Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi

Facts of the Case

This case, which required a subsequent clarification (review), addressed whether the supply of meals in a restaurant or hotel dining room could be taxed as a sale of food items.

• The Assessee: Northern India Caterers (India) Ltd., a hotelier providing lodging and meals to residents and serving meals to non-residents in its restaurant.

• The Dispute: Sales tax authorities sought to impose sales tax on the receipts from meals supplied, treating a portion of the turnover as representing the price of the food sold.

• The Appellant's Contention: The supply of meals, whether to residents on inclusive terms or to customers in the restaurant, was part of an entire and indivisible service contract (a contract of hospitality or ministering to a bodily want) and not a separate contract for the sale of goods (foodstuffs).

• High Court: The High Court allowed the levy of sales tax on the meals served in the restaurant (to non-residents) but excluded those supplied to residents on inclusive terms.

Issue

Whether the service of meals and beverages to customers in a restaurant (or hotel) constitutes a taxable "sale of goods" under the sales tax legislation of the time (Bengal Finance (Sales Tax) Act, 1941, as extended to Delhi).

Judgment

The Supreme Court, in its final decision on review (1980), held that the service of meals to visitors in the restaurant did not constitute a taxable sale under the sales tax law, regardless of how the charges were calculated.

Legal Analysis

The Court relied heavily on the historical and legal tradition associated with hoteliers and restaurateurs, and the doctrine of the indivisibility of composite contracts (established in Gannon Dunkerley).

1. The Dominant Object Test (Hospitality)

The Court applied the dominant object test to the transaction:

• Essence of Service: The essence of the transaction in a restaurant is service and hospitality. The customer is there for more than just the food; they are there for the ambiance, seating, crockery, cutlery, service, and cooking expertise.

• Indivisible Contract: The contract is considered entire and indivisible. It cannot be artificially split into a contract for the sale of foodstuffs and a contract for service. The dominant object is the ministering to a bodily want or the satisfaction of a human need through the provision of hospitality.

• Legal Precedents: The Court cited English and American jurisprudence, which traditionally viewed the supply of food by an innkeeper or restaurateur as a matter of service and not a sale of provisions, even if a bill was presented itemizing the price of the food.

2. Rejection of Divisibility

The Court rejected the argument that calculating charges per dish (or a la carte) makes the transaction divisible into a sale:

• Billing is Procedural: Whether the charge is a fixed lump sum (table d'hôte) or calculated per item (a la carte), the fundamental legal nature of the transaction as a single service contract does not change. The method of computation does not transform a service into a sale of goods.

• No Distinction Between Customers: The Court found no legal basis to distinguish between residents and non-residents served in the restaurant. In both cases, the dominant intention remains the provision of hospitality and service, which is not a "sale of goods" in the constitutional sense.

Commentary: Overruled by Amendment

Northern India Caterers represents the final and authoritative position of the Supreme Court prior to the 46th Constitutional Amendment regarding the taxability of meals served in restaurants and hotels.

The ruling made it clear that since the transaction was viewed as an indivisible contract for service where the transfer of property in food was merely incidental, it fell outside the scope of the State's power to tax the "sale of goods".

This judgment, along with the Gannon Dunkerley decision, led directly to legislative action:

• The Constitution (Forty-Sixth Amendment) Act, 1982, introduced Article 366(29A)(f), which defined "tax on the sale or purchase of goods" to include a "tax on the supply, by way of or as part of any service... of food or any other article for human consumption..."

This constitutional amendment effectively overruled the Northern India Caterers judgment by creating a legal fiction (a deemed sale) for the supply of food and drinks, thereby giving State Legislatures the competence to levy tax on that component of the restaurant transaction.