Restaurant and Caetring Services – Cenvat Credit

Cenvat Credit in respect of Restaurant and outdoor catering Services

V S Datey

 

There are various issues involved in availability of Cenvat credit in case of restaurant and outdoor catering services. These are discussed in this Article.

Background of service tax on restaurant and outdoor catering services

Section 66E(i) of Finance Act, 1994 defines following as ‘declared service’ – Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.

As per Article 366(29A)(f), a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, is ‘deemed sale of goods’.

Such ‘deemed sale of goods’ has been excluded from definition of ‘service’ itself , vide section 66B(44)(a)(ii) of Finance Act, 1994.

Thus, mere supply of food is not ‘service’ at all. Further, only service portion which is not ‘deemed sale of goods’ can be subject to service tax.

This service was earlier (upto 1-7-2012) partly covered as ‘outdoor catering’ service under section 65(105)(zzt) of Finance Act, 1994 and partly under ‘restaurant service’ under section 65(105)(zzzzv) of Finance Act.

Now, both outdoor catering and restaurant services have been clubbed under one head w.e.f. 1-7-2012.

Exemption to services provided in restaurants without air conditioning or central heating

Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, are exempt from service tax – Sr No.19 of  Notification No. 25/2012-ST dated 20-6-2012 w.e.f. 1-7-2012 as amended w.e.f. 1-4-2013.

Till 1-4-2013, Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having (i) the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and (ii) a licence to serve alcoholic beverages are exempt from service tax – Sr No.19 of  Notification No. 25/2012-ST dated 20-6-2012 w.e.f. 1-7-2012 as existing upto 1-4-2013.

Thus, after 1-4-2013, all restaurants having AC or central heating system in any part of establishment will be subject to service tax even if the restaurant does not have a bar. During 1-7-2012 to 31-3-2013, only restaurants with AC/central heating and bar were subject to service tax.

Thus, service tax provisions apply to restaurants air conditioned restaurants or having central air-heating in any part of establishment [Assessees in Gujarat are unhappy as till 1-4-2013 they were exempt from service tax as they could not officially serve liquor].

Restaurants with AC/central heating to pay service tax on 40%

The restaurants with AC/central heating and bar are required to pay service tax on 40% amount. They can avail Cenvat credit of input services, capital goods and input goods other than food items

Rule 2C of Service Tax (Determination of Value) Rules, 2006 [effective from 1-7-2012] makes provision for valuation of supply of food articles and drinks in restaurant or outdoor catering service.

Subject to section 67 of Finance Act, 1994, the value of taxable service involved in the supply of food or drinks for consumption either in a restaurant or as outdoor catering, shall be the percentage of total amount charged for such supply, as follows -

Service portion in an activity wherin goods,  being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity, at a restaurant 40% of ‘total amount
Service portion in outdoor catering wherin goods,  being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of such outdoor catering 60% of total amount
Food as part of other services like convention, pandal, shamiana etc. (abatement scheme) 70% of total amount

 

Restrictions on Cenvat credit – Cenvat Credit of input services and capital goods will be available.

Any goods classifiable under chapters 1 to 22 of the Central Excise Tariff Act, 1985 meant for human consumption shall not be considered as “inputs” for the service portion in an activity wherein goods, being food or any other article of human consumption or drink is supplied in any manner as part of the activity.

Thus, Cenvat Credit of Cenvat credit of food items (falling under Chapters 1 to 22 of Central Excise Tariff) is not available. Cenvat credit of other input goods is available [There will be hardly such input].

Cenvat Credit of service tax and capital goods

The service provider can avail Cenvat credit of service tax paid on input services and excise duty paid on capital goods, but not of excise duty paid on food items.

The service tax is payable on 40%/60%/70% of ‘total amount’.

Issue is whether 100% Cenvat Credit of input services is available or only proportionate Cenvat Credit of input services and input goods (other than those covered under chapter headings 1 to 22) is available, as per rule 6 of Cenvat Credit Rules.

Composite contract of material plus service – The contract is composite contract of material plus services. Hence, rule 6 of Cenvat Credit Rules should be applicable.

29.2-4 Is excise duty payable on food served in hotel?

There is no doubt that food is ‘manufactured’ in restaurant.  These can be subjected to excise duty.

Most of food products were exempted earlier vide Notification No. 3/2006-CE dated 1-3-2006.

However, when 1% excise duty was imposed on many items w.e.f. 1-3-2011, the entries relating to food items in Notification No. 3/2006-CE were omitted vide Notification No. 23/2011-CE dated 24-3-2011. Later Notification No. 37/2011-CE dated 25-7-2011 was issued making it clear that excise duty is not applicable for food preparations served in restaurants of articles covered under 16 or 19.

The Notification No. 6/2006-CE dated 1-3-2006 was rescinded and replaced by Notification No. 12/2012-CE dated 17-3-2012.

As per Sr Nos. 12 and 13 of Notification No. 12/2012-CE dated 17-3-2012, food preparations, including food preparations containing meat, fruits and vegetables, which are prepared or served in a hotel, restaurant or retail outlet whether or not such food is consumed in such hotel, restaurant or retail outlet, falling under chapter headings 16, 19 or 20 (except 1905) are fully exempt from excise duty.

Thus, all food preparations falling under chapter headings 16 (preparation of meat, fish), 19 (preparations of cereals, flour, starch or milk) or 20 (preparations of vegetables, fruit, nuts) except 1905 (bread, pastry, cakes, biscuits and other baker’s wares) are exempt from excise duty.

However, soups are covered under heading 2104. Prepared tea can get covered under heading 2101 or 2202. Beverages containing milk (like falooda , milk shakes) can get covered under 2202 90 30, fruit juice based drinks are covered under 2209 90 30 (though fruit juices are covered under heading 2009).

Issue is whether excise duty is payable on products like soup, milk shakes, tea, coffee etc. sold in a restaurant or eating joint?

By strict interpretation, excise duty should be applicable.

However, non-inclusion of these items in exemption notification dated 17-3-2012 seems to be an inadvertent omission.

As per MF(DR) Instruction No. 332/09/2011-TRU dated 27-7-2011 [291 ELT T14], it is not intention of Government to charge excise duty on food preparations, including those containing meet, which are prepared and served in a hotel, restaurant or retail outlet, including such preparation provided as takeaways.

Para 8.4.3 of CBE&C’s education Guide released on 20-6-2013 states that sale of food in restaurant would amount to clearance of exempt goods and thus, provisions of Rule 6 of Cenvat Credit Rules will be applicable.

Thus, policy of Government is clear that excise duty is not payable on food served in a restaurant.

If issue comes, it seems Government will have to issue Notification under section 11C of Central Excise Act exempting these goods with retrospective effect.

Departmental clarification - Para 8.4.3 of CBE&C’s education Guide released on 20-6-2013 states that sale of food in restaurant would amount to clearance of exempt goods and thus, provisions of Rule 6 of Cenvat Credit Rules will be applicable.

Sale of food is deemed sale of goods, as per Constitution

Article 366(29A) of Constitution, as amended by Constitution (46th Amendment) Act, 1982, w.e.f. 2-2-1983 states as follows- ‘Tax on the sale or purchase of goodsincludes – - (f) a tax on supply, by way of or as part of any service or in any manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration – - And such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

Thus this is ‘deemed sale of goods’. 

Value in case of trading – As per Explanation I(c) to rule 6(3D) of Cenvat Credit Rules, in case of trading, ‘Value’ for purpose of rule 6(3) and 6(3A) of Cenvat Credit Rules shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or 10% of cost of goods sold, whichever is more.

Cenvat Credit in respect of Common input services

It is a fact that common input services are used both for deemed sale of goods and provision of output (taxable) service. There are three possible views on How to apply rule 6 in case of common input services service.

(a) The 60% (in case of restaurant service)/40% (in case of outdoor catering service)/30% (in case of food service with mandap/shamiana/convention service) of value (on which service tax is not paid) shall be deemed to be value of ‘exempted goods’ . In effect, assessee can avail only 40% (in case of restaurant service)/60% (in case of outdoor catering service)/70% (in case of food service with mandap/shamiana/convention service) of Cenvat credit of input services and balance Cenvat Credit is required to be reversed.

(b) The sale of food is to be treated as sale of goods as per Constitutional provisions. Thus, difference between sale price of goods and purchase price of inputs should be taken as value of ‘exempted services’ as per rule Explanation I(c) to rule 6(3D) of Cenvat Credit Rules. For example, in case of restaurant services, service tax is payable on 40% of value. Thus, 60% is to be taken as value of sale of food. If total value is 100 and value of purchase of goods is (say) 40, the value of ‘exempted service’ will be 20 (60 – 40).  Thus, total value of service = taxable service + Exempt service = 40 + 20 = 60. Thus, the assessee can avail Cenvat credit of common input services in the ratio of 40/60 i.e. 66.67% of common input services and balance 33.33% should be reversed.

(c) Explanation 2 to Rule 2C of Service Tax (Determination of Value) Rules, 2006 (as inserted w.e.f. 1-7-2012) states as follows – ‘For the removal of doubts, it is clarified that the provider of taxable service shall not take Cenvat credit of duties or cess paid on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985.  This implies that all other Cenvat credit is fully available, overriding provisions of rule 6 of Cenvat Credit Rules. This is on the principle that a specific provision (explanation 2 in rule C) prevails over a general provision (rule 6 of Cenvat Credit Rules) [Generalia specialibus non derogant - General things do not derogate from special - i.e. - Special provision prevails over general provision].

Which alternative assessee should assessee follow

The first alternative is of course conservative and hopefully free from litigation.

The second alternative can be justified on the basis that deeming Constitutional provision should prevail over a statutory provision in Central Excise Tariff Act. Hence. such sale of food should be treated as ‘sale of goods’ and difference between sale price and purchase price shall be taken as value of ‘exempted service’ and then rule 6 of Cenvat Credit Rules should be applied in respect of common input services (like audit, security, banking etc.).

The third alternative appears to be very aggressive. I doubt if this view will be accepted, as the fact remains that the common input services are used in respect of provision of food and provision of service. As per rule 2(l) of Cenvat Credit Rules, input services are only those which are used for providing output service. Though the inclusive part of definition of input service expands the scope of ‘input service’, it cannot cover input services which are not related to output services. Thus, entire input service cannot be said to be ‘used for providing an output service’.

The issue is not free from doubt and ultimate result is uncertain, though as per basic principle of Vat, such proportionate reversal of Cenvat credit can be justified.

If assessee intends to follow the second or third option, it is advisable to make full disclosure to department to avoid charge of suppression of facts.

In my view, second alternative is fair and reasonable.

Entire Cenvat credit of duty paid on capital goods available

Cenvat credit of 100% of excise duty paid on capital goods is available (and not restricted to  60%/40%/30%), in view of rule 6(4) of Cenvat Credit Rules.

Entire Cenvat Credit of input services directly relating to provision of taxable service

It may be noted that rule 6(3) of Cenvat Credit Rule applies only to common input services.

Para 2 of CBEC circular No. 754/70/2003-CX dated 9-10-2003 states as follows – ‘The option to maintain the separate accounts or payment of 8% of the price of the exempted goods can be exercised only in respect of common inputs used for the manufacture of dutiable and exempted goods’.

This view has been upheld in Chennai Petroleum Corporation Ltd. In re (2012) 286 ELT 467 (Commr Appl). In this case, it was held that rule 6 is only for common inputs and input services. Rule 6(3) is only procedural. It cannot take away right to avail credit fully on inputs and input services used in dutiable goods or taxable services. Credit of service tax paid on input services exclusively used in dutiable goods is not covered under rule 6 but under rule 3 of Cenvat Credit Rules.

Thus, entire Cenvat credit should be available where there is one to one relation between input service and output service (like back to back services).

Conclusion

(a) 100% Cenvat Credit is available in case of capital goods and input services used exclusively for providing output (taxable) services.

(b) In case of common input services, on the basis of Constitutional deeming provision, it can be argued that only difference between sale price and purchase price should be taken as value of exempted services and then rule 6 should apply. Issue is litigation prone and hence this option should be taken after full disclosure to department and where stakes are high and assessee is willing to contest the issue

(c) If assessee is conservative or where stakes are not high, it is advisable to treat sale of food as ‘exempted goods’ and then apply rule 6 (i.e. take only 40% Cenvat credit in case of restaurant service, 60% in case of outdoor catering service and 70% in case of other composite services).