AUGUST 22, 2016

By Bharat Bhushan, Advocate

PRESENTLY, accommodation provided by a Hotel, Inn, Guest House, etc. having declared Tariff of a room @ Rs. 1000/- per day or above attracts Service Tax. The Hon'ble High Court of Delhi in its judgment dated 12th August, 2016 in Federation of Hotels and Restaurants Vs. Union of India, W.P.(c) No. 6482 of 2011 - 2016-TIOL-1730-HC-DEL-ST, struck down the levy as beyond legislative competence of Parliament. Now, the question is whether Service Tax has to be collected and paid on room rent or not. If the said judgment is followed and Service Tax is not collected and deposited, and on a later date, it is found that the said judgment was not binding, then the Assessee would be liable to pay Service Tax from his pocket along with interest.

The Hon'ble High Court has given two reasons for the said judgment. The first one is that the tax on providing accommodation in Hotel etc. is covered under "Tax on Luxuries" as contemplated under Article 246 read with entry 62 of State List and, therefore, Parliament lacks the legislative competence to levy Service Tax under residuary powers. The Hon'ble High Court compared the provisions contained in Delhi Tax on Luxuries Act, 1996 and the provisions imposing Service Tax and came to the conclusion that subject matter of both the levies i.e. Luxury Tax and Service Tax are the same.

The Hon'ble High court has stated that in the counter affidavit, the Government has simply asserted that Service Tax is a levy that is distinct from luxury tax levied by the States, but the basis for this assertion is not set out. From these observations, it is clear that the Government had failed to bring to the notice of the Hon'ble High Court that an identical issue had been decided by Hon'ble Supreme Court in Federation of Hotel & Restaurant Association Vs. Union of India, - 2002-TIOL-699-SC-MISC-LB, in favour of revenue.

In Federation of Hotel case (supra), the Constitutional validity of the Expenditure Tax imposed by Expenditure Tax Act, 1987 was challenged. The Union Parliament had imposed the said Tax by exercising its residuary powers of legislation as in the case of Service Tax. The levy was on hotel accommodation having room rent @ Rs. 400/- per day and above. In that case also the challenge was that the subject matter of levy is identical to the subject matter of levy of Luxury Tax imposed by State Governments and hence beyond the legislative competence of Union Parliament. The Hon'ble Supreme Court, to determine this question, propounded "the Aspect Theory" and held that the same transaction may have different taxable aspects. The Hon'ble Supreme Court held that the expenditure is a different aspect than the luxury which is within the legislative competence of state legislatures. On this basis,the Hon'ble Supreme Court upheld the Constitutional validity of Expenditure Tax Act.

The instant case also has two aspects. One is tax on luxuries and the other is tax on services. And it is nobody's case that the State has power to levy tax on Services. Therefore, the instant case is squarely covered by the said judgment of Hon'ble Supreme Court. If the facts of the said case before the Hon'ble Supreme Court would have been brought to the notice of Hon'ble High Court, the decision could have been different. Thus, the said judgment has failed to consider ‘the Aspect Theory' propounded by the Hon'ble Supreme Court in identical case, in case of the very same parties. Therefore, the said judgment of Hon'ble High Court being sub silentio has no binding effect.

The second reason given by the Hon'ble High Court for striking down the levy is that the exemption from Service Tax on the provision of accommodation for a room having a declared tariff of less than Rs.1000/- per day is by Notification No. 12/2012-ST dated 17th March, 2012 and is not provided in the Act or the Rules. The Hon'ble High Court held that the machinery provisions could not be provided by instructions and circulars which are not backed by any authority of law. In this regard it is humbly submitted that the Hon'ble High Court failed to appreciate that the Notification No. 12/2012-ST was not any administrative instruction or circular, but a piece of delegated legislation passed under the authority of Section 93 of the Finance Act, 1994. The Hon'ble High Court also failed to appreciate that there is no material difference between an Exemption Notification and the Rules, both being issued under the authority of the parent Act.

The Hon'ble CESTAT in Dr. Reddy's Laboratories Ltd. Vs. Commissioner, - 2013-TIOL-934-CESTAT-BANG, placing reliance on the judgment of Hon'ble Andhra Pradesh High Court in K. Srinivas Rao Vs. State of A. P., W.P. No. 14175/2002, held that the doctrine of per-incuriam is applicable against a judgment rendered in ignorance of any statutory provisions. The High Court had observed - The rule apparently applies even though the earlier court knew of the statute in question, if it did not refer to, and had not present to its mind, the precise terms of the statute. Similarly, a court may know of the existence of a statute and yet not appreciate its relevance to the matter in hand; such a mistake is again such incuria, as to vitiate the decision.

Thus, the first reason given by the Hon'ble High Court is contrary to the judgment of Hon'ble Supreme Court, which is law of the land, in terms of Article 141 of the Constitution and the other reason is merely a wrong appreciation of the legal position of an Exemption Notification. Therefore, the said judgement is nothing but per-incuriam and has no binding force.

Assuming that the said judgment of Hon'ble Delhi High Court is binding, then the next question is whether the same is applicable to the whole of India or only within its territorial jurisdiction. As per one school of thought, if a provision of a central Legislation is struck down then the said provision stands omitted from the Statute altogether and hence nothing is left for other High Courts to decide upon. This thought was followed by some High Courts including Hon'ble High Court of Karnataka in Shiv Kumar Vs. Union of India, W. P. No. 13172 of 2012. Accordingly, such a judgment of a High Court is applicable throughout the country.

The other school of thought is based upon two settled legal propositions. One is that the judgment of one High Court will have only persuasive value beyond its territorial jurisdiction. The other is that an authority which is a creature of a statute cannot decide whether the very statute of which he is a creature is a valid statute or not. Therefore, the Statutory Authorities including Tribunal are not supposed to declare a provision of parent Act as invalid on the basis of an authority which is merely persuasive and not binding upon him. The second thought appears to be more logical and is also consistently followed. For example, when the Hon'ble High Court of Kerala - 2014-TIOL-1913-HC-KERALA-STstruck down the provisions levying Service Tax on Food served in Hotels and Restaurants, the tax continued to be levied in other parts of the Country. Moreover, the Hon'ble Delhi High Court also in the present judgment has not followed the first proposition and has independently examined and upheld the levy of Service Tax on food served in Hotels. Therefore, the said judgement has no application beyond the territorial jurisdiction of Hon'ble Delhi High Court.