Sale of goods in restaurant = Clearance of exempted goods = clarification or…?

SALE OF GOODS IN RESTAURANT = CLEARANCE OF EXEMPTED GOODS = CLARIFICATION OR….?

Introduction:-

“Service tax by way of negative list” – the movie in theatres now!!! Yes, the negative list has already been implemented on July 1, 2012. As predicted, lacunas and ambiguities have also started playing their role very well. In order to remove the probable ambiguities, Board has issued an education guide wherein clarifications have been given about various issues involved in the new scheme. One such clarification has been given by TRU regarding the abatement portion forming part of the assessable value. In this clarification given in respect of restaurant services, it is clarified that the supply of food will be treated as sale of “exempted goods”. This article is about the interpretations, problems and disputes that are likely to arise in coming time.

Backdrop:-

Combination of material and services is a common feature of many of the services chargeable to service tax, both under the old scheme of service tax by way of positive list and new scheme of negative list. Some of such services are construction related services, Mandap keeper services, restaurant services, photography services, etc. where the value charged included both material and labour portion. Since service tax is a “tax on services”, the material value should not be the part of the assessable value for the purpose of service tax levy. As such, deduction of material portion was allowed under old scheme on actual basis under notification no. 12/2003-ST or on a fixed percentage basis under notification no. 1/2006-ST dated 1.3.2006. Now the notification no. 12/2003 has been deleted and the abatement scheme is continued under new notification no. 26/2012-ST DT 20.6.12. The deduction on actual basis has been carried forward only in case of the works contract under current scheme. Further, the taxable portion of the services under abatement has been increased by simultaneously allowing the Cenvat Credit thereupon in order to reduce the cost of the service providers.

The clarification:-

In the education guide issued on June 20, 2012, a clarification has been given regarding the availment of Cenvat Credit by service providers providing supply of food and drink facility in restaurant or as outdoor caterer. This para is reproduced as follows:-

“8.4.3. What are the restrictions, if any, on availment of Cenvat credit by such service providers?
In terms of the Explanation2 to Rule 2C of the Valuation Rules any goods meant for human consumption classifiable under chapters 1 – 22 of Central Excise Tariff are not ‘inputs’ for provision of such service. Cenvat Credit is, therefore, not available on these items. Availability of Cenvat credit on other inputs, input services and capital goods would be subject to the provisions of the Cenvat Credit Rules, 2004 including the provisions relating to reversal of credits contained in rule 6 of the said rules. It may be noted the sale of food in the restaurant would amount to clearance of exempt goods and thus the provisions of Rule 6 of Cenvat Credit Rules will be applicable.”

Thus, in the above para, it is clarified that if any food is being sold in the restaurant, it would amount to clearance of exempted goods. Therefore, the provisions of rule 6 of Cenvat Credit Rules, 2004 will be applicable.

Perspectives of the clarification:-

There can be four perspectives of this clarification, which are as follows:-

Only sale of food and drinks in restaurant will amount to clearance of exempted goods;
Sale of food and drinks in restaurant as well as by outdoor caterer will amount to clearance of exempted goods;
Sale of food and drinks by other service providers (other than restaurant and outdoor caterers) will not amount to clearance of exempted goods;
Sale of food and drinks by all the service providers (including the mandap keepers) will amount to clearance of exempted goods;
This clarification will not be applicable on any of the service providers.

Clarification applicable only on restaurants:-

The clarification has the language:- “It may be noted the sale of food in the restaurant would amount to clearance of exempt goods and thus the provisions of Rule 6 of Cenvat Credit Rules will be applicable.” Thus, this clarification says that the sale of foodin the restaurant will amount to clearance of exempted goods. Thus, strictly interpreting, only the food supplied in the restaurant will amount to clearance of exempted goods and therefore, the credit taken on this service will go to proportionate reversal. Also, the taxable value of 40% in case of restaurant service will be considered as the receipts from taxable services and remaining 60% will be considered as receipts from exempted goods.

Clarification applicable on both restaurants as well as outdoor caterers:-

This clarification is being given in respect of explanation 2 to rule 2C of the Valuation rules and rule 2C is specifically inserted in these rules in order to determine the taxable portion of restaurant and outdoor caterer services. Further, the opening para of guidance note no. 8 clarifies that this para is meant to explain the contents and prospects of the rule 2C of Valuation rules. As such, it can be contended that the rule 2C of the Valuation rules is specifically meant for the restaurant and outdoor caterer services and the manner of determining the taxable portion in respect of these two services is being dealt with under this rule. Therefore, it can be interpreted that the clarification given for one service (restaurant) will be equally applicable on the other service (outdoor caterer) also.

Clarification not binding on other similar services like Mandap Keeper:-

It is clarified at para 8.4.4 of this education guide that rule 2C will not be applicable on the services other than restaurant and outdoor caterer. This para contains a language – “Rule 2C applies only in cases of restaurants and outdoor catering. For valuation of service portion where such supplies are made in any other premises like hotel, convention center, club, pandal, shamiana or any place specially arranged for organizing a function an abatement of 30% has been provided for in exemption notification no 26/2012-ST dated 20/6/12.” Thus, since the valuation rule 2C of the Valuation Rules do not apply on the supply of food or drink anywhere else, like in Mandap, club, convention center, etc.; we can say that the clarification given in respect of rule 2C is also not applicable on the services on which abatement has been given in notification no. 26/2012-ST dated 20.6.2012.

Clarification applicable on all services where supply of food is involved:-

The clarification given at para 8.4.3 has been given on the basis of explanation 2 to the rule 2C of the valuation rules. This explanation reads as follows:-
“Explanation 2.- For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986).".
Thus, this explanation restricts the availment of Cenvat Credit on inputs falling under chapter 1 to 22 of CETA, 1985. Similar restriction is being contained in the Mandap keeper services as given in notification no. 26/2012-ST dated 20.6.2012, this condition at relevant serial no. 4 reads as follows:-

“CENVAT credit on any goods classifiable under chapter 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) has not been taken under the provisions of the CENVAT Credit Rules, 2004.”

Thus, the abatement under mandap keeper services also restricts the availment of credit on inputs falling under chapter 1 to 22 of CETA, 1985 which is just the same as contained in the rule 2C for the restaurant and outdoor caterer services. Further, in the both types of services (mandap keeper as well as the restaurant services), the food and drink are being supplied. As such, the department may contend that the clarification is equally applicable on all the services of the similar nature.

Clarification is not applicable on any service provider:-

It is clarified at para 1.2 of this education guide that this guide is merely prepared as an educational reference and has no binding effect. This para says - “It is clarified at the outset that this guide is merely an educational aid based on a broad understanding of a team of officers of the issues. It is neither a “Departmental Circular” nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide is being released purely as a measure of facilitation so that all stakeholders obtain some preliminary understanding of the new issues for smooth transition to the new regime.” Thus, it is quite simple that the interpretations taken in this guide are not binding either on department or on the assessees.

From our angle:-

On the basis of above discussion, we can say that the litigation is inbuilt in this clarification. Though this education note is not binding, yet the interpretations laid in it will be accepted and followed by the departmental authorities, particularly when a clarification is revenue generating for them. However, in the opinion of authors of this article, what the clarification says is not the intention of the government. The intention of the government is to allow the Cenvat Credit on these services alongwith abatement and the same cannot be restricted by applying the rule 6(3) by considering the material portion as clearance of exempted goods. This intention of the government is clarified by the following facts/legal provisions:-

The taxable portion of the services is being increased, for eg. in mandap keeper it is increased from 60% to 70%, in restaurant services it is increased from 30% to 40%, etc. The facility of Cenvat Credit is being extended alongwith this increase in order to reduce the cost. This fact was mentioned in the TRU letter dated 17.3.2012.If the clarification given in education guide is accepted, it would mean that there is clearance of exempted goods alongwith each abated service as abatement is always given for material portion. As such, credit allowed on every service with abatement will subject to reversal under rule 6(3) of CCR. In other words, even if a single service is being provided for eg. Restaurant service, credit taken on the same will go to reversal under rule 6(3) whereas the government has specifically allowed Cenvat Credit with abatement on this service.

Further, the government has specifically disallowed the credit on inputs falling under chapter 1 to 22 of Central Excise Tariff Act, 1985. The chapter 1 to 22 covers the edibles or food items and drinks. Thus, the credit is being disallowed on the food items involved in providing the said service. In other words, the Cenvat credit on items directly used in supply of food and drink is specifically being disallowed. As such, the credit on other items cannot be restricted when the legislation intent is not so.

The trading activity is specifically included in the definition of exempted service. The trading activity means purchase and sale of goods. When the definition of exempted service specifically includes trading, any clarification cannot assume the same as clearance of exempted goods contrary to the existing provisions.

· Further, the same analogy applies on the works contract service where abatement is being prescribed alongwith Cenvat Credit. Abatement of 40% has been allowed alongwith facility of Cenvat credit. In other words, abatement is treated as sale of material, but no such interpretation is being given thereunder.

Before parting:-

The intention of the government is to allow the Cenvat credit alongwith abatement. Further, taxable portion is also increased with allowing the Cenvat Credit in order to reduce the ultimate cost of the service providers. However, on the basis of discussion done in education guide, this intention is badly defeated ultimately increasing the cost of the services. Clarifications in the education guide are given to facilitate the effective implementation of the negative list. But at some places the interpretations are creating the ambiguities when otherwise the picture is clear. Hope this clarification will be clarified further very soon, else this will prepare a sound base for future litigations, which is obviously not intended…

Comments

Sale of goods in restaurant = Clearance of exempted goods = clarification or…?

Post a Comment

Query