The Background

Recently, the Maharashtra AAR had given a ruling that the supply of ice cream from the applicant’s retail outlets constitutes a supply of goods under Section 2(52) of the CGST Act, 2017. It relied on a ruling by the Rajasthan High Court and made a distinction between the ice cream outlets and conventional restaurants where food is prepared and served to the customers by waiters. It further expounded that even if the transaction is considered to be a composite supply under Section 2(30), the principal supply would still be sale of goods i.e., ice creams. The AAR concluded that as there is a transfer of title in ice creams from the applicant to the customers and the transaction is a supply of goods, in terms of Entry No.1 (a) of Schedule II of CGST Act.

The Journey

The facts that were before the AAR indicate that the applicant purchased ice creams from the Franchisor and the ice creams were sold either in retail packs or by way of scoops. The retail pack was nothing but ‘tubs’ being plastic containers which had the details of the product including MRP. In so far as scoops were concerned, the ice creams purchased in wholesale packs were emptied into steel containers at the outlet and the ice cream was sold to the customer in scoops served in paper cups, regular cones and waffle cones. The factual matrix also indicated that the customer would also seek flavour combinations and there were cases where the ice creams were also sold in semi melted form. The outlet also provided toppings such as fruits based on customer requirements.

The Debate

One cannot help but notice that the applicant’s submissions were more towards the transaction being supply of goods rather than supply of services and the AAR also veered towards such a conclusion by relying upon the decision of the Rajasthan High Court in the case of Govind Ram v State of Rajasthan (AIR 1982 Raj 265) wherein it was held that if the dominant object is the sale of eatables and drinks and rendering of services is merely incidental then the transaction may amount to sale. While the AAR ruling is relevant only to the applicant and does not constitute a binding precedent, this ruling has opened up a pandora’s box. The law makers in their wisdom implemented GST in India and chose to treat goods and services separately. However, the law makers were very careful in dealing with certain transactions which contributed to maximum litigation in the pre-GST era.

The Aspect Theory

The pre-GST litigation was dominated by the goods versus services debate. When a restaurant or a food outlet sold food, the VAT law perceived a sale of goods while the Service Tax law perceived a provision of service. The AAR’s view that the sale of ice cream by way of scoops from tubs or as retail packs constitutes a sale of goods may not be the right proposition of law in the GST regime, given the specific provisions in the GST law treating certain composite supplies as supply of services. The ruling applies the aspect theory which was relevant in the pre-GST era. This theory was manifest in many decisions where one aspect would fall within the subject matter of levy by the Parliament and another aspect of the transaction could be the subject matter of legislative power of the State. Composite supplies such as works contracts, catering contracts, restaurant and hotels were subject to this debate. In some cases, one could see a dual levy on different components of the transaction and in some cases, there was clearly an overlap.

The Delhi High Court in the case of Commissioner, VAT, Trade and Taxes Department v. International Travel House Ltd., (2009) 25 VST 653 (Delhi), referring to the ratio laid down by the Supreme Court in Bharat Sanchar Nigam Limited held that, the “aspect” theory (viz. the aspect of goods in composite contracts) would not apply to enable the value of the services to be included in the sale of the goods or the price of the goods in the value of the service. the contract in question being a composite contract is to be treated as a contract for services and no sales tax can be imposed on the contracts in question.”

The GST Legislation

The debate was put to rest when the Parliament enacted the Central Goods and Services Tax Act, 2017 and more specifically Schedule II of the CGST Act. In terms of Section 7(1A) of the CGST Act, activities or transactions which constitute a supply under Section 7(1) shall be treated either as supply of goods or supply of services as referred to in Schedule II .Entry 6 of Schedule II deals with composite supply and Para 6(b) provides that 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 (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration shall be treated as a supply of services.

A plain reading of this entry would show that supply of food or any other article for human consumption is treated as a supply of service under 3 circumstances namely 

  • When it is a supply by way of any service;
  • When it is a supply as part of any service;
  • When it is a supply in any other manner.

Thus, supply of food, articles for human consumption and non-alcoholic beverages have been treated as supply of services.

The Joy

The AAR records the fact that the ice creams are stored in steel containers and has also oversimplified the facts by stating that the ice creams are sold in paper cups, regular cones and waffle cones without appreciating the fact that the ice creams are served. The ice creams are in fact on splendid display in steel containers and an enthusiastic customer defying age and Doctor’s advice gleefully looks through the various colours; imagines the flavour and in most cases tastes the flavour and then makes an informed choice of a single scoop or multiple scoops or that of a single flavour or multiple flavours or that of the mode of the same being served or that of the choice of toppings. This sheer joy of the customer is encouraged by the employees in the outlets who take great efforts to ensure that the appropriate flavour in the appropriate combination residing in an appropriate receptacle is duly served. If this is not a service, what else could be?

The dominance of service in an ice cream outlet is evident by the time that is taken by the customer to make a choice as well as the time taken by the employee to complete the service being a customized order. There is a whale of a distinction between a paper cup which lands in the bin after the ice cream is consumed, and a cone which by itself is an edible preparation. There are also differences between a plain cone and a waffle cone. It is not clear as to whether the outlet made its own waffle cones or purchased the same. Either way, the waffle cones are edible and they also contribute to the enhanced taste experience of the ice cream.

The AAR observes that the intention of the parties and the understanding of the parties is that the same is a sale and there is no contract for provision of service. This is far from the truth since the intention of the customer is to get the desired serving of the ice cream being the flavour of choice and the variants being combinations and toppings. The last thing in the mind of the customer is to obtain transfer of title in the ice cream in his favour. The AAR also records that the customer is free to consume the ice creams inside and outside the outlet. The observations to the effect that many outlets do not offer seating or the seating is occupied by senior citizens and mothers with toddlers or seating is outside is totally irrelevant when the Parliament in their wisdom chose to classify the transaction as a supply of service.

Normally, an ice cream outlet would be aesthetically designed; air conditioned and with appropriate cold storage facilities and would be lit in such a manner to appeal to the customers. The ambience and the aesthetic element would be predominant since the visual appeal of the ice cream plays a major role in the mind of the customer. The outlet would have the necessary comfort for the customer to even stand and consume the product. It is irrelevant whether the customer chooses to consume his purchase within or outside the eating facility.

The Service

When a transaction is in the nature of a service one should not go on a fishing expedition to catch an element of ‘goods’ in the service. Considering ice-cream as sale of goods with transfer of title in an ice-cream outlet is as quixotic as perceiving sale of tomato or coriander in a tomato soup that is being served. In fact, in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India (2006) 2 STR 161, the Apex Court held that “if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.”

When the law makers have chosen to declare supply of food and beverages as a service through Entry 6(b), Second Schedule, CGST Act, considering the same as supply of goods falling under Entry 1(a) which deals with transfer of title in goods may not be correct.

The Alternative

GST at the rate of 5% under Notification No.11/2017 for restaurants, eating joints, mess, canteen, etc. is subject to the condition of non-availment of input tax credit. While the applicant has earnestly submitted that the transaction should be a supply of goods, the reasons could probably be the non-availability of ITC under Notification No.11/2017 and the ITC for an icecream outlet could be significant. In fact, one of the questions posted before the AAR was whether it is mandatory for the applicant to discharge GST at 5% under Entry 7(i), Notification No.11/2017, if the supply is held to be a supply of service, given the fact that the Notification provides for a conditional entry. The AAR has not answered the question in lieu of the fact that the Ruling was to the effect that it is a supply of goods.

It is worthwhile to examine whether restaurants, eating joints, mess, canteen, etc. including icecream outlets can opt for the residual GST rate of 18% as applicable to services and avail input tax credit. Notification No.11/2017 has been issued in exercise of powers available under Section 9(1) as well as Section 11(1) of the CGST Act. While Section 9(1) deals with the power to notify the rate of tax, it does not cover the power to specify conditions. Section 11(1) deals with the power to grant exemption and one would have to perceive that the 5% rate is akin to a partial exemption granted under Section 11(1) with conditions. It is settled position of law that the conditional exemption is not binding and it is open to the assessee not to avail the said exemption; discharge GST at the residual rate and avail input tax credit. Needless to say, that litigation is likely in this space.


Published in Taxsutra