Service Tax Applicability on Hotel No-Show Fees and Restaurant Service Charges: An Analysis of the CESTAT Delhi Ruling

The intersection of indirect taxation and the hospitality industry frequently generates complex interpretational disputes, particularly concerning the exact nature of considerations and the classification of specific business practices. A prominent example of this complexity is found in the judicial analysis of whether retained advances for cancelled hotel bookings constitute a taxable service, and whether mandatory service charges added to restaurant bills are subject to service tax.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi, recently addressed these pivotal issues in the case of Shiv Vilas Resorts (P) Ltd. Vs Commissioner of Central GST and Central Excise. The Tribunal delivered a nuanced order that partly allowed the appeal of the assessee, providing critical clarity on the interpretation of declared services under the Finance Act, 1994, the valuation of taxable services, and the stringent conditions required to invoke the extended period of limitation.

Factual Matrix of the Dispute

The assessee, engaged in the business of providing various taxable services including short-term hotel accommodation and restaurant services, was subjected to a departmental audit. During the examination of their financial records, the audit team flagged two specific practices:

  1. The assessee was found to be collecting a "service charge" from patrons in addition to the price of food served in their restaurants, without discharging service tax liabilities on this specific collection.
  2. The assessee retained or forfeited advance payments in scenarios where customers either cancelled their prior reservations or failed to arrive (commonly referred to as "no-show charges"). The department alleged that this forfeiture amounted to a "declared service" under the statutory framework, specifically characterizing it as an act of agreeing to tolerate a situation.

Following these observations, Show Cause Notice No. 829 dated 18.04.2016 was issued to the assessee. The notice proposed a service tax demand of Rs. 17,103/- on the service charges amounting to Rs. 7,18,331/- collected by the assessee. Furthermore, it proposed a demand of Rs. 1,35,709/- on the no-show charges amounting to Rs. 10,97,974/-. The notice also proposed the recovery of proportionate interest and the imposition of appropriate penalties.

These proposals were subsequently confirmed by the adjudicating authority via Order-in-Original No. 87/2017 dated 31.03.2017. The assessee’s subsequent appeal was rejected through Order-in-Appeal No. 30(RK)ST/JPR/2017-18 dated 06.02.2018, prompting the present appeal before the CESTAT Delhi.

To properly adjudicate the dispute, the Tribunal undertook a comprehensive examination of the relevant statutory provisions governing service tax.

Definition of Service and Consideration

The fundamental definition of a "service" is enshrined in Section 65B(44) of the Finance Act, 1994. The statute defines it as any activity carried out by a person for another for consideration, expressly including a declared service.