Food delivery gained prominence in the period of World War II when the Women’s Volunteer Service in the United Kingdom delivered food to homes that had been bombed and ravaged in such a manner. This has today evolved to such an extent that the internet consists of a directory of all restaurants and the like, that would deliver in a particular area as well as the option to choose what is to be delivered online. India also has taken to this system very well where food is being delivered by big and small eateries, pizza shops and so on. Take away is when the customer gets his food packed and takes it himself, as opposed to being delivered to him by the restaurant personnel.
Composite Services with Food Served at Restaurants
A service tax is what is paid by the provider of any service to the Government of India. However, since it is an indirect tax, the provider can shift the burden to the consumer of the same. Though service providing and sale of goods are markedly different, some such as food served in restaurants are known as “composite service” since not only the goods i.e. the food is being purchased by the customer but there also the services being availed by them. It is impossible to demarcate the goods and the services in such a case since they go hand in hand. The government deals with these by announcing abatement schemes charging service tax only on a certain portion of the bill.
According to the Customs, Excise and Service Tax Appellate Tribunal (cestat) and several of its decisions, a ‘composite service’ is a combination of different taxable services. When a food is served in a restaurant, not only the food itself taxable to sales tax, but the whole environment created is a part of the dining process. When a restaurant offers air conditioning, skilled and polite waiters, music or television viewing facilities, other forms of entertainment, feedback and complaints mechanism etc., all count as services offered by the restaurant to enhance the experience of visiting that particular place. This may as well be in competition from other restaurants, but it is nonetheless a gamut of services that the restaurant undertakes to provide along with quality food. Thus, it is a set of several services or composite service along with the sale of the food itself.
Before the budget was passed for the financial year 2012-13, the Act stated that service tax would be applicable only in case a restaurant offered air conditioning or central- heating along with their food or beverages and had License to serve alcoholic drinks as in S. 65(105)(zzzzv) of the Finance Act, 2010. However, since July 1st, 2012 the second condition i.e. Licence to sell alcohol has been removed and restaurants satisfying simply the first condition are eligible to be paid service tax through what was called, the “Mega Exemption Notification”.
Cases Determining the Service Tax Applicability of Restaurants
In the case of Vishwavihar Bar & Restaurant v. State of Maharashtra, this condition in S. 65(105) (zzzzv) was challenged as unconstitutional under clause (29A) of Article 366 of the constitution. It was contended that when a customer pays the bill for an item of food he chooses to buy, it is not of any relevance whether it is a service or a part of a service. The customer is only interested in the food. The petitioners gave an example of a patron of a fancy restaurant who pays a certain price for a cheese sandwich despite knowing that the ingredients do not cost so much that it be priced so high. Thus, they contended that since the food is chargeable to sales tax and the food items and services along it are indivisible, it should not be chargeable for service tax under the relevant section of the Finance Act.
In the case of State of Punjab v. M/s Hotels of India Ltd., which was referred to in the case mentioned above, it was held by the Supreme Court of India that the residual power of the State under Entry 97, List I does not extend to splitting of transaction in two parts, one for sale of goods and one for service to be able to levy service tax. In this case the respondents contended that they weren’t liable for sales tax for the food they served to their lodgers because these meals were incidental to the rooms they provided to them and the purpose was to make them stay and not make sales of food. Thus, the contention was that the services offered at their hotel were a complete whole and indivisible for the purpose of taxation.
In fact the case of 20th Century Finance Corporation Limited and another v/s State of Maharashtra, was cited in the present case to contend that a tax on supply by way of service or as a part of service of food or any other article for human consumption or any drink, is within the exclusive power of the State Legislature under Entry 54 of the State List.
The Respondents on the other hand in Vishwavihar Bar & Restaurant v. State of Maharashtra, cited the case of Tamil Nadu KalyanaMandapam Association v/s Union of Indiaand stated that the judgment of the Supreme Court analyzed all the Entries and relevant Articles of the Constitution of India and held that a tax cannot be struck down on the ground of lack of legislative competence by inquiring, whether, the definition accords with the layman’s view of “service”. A levy of service tax on a particular kind of service cannot be struck down on the ground that it does not conform to a common understanding of the word “service” so long as it does not transgress any specific restriction contained in the Constitution of India. It was submitted by the respondents that Article 366(29A) and specially sub-clause (f) thereof cannot be interpreted to mean that there was waiver/ exclusion of the Parliament’s right to levy service tax on the transactions/ dealings of the nature referred to in the present Writ Petition. The respondents therefore said that the Honourable Supreme Court has consistently held that merely because the State Legislature is competent to impose a tax on sale, does not take away the competence of the Parliament to impose tax on service component.
In the end, the court did uphold the respondents’ view that service tax can be imposed on restaurant services and dismissed the petition stating that there was not enough merit in the petitioner’s arguments. Thus, service tax was held to be valid on the food served in restaurants based on the conditions in the Finance Act.
Abatement Scheme of Service Tax Liability
Service tax is applicable on 40% of the bill of a customer since that portion is seen as providing of services such as quality of waiter, food service, air-conditioning etc and 60% abatement is allowed on restaurant services. Thus, at current rates (since 2016) a restaurant goer will have to pay 15%(including 0.5% Swachh Bharat Cess and 0.5% KrishiKalyanCess) on 40% of his bill as service tax if the restaurant is air-conditioned.
In case of home delivery then, the service that is mandatory for tax chargeability i.e. air conditioning or central heating, is not availed at all by the consumer. Therefore, it would be right to exempt service tax for food that is delivered to homes or taken away by the customers. In fact, the letter dated 28.11. 2011 of the Tax Research Unit (TRU) in paragraph 1 of Annexure A states–
“Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion,garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.”
Thus, it would seem that only in-restaurant services ought to be taxed and not home delivered or take away food of customers. However, since there were no explicit instructions regarding the chargeability or non-chargeability of service tax on take-away or home delivered food, restaurants continued to extract such taxes from the consumers on their purchase.
Trade Notice of the Chandigarh Commissionerate
It was in the case of M/S Apex Restaurants Pvt Ltd V/S Central Excise Department of Chandigarh where it was clarified that the food which was delivered at home as free delivery without any of the other emoluments will not be covered under the definition of service and hence no service tax liability will arise.
The Service Tax Department of Chandigarh vide its letter C.No. ST-20/STD/Misc./Sevottam/62/12/4693 dated August 13, 2015 (“the Clarification”) has clarified that free Home delivery/ Pick-up of food is not liable to Service tax.” The dominant nature of the transaction is that of sale and not service as the food is not served at the restaurant and further no other element of service which is available at the restaurants, be it ambience, live entertainment if any, air-conditioning or personalized hospitality is offered,” the clarification stated.
Since the clarification regarding service tax on delivered food is a very recent one, there haven’t been any noted disputes before the courts on such subjects.
Repercussion of the Notice
The National Restaurant Association of India (NRAI) has been prompted by the notification to seek a written clarification on the applicability of service tax on home delivery of food from the finance ministry.
The Secretary General of the NRAI, a body with a diversified membership all over India, of more than a thousand, including large restaurant chains as well as owners of single restaurants, stated that the opinion of the CBEC was sought to be clarified. The Secretary General said that based on prior discussions, the members of the Association were informed that service tax was applicable to all formats, including home delivery and take away. In pursuance of this, written clarification regarding applicability was sought so that the members do not contravene any law. Thus, a notification or circular issued by the Finance Ministry at the earliest would be of help among other things, in determining the uniformity of its applicability throughout the country and not just within the territory pertinent to the clarification by the Chandigarh Commissionerate.
However, this absence of liability towards service tax on delivered or take away food is only available if the services are rendered free of cost. If there is a delivery charge, then such services are being rendered at a certain expense and thus, service tax liability extends to the extent of the delivery charge.
Thus, a clear declaration by the Finance Ministry is required to understand its position on the applicability of service tax on the home delivery or take away services offered by restaurant. However, as status quo exists, it is understood that unless the restaurant extracts a pay for such services rendered it is not required to collect or deposit service tax with the government as has been understood subsequent to the Chandigarh Commisionerate’s clarification. What is left to do is extend its applicability to all the appropriate territory.
Thus, once established that a restaurant is not simply ‘selling’ food but also ‘serving’ food and is hence liable towards service tax it is important to understand what connotes a taxable service. If a restaurant is undertaking expenses in order to install and operate air conditioners for the customers, the law sees it as a taxable service. When the restaurant decides to deliver food to the homes of the customers or allows them to pack the food and take it away then they cannot extract tax towards the air conditioner for them because they have no use for it.
When there was no law regarding the same, restaurants continued to extract service tax for delivered or take away food which was a point of concern for customers who weren’t even availing these service.
The clarification of the Chandigarh Commissionerate provided for the necessary rules regarding this tax and stated clearly that it cannot be extracted when free delivery services are offered. This made it amply clear that all extra services ordinarily chargeable aren’t available when a customer chooses not to eat at the restaurant and hence not available for taxation as is correct. When a customer is not using the waiter’s services or the entertainment of the restaurant, he should not be taxed for it. Thus, the clarification has gone a long way in giving clarity to service tax applicability.
However, the Chandigarh Commissionerate consists of the Union Territory of Chandigarh, Himachal Pradesh and parts of Punjab in its jurisdiction only, so the rule regarding service tax will be applicable in these regions only. The same rule is not available for the rest of India outside the jurisdiction of the Commissionerate. This means that the lacuna can be exploited by restaurant owners unless some explicit rule is made soon. This makes it imperative for the Finance Ministry to make a clarification in this regard as soon as possible to prevent delivered and takeaway food from continuing to be subject to service tax.
Thus, there ought to be clearly spelled-out tax rules for free as well as charged food delivery and takeawaymade applicable throughout the territory of India.
 Karan Batra, All about Service Tax & new tax rate @ 14.5% , http://www.charteredclub.com/what-is-service-tax-and-current-rates-of-service-tax-in-india/, (2016)
 (1972) 1 SCC 472
(2000) 6 SCC 12
AIR 2004 SC 3757
 Para 28 reported at http://indiankanoon.org/doc/142023456/
DarshitMashru, Service tax on Restaurant Services-Home Delivery Valuation, http://www.simpletaxindia.net/2013/12/service-tax-on-restaurant-service-home.html#axzz43RnYhNpN (December 10, 2013)
Yash Shah, No Service Tax on Free Delivery of Goods, http://caknowledge.in/no-service-tax-on-free-home-delivery-pick-up-of-food/ (December 29, 2015)
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3rd yr B.A.LL.B (Hons),
Hidayathullah National Law University,
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