1. Dispute regarding the State's entitlement to levy sales tax on the supply of food and drink under the Constitution and various State Sales Tax Acts. (Para 1 , 5 , 6 )
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1999 Supreme(SC) 1205
SUPREME COURT OF INDIA
B.N.Kirpal : D.P.Mohapatra : N.Santosh Hegde : S.P.Bharucha : V.N.Khare
K.Damodarasamy Naidu And Bros
Versus
State Of Tamil Nadu
Case No. : 1416 of 1990
Date of Decision : 10/12/99
Advocates Appeared: Adhyaru Yashank Praveen : Arvind S. : Bagga Shurestha : Balachandran V. : Bery Tania : Bhasme A.S. : Bhasnic A.S. : Chaudhary Arpita Roy : Chaudhary Sanjay : Dholakia S.K. : Goburdhan D. : Goel A.K. : Gulati Kavin : Gupta Amita : Gupta Nina : Jagadeesan Senthil : Jain Neeraj Kumar : Jain P.K. : Jaiswal Kamini : Krishnamurthy V. : Kumar K.Ram : Kumar T.Harish : Kumar Vineet : Mahto R.B. : Mariarputham A. : Mishra R.B. : Mohalik K.K. : Mohanty Debasis : Mukherjee D.P. : Nambiar K.R. : Nariman R.F. : Parameswaran P. : Parasaran K. : Parmeshwaran P. : Ramasubramaniam V. : Rao B.Sunita : Rao C.V.Subba : Rao Y.Subba : Salve Harish N. : Satinarayan : Sen B. : Sethi G.B. : Sidharth C. : Singh Khawairakpam Nobin : Singh Swati : Sinha S.P. : Sirur Urmila : Sridhar B. : Srinivasan S. : Terdal S.N. : Tripathi Neelima : Tripathi P.P. : Vaidyanathan C.S. : Veerappa M. : Verma R.C.
The supply of food and drink in restaurants is a deemed sale taxable on the total price. For composite hotel charges, specific rules for apportionment are required. A Constitution Amendment cannot retrospectively validate a state tax if the state legislation lacked the enabling provision.
Headnote:(A) Constitution - Article 366(29A)(f) - Entry 54, List-II, Seventh Schedule - State Sales Tax Acts - Levy of tax on supply of food and drink - The supply of food and drink, whether by way of service or as part of a service, is deemed to be a sale. The price paid by a customer for food in a restaurant cannot be split into service and food components; the total amount charged for the supply is subject to tax. (Para 9)
(B) Composite charges for lodging and boarding - Where a residential hotel levies a composite charge for lodging and boarding, tax on food and drink can only be imposed on the component relating to the supply of food. To avoid arbitrariness in assessment, the State must frame rules providing formulae for determining this component. (Paras 11-14)
(C) Retrospective validation - Section 6 of the Constitution Amendment Act - The central legislature, while amending the Constitution, cannot amend State Acts. The validation clause in the Constitution Amendment Act validates State laws only if those laws already contained provisions entitling the State to levy tax on the supply of food and drink. It does not create a taxing power where none existed in the State legislation. (Paras 20-21)
Facts of the case:
Restaurant and hotel owners challenged the levy of sales tax on food and drinks. Some argued that the total bill should be split between service and food. Others challenged the retrospective application of tax prior to specific amendments in State Sales Tax Acts, relying on a validation clause in a Constitution Amendment Act. In the case of residential hotels, composite charges for lodging and boarding were being taxed without a clear formula for apportionment.
Findings of Court:
The court held that for restaurants, the total price charged for food is taxable regardless of incidental services. For residential hotels, composite charges require a formulated rule for splitting lodging and boarding to prevent arbitrary assessment. Retrospective taxation is invalid if the State Act lacked the specific provision, as a Constitution Amendment cannot override the exclusive legislative power of States to amend their own tax laws.
Issues: 1. Whether the price of food in restaurants can be split into service and food components for tax purposes. 2. Whether composite charges for lodging and boarding can be taxed without specific rules for apportionment. 3. Whether a central validation clause in a Constitution Amendment Act can retrospectively validate a tax levy in the absence of a corresponding provision in the State Sales Tax Act.
Ratio Decidendi: Under Article 366(29A)(f), the supply of food/drink is a deemed sale; the total consideration paid is the taxable base. For composite services, administrative rules are necessary to ensure non-arbitrary assessment of the taxable component. The constituent power to amend the Constitution does not extend to amending State statutes; thus, validation clauses only apply to existing State laws.
Result: Appeals and writ petitions against certain States dismissed. One State directed to frame rules for composite charges; levy prior to 2/02/1983 declared bad in law for two States.
Legal Category Hierarchy
Table of Contents
2. Whether tax on restaurant meals should be split between food and service, and whether retrospective validation allows taxing without specific State law provisions. (Para 7 , 8 , 11 , 15 , 19 )
3. The supply of food in restaurants is taxable on the total price charged; composite hotel charges require specific rules for assessment to prevent arbitrariness. (Para 9 , 13 )
4. Constitutional amendments validating taxes on food supply do not retrospectively amend State Acts to create taxing powers where no such provision existed in State law. (Para 21 )
5. Petitions dismissed; Maharashtra directed to frame rules for composite hotel charges; sales tax levies prior to 2/02/1983 in Maharashtra and Uttar Pradesh declared invalid. (Para 14 , 21 , 23 , 24 )
6. Is the tax on food served in restaurants levied on the total price or only the cost of ingredients?
The tax is levied on the total price the customer pays for the supply of food, regardless of whether the supply is part of a service or includes costs for decor and amenities. (Para 9 )
7. How should sales tax be assessed for composite charges covering both lodging and boarding in residential hotels?
Tax is imposed only on the component relating to food and drink; however, the State must frame rules providing formulae for such assessment to avoid arbitrariness. (Para 12 , 13 , 14 )
8. Does Section 6 of the Constitution Forty-sixth Amendment Act retrospectively enable States to tax food supply if the State Act lacked such provisions?
No. Section 6 validates existing State laws that already provided for such taxes but cannot be construed as amending State Acts to create taxing powers where none existed. (Para 20 , 21 )
JUDGMENT
S.P. Bharucha, J.
(1) THE issues in these appeals and writ petitions relate to the entitlement of the State to levy tax on the sale of food and drink. Entry 54 of List-II of the Seventh Schedule to the Constitution empowers the State to levy "taxes on the sale or purchase of goods other than newspapers subject to the provisions of entry 92A of List-I." (Entry 92A of List-I deals with taxes on the sale or purchase of goods in the course of interstate trade or commerce and does not concern us here).
(2) IN the decision in State of Punjab v. M/s Associated Hotels of India Ltd., 1972(2 SCR 937, this court considered the plea of Associated Hotels of India Ltd., which ran the Cecil Hotel in Shimla, that it was not liable to pay sales tax in respect of meals served to guests who came there to say. Posing the questions, what was the nature of the transaction and the intention of the parties when a hotelier received a guest in his hotel and was there in that transaction an intention to sell him the food contained in the means served to him during his stay, this court held that the transaction was essentially one and indivisible, namely, to receive customers in the hotel to stay. Even if the transaction was to be disintegrated, there was no question of the supply of meals during such stay constituting a separate contract of sale since no intention on the part of the parties to sell and purchase food-stuff supplied during meal times could realistically be spelt out. The transaction, essentially, was one of service by the hotelier, in the performance of which meals were served as part of and incidental to that service, such amenities being regarded as essential in well conducted modern hotels. Such amenities, including meals, were part and parcel of service, which was in reality the transaction between the parties. The Revenue, therefore, was not entitled to split 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-stuff served.
(3) THE case of Northern India Caterers (India) Ltd. v. Lt. governor of Delhi, 1978(4) SCC 36, dealt specifically with the levy of sales tax upon the service of meals to casual visitors in a restaurant. The question was whether the service of meals to non resident customers in the appellants restaurant constituted a sale of food stuff. This court said that the view taken in the case of Associated Hotels of India Ltd. indicated the approach to the question. This court considered the origin and historical development of the institution of a restaurant and found it akin to what, historically, was an inn. An innkeeper or hotelier "does not lease his rooms, so he does not sell the food he supplies to the guest. It is his duty to supply such food as the guest needs, and the corresponding right of the guest is to consume the food he needs, and to take no more. Having finished his meal, he has no right to take food from the table, even the uneaten portion of food supplied to him, nor can he claim a certain portion of food as his own to be handed over to another in case he chooses not to consume it himself. The title to food never passes as a result of an ordinary transaction of supplying food to a guest," This principle, put in the words of Professor Beale, had been extended in England to the service of food at restaurants. The restaurateur was regarded fundamentally as providing sustenance to those who ordered food to eat in the premises. Like the hotelier, the restaurateur provided many services in addition to the supply of food. He provided furniture and furnishings, linen, crockery and cutlery and, perhaps, music, a dance floor and a floor show. The court held, accordingly, that the service of meals to visitors in the appellants restaurant was not liable to sales tax and this was so whether the charges were imposed for the meals as
