, inn, guest house, club or camp-site by whatever name called, for providing of accommodation for a continuous period of less than three months." When the above definition is placed alongside the above extracted provisions of the Delhi Tax on Luxuries (DTL) Act, it is difficult to discern any real difference in the subject matter of the two levies.

• In other words, what is defined under the DTL Act of 1996 is an identical service of providing accommodation in a hotel. The only additional pre-fix in the FA is the hyphenated word "short-term" in Section 65 (105) (zzzzw) followed by the expression "for a period of less than three months". However, such provision of short-term accommodation of less than three months is by no means exempt from luxury tax under the DTL Act. The very same taxable event of providing service by way of accommodation in a hotel etc. is the subject matter of both levies viz., luxury tax under the DTL Act and service tax under the FA.

• Consequently Section 65 (105) (zzzzw) of the FA fails the foremost test of constitutionality of a Union tax that "before exclusive legislative competence can be claimed for Parliament by resort to the residuary power, the legislative incompetence of the State legislative must be clearly established." Here the DTL Act which provides for levy of luxury tax on provision of the service of accommodation in a hotel etc. is traceable to Entry 62 of List II and the State is therefore competent to levy and collect luxury tax on such taxable event.
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