JUDGMENT

S. Muralidhar, J. The challenge in this petition under Article 226 of the Constitution of India is to the constitutional validity of Section 65 (105) (zzzzv) of the Finance Act 1994 (FA) whereby the provision to any person by a restaurant, by having the facility of air-conditioning in any part of its establishment serving food or beverage, including alcoholic beverages or both, in its premises has been made amenable to service tax. Also challenged is the constitutional validity of Section 65 (105) (zzzzw) of the FA whereby the provision by a hotel, inn, guest house, club or camp-site by whatever name called to any provision, accommodation for a continuous period of less than three months has been made amenable to service tax.

1.2. The additional prayers in the writ petition are for a declaration that Section 66 E (i) of the FA to the extent it seeks to constitute a service portion in an activity of supply of food or other articles as `declared service' to be bad in law. The Petitioners seek a declaration that Rule 2C of the Service Tax (Determination of Value) Rules, 2006 is invalid.

Profile of the Petitioners

2.1. Petitioner No.1 is the Federation of Hotels and Restaurants Association of India, a registered association whose members are a number of hotels spread all over the country. Petitioner No.2, the Leela Palace, Chanakya Puri, New Delhi is a unit of Hotel Leela Venture Limited which runs 5-star hotels all over the country. Petitioner No.3 is Rodeo, a restaurant which is part of the chain operating in the National Capital Territory of Delhi.

2.2. Several members of the Petitioner No.1 Association run hotels which provide both lodging and meals to the residents. They also operate air-conditioned restaurants where meals are served to non-residents and casual visitors. Many of the hotels have licence to serve liquors in such restaurants. Some of the members of the Petitioner No.1 Association operate only air-conditioned restaurants, serve meals to the visitors and also have licence to serve liquor.

Case of the Petitioners

3. The case of the Petitioners in short is that after Constitution (Forty-Sixth Amendment) Act, 1982 which inserted clause 29A (f) in Article 366 defining `tax on sale or purchase of goods' to include 'a tax on the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration', all aspects of the transaction of sale of food and beverages by the members of Petitioner No.1 to their customers fell within the meaning of 'sale of goods' amenable to sales tax i.e. value added tax (`VAT') levied by taxing statutes of the States. It is submitted that the provision of food and beverages in a restaurant, even where it forms part of a hotel which provides lodging and meals is covered entirely by Entry 54 of List II read with Article 366 (29A) (f) and, therefore, it is only the State legislature that has the exclusive competence to legislate in respect of levy of tax on such sale or purchase of goods. It is contended that no part of the transaction of supply of food in a restaurant or hotel is now left out for being made amenable to service tax levied by a statute enacted by Parliament. Thus it is submitted that Section 65 (105) (zzzzv) of the FA is beyond the legislative competence of Parliament.

4. Further, it is pointed out that under Entry 62 of List II (State List) the States are empowered to impose tax on luxuries including taxes on entertainment, amusement, betting and gambling. In fact State Legislatures have enacted statutes in terms of which luxury tax is levied on hotel accommodation. It is submitted that the entire amount paid on provision of accommodation by hotels is also a matter falling exclusively in the State List. Therefore, the constitutional validity of Section 65 (105) (zzzzw) of the FA the above provision whereby Parliament seeks to levy service tax on a transaction which is completely covered by Entry 54 of List II