Classification Of Hotels Based On Star Ratings Is Not Arbitrariness Or Discrimination Under Article 14 Constitution: Delhi High Court
The Delhi High Court said that having voluntarily sought and obtained the benefits of star accreditation, the Petitioners-hotels cannot now assail the consequential fiscal obligations, the doctrine of approbation and reprobation squarely operating against them.
Justice Purushaindra Kumar Kaurav, Delhi High Court
The Delhi High Court held that the classification of hotels on the basis of star ratings does not suffer from the vice of arbitrariness or discrimination under Article 14 of the Constitution.
The Court held thus in a batch of Writ Petitions challenging the recommendations made by the Municipal Valuation Committee (MVC) under Section 116 of the Delhi Municipal Corporation Act, 1957 (DMC Act), implemented by the Municipal Corporation of Delhi (MCD) for levying property tax on the Petitioners-hotels.
A Single Bench of Justice Purushaindra Kumar Kaurav observed, “The classification of hotels on the basis of star ratings does not suffer from the vice of arbitrariness or discrimination under Article 14 of the Constitution. The star-rating system, being an objective and universally recognised yardstick prescribed by the MoT, is a system of self-classification and furnishes an intelligible differentia distinguishing luxury hotels from ordinary hospitality establishments. The said classification bears a rational nexus with the legislative object of imposing a higher fiscal incidence on establishments catering to affluent clientele and availing premium amenities.”
The Bench added that having voluntarily sought and obtained the benefits of star accreditation, the Petitioners cannot now assail the consequential fiscal obligations, the doctrine of approbation and reprobation squarely operating against them.
Senior Advocates Harish Malhotra, B.B. Gupta, Rajiv Nayar, Gaurav Sarin, Ravi Kant Chadha, Advocates Tarun Johri, Lalit Bhasin, Charul Sarin, and Sidharth Aggarwal appeared for the Petitioners while Senior Advocate Sanjay Poddar, Advocates Madhu Tewatia, and Suneita Ojha appeared for the Respondents.
Brief Facts
The Petitioners-hotels sought the quashing of the user multiplier factor of 10 and the imposition of the rate of tax as 20% as against 10% before. The majority of the Writ Petitions were related to the hotels of the erstwhile 5-star category. The rating of 5-star was allegedly reclassified as 4-star with effect from February 2, 2022. In the year 2004, the DMC (Amendment Act), 2003 came into force which brought about a change in the property tax regime to the extent of replacing the then existing Rateable Value (RV) system with Unit Area Method (UAM).
After the enforcement of UAM based system, the property tax for a particular property was calculated based on annual value of the property arrived at as per Section 116 E of the Amendment Act of 2003, by multiplying the Unit Area Value (UAV) of such covered space of the property and the multiple factors of occupancy, age, structure, and use as referred to in clause (b) of Section 116 A (2) of DMC Act.
After the said amendment, the DMC (Property Taxes) Bye-Laws, 2004 were also issued by the MCD. In the oldest pending Writ Petition, it was recorded that the challenge to the vires of Section 116(E) of the DMC Act, as amended by the Amendment Act of 2003, was given up. Similar orders were passed by the Court in various other Writ Petitions taken up for adjudication. Thus, the constitutional validity of any of the statutory provisions of the DMC Act was not assailed by the Petitioners. Pursuant to the said aspect, the Petitions were placed before the High Court.
Issues for Consideration
The following issues arose for consideration before the Court –
(i) Whether the imposition of a uniform UF-10 and a 20% property tax rate on hotels classified as 3-star and above, particularly when such classification is based on voluntary star ratings, violates Article 14 of the Constitution being arbitrary?
(ii) Whether inclusion of non-FAR, non-revenue spaces like basements and stilts in 'covered space' for the calculation of property tax is ultra vires Section 116 E of the DMC Act?
(iii) Whether the recommendations of MVC, as adopted by the MCD, were consistent with the procedural mandate provided under Sections 116A to 116C of the DMC Act?
Court’s Observations
In view of the first issue, the High Court noted, “Upon careful consideration of the facts and legal position explicated hereinabove, the Court is unable to accept the arguments advanced by the petitioners. … The imposition of a higher rate of property tax on luxury hotel establishments cannot be construed as arbitrary or capricious, particularly in light of the economic profile of the clientele such establishments are designed to attract. These enterprises voluntarily situate themselves within a premium segment of the hospitality industry, offering high-end amenities and exclusive services that cater to patrons of considerable means, individuals who, by virtue of their financial capacity, are already contributors to the higher tax brackets across various statutory schemes.”
The Court said that the classification based on the star rating of hotels is rationally connected to the object of the legislation, which is the imposition of property tax based on the classification of buildings into different categories and these buildings operating as high-end luxury hotels, categorized under superior star ratings, encompass premium infrastructure and exclusive facilities, such as grand banquet halls, spas, fine-dining establishments, concierge services, and other opulent amenities that distinctly separate them from ordinary lodging accommodations.
“… the legislative intent underlying the imposition of elevated property tax rates on such establishments is to equitably distribute the fiscal burden, ensuring that those possessing greater capacity to pay contribute proportionately to the public revenue. This mechanism advances the tenet of economic equity, whereby taxation is calibrated to reflect not merely ownership, but also various other factors such as the economic stature and voluntary positioning of the establishment”, it remarked.
The Court was of the view that the star-rating system, which is used to classify hotels based on the quality of their services, infrastructure, and amenities, provides an intelligible and rational basis for this distinction.
“The star-rating system is an objective and widely recognized standard that provides a practical mechanism for distinguishing between high-end and modest hotels that offer a spectrum of services. To mandate a fresh classification would unnecessarily complicate the legislative process and introduce greater subjectivity. The Court, therefore, holds that the reliance on the star-rating system is not only rational but also serves the purpose of ensuring fairness and reducing the administrative burden associated with determining which hotels should be subject to higher taxes and which to lower”, it held.
The Court further observed that the star-ratings are based on a host of factors and are intended to target a certain section of society and thus, the hotels placed in a common star category share similar economic dynamics and consequently, the exaction of tax from such similarly placed hotels could not be termed as arbitrary or unconstitutional.
“In conclusion, after a thorough examination of the facts and legal principles, this Court upholds the classification of hotels based on their star ratings as a valid exercise of legislative power. The classification passes the test of reasonableness under Article 14 of the Constitution, as it is based on an intelligible differentia and bears a rational nexus with the object of raising revenue from those who are economically capable. It is apposite to reiterate that calibration of tax rates on the basis of the economic potential of an entity is not unknown to law”, it added.
The Court, therefore, upheld the classification and declared the imposition of the property tax based on this classification to be constitutionally valid.
With regard to the second issue, the Court said, “Bye-law 14 is not ultra vires 116E of the DMC Act and the challenge on this aspect is turned down. … The contention of some of the petitioners that, under the Delhi Development Act, 1957, the Master Plan and Zonal Plans formulated under Sections 7-11 of the DMC Act are accorded supremacy in respect of governing the use to which land is put, is equally unsustainable. An examination of the concerned provisions does not accord any such purported supremacy to the aforesaid Plans.”
The Court noted that the challenge by Petitioners to Bye-law 14, which includes non-FAR, non-revenue spaces such as basements and stilts within the definition of ‘covered space’ for property valuation, is without merit.
“The inclusion of these areas aligns with the expansive definition provided under Section 116E of the DMC Act, which grants the MCD the authority to prescribe such spaces. The Court holds that Section 116E of the DMC Act does not mandate differential base area values for distinct areas within a property based on their use, and the imposition of a uniform base area value for the entire hotel complex is consistent with the statutory provisions. The challenge to the policy is ultimately a matter of legislative discretion and falls within the jurisdiction of the MTT, not this Court”, it held.
The Court explained that the determination of ‘covered space’ is not confined solely to areas that directly generate income and the inclusion of garages, service areas, and basements is consistent with the legislative intent to account for all usable and constructed spaces within a building’s footprint.
“These areas, while not revenue-generating in the traditional sense, are integral to the functioning of the building and, in many cases, support the primary commercial or residential activities of the property. Garages and service areas, for instance, facilitate the operation and maintenance of the building, and basements, while sometimes used for storage, often serve as critical infrastructure for the proper functioning of the premises. If not directly, their existence is often essential for the overall financial viability of the building and contributes to the income generation potential of the enterprise”, it observed.
Coming to the last issue, the Court noted that the classification of star-rated hotels under UF-10 was the result of a thorough, lawful, and participatory process that adhered to the statutory provisions of the DMC Act and the constitutional mandate of fairness and reasonableness.
“The MVC‟s recommendations, which were subject to public consultation, were revised based on stakeholder feedback, and these revisions were well within the legal scope envisaged under Sections 116A to 116C of the DMC Act. The MCD's acceptance of the final recommendations, including the assignment of UF 10 to 3-star and above hotels, followed a transparent and inclusive process that complied with the principles of natural justice. The challenge to the imposition of UF-10 was, therefore, legally unsustainable, as the entire process met the statutory requirements and upheld the constitutional principles of fairness and reasonableness”, it held.
The Court also remarked that mere disagreement with the outcome of the process cannot be a ground of review, unless the process itself is compromised, which is not the case herein.
Conclusion
The Court held that the uniform levy of UF-10 and property tax at the rate of 20% on 3-star and above hotels is a valid exercise of legislative discretion and withstands scrutiny under Article 14 of the Constitution.
“… the inclusion of non-FAR, non-revenue generating areas such as basements, stilts, service areas and garages within the definition of "covered space" under Bye law 14 is intra vires Section 116E of the DMC Act. Section 116E itself adopts an inclusive definition of covered space and empowers the MCD to bring additional areas within its sweep”, it said.
The Court observed that the inclusion of ancillary areas within the tax base is, thus, neither arbitrary nor ultra vires, but a legitimate reflection of their integral role in enhancing the commercial utility of hotel establishments.
“The recommendations of the MVC, as adopted by the MCD, were in strict conformity with the procedure enshrined in Sections 116A to 116C of the DMC Act. The statutory scheme constitutes a self-contained code prescribing the classification of colonies, fixation of BUAVs, and determination of multiplicative factors, through a regime of public notice, invitation and consideration of objections, and revision of recommendations. The process culminating in the adoption of the MVC‟s recommendations by the MCD is, thus, held neither arbitrary nor ultra vires, but in faithful adherence to the legislative mandate”, it concluded.
Accordingly, the High Court disposed of the Writ Petitions.
Cause Title- M/s Eros Resorts & Hotel Ltd & Anr. v. Municipal Corporation of Delhi (Neutral Citation: 2025:DHC:8145)
