The Customs, Excise & Service Tax Appellate Tribunal has clarified a long-standing ambiguity in the taxation of bundled hospitality services, affirming that separate invoicing for food and venue rental negates the classification of such services as composite. This decision provides critical relief to hotels and event venues that have faced retrospective tax demands for catering components billed independently.
Background & Facts
The Dispute
Sangu Chakra Hotels P Ltd, operating banquet halls in Madurai, charged customers separately for two distinct services: rental of banquet facilities under the category of "mandap keeper" service, and provision of food and beverages as a separate "Banquet Bill." While service tax was paid on the hall rental component, the department contended that the food service formed an inseparable part of the mandap keeper service and thus should be included in the taxable value under the same head.
Procedural History
- 2008 - 2013: Appellant provided banquet and catering services, issuing separate invoices for hall charges and food charges.
- 2015: Adjudicating Authority issued a show cause notice under the extended period of limitation, demanding Rs. 40.5 lakh in service tax, interest, and penalties under Section 76, 77, and 78 of the Finance Act, 1994, on the ground that food supply was part of a composite service.
- 2016: Commissioner (Appeals) upheld the demand, rejecting the appellant’s claim that Notification 12/2003-ST applied.
- 2026: Appeal filed before the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai.
Relief Sought
The appellant sought cancellation of the tax demand, interest, and penalties, arguing that the food component was a distinct supply of goods subject to VAT, and that separate billing satisfied the conditions of Notification 12/2003-ST for exemption.
The Legal Issue
The central question was whether the provision of food and beverages, when billed separately from banquet hall rental, constitutes a distinct supply eligible for exemption under Notification 12/2003-ST, or whether it forms an inseparable part of a composite service subject to service tax.
Arguments Presented
For the Appellant
The appellant relied on Jindal Hotels Limited v. CCE, Vadodara (2024) and Chokhi Dhani Resorts v. Principal Commissioner (2020) to argue that:
- Food supply is a sale of goods, not a service, and is subject to VAT.
- Customers are not compelled to avail catering; it is an optional add-on.
- Separate invoices and accounting records demonstrate clear segregation.
- Notification 12/2003-ST explicitly exempts the value of goods supplied with a service where evidence of value is maintained - conditions fully satisfied.
For the Respondent
The department contended that:
- The mandap keeper service inherently includes catering as an ancillary activity.
- The composite nature of the service cannot be fractured by mere invoicing.
- The intent of the law is to tax the entire package offered to customers.
- Previous decisions by the department and lower authorities had consistently treated such bundled offerings as taxable.
The Court's Analysis
The Tribunal emphasized that the nature of the service must be determined by the substance of the transaction, not merely by the label assigned by the service provider. It noted that the appellant had consistently issued separate bills for hall rental and food, with distinct accounting entries and VAT payments on the latter.
"The constraint of separate contract emphasized in impugned order remains of no legal consequence, when supplier of service and service receiver indicate through invoice by implication that separation of both elements was agreed upon and accepted by both parties to the contract."
The Tribunal held that the existence of separate billing, coupled with payment of VAT on food items, constituted sufficient evidence under Notification 12/2003-ST to exclude the value of goods from the taxable service value. It further observed that the earlier decisions of coordinate benches in Chokhi Dhani Resorts and Jindal Hotels were directly on point and binding under the principle of consistency in administrative adjudication.
The Tribunal rejected the department’s argument that the extended period of limitation could be invoked, noting that the issue involved a bona fide interpretation of law, not concealment or fraud. The absence of any evidence of intentional misclassification negated the grounds for invoking Section 73(1) for extended demand.
The Verdict
The appellant prevailed. The Tribunal held that Notification 12/2003-ST applies where food and venue services are separately billed and VAT is paid on the food component. The demand for service tax on the food value, along with interest and penalties, was set aside. The impugned order was quashed, and the appeal was allowed with consequential relief.
What This Means For Similar Cases
Separate Invoicing Defeats Composite Service Classification
- Practitioners must ensure that bundled services (e.g., accommodation + meals, venue + catering) are billed under distinct line items with separate accounting.
- Merely labeling services as "composite" in internal records does not override the taxpayer’s external billing practice.
- Tax authorities cannot impose service tax on goods components where VAT has been paid and invoices clearly segregate the value.
Notification 12/2003-ST Is a Powerful Exemption Tool
- Taxpayers in hospitality, event management, and tourism sectors can claim exemption for goods supplied with services if:
- Goods are identifiable and separately priced
- VAT or GST is paid on the goods component
- Records maintain clear evidence of value
- This applies even if the goods are consumed on-site.
Extended Period of Limitation Cannot Be Invoked for Legal Interpretation Disputes
- Assessments under extended period (beyond 3 years) require proof of fraud, suppression, or wilful misstatement.
- A bona fide difference in interpretation of law - such as whether a service is composite - is insufficient to justify extended demand.
- Practitioners should raise this as a threshold defense in any audit or reassessment involving novel or contested classifications.
