CESTAT Chennai Quashes ₹2.32 Crore Service Tax Demand On Non-AC Restaurant Sections In Same Establishment

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Chennai, has set aside a service tax demand of ₹2.32 crore against a Coimbatore-based restaurant chain. It held that the chain was not liable to pay service tax on food and beverages served in the physically demarcated non-air-conditioned sections of its establishments.

A tribunal comprising Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar allowed the appeals filed by Sree Annapoorna Sree Gowrishankar Hotels Pvt. Ltd. It also set aside the interest and penalty imposed on the company.

The tribunal observed, "In view of the above, we find merits in the appellant's contention that in the given circumstances the appellant is not liable to pay service tax for providing services relating to supply of food and beverage in the non-air-conditioned portion of the restaurant which is located in the same establishment during the period from April 2013 to March 2015. Therefore, we find the impugned order cannot be sustained and is liable to be set aside. Ordered accordingly. The appeal is allowed with consequential reliefs in law, if any."

The company operates a chain of restaurants in Coimbatore. Six of its 16 branches had both air-conditioned and non-air-conditioned dining areas. Food for both sections was prepared in a common kitchen. During the period between April 1, 2013 and March 31, 2015, the company paid service tax only on food and beverages served in the air-conditioned dining halls. It claimed exemption for supplies made in the non-air-conditioned sections.

The Department disputed the exemption. It argued that once an establishment had an air-conditioned dining area, service tax became payable on food served throughout the establishment, including the non-air-conditioned sections. Based on this interpretation, it confirmed a demand of ₹2.32 crore, along with interest and penalty.

Before the tribunal, the company contended that the air-conditioned and non-air-conditioned dining areas were physically demarcated and functioned independently. They had separate billing, different prices, dedicated staff and different levels of service, although both were supplied from a common kitchen. It also relied on a CBEC circular clarifying that a non-air-conditioned restaurant would continue to enjoy the exemption where separately demarcated restaurants shared a common kitchen.

Examining the history of the levy, the tribunal noted that service tax on restaurant services was originally introduced to tax services provided by air-conditioned restaurants that offered a higher level of ambience and service. It observed that the law was intended to distinguish such restaurants from ordinary eating establishments.

The tribunal also considered the CBEC Circular dated October 7, 2013. It noted that the circular clarified that where air-conditioned and non-air-conditioned restaurants are clearly demarcated, only the specified air-conditioned restaurant attracts service tax, even if both source food from a common kitchen.

The tribunal observed, "Such a levy, to our mind would render the provision arbitrary, ambiguous and excessively broad, if not confined to that part of the establishment which alone is air-conditioned, especially in light of the fact that the levy was intended only to be on the services rendered by air-conditioned restaurant."

The tribunal found that the Department had not disputed the company's claim that the two dining sections were physically segregated and operated separately. It also noted that the separate billing, pricing and service arrangements supported the company's case. The tribunal further observed that the Department's own circular recognised exemption in such circumstances.

Holding that service tax was not payable on food and beverages served in the non-air-conditioned dining areas, the tribunal quashed the demand of ₹2.32 crore, along with the interest and penalty.

For Appellant: Advocate M. N. Bharathi

For Respondent (Revenue): M. Selvakumar, Authorised Representative.