Service tax liability on complimentary services provided.

CASE STUDY

Prepared By:
CA Neetu Sukhwani &
Arundhati Bajpai

INTRODUCTION:
M/s INDIAN HOTEL CO. LTD. (VIVANTA BY TAJ HARI MAHAL), were issued with the show cause notice where in it was alleged that they have failed to pay service tax amounting to Rs.263470/- during the period from July, 2012 to september,2015 on account of complementary service provided to the customers/staff valued at Rs.5235795/- it has been alleged that by not paying the service tax on the complementary services, they have contravened the provision of section 67&68 of Finance Act,1944 read with rule 6 of the service tax rules,1944 and rule 2C of service tax(determination of the value)Rules,2006,rendering themselves liable under 78(1) of the Finance Act 1944.In the context of the above it was submitted by the assessee that they provided complementary food and beverages to their guest, employees, visitors. The receiver of said complementary food is not supposed to perform any act and thus activity is said to perform without consideration therefore it will not fall in the definition of service, and thus no service tax would we leviable. The adjudicating authority rejected departments contention and dropped the demand of service tax.

M/s THE INDIAN HOTEL COMPANY LIMITED (VIVANTA BY TAJHARI MAHAL)
[OIO NO.   71/2016 DATED 13.02.2017]

RELEVANT LEGAL PROVISION:
·         Section 65B (44) providing definition of ”Service”
·         Section 66B. Charge of service tax on and after Finance Act, 2012.
·         Section 78 of the Finance Act, 1994.

Issue Involved:-Service tax liability on complimentary services provided.

Brief Facts:- The issue involved here in above was that :
The assessee appears to have contravened the provision of section 67 & 68 of Finance Act, 1994 read with rule 6 of the service tax rule,1994 and rule 2c of service tax rules ,2006 in as much as they have failed topay service tax amounting to Rs.263470/- payable by them on complementary services amounting to Rs. 5235795/- provided to their customers during the period from july 2012 to sep2015 as per facts mentioned:
During audit it was observed that assessee has provided services of serving complementary food and beverages to its coustmers and employees bill was raised for the same but service tax was not paid on those services.
Whereas the clause (i) OF SECTION 66(E)of the FINANCE ACT 1994 provides the following shall constitute services :-(i)” Service portion in an activity wherein goods ,being food or any other article of human consumption or any drink is supplied in any manner as part of activity”
Rule 2C that is determination of value of service portion involved in supply of food or any article of human consumption or any drink in a restaurant or as outdoor 2C
For the purpose of this rule total amount means the sum total of the gross amount charged and the fair market value of all goods and services supplied in or in relation to the supply of food or any other article of human consumption or any drink ,whether or not supplied under the same contract or any other after deducting
(I)           The amount charged for such goods or services if any
(II)          The vat or sales tax if any
Provided the fair market value be determined as per generally accepted accounting principle.
The provider of taxable services shall not take cenvat credit of duties.
Whereas the assessee is raising invoices depicting “complimentary bill “ for foods and beverages served to customers/staff members. They were also keeping the separate account of such bills for booking expenditure. The assessee during the period provided services of serving the food and beverages for value of Rs 5235795/- on which the assessee was required to pay service tax of Rs.263470/- i.e. at the rate of 12.36%of 40% of the total value in terms of rule 2C.whereas the assessee has failed to pay service tax on such amount showing it as free services.
The assessee vide letter dated 29.03.16 issued by the superintendent was informed about the non payment of service tax along with the penalty imposed thereon. The assessee did not agree with the view of the authorities and declined from payment of said short paid amount of service tax.
The fact as per department was that the service of serving food and beverages has been provided to client / staff members and bills have been raised for taxable value of service which attract service tax at the prescribed rate 40% of the taxable value in terms of rule 2c of service tax rules ,2006.
The assessee has never disclosed the fact of non payment of service tax to the department .Thus it appears that the has willfully suppressed the same with an intention to evade service tax .Therefore extended period of limitation as provided under the proviso to sub section (1) of section 73 of the Act appears to be invocable in the present case .
The assessee appeared to be rendered themselves liable for penalty under section 78(1) of the Finance Act 1994 read with the rule 6 of the service tax rules, 1994 and rule 2C of service tax rules,2006.
Therefore the assessee has been asked to show cause as to why:-
(i)            Service tax amounting to Rs. 2,63,470/- not paid by us should not be demanded/recovered from us under the proviso to sub-section (1) of Section 73 of the Finance Act, 1994 alongwith interest under section 75 of the Finance Act, 1994.

(ii)           Penalty should not be imposed upon us under Section 78(1) of the Finance Act, 1994 for contravention of the provisions of Section 67 and 68 of the Finance Act, 1994 read with rule 6 of the Service Tax Rules, 1994 and rule 2C of Service Tax (Determination of value) Rules, 2006.


Assessee’s Contention:The assessee made following submissions before the adjudicating authority:-
1)            That the impugned show cause notice has been issued on the grounds that the assessee have provided the service of complementary food and beverages in our restaurant and have not paid the service tax on the same. In other words it has been alleged that the complementary food is liable to service tax even if no amount is recovered from the guest or employee. In this regard, it is submitted that the service tax is leviable on any activity if the same falls in the definition of service. The word ‘service’ has been defined in section 65A (44) as follows:-
“(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—…..” Thus, in simple terms, the word “service” means –
(i)            any activity
(ii)           for consideration
(iii)          carried out by a person for another

If ALL of the criteria specified at serial no. (i) to (iii) above are satisfy, the activity will fall under the definition of service and service tax would be levied unless otherwise exempted. The first component is “activity” which is wide enough to cover all types of work or operation. The third essential element is that it should be carried out by one person to another, i.e. there should be two persons involved in that activity. The second component, i.e. “consideration” is the most crucial one. If there is an activity carried out by one person to another but the “consideration” is not there, it cannot fall in purview of term “service”.
In continuation to above, it is submitted that as per Explanation (a) to section 67 of the Act “consideration” includes any amount that is payable for the taxable services provided or to be provided. In simple terms, ‘consideration’ means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non- monetary nature or deferred consideration. The barter system is also included in it. For eg. if a photographer clicks photo of a milkman and it is agreed that the milkman will provide 3 litre milk to the photographer, then it will be called as an activity for consideration. The Education Guide dated 20.6.2012 as issued by the Tax Research Unit (TRU) formed under Finance ministry has clarified this term in guidance note no. 2 as follows:-

The phrase ‘consideration’ has not been defined in the Act. What is, therefore, the meaning of ‘consideration’?
As per Explanation (a) to section 67 of the Act “consideration” includes any amount that is payable for the taxable services provided or to be provided. Since this definition is inclusive it will not be out of place to refer to the definition of ‘consideration’ as given in section 2 (d) of the Indian Contract Act, 1872 as follows-
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”
In simple terms, ‘consideration’ means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non- monetary nature or deferred consideration as well as recharges between establishments located in a non-taxable territory on one hand and taxable territory on the other hand.
What are the implications of the condition that activity should be carried out for a ‘consideration’?
·         To be taxable an activity should be carried out by a person for a ‘consideration’
·         Activity carried out without any consideration like donations, gifts or free charities are therefore outside the ambit of service. For example grants given for a research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research.
·         An act by a charity for consideration would be a service and taxable unless otherwise exempted. (for exemptions to charities please see Guidance Note 7)
·         Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service.
·         Donations to a charitable organization are not consideration unless charity is obligated to provide something in return e.g. display or advertise the name of the donor in a specified manner or such that it gives a desired advantage to the donor.

What is the meaning of monetary consideration?
Monetary consideration means any consideration received in the form of money. ‘Money’ has been defined in section 65B and includes not only cash but also cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler’s cheque, money order, postal or electronic remittance or any such similar instrument.
What is non-monetary consideration?
Non-monetary consideration essentially means compensation in kind such as the following:
•      Supply of goods and services in return for provision of service
•      Refraining or forbearing to do an act in return for provision of service
•      Tolerating an act or a situation in return for provision of a service
•      Doing or agreeing to do an act in return for provision of service”
The analysis of above paras from education guide makes it clear that for coming in the definition of “service”, consideration must be there. An activity carried out without consideration will not be termed as ‘service’. TRU has clearly mentioned that consideration is something received in return of an activity. Also, in the cases of non-monetary consideration, the other person should be under obligation to do something in return. The cases of non-monetary consideration will cover the acts done in return of that activity. In other words, when the other person is not in obligation to do anything in return of act done by a person, it will be said that no consideration is involved. Accordingly, the said activity will not fall in the definition of “service” in absence of any consideration.
Aligning with above discussion, it is submitted that in the instant case, the assessee are providing the complementary food and beverages to our guest, employees, visitors (by whatsoever reason they visit), etc. This complementary food or beverage is being given without expecting anything in return. In other words, the receiver of said complementary food is not supposed to perform any act or he is not in obligation to give anything against supply of such complementary food and beverages. It is worthwhile to mention here that when the other person is not liable to give anything in return, the activity is said to be performed without any consideration, therefore, it will not fall in the definition of service “ Accordingly, in absence of any consideration involved in the instant case, the activity will not be construed as “service” and no service tax would be leviable. Therefore, the impugned show cause notice is totally wrong in demanding the service tax and deserves to be quashed.

2)            It is further submitted that the service tax law does not apply on the activities which do not fall in the definition of ‘service’. In this regard, the charging section 66B of the Finance Act, 1994 as applicable w.e.f. 1.7.2012 is produced as follows:-

“SECTION 66B. Charge of service tax on and after Finance Act, 2012. —There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”

The analysis of above charging section of service tax law makes it clear that the service tax is to be levied on the value of a “service”. When there is no “service”, the charging section fails to apply; therefore, the impugned show cause notice has been issued without authority of law and is liable to be set aside.

3)            It is further submitted that the complementary food is normally given to the employees. Without accepting the allegations and service tax liability proposed in the impugned show cause notice and without prejudice to above submissions, it is submitted that nothing is recovered for the complementary food supply from the employees and therefore no consideration is involved. Also, the services otherwise provided by the employees are covered in the exclusion clause to the definition of service which is reproduced as follows:-

"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
a) an activity which constitutes merely,––
i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or
iii) a transaction in money or actionable claim.

b) a provision of service by an employee to the employer in the course of or in relation to his employment;

c) fees taken in any Court or tribunal established under any law for the time being in force."

The analysis of above definition makes it clear that a provision of service by an employee to the employer in the course of or in relation to his employment has been specifically excluded from the definition of service. Thus, even if it is accepted for the sake of argument also that there is consideration involved in the given case; it will be services provided by the employee to the employer which has specifically been excluded from the definition of service. Therefore, in that case also, the activity will not fall in purview of definition of service and no service tax would be levied. The impugned show cause notice is hence not sustainable and deserves to be set aside.

4)            The assessee submit that the impugned show cause notice has alleged that they had never disclosed the fact of non-payment of service tax on complementary services to the department. It is therefore alleged that they have willfully suppressed these facts with an intention to evade payment of service tax. On this ground, the extended period is held as invokable in this case. In this respect, it is submitted that there is no provision in the service tax law which states that the assessee is required to submit each and every act or policy adopted by him to the department. This is neither envisaged; in any provision nor in rule or in any return filed to the department. Further, there is no provision in the service tax law which states that each and every act and procedure followed by the assessee should be intimated to department and that too suo motu as alleged in the impugned show cause notice. It has been held by hon’ble Gujarat High Court in the case of APEX ELECTRICALS PVT. LTD. Versus UNION OF INDIA [1992 (61) E.L.T. 413 (Guj.)] that non-furnishing of the information not required under law does not amount to suppression. The verdicts of hon’ble High Court are given as follows:-

“Demand - Limitation - Suppression - Information not required to be supplied under law if not supplied does not amount to suppression - Proviso to Section 11A(1) of Central Excises and Salt Act, 1944.”
5)            In continuation to above, it is submitted that it is well known practice in all the hotels to give complementary services to its customers as well as the employees in order to attract and retain them. All the hotels, particularly those five stars, are engaged in offering such complementary services to their guests. A practice which is common in a particular trade/industry cannot be said to be suppressed in any ways. This is so because the thing which is generally known to all the people, it cannot be said that the department is not aware of it. Suppression means deliberate hiding of facts which is not the case here. Also, assessee’s hotel is engaged in this practice right from its registration under service tax law. In the past so many years, audit of assessee’s concern has been conducted a couple of times and all the records have been duly checked by the departmental audit team. The invoices of complementary services were there and were handed over alongwith other invoices each and every time the audit was conducted by the department. Therefore, when the department has already audited assessee’s records including the complementary invoices issued, it cannot be now said that this fact was not brought to the knowledge of department. Such an allegation is absurd and show cause notice issued on the basis of absurd allegation is not viable and deserves to be quashed.

The submissions made in the forgoing paras make it ample clear that there was no misstatement or willful suppression of facts on assesse’s part, thus, the show cause notice is barred by the clause of limitation. To invoke the extended period, the fraud, collusion or willful misstatement should be there.
6)            The impugned show cause notice has proposed the penalty under section 78(1) of the Finance Act, 1994. This section reads as follows:-

“78. (1) Where any service tax has not been levied or paid, or has been short levied or short-paid, or erroneously refunded, by reason of fraud or collusion or willful mis-statement or suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with the intent to evade payment of service tax, the person who has been served notice under the proviso to sub-section (1) of section 73 shall, in addition to the service tax and interest specified in the notice, be also liable to pay a penalty which shall be equal to hundred per cent. of the amount of such service tax:”

The analysis of section 78(1) makes it clear that no penalty can be imposed under Section 78 of the Finance Act, 1994 if there was no willful suppression or intention to evade payment of service tax on the part of the assessee. The impugned show cause notice has not been able to clearly establish that any of these elements were in existence in assessee’s case. On the other hand, assessee has proved his bonafides as categorily discussed hereabove. It is submitted that when no such element was there, the penalty under Section 78 of the Act is not required to be imposed on the assessee . It has been held in the case of Hindustan Steel v. State of Orissa [1978 2 ELT J 159 (Supreme Court)] that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct or dishonest or acted in conscious disregard of his obligation. It is further held in the case of Orient Ceramics and Industries [1987 (32) ELT 218 (I)] that words ‘with intent to evade payment of duty’ are very significant and unless and until the intention to evade payment of tax is proved on part of assessee, no penalty can be imposed

Reasoning adopted by the adjudicating authority:- The adjudication authority gone through the case records and written submission maid by the assessee .The main allegation against the assessee was found that they have failed to pay service tax amounted to Rs.263470/- for complementary services provided to the customer and staff .
The issue before the authority was to decide whether complimentary food supplied by the hotel to its customer/employees without any consideration would be liable to service tax or not .authority saw the tax invoice NO.67232 DT.29.09.15 where specifically mentioned that complementary bill ,without charging vat ,service tax and luxury tax. In the bill it was specifically mentioned “this not a bill, please don’t pay”. Thus resulting in no consideration by service recipeint to service provider.
In this regards the word service has been defined as:-
“(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—…..” Thus, in simple terms, the word “service” means –
(i)            any activity
(ii)           for consideration
(iii)          carried out by a person for another

On the basis of the above definition it was found that If all of the criteria specified at serial no. (i) to (iii) above are satisfy, the activity will fall under the definition of service and service tax would be levied unless otherwise exempted. The first component is “activity” which is wide enough to cover all types of work or operation. The third essential element is that it should be carried out by one person to another, i.e. there should be two persons involved in that activity. The second component, i.e. “consideration” is the most crucial one. If there is an activity carried out by one person to another but the “consideration” is not there, it cannot fall in purview of term “service”.
It was also found that as per Explanation (a) to section 67 of the Act “consideration” includes any amount that is payable for the taxable services provided or to be provided. In simple terms, ‘consideration’ means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non- monetary nature or deferred consideration. The barter system is also included in it. For eg. if a photographer clicks photo of a milkman and it is agreed that the milkman will provide 3 litre milk to the photographer, then it will be called as an activity for consideration. The Education Guide dated 20.6.2012 as issued by the Tax Research Unit (TRU) formed under Finance ministry has clarified this term in guidance note no. 2 as follows:-
The phrase ‘consideration’ has not been defined in the Act. What is, therefore, the meaning of ‘consideration’?
As per Explanation (a) to section 67 of the Act “consideration” includes any amount that is payable for the taxable services provided or to be provided. Since this definition is inclusive it will not be out of place to refer to the definition of ‘consideration’ as given in section 2 (d) of the Indian Contract Act, 1872 as follows-
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”
In simple terms, ‘consideration’ means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non- monetary nature or deferred consideration as well as recharges between establishments located in a non-taxable territory on one hand and taxable territory on the other hand.
What are the implications of the condition that activity should be carried out for a ‘consideration’?
• To be taxable an activity should be carried out by a person for a ‘consideration’
• Activity carried out without any consideration like donations, gifts or free charities are therefore outside the ambit of service. For example grants given for a research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research.
• An act by a charity for consideration would be a service and taxable unless otherwise exempted. (for exemptions to charities please see Guidance Note 7)
• Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service.
• Donations to a charitable organization are not consideration unless charity is obligated to provide something in return e.g. display or advertise the name of the donor in a specified manner or such that it gives a desired advantage to the donor.
What is the meaning of monetary consideration?
Monetary consideration means any consideration received in the form of money. ‘Money’ has been defined in section 65B and includes not only cash but also cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler’s cheque, money order, postal or electronic remittance or any such similar instrument.
What is non-monetary consideration?
Non-monetary consideration essentially means compensation in kind such as the following:
• Supply of goods and services in return for provision of service
• Refraining or forbearing to do an act in return for provision of service
• Tolerating an act or a situation in return for provision of a service
• Doing or agreeing to do an act in return for provision of service”
On examining the above provision it was concluded that for coming in the definition of “service”, consideration must be there. An activity carried out without consideration will not be termed as ‘service’. TRU has clearly mentioned that consideration is something received in return of an activity. Also, in the cases of non-monetary consideration, the other person should be under obligation to do something in return. The cases of non-monetary consideration will cover the acts done in return of that activity. In other words, when the other person is not in obligation to do anything in return of act done by a person, it will be said that no consideration is involved. Accordingly, the said activity will not fall in the definition of “service” in absence of any consideration.
The authority next concluded that as per charging section 66B of the Finance Act 1994 :-
“SECTION 66B. Charge of service tax on and after Finance Act, 2012. —There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”
The analysis of above charging section of service tax law makes it clear that the service tax is to be levied on the value of a “service”. When there is no “service”, the charging section fails to apply; therefore, the impugned show cause notice has been issued without authority of law and is liable to be set aside.
Also provision of services by an employee to the employer in the course of or in relation to his employment has been specifically excluded from the ambit of services. Thereby providing complimentary food to employee ,services provided by the employee to the employer is excluded from services.
In the view of the above discussions it was held by the adjudication authority that in absence of consideration involved the activity will not fall in the definition of services and and no service tax will be leviable. Thus demand raised by the department on the assessee was dropped .

Conclusion:- The analogy that is drawn from this case is that the assessee provided complementary food and beverages to their guest, employees , visitors. The receiver of said complementary food is not supposed to perform any act or he is not in obligation to give anything in return. Thus it is worthwhile to mention here in that where services are said to be performed without consideration then it will not fall in the ambit of services and therefore not liable to service tax. Thus the demand raised by the department against the assessee for complimentary food was not sustainable, thus the impugned show cause notice was dropped by the adjudication authority.

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