Service tax liability on retention charges by hotel and food served in rooms

PJ/Case Law/2019-2020/3618

LEMON TREE HOTEL VERSUS COMMISSIONER, GST, C.E. & CUSTOMS, INDORE
[2020 (34) G.S.T.L. 559 (TRI.-CHENNAI)]
Issue:-Service tax liability on retention charges by hotel and food served in rooms
Brief facts:-The issue in this appeal is regarding taxability of the advance received from a customer for booking of a room in a hotel and whether on the cancellation of the booking, the said amount or a portion forfeited by way of cancellation charges, amount to taxable receipt under Section 66E(e) of Finance Act, 1994 pertaining to tolerate an act. Also, whether any service is involved for delivery of food in the room of the hotel and whether the same is taxable.

Appellant’s contentions: -It was submitted that the appellant, in the course of their business of running a hotel, offers advance booking to its customers, on payment of rent or deposit. Sometimes in the event of cancellation or of no show i.e. if the guest does not come for stay, the appellant retains the full or part of the amount towards cancellation charges. It is admitted that the appellant have paid service tax under Accommodation Services as and when they receive advance, availing the permissible abated value and so they are not liable for paying service tax under declared service of “tolerating an act” under section 66E of the Finance Act, 1994.
Respondent’s contentions: -The respondent submits that upon cancellation by the customers, the gross amount received by the appellant qualifies the receipt under Section 66E(e), which is defined as under: -
“Following shall constitute the declared services viz.: -
“agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and chargeable on full value and not on abated value”.
Reasoning of Judgment: -Ld. Commissioner (Appeals) in confirming the demand under this head has observed that retention of such cancellation charges is not against the provisions of intended services but for not availing the said services by the customers, which the appellant has tolerated.

After considering the submissions, it was concluded that the aforementioned observation of the Commissioner (Appeals) is erroneous and have no legs to stand. Admittedly, the customers pay an amount to the appellant in order to avail the hotel accommodation services, and not for agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and chargeable on full value and not on abated value. The amount retained by the appellant is for, as they have kept their services available for the accommodation, and if in any case, the customers could not avail the same, thus, under the terms of the contract, they are entitled to retain the whole amount or part of it. Accordingly, it was held that the retention amount (on cancellation made) by the appellant does not undergo a change after receipt. Accordingly, it was held that no service tax is attracted under the provisions of Section 66E(e) of the Finance Act.

So far as the second issue regarding service tax on food served in the room is concerned, it was held that the appellant, prima facie, sold the food, which attracts service tax/VAT. Further, C.B.E. & C. in its Clarificatory Circular No. 139/8/2011-TRU, dated 10-5-2011 exempted the scope of the service tax relating to the services by hotel and restaurant wherein the question was - Is the serving of food and/or beverages by way of room service liable to service tax? It is clarified that when the food is served in the room, the service tax cannot be charged under the restaurant service as the service is not provided in the premises of the air-conditioned restaurants with a licence to serve liquor, and also the same cannot be charged under the Short Term Accommodation head, if the bill for the food raised separately and it does not form part of the declared tariff.
Similarly, reliance was placed on the clarification issued by the Dy. Commissioner of Central Excise & Service Tax Division, Chandigarh vide his letter No. ST-20/STD/Misc./ Sevottam/62/12, dated 13-8-2015, clarifying the levy of service tax on food sold by way of Pick-up or Home Deliveries. It is clarified that service tax is liable, if there is an element of service involved, which is offered at the restaurants, be it ambience, live entertainment, if any, air conditioning, or personalized hospitability is offered. The service tax can be levied if there is an element of “Service” involved which would typically be the case where the food is served in restaurant. The element of service is not involved and it amounts to sale and does not attract service tax. Admittedly, it is the case of the Department that the appellant has provided food in the rooms, which is not included in the room service.

In view of the above matter, it was held that the appellant is not liable to service tax on the delivery of the food in their hotel rooms. As both the grounds have been decided in favour of the appellants, penalties imposed are also set aside. Thus, the appeal is allowed with consequential benefit to the appellant.
COMMENT:-The decision regarding the first issue that retention charges for cancellation of bookings is not liable to full rate of service tax under the declared service falling under category of “tolerate an act” is appreciable as the hotel never intends to provide such service and rather it intends to provide accommodation services on which tax has been correctly discharged on abated value. However, the favourable decision as regards second issue of serving of food in rooms by hotel is doubtful as service element is involved in serving of food in rooms as compared with home deliveries/take away. Moreover, in our opinion, there is service of delivering food to the customer at their doorstep in case of home deliveries and so both the transactions are liable to service tax. The only dispute in case of food served in room is whether the service tax is leviable under service of supply of food and beverages or under accommodation service and the liability to pay service tax is certain in such transactions.
Prepared by- CA Neetu Sukhwani

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PJ/Case Law/2019-2020/3618

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