Delhi High Court also strikes down Section 65(105)(zzzw) of the Finance Act, 1994
The division bench of the Delhi High Court in a landmark decision, struck down section 65(105)(zzzw) of the Finance Act, 1994 by holding that the Parliament lacks competence to levy service tax on short-term accommodation in hotels etc which is clearly covered under List II of the seventh schedule of the Constitution.
The Court was considering a writ petition filed by Federation of Hotels and Restaurants Association of India challenging the validity of sections 65(105)(zzzv) and 65(105)(zzzw) of the Finance Act, 1994.
While nullifying sections 65(105)(zzzw), the Court retained section 65(105)(zzzw) by observing that it is enacted within the powers conferred under the Union list.
The petitioners challenged the constitutional validity of sections 65(105)(zzzv) and 65(105)(zzzw)of the Finance Act, 1994. Section 65(105)(zzzv)was inserted to levy service tax on serving food or beverage, including alcoholic beverages or both in the premises of restaurants having the facility of air-conditioning in any part of its establishment.
Section 65(105)(zzzw) imposes service tax on 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.
The Petitioners contended that the levy of service tax on “sale of goods” is unconstitutional since the only the State legislature is competent to impose tax on the said item. The “sale of goods” are covered by Value Added Tax levied by the respective state legislatures. The petitioners 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), which is beyond the legislative competence of the Parliament.The petitioners further challenged section 65(105)(zzzw)on ground that the power to impose tax on luxuries including taxes on entertainment, amusement, betting and gambling lies on the State legislatures under Entry 62 of List II.
The division bench comprising of Justice S Muralidhar and Justice Najmi Waziri refused to accept the contention of the petitioners that s.65(65)(zzzv) is unconstitutional and observed that “The Parliament has further made the legal position explicit by inserting Section 66 E (i) of the FA read as it were with Section 65 (22) and 65 (44) of the FA. It 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 as explained in the aforementioned decisions of the Supreme Court.”
On the second question raised by the Petitioners that section 65(105)(zzzw) is unconstitutional, the Court found that the term luxury provided in a hotel” as defined under Section 2 (i) of the Delhi Tax Luxuries Act, 1996 (‘DTL Act’), includes “accommodation and other services provided in a hotel, the rate or charges for which including the charges for air-conditioning, telephone, radio, music, extra beds and the like, is five hundred rupees per room per day or more; however, the supply of food, drinks or other services which is separately charged for”are out of the ambit of the said section.
Further, 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.”The Court opined that the combined reading of the above two provisions makes it difficult to discern any real difference in the subject matter of the two levies.
“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 thesubject matter of both levies viz., luxury tax under the DTL Act and service tax under the FA.”
The Court further noticed the decision in International Tourist Corporation v. State of Haryana in which it was held that 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.”
Following the above decision the Court observed that “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.”
While invalidating section 65(105)(zzzw), the Court noted that “It is, therefore, plain that there is not merely an overlap of luxury tax and service tax as far as accommodation provided in hotels is concerned. It is in fact the same levy but by different statutes: one enacted by the State and the other by the Union. This is indeed an instance of encroachment by the Union into a field that is completely covered by a State legislation.”
In view of the above the Court struck down the said section on ground that the provision of short-term accommodation in hotels etc. covered under the said section is included in the State list and therefore, the levy of service tax on such item is out of the legislative power of the Parliament.
Read the full text of the Judgment below.
