By TIOL News Service

NEW DELHI, SEPT 30, 2015: THE applicant is a resident public limited company and is in the business of establishing and running an indoor sports complex and club. The facilities are proposed to be allowed to the members from whom membership fee and also refundable deposits are collected. The applicant raised the following questions before the AAR.

(a) Whether the relationship between the applicant and members of the club could be considered as provision of 'service' by one person (service provider) to another person (service receiver) for the purpose of Section 65B(44) of the Finance Act, 1994 read with Sections 66B, 66D and Section 66E of the Finance Act,

(b) Whether refundable security deposit would be subject to Service Tax is in accordance with the applicable provisions of law, in particular, the definition of service contained in Section 65B(44) read with sections 66B, 66D and Section 66E of the Finance Act, 1994 or not.

It is the contention of the applicant inter alia that there is no "activity" undertaken by the applicant for the members, that no service is being provided by one person to another as there is complete absence of identity between the contributors and the beneficiaries thereof; that for a service to be regarded as taxable service, there should be two distinct person i.e. service provider and service receiver.

After hearing both sides, the AAR ruled:

+ It is observed that the term "activity" has very wide connotation. It could be active or passive. Further, it includes provision of a facility provided by the club. Therefore, the contention of the applicant that the proposed service of club to members will not have the element of "activity" and thus, will not fall under the definition of "service", is not tenable.

+ In Joint Commercial Tax officer, Madras vs. Young Men's Indian Association, the Supreme Court held that clubs or associations were not transferring property belonging to them but were merely acting as agents for and on behalf of members; that they were not selling goods but rendering a service to their members. The judgment makes it clear that activity of giving goods to its members by the club is not sale but service. Therefore, this verdict of the Hon'ble Supreme Court is in favour of the Revenue.

+ With effect from 01.07.2012, new system of taxation of services has been introduced by the Government. Besides other changes, the word "service" has also been defined under Section 65B (44) of the Finance Act, 1994. Explanation 3 (a) to said Section states that for the purposes of this chapter, an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons. Therefore, deeming provision has been introduced with effect from 01.07.2012 to the effect that the club and members are deemed to be separate persons. In view of these recent changes, the judgments of Hon'ble High Courts relied upon by the applicant, are no more applicable to facts of the case before us. Therefore, the contention of the applicant that club and its members are not two distinct persons, is incorrect.

With regard to interest on refundable deposits, the AAR Ruled:

+ It is noticed from Section 67(1)(i) ibid that consideration received in money for services rendered is liable to Service Tax. In the case before us, refundable security deposit ranging from Rs . 1.50 lakhs to Rs . 10 lakhs is to be taken by the applicant for a period of 20 years, for most of the categories of members. Since refundable security deposit is proposed to be taken from members in money (ranging from Rs. 1.50 lakhs to Rs . 10 lakhs), Section 67 (1) (ii) and (iii) are not applicable. Applicant proposes to take refundable security deposit from proposed members and same is not a consideration for service provided or to be provided, as same would be refunded to members. Further, Section 67(1)(i) ibid inter-alia envisages that Service Tax chargeable on any taxable service with reference to value, be the gross amount charged by the service provider for such service provided or to be provided by him. Therefore, "charged" means amount collected or to be collected by the service provider for service provided or to be provided by him. Notional interest on refundable security deposit is not a "charge" by the applicant. Since there is no "charge" , there is no service in the present case.

+ Further, there is no provision under the Finance Act, 1994 or rules made there-under allowing addition of notional interest to the value of taxable service. Further, Revenue has not been able to establish that notional interest of refundable security deposit has led to depression or reduction in the value of taxable service.

Accordingly, the AAR ruled that the activity attracts service tax, but the notional interest on refundable deposits is not includable in the taxable value.

(See 2015-TIOL-07-ARA-ST)