Levy of Service tax on services provided by AC restaurants and hotels held to be unconstitutional by Kerala HC

This Tax Alert deals with the recent Kerala High Court decision in the case of UoI & Ors. vs. Kerala Bar Hotels Association & Ors. [TS-501-HC-2014-(KER)-ST].

The issue before the Division Bench in this writ appeal was whether the Parliament is competent to impose tax on the services provided by an air-conditioned restaurant and services provided by hotels, inns etc. in relation to providing of accommodation.

The Division Bench of the Kerala High Court held that the levy of Service tax by the Parliament on the said transactions is unconstitutional as such transactions were enumerated in List II (State List) and therefore, only the States have the legislative competence to impose tax on such transactions.
It was held that even the service part involved in the supply of food and beverages is deemed as a sale to enable the States to impose tax thereon. Hence, having characterised constitutionally the subject matter of supply of food in a restaurant, including the service part of it, as a sale, the Parliament cannot characterise the same transaction as a service for imposition and levy of Service tax.
The Kerala High Court has differed from the decision of the Bombay High Court in the case of Indian Hotels and Restaurant Association & Anr. vs. UoI & Ors. wherein the levy of Service tax on the services rendered by restaurants under clause (zzzzv) of section 65(105) of the Finance Act, 1994 was held to be constitutionally valid.