The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of ₹2.32 crore holding that food and beverages served in clearly demarcated non-air-conditioned dining areas cannot be subjected to service tax merely because an air-conditioned restaurant operates within the same establishment.
The Bench of Ajayan T.V. (Judicial Member) and M. Ajit Kumar (Technical Member) has observed that the objective behind the levy was never to tax ordinary dining facilities lacking such enhanced services. Referring to Budget documents and CBEC circulars, the Tribunal held that the focus of the levy remained on services rendered by air-conditioned restaurants.
The appellant/assessee operates multiple vegetarian restaurants across Coimbatore. Out of its 16 branches, six had both air-conditioned and non-air-conditioned dining sections. While the company discharged service tax on food and beverages served in the air-conditioned sections, it did not pay service tax on supplies made in the non-air-conditioned areas.
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The Department took the view that after the amendment made through Notification No. 03/2013-ST, service tax was payable even on food served in non-air-conditioned portions if those portions formed part of an establishment having an air-conditioned restaurant. Based on this interpretation, show cause proceedings were initiated for the period from April 1, 2013 to March 31, 2015.
The adjudicating authority subsequently confirmed a service tax demand of ₹2,32,03,466 along with interest and imposed a penalty of ₹23,20,467.
The appellant contended that its air-conditioned and non-air-conditioned restaurants were physically segregated and functioned independently despite sourcing food from a common kitchen. Separate bills, pricing structures, service arrangements, and customer facilities existed for the two categories of dining areas. Bills issued in the non-air-conditioned sections specifically mentioned “Non-A/C”.
The company argued that the exemption under Notification No. 25/2012-ST, as amended, continued to apply to food served in non-air-conditioned restaurants. It also relied on CBEC Circular No. 173/8/2013-ST dated October 7, 2013, which clarified that where air-conditioned and non-air-conditioned restaurants are clearly demarcated and separately identified, only services provided in the air-conditioned restaurant are taxable even if food is sourced from a common kitchen.
The appellant further submitted that consumers dining in non-air-conditioned sections did not enjoy the premium services and ambience associated with air-conditioned restaurants and therefore could not be subjected to the same tax treatment.
The department argued that the exemption notification had to be interpreted strictly. According to the Department, the relevant criterion was whether any part of the establishment had air-conditioning facilities. Since the same establishment contained air-conditioned dining areas, the entire restaurant complex became taxable.
It was contended that the Board’s clarification would apply only where there were separately named and distinct restaurants and not where a single restaurant merely had separate air-conditioned and non-air-conditioned halls.
The Tribunal undertook a detailed examination of the legislative history of restaurant service taxation. It noted that when service tax on restaurants was first introduced in 2011, the levy was specifically targeted at air-conditioned restaurants, which were considered to provide a higher level of service and ambience.
The Bench found that the appellant’s non-air-conditioned dining sections were physically demarcated, separately operated, charged different prices, issued distinct bills, and provided a different level of service. These factors demonstrated that the non-air-conditioned sections functioned independently from the air-conditioned restaurants.
A significant factor in the Tribunal’s ruling was CBEC Circular No. 173/8/2013-ST. The circular expressly clarified that where a complex contains both air-conditioned and non-air-conditioned restaurants that are clearly demarcated and separately identified, only services provided in the air-conditioned restaurant would attract service tax, even if food was prepared in a common kitchen.
The Tribunal held that the appellant’s operational structure substantially satisfied the requirements laid down in the circular. It also noted that departmental authorities had granted similar relief in other cases involving comparable facts.
The Bench also referred to the judgment of the Madras High Court in Anjappar Chettinad A/C Restaurant v. Joint Commissioner of GST, where the Court had emphasized that service tax liability in restaurant services was linked to the provision of additional amenities and attendant services typically associated with air-conditioned restaurants.
According to the Tribunal, the High Court’s observations reinforced the view that the levy was intended only for air-conditioned restaurant services and not for ordinary dining facilities lacking such features.
The Tribunal concluded that Sree Annapoorna Sree Gowrishankar Hotels was not liable to pay service tax on food and beverages supplied in the non-air-conditioned portions of its restaurants during the period April 2013 to March 2015, despite those portions being located within the same establishment as air-conditioned dining areas.
CESTAT Rules Non-AC Dining Areas in Same Hotel Complex Not Liable to Service Tax; Quashes ₹2.32 Crore Demand Against Sree Annapoorna Hotels
The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of ₹2.32 crore raised against M/s. Sree Annapoorna Sree Gowrishankar Hotels Pvt. Ltd., holding that food and beverages served in clearly demarcated non-air-conditioned dining areas cannot be subjected to service tax merely because an air-conditioned restaurant operates within the same establishment.
The decision was delivered by a Bench comprising Shri Ajayan T.V., Member (Judicial), and Shri M. Ajit Kumar, Member (Technical), while allowing the appeals filed by the Coimbatore-based restaurant chain against an Order-in-Original dated February 28, 2017.
Background of the Dispute
Sree Annapoorna Sree Gowrishankar Hotels operates multiple vegetarian restaurants across Coimbatore. Out of its 16 branches, six had both air-conditioned and non-air-conditioned dining sections. While the company discharged service tax on food and beverages served in the air-conditioned sections, it did not pay service tax on supplies made in the non-air-conditioned areas.
The Department took the view that after the amendment made through Notification No. 03/2013-ST, service tax was payable even on food served in non-air-conditioned portions if those portions formed part of an establishment having an air-conditioned restaurant. Based on this interpretation, show cause proceedings were initiated for the period from April 1, 2013 to March 31, 2015.
The adjudicating authority subsequently confirmed a service tax demand of ₹2,32,03,466 along with interest and imposed a penalty of ₹23,20,467.
Hotel Chain’s Arguments
The appellant contended that its air-conditioned and non-air-conditioned restaurants were physically segregated and functioned independently despite sourcing food from a common kitchen. Separate bills, pricing structures, service arrangements, and customer facilities existed for the two categories of dining areas. Bills issued in the non-air-conditioned sections specifically mentioned “Non-A/C”.
The company argued that the exemption under Notification No. 25/2012-ST, as amended, continued to apply to food served in non-air-conditioned restaurants. It also relied on CBEC Circular No. 173/8/2013-ST dated October 7, 2013, which clarified that where air-conditioned and non-air-conditioned restaurants are clearly demarcated and separately identified, only services provided in the air-conditioned restaurant are taxable even if food is sourced from a common kitchen.
The appellant further submitted that consumers dining in non-air-conditioned sections did not enjoy the premium services and ambience associated with air-conditioned restaurants and therefore could not be subjected to the same tax treatment.
Revenue’s Stand
The Revenue argued that the exemption notification had to be interpreted strictly. According to the Department, the relevant criterion was whether any part of the establishment had air-conditioning facilities. Since the same establishment contained air-conditioned dining areas, the entire restaurant complex became taxable.
It was contended that the Board’s clarification would apply only where there were separately named and distinct restaurants and not where a single restaurant merely had separate air-conditioned and non-air-conditioned halls.
Tribunal’s Analysis
The Tribunal undertook a detailed examination of the legislative history of restaurant service taxation. It noted that when service tax on restaurants was first introduced in 2011, the levy was specifically targeted at air-conditioned restaurants, which were considered to provide a higher level of service and ambience.
The Bench observed that the objective behind the levy was never to tax ordinary dining facilities lacking such enhanced services. Referring to Budget documents and CBEC circulars, the Tribunal held that the focus of the levy remained on services rendered by air-conditioned restaurants.
Importantly, the Tribunal found that the appellant’s non-air-conditioned dining sections were physically demarcated, separately operated, charged different prices, issued distinct bills, and provided a different level of service. These factors demonstrated that the non-air-conditioned sections functioned independently from the air-conditioned restaurants.
Reliance on CBEC Clarification
A significant factor in the Tribunal’s ruling was CBEC Circular No. 173/8/2013-ST. The circular expressly clarified that where a complex contains both air-conditioned and non-air-conditioned restaurants that are clearly demarcated and separately identified, only services provided in the air-conditioned restaurant would attract service tax, even if food was prepared in a common kitchen.
The Tribunal held that the appellant’s operational structure substantially satisfied the requirements laid down in the circular. It also noted that departmental authorities had granted similar relief in other cases involving comparable facts.
Support from Madras High Court Decision
The Bench also referred to the judgment of the Madras High Court in Anjappar Chettinad A/C Restaurant v. Joint Commissioner of GST, where the Court had emphasized that service tax liability in restaurant services was linked to the provision of additional amenities and attendant services typically associated with air-conditioned restaurants.
According to the Tribunal, the High Court’s observations reinforced the view that the levy was intended only for air-conditioned restaurant services and not for ordinary dining facilities lacking such features.
Final Verdict
Allowing the appeals, the Tribunal concluded that Sree Annapoorna Sree Gowrishankar Hotels was not liable to pay service tax on food and beverages supplied in the non-air-conditioned portions of its restaurants during the period April 2013 to March 2015, despite those portions being located within the same establishment as air-conditioned dining areas.
Accordingly, the Tribunal set aside the impugned order confirming the tax demand, interest, and penalty, and granted consequential relief to the appellant.
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