The Issue involved in this case is that whether the reversal of credit tantamount to non availment of credit and benefit of abatement notification no. 01/2006-ST dated 01.03.2206 can be availed? Whether service tax is leviable on the restaurant services p

PJ/Case Study/2018-19/129

CASE STUDY- JAI MAHAL PALACE HOTEL[ FINAL ORDER NO. 55116/2017 DATED 13.07.2017]

Prepared By: CA Preksha Jain And Himanshu Bhimani

Introduction: -
The compendious of the case is that M/S Jai Mahal Palace (hereinafter referred to as the appellant), holder of Service tax Registration No. AACT3957GSD055 were engaged in health club and fitness center services, Dry cleaning, Internet Café, Renting of Immovable Property, Management Consultant, Banking & Financial Services, Business Support, Maintenance & Repairs, Restaurant and Short term accommodation services, etc.
A show cause notice no. V(H)Adj.-1/ST/177/2012/1902 dated 28.09.2012 was issued to the appellant alleging that they have short paid the service tax of Rs.28,77,833/- on the Restaurant service as defined under Sub Clause No(zzzzv) of clause (105) of Section 65 of the finance Act, 1994 and 72,25,532/- on short term Accommodation Services as defined under Sub Clause No (zzzzw) of clause (105) of the Finance Act 1994 by wrong availment of benefit of Notification No.1/2006 ST dated 1.3.2006. The department contended that they failed to fulfill the condition of the said Notification and they did Not pay Service Tax of Rs.3,78,898/- on the amount of Rs.36,78,618/- received from the customers during May 2011 to March 2012 on the sale of food and liquor effected from Restaurant. The appellant filed reply to the show cause notice vide letter dated 28.09.2012. The submissions made by the appellant in their reply to the show cause notice that they have mistakenly availed cenvat credit of common input services which was rectified and revised return was filed in February 2012. Appelant contended that the reversal of credit amounts to non availment of credit and as such benefit of Notification No.1/2006-ST should not be denied to us. It was also argued that the Board has clarified Circular No.139/8/2011-TRU dated 10.5.2011 that where more than one restaurant are situated in a premises, the one which satisfies both the criteria will be liable to service tax. .
However, the submissions made by the appellant in their reply to the show cause notice and during the course of personal hearing were not adhered to by the learned adjudicating authority and impugned order in original no. JAII-EXCUS-001-COM-062-13-14 dated 23.09.2013 was passed thereby confirming the demand of Rs. 1,04,82,263/-. Interest under section 75 has also been confirmed with penalty of Rs. 200/day under section 77 and penalty of Rs. 1,04,82,263/- under section 78 of the Finance Act, 1994.

Aggrieved by the impugned Order-In-Original the applicant filed an appeal before CESTAT. Thus, vide the final order it was held that as the assessee has reversed the credit on the input service, it is to be construed that no credit has at all been taken. As the credit has been reversed, the benefit of Notification No. 1/2006-ST should be available to the appellant for claim of abatement. Moreover, the appellant is not satisfying the conditions as as defined in Section 65(105)(zzzzv) of the Finance Act, 1994 referred and therefore, service tax demand on the restaurant service is not confirmed. The appeal was decided in favour of the Appellant.

Relevant Legal Provisions:-

Notification No. 1/2006-ST dated 01.03.2006 – Benefit of Abatement.
Section 65(105)(zzzzv) of the Finance Act,1994.
Board Circular No. 139/8/2011-TRU dated 10.5.2011
Section 73(1) of the Finance Act,1994
Interest Amount under the Provision of Section 75 of the Finance Act 1994.
Amount of Penalty under section 76, 77 and 78 of the Finance Act 1994.

Issue Involved: -
The Issue involved in this case is that whether the reversal of credit tantamount to non availment of credit and benefit of abatement notification no. 01/2006-ST dated 01.03.2206 can be availed? Whether service tax is leviable on the restaurant services provided in an open air restaurant?

Brief Facts:-
The applicant -M/s Jai Mahal Palace are leading hoteliers in the city of Jaipur. The present appeal involves two issues for consideration. The first issue is whether the benefit of abatement notification no. 01/2006-ST dated 01.03.2006 is admissible to the applicant when they mistakenly availed credit on some common input services but subsequently reversed the same by filing the revised ST-3 returns as the abatement notification has condition that no cenvat credit is to be availed with respect to inputs/input services and duty paid on capital goods. The service tax demand pertaining to first issue amounts to Rs. 28,77,833/- on the Restaurant Services and Rs. 72,25,532/- on the short term accommodation services. The second issue is as regards the leviability of service tax on the restaurant services provided by the applicant with respect to its open air restaurants near the poolside named as “Giardino” and “Phulwari”. The service tax demand pertaining to the second issue is Rs. 3,78,898/-. The merits for each of the issue are separately submitted as follows:-

Assessee’s Contention:

The applicant submits that they have mistakenly taken credit of certain common input services that were used for provision of all the services like service tax credit on telephone services. However, subsequently on realising the mistake, they reversed such credit and the same was also reflected in the revised returns filed by them. As such, reversal of credit tantamount to “non-availment of cenvat credit” in view of the Apex Court judgment in the case of Chandrapur Magnet Wires Pvt. Ltd. [1996 (81) E.L.T. 3 (S.C.)]. It is further submitted that the impugned order in original has tried to distinguish the applicability of the above cited Apex Court judgment by stating that in the said case, reliance was placed on the board circular wherein it was clarified that if the credit reversal was made before removal of exempted goods, it amounts to non-availment of cenvat credit whereas in the present case, it is not so. In this regard, it is submitted that on account of difference in the concepts regarding liability to pay excise duty and service tax, there is practical difficulty in implementing the said board circular strictly. The applicant submit that in case of excise duty, the liability to pay excise duty arises on the clearance of goods and so it is possible to reverse the credit pertaining to inputs/input services used in the manufacture of such goods. However, in case of provision of services it is not possible to first reverse the credit pertaining to input services and then avail the benefit of abatement notification. Take for an example, credit was mistakenly availed on the telephone services that are commonly used for the provision of exempted and taxable services and was subsequently reversed in the revised return. It is submitted that it was practically not possible to reverse the credit of input services first and then avail the benefit of the abatement notification as telephone bills are received on monthly basis and so it is not possible to first reverse the credit and then provide the exempted services. As such, it is submitted that as the applicant have mistakenly availed credit on common input services, and have reversed the credit pertaining to common input services in the revised return, the benefit of abatement notification should not be denied on the basis of procedural lapse. Furthermore, the applicant also wishes to place reliance on the decision given by the Hon’ble Mumbai Tribunal in the case of Central Warehousing Corporation Vs Commissioner of Service Tax, Raigad [2014-TIOL-2182-CES-MUM] wherein it has been concluded that the denial of benefit of notification no. 01/2006-ST on the ground that reversal of credit after availing the same does not amount to non-availment of credit and therefore condition of the abatement notification is violated is clearly not sustainable in law. The Hon’ble Mumbai Tribunal has remanded the case to the adjudicating authority to compute and verify the reversal made by the assessee under Rule 6(3A) and if the same is proper, extend the benefit of abatement notification no. 01/2006-ST to them. The applicant submits that the facts of the above cited decision of Mumbai Tribunal clearly reveals that reversal of credit amounts to non-availment of cenvat credit and so the benefit of abatement notification should not be denied to the assessee once the credit availed has been reversed by them. It is also worth observing that similar view was also taken in the case of Tata Consultancy Services Ltd. Vs CCE, & ST, LTU Mumbai [2014-TIOL-1172-CESTAT-MUM] wherein the appeal was allowed by way of remand by placing reliance on the decision given by the Allahabad High Court in the case of Hello Minerals Water (P) Ltd. that the benefit of exemption notification is to be allowed if credit taken is reversed because reversal of credit is equivalent to non-taking of credit.

It is worth noting that recently, even the Hon’ble Delhi Tribunal has concurred with the view that reversal of cenvat credit along with interest at a later date also amounts to non availment of credit and the benefit of abatement is admissible even in such case. The decision is reported at taxindiaonline website as having citation as [2015-TIOL-1259-CESTAT-DEL]. The synopsis of the decision is also enclosed for your reference.

The applicant submits that the Apex Court in the case of CCE v/s Bombay Dyeing & Manufacturing Co [2007 (215) ELT 3 (SC)] has again held that reversal of credit amount to non-availment of credit. This has also been held by the High Court of Gujarat in the case of CCE v/s Ashima Dyecot Ltd [2008-TIOL-659-HC-AHM-CX] that reversal of credit amounts to non-taking of credit on inputs. Consequently, in light of the above cited decisions of the Supreme Court and the High Court, the applicant is entitled to the benefit of the abatement notification once the credit mistakenly availed by them has been reversed because credit reversal tantamount to non-availment of credit. Therefore, the impugned order in original denying the benefit of abatement notification is totally erroneous and deserves to be quashed.

Credit availed by the applicant pertains to Mandap Keeper Services provided by them wherein service tax at full rate has been paid by them:- The applicant further submits that there is no embargo in availing the cenvat credit exclusively attributable to other fully taxable services provided by them because the abatement notification no. 01/2006-ST dated 01.03.2006 puts restriction for availment of cenvat credit used in providing the taxable service for which abatement is being claimed. Therefore, there is no prohibition in the availment of cenvat credit on the inputs/input services exclusively used by the applicant in provision of Mandap Keeper Services wherein service tax has been paid by them at full rate without claiming any abatement or exemption. The fact that the credit availed by the applicant solely pertains to Mandap Keeper Services has been explained in detail in the grounds of appeal from paragraph 9 on page no. 22 of the appeal memorandum. As such, when it has been clearly established that the condition of non-availment of credit of inputs/input services/capital goods enshrined in the abatement notification no. 1/2006-ST has not been violated, the impugned order in original denying the benefit of abatement is totally bad in law and is liable to be set aside.
Restriction to avail credit pertaining to services for which abatement claimed:-In order to appreciate the fact that the prohibition for availing the credit applies to only for the credit of inputs/input services/capital goods used for providing the taxable service for which abatement is being claimed, the relevant condition is reproduced for the sake of convenient reference as follows:-

“Provided that this notification shall not apply in cases where, -
(i) the CENVAT credit of duty on inputs or capital goods or the CENVAT credit of service tax on input services, used for providing such taxable service, has been taken under the provisions of the CENVAT Credit Rules, 2004; or
The analysis of above condition prescribed in the notification makes it ample clear that the benefit of abatement will be allowed only if the Cenvat credit on the inputs/capital goods/input services USED FOR PROVIDING such service is not taken. The language used in this condition is that the credit should not be taken in respect of inputs/capital goods/input services USED FOR PROVIDING THE SERVICE on which abatement is claimed. This condition has not been violated by the applicant. They have not taken Cenvat Credit on any inputs/capital goods/input services which are used solely in providing the services of Restaurant and accommodation. As such, the impugned order in original denying the benefit of abatement deserves to be quashed.

Second issue regarding leviability of service tax on the open air Giardino/Phulwari restaurant:-

3.1 No service tax leviable on the Giardino/Phulwari Restaurant:- It is submitted that there is no service tax liability on the running of Giardino/Phulwari open air restaurants because they do not satisfy the conditions for leviability of service tax. As per section 65 (105) (zzzzv) of the Finance Act, 1994,-
“Any service provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises”.
The analysis of above makes it clear that the services provided by a restaurant are taxable if all of the following conditions are satisfied:-

The service provider should be a restaurant.
The restaurant should have the facility of Air conditioning.
The facility of AC can be in any part of the restaurant and at any time during the financial year.
The restaurant has licence to serve alcoholic beverages.

Thus, if all of the above conditions are satisfied, the service tax is levied on the services provided by the restaurant. In the instant case, the allegation is raised to levy the service tax on the Restaurant Giardino, Phulwari/pool side. As the name indicates, these are the open air restaurants. As such, the condition of having the facility of Air conditioning is not satisfied in these restaurants. Thus, the services provided by them do not fall under the definition of taxable services as reproduced here-above. Since the service tax is leviable on the restaurant services only if ALL the conditions mentioned here-above are satisfied, due to absence of facility of air conditioning, the services provided therefrom will not fall under the category of taxable services. Thus, no service tax is leviable on the services provided from Giardino and Phulwari. As such, the impugned order in original is not tenable and is liable to be quashed.

3.2      Reliance placed on serial no. 1 of the Board Circular no. 139/8/2011-TRU dated 10.05.2011:- It was clarified in this circular that if there are more than one restaurants belonging to the same entity in a complex, out of which only one or more satisfy both the criteria relating to air conditioning and license to service liquor, service tax is leviable on the service provided by the restaurant which satisfies the two conditions. Moreover, it was also clarified that within the same entity, if there are more than one restaurant which are clearly demarcated and separately named, the one which satisfy the criteria is only liable to service tax. In the present case also, the applicant submits that a number of restaurants are being operated in the same entity, M/s Jai Mahal Palace and the applicant is regularly paying service tax on the restaurant that satisfies the above two conditions and that they are not liable to pay service tax on the Phulwari/Giardino/poolside restaurants. They submit that it is not disputed that the Phulwari/Giardino restaurants are separately demarcated and are separately named and are also separately billed. Therefore, these poolside restaurants cannot by any stretch of imagination be treated as an “extension” of the restaurant that satisfies the condition for leviability of service tax. In order to have a clear picture of the issue under consideration, the applicant wishes to explain the kinds of restaurants maintained in their premises. The applicant has two types of restaurants, one that is having air conditioning facility that is being named as “The Marble Arch” on which the applicant is duly paying service tax also. The other type of restaurant is named as “Giardino” that is an Italian restaurant situated near the pool side and is clearly demarcated from the restaurant “The Marble Arch”. The restaurant “Giardino” is not having any air conditioning facility and is a sort of an open air restaurant. Furthermore, as far as “Phulwari” is concerned, it is not a restaurant and rather it is merely serving of food and beverages at the pool side. It is further worth mentioning that there is separate kitchen for the restaurant “The Marble Arch” and that for the restaurant “Giardino” which clearly indicates that the two restaurants are clearly demarcated and the restaurant “Giardino” cannot be considered as an extension of the restaurant “The Marble Arch”. Moreover, both the two restaurants are also separately named. Therefore, the present case clearly falls under the serial no. 1 of the Board Circular no. 139/8/2011-TRU dated 10.05.2011 and no service tax is leviable on the poolside restaurants as contended by the impugned order in original.

3.3      Erroneous reliance on serial no. 2 of Board Circular no. 139/8/2011-TRU dated 10.05.2011:- In this respect, it is submitted that the present case is not covered by the serial no. 2 of the cited board’s circular as alleged in the impugned order in original. The language of the serial no. 2 is produced as follows for better understanding of the clarification.

“The taxable services provided by a restaurant in other parts of the hotel eg. Swimming pool, or an open area attached to the restaurant are also liable to service tax as these areas become the extension of the restaurant.”

On perusal of the above language, it is very clear that this serial covers the situation when a restaurant that is liable to pay service tax also provides services in other parts of the hotel like swimming pool or open area attached to the restaurant, then such areas also become the extension of the restaurant. In the present case, this situation would come into play if the restaurant liable to pay service tax i.e. “The Marble Arch” provided restaurant services to the open area attached to “The Marble Arch” or swimming pool, thereby meaning that there is no demarcation between the open area and the restaurant. However, this is not the case in the present appeal. In the present situation, the restaurant “The Marble Arch” is different and separate from the Italian open air restaurant, “The Giardino” and is separately demarcated and distinctly situated. Moreover, the kitchen is also separate for both the restaurants and there is separate billing for the service recipients in both the restaurants. As such, the restaurant “Giardino” cannot be considered as an extension of the restaurant “The Marble Arch”. Hence, the impugned order has placed erroneous reliance on the serial no. 2 of the cited board circular and consequently, the impugned order in original confirming the service tax demand on “Giardino” and “phulwari” is liable to be quashed.

3.4      Reliance placed on Board Circular no. 173/82013-ST dated 07.10.2013:- The applicant also places reliance on the following clarification issued by the Board Circular:-

S.No.	Doubts	Clarifications
1.	In a complex where air conditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, will service tax arise in the non-air conditioned restaurant?	Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year (hereinafter referred as ‘specified restaurant’) attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned / non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.
2.	In a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, will service tax arise?	Yes. Services provided by specified restaurant in other areas of the hotel are liable to service tax.

On analyzing the above circular, the following points are clear:-

The term ‘Specified Restaurant’ used herein denotes that having the facility of air conditioning or central air heating in any part of the establishment at any time during the year. [Note: Prior to 01.07.2012, the restaurant services were taxable if the restaurant had air conditioning facility and also had license to serve alcoholic beverages. However, with effect from 01.07.2012, the condition of having license to serve alcoholic beverages has been dispensed with.] In simple words, the specified restaurant is that which is leviable to service tax.

The serial no. 1 clarifies that if in a complex, there is more than one restaurant which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in non air-conditioned or non-centrally heated restaurant will not be liable to service tax. Similarly, in the present case, the restaurant “The Marble Arch” and “Giardino” are clearly demarcated and are separately named with separate billing system. Moreover, both the restaurants have separate kitchen while this clarification even exempts the non-air conditioned restaurant if food is sourced from a common kitchen. In light of the above clarification, it is crystal clear that no service tax is leviable on the restaurant “Giardino” that is open air restaurant not having the facility of air conditioning and also separately demarcated from the restaurant “The Marble Arch”.

It is also submitted that this circular clarifies that if the restaurant services are provided by a specified restaurant in other areas, eg. Swimming pool or an open area attached to the restaurant, service tax will be leviable. However, the restaurant “Giardino” is not attached to the specified restaurant “The Marble Arch” and is separately demarcated. Moreover, there is even separate kitchen for the restaurant “Giardino” and no service is being provided by the restaurant “The Marble Arch” to the restaurant “Giardino”. In any case, no service tax is leviable on the services provided by the restaurant “Giardino”.

In light of the above clarification, the benefit of the board circular no. 173/82013-ST dated 07.10.2013 is extendable to the applicant and the impugned order in original demanding service tax on the restaurants without facility of Air conditioning is liable to be set aside.

Reasoning adopted by the adjudicating authority: -
On perusal of the case records, The Authority found that the benefit of Notification No.1/2006-ST was denied to the appellant on the ground that they
have availed Cenvat credit on the input services used for providing the output service.
The fact is not under dispute because the credit so availed was reversed by the appellant suo moto and no proceedings were initiated for recovery of such credit.
Thus, upon reversal of cenvat credit on the input service, it has to be construed that no credit has at all been taken by the appellant. On a similar case, the Hon’ble Supreme Court in the case of Chanderpur Magnet Wires Pvt. Ltd. V. Commissioner of Central Excise, Nagpur 1996(81) E.L.T 3(SC) have held that on reversal of modvat credit, the appellant is entitled to avail exemption. In this case since the credit was reversed, the benefit of Notification No. 1/2006- ST should be available to the appellant for claim of abatement.
The Adjudicating Authority have confirmed the demand of service tax on the ground that taxable services were providing by the appellant from the restaurant Giardino, phulwari/ pool side. It is an admitted fact on record that there are open air restaurant and the conditions mentioned in section 65(105)(zzzzv) that the restaurant should have the facility of air conditioning; the restaurant has license to serve alcoholic beverages have not satisfied in this case. In context with leviability of service tax on the restaurant, the CBEC vide Circular dated 10.05.2011 has clarified the following:

If there are more than one restaurants belonging to the same entity in a complex, out of which only one or more satisfy both the criteria relating to air-conditioning and license to serve liquor, will the other restaurant(s) be also liable to pay service Tax?

Service tax is leviable on the service provided by a restaurant which satisfies two conditions
(i)IT should have the facility of air conditions
(ii)IT should have licence to serve alcoholic beverages. Within the same clearly Demarcated and separately named, the once which satisfy both the criteria is only liable to service tax.

In view of the above referred Circular issued by the CBEC, since the appellant has not provided the services mentioned therein, service tax demand on the restaurant service cannot be confirmed against the appellant.
In view of the above, they do not find any merits in the impugned order. Accordingly, after setting aside the same, they allowed the appeal in favour of the appellant.

Decision- Appeal Allowed.

Conclusion:-On the basis of above pretentions it can be concluded that, the wrongly availed credit has been reversed suo moto, the benefit of Notification No. 1/2006-ST should be available for claim of abatement. Reversal of credit is equivalent to non availment of credit. Moreover, the appellant is not satisfying the conditions as as defined in Section 65(105)(zzzzv) of the Finance Act, 1994 referred and therefore, service tax demand on the restaurant service is not confirmed.

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PJ/Case Study/2018-19/129
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