State of Karnataka v. Udipikrishna Bhavan ((1981) 3 SCC 76)

Facts of the Case

This case came shortly after the Supreme Court's definitive ruling on the taxability of meals in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (on review, 1980), and required the Court to clarify how the principles laid down in that case should be applied by lower authorities.

• The Assessee: Udipikrishna Bhavan, a hotel operator in Karnataka serving food and refreshments.

• The Dispute: The Sales Tax Authorities sought to levy sales tax on the supply of refreshments by the hotel.

• Lower Courts' Reliance: The Karnataka Appellate Tribunal and the High Court ruled in favour of the hotel, holding that the supply of food was part of a "social service and not a sale," based on an interpretation of the initial Supreme Court ruling in Northern India Caterers (1978).

• The State's Challenge: The State of Karnataka challenged this blanket exemption, arguing that the specific facts of the transaction must be examined to determine if a sale component exists.

Issue

Whether the lower courts were justified in granting a blanket exemption from sales tax to the hotel merely upon finding that the assessee runs a hotel, or whether a factual assessment based on the "dominant object" of the transaction was required, as established in the Northern India Caterers review judgment.

Judgment

The Supreme Court set aside the High Court's order and remitted the case back to the Sales Tax Officer for a fresh assessment. The Court held that the lower authorities' conclusion was reached without proper application of the decisive legal principle.

Legal Analysis

The Court used this opportunity to correct the misapplication of its own precedent regarding composite contracts in the hospitality sector.

1. Misapplication of Northern India Caterers

• Blanket Exemption Rejected: The Supreme Court noted that the Tribunal and High Court had misinterpreted the Northern India Caterers judgment. The mere finding that the assessee runs a hotel where food and drinks are served is not sufficient to justify a blanket conclusion that the supply of food is merely a "social service" exempt from tax.

• Dominant Object Test Mandate: The Supreme Court, referencing its own judgment disposing of the review petition in the Northern India Caterers case (1980), reiterated that the taxability hinges on the dominant object of the transaction:

  "Where food is supplied in an eating-house or restaurant, the substance of the transaction, evidenced by its dominant object, determines whether it qualifies as a sale of food or a social service."

2. Necessity of Factual Determination

• Role of Taxing Authority: The determination of the transaction's true nature is primarily a question of fact that must be ascertained by the taxing authority (the Sales Tax Officer) based on the specific circumstances of the contract, the nature of the service, and the manner of supply in each case.

• Guideline for Fresh Assessment: By remanding the case, the Supreme Court effectively directed the Sales Tax Officer to conduct a thorough inquiry based on the Northern India Caterers guidelines—ascertaining whether the true intention was the transfer of property in food qua goods (a sale) or the rendering of service, with the supply of food being merely incidental.

Commentary: Fact Finding in Composite Contracts

The Udipikrishna Bhavan case is important because it clarified the procedural application of the seminal Northern India Caterers ruling.

It acts as a warning to lower courts and tribunals against drawing sweeping legal conclusions based solely on the nature of the assessee's business (running a hotel). Even where a contract is composite, the law requires the relevant taxing authority to actively apply the dominant object test to the facts of the particular transaction to ascertain the legal character of the supply.

This decision underlined that the Supreme Court's ruling on the indivisibility of hospitality contracts did not automatically grant every restaurant an exemption; it merely established the legal framework for testing the transaction's taxability.