Service Tax on Outdoor Catering Cannot Include Food Value Already Taxed under VAT: CESTAT Chennai

Background and Context

The dispute in Sri Ponnusamy Caterers Vs Commissioner of Service Tax (CESTAT Chennai) centered around whether Service Tax under the category of Outdoor Catering Services could be imposed on the full consideration received by the assessee, including the value of food on which Sales Tax/VAT had already been discharged.

The assessee, Sri Ponnusamy Caterers, was engaged in supplying food to various industrial establishments in and around Chennai. Over the years, their arrangements with customers evolved from a single agreement model to a dual-contract structure that separated the sale of food from the service of serving food. The Department alleged that Service Tax was payable on the combined value, while the assessee contended that only the service element could be taxed, as the food component was already liable to Sales Tax/VAT.

The CESTAT Chennai, by order dated 07/04/2022 in Service Tax Appeal No. 591 of 2012, examined both the factual arrangements and the applicable legal precedents and concluded that Service Tax could not be levied on the food value which had already suffered Sales Tax/VAT.

Facts of the Case

Business Activity and Registration

• The assessee was in the hotel and catering business, providing Outdoor Catering Services to industrial units located around Chennai.
• They were registered with the Service Tax Commissionerate, Chennai under the taxable category of Outdoor Catering Services.

Departmental Scrutiny and Initial Findings

Upon scrutiny of ST-3 returns, the Department noticed that the assessee had not claimed abatement under Notification No. 01/2006-S.T. dated 01.03.2006 while discharging Service Tax. Based on this, it appeared to the Department that:

• Service Tax was being paid only on the amount treated as “service charges”.
• The entire gross amount received from customers, including the value of food, was not being subjected to Service Tax under Outdoor Catering.

The assessee was asked to clarify, and they responded by letter dated 11.02.2011.

Assessee’s Stand in Reply

In their written reply, the assessee clarified the following:

1. Position before 01.04.2007

   • They entered into contracts with corporate clients solely for supply of food.
   • According to them, no activity of serving food was undertaken by them during this period.
   • They discharged Sales Tax and VAT on the food supplied.
   • No Service Tax was paid prior to 01.04.2007, as they claimed they were not rendering any service in relation to the supply of food.

2. Position from 01.04.2007 onwards

   • The assessee moved to a two-contract structure with customers:
     • One agreement for sale/supply of food.
     • A separate agreement for serving food.
   • Sales Tax/VAT was paid on amounts received for food supply, and
   • Service Tax was paid on amounts received as service charges for serving food.
   • ST-3 returns were filed reflecting Service Tax payment on the service charges portion.

3. Submission of Records

   • The assessee stated that they had provided the documents sought by the Department on 28.05.2010.

4. Limitation Objection

   • They objected to the demand being raised from 10.09.2004, arguing that their activities were already within the knowledge of the Department.

5. Voluntary Payment (Without Prejudice)

   • Without conceding taxability on the food component, and to avoid future disputes, they paid:
     • Rs. 19,20,486/- towards Service Tax, and
     • Rs. 1,39,749/- as interest,
   • on 08.02.2011, as per their own computation for the period October 2009 to December 2010.

Show Cause Notice and Adjudication

The Department was not satisfied with the assessee’s explanation. It took the view that:

• Even before 01.04.2007, the assessee both supplied and served food, and
• After 01.04.2007, the assessee had understated taxable value by excluding food value from Service Tax.

Accordingly, a Show Cause Notice dated 11.04.2011 proposed:

• Demand of Service Tax of Rs. 61,57,841/- for the period October 2005 to December 2010,
• Recovery of interest,
• Imposition of penalties, and
• Appropriation of the amounts already paid (Rs. 19,20,486/- + interest).

The Original Authority, after adjudication, passed an order:

• Confirming the Service Tax demand of Rs. 61,57,841/-,
• Ordering recovery of interest,
• Imposing equivalent penalty under Section 78 of the Finance Act, 1994, and
• Levying a penalty of Rs. 5,000/- under Section 77(2) for not furnishing correct particulars in ST-3 returns.

The assessee filed an appeal before CESTAT Chennai against this order.

Arguments on Behalf of the Assessee

Separate Treatment of Sale and Service

Counsel for the assessee submitted:

• The assessee had long been engaged in the hotel and catering line, providing food to large corporate entities such as M/s. TPL, MPL, Petro Araldite, etc.
• As per various agreements, the assessee supplied/sold food as per client requirements and paid Sales Tax/VAT on the entire value of food.

Pre-01.04.2007