OCTOBER 09, 2019

By Mr Nand Kishore, Partner, Mr Akash Deep, Principal Associate and Mr Rohit Arora, Associate, DSK Legal

RECENTLY, a larger bench of the Supreme Court in the case of State of West Bengal & Ors.v Calcutta Club Limited; Civil Appeal No. 4184/2009 and Chief Commissioner of Central Excise and Service & Ors. v Ranchi Club Ltd. Civil Appeal No. 7497/2012 - 2019-TIOL-449-SC-ST-LB decided one of the most litigated issues relating to taxability of sale of goods/provisions of services by member's club to their members.

The contention of the member's club was that it acts as agents of its members and hence any supply of goods or services to the members would constitute sale of goods or rendition of services to self and hence no sales tax / VAT or service tax can be levied in respect of such activities. They relied upon the doctrine of mutuality which was propounded by the Supreme Court in the case of CTO v. Young Men's Indian Association, (1970) 1 SCC 462 ("Young Men's Indian Association").

The revenue, on the other hand, argued that doctrine of mutuality/agency/trust has been done away by 46th Constitutional Amendment whereby Article 366(29-A), which was inserted to deem supply of goods by member's clubs to its members for a price as sale of such goods for the purpose of levy of sales tax.

On the issue of services provided by member's club to its members, the Revenue argued that the doctrine of mutuality was restricted to cases pertaining to VAT and cannot be applied to service tax cases.

Decision by the Supreme Court

Ruling in case of sale of goods

Article 366(29A) was introduced by way of 46th Constitutional Amendment with the view to expand the scope of tax on sale in respect of certain specified activities involving supply of goods or supply of goods and services, which hitherto was held by the Supreme Court in various decision as not amounting to sale of goods.

Clause (e) to Article 366 (29A) reads as under:

"tax on the sale or purchase of goods includes a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration ."

The Supreme Court relied upon the 61 st Law Commission Report, which recommended the above amendment to the Constitution. The Report was of the view that the Constitution ought not to be amended so as to bring within the tax net member's clubs. Three reasons were given in the report, viz. a) the number of such clubs and associations would not be very large; b) taxation of such transactions might discourage the cooperative movement; and c) third, no serious question of evasion of tax arises as a member of such clubs really takes his own goods.

The Court referred to the Statement of Objects and Reasons for 46th Constitutional Amendment wherein it was observed that while sale by registered club or other association of persons (the club or association of persons having corporate status) to its members is taxable, sales by an unincorporated club or association of persons to its members is not taxable as such club or association, in law, has no separate existence from that of the members.

The Court held that the Statement of Objects and Reasons did not properly understand the decision of the Supreme Court in the case of Young Men's Indian Association case. It was held that, in the Young Men's Indian Association case, the Supreme Court had held that sale of good by an incorporated entity to its members is sale to self and hence, does not amount to sale of goods for levy of sales tax.

Thus, the Court ruled that the 46th amendment to the Constitution did not overcome the decision in the Young Men's Indian Association case and the doctrine of mutuality remains applicable even after the amendment.

The Court also referred to the Constitution Bench decision in the case of BSNL v. Union of India - 2006-TIOL-15-SC-CT-LB wherein it was specifically observed that 46th Constitutional Amendment overcomes the decision in Young Men's Indian Association case. However, the Court held that such an observation was not the ratio decidendi and hence cannot be said to be laying down any law in this regard.

The Court further held that even in case of sale /supply of goods by unincorporated associations or body of persons to members, the requirement of consideration is not fulfilled since in case of sale of goods to self, there exist no consideration as per the provisions of the Contract Act, 1872. Accordingly, the Court ruled that there is no sale even in cases of sale by unincorporated association or body of persons to member.

Ruling in case of supply of services

The Court held that for the period prior to 1.7.2012 i.e. before the Negative List regime, the definition of "club or association" as per Section 65(2a) of the Finance Act, 1994 specifically excluded incorporated entities. Thus, the Court held that incorporated entities providing services to its members would be outside the service tax net prior to 1.7.2012.

For the period post 1.7.2012, the Court referred to the definition of "services" given under Section 65B(44) of the Finance Act, 1994 which required provision of service by one person to another. The Court held that the doctrine of mutuality, doctrine of agency, trust, as applicable to sales tax cases, would be applicable to the definition of services. Accordingly, the Court ruled that services by a member's club to its members would amount to services to self and hence would not qualify as service as defined above. Having said this, the Court referred to Explanation 3, which was subsequently incorporated and read that incorporated associations or body of persons and their members are statutorily to be treated as distinct persons. Accordingly, it was held that services provided by member's club, who are not incorporated under any law for the time being force, to its members would be taxable.

Author's View

The decision of the Supreme Court would provide much awaited relief to member's club and similarly situated entities like the cooperative societies, resident welfare associations etc. who were being burdened with VAT (for sale of goods to their members) or service tax (rendition of services to members).

The judgment is landmark for two reasons. First, it boldly and eruditely overcomes the 46th Constitutional Amendment and secondly, it distinguishes the observations made by the Constitution Bench in BSNL's case and upholds the doctrine of mutuality.

Impact of the judgement on GST Law

The ratio of this judgment would be applicable even under the GST regime in respect of supply of goods and / or services by member's clubs or cooperative societies to its members.

The term supply is defined under Section 7 (1) of the Central Goods and Services Tax Act, 2017 ("CGST") and includes all forms of supply of goods and services or both such as sale, transfer, barter, licence, exchange made or agreed to be made by a person in the course or furtherance of business.

Entry 7 to Schedule II of the CGST provides that goods supplied by unincorporated associations or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods under the GST Law.

No such deeming fiction has been created under Schedule II with respect to supply of services. Following the ratio of the judgement, it follows that:

(a)  Supply of goods and services by incorporated entities to its members would not be taxable.

(b)  Supply of services by an unincorporated entities to its members would not be taxable

(c)  However, by virtue of the deeming fiction, supply of goods by an unincorporated entity to its members would be taxable.

Having said this, we are of the view that even in case of supply of goods by an unincorporated entity to its members, it can be argued that there exists no consideration as defined under the Indian Contract Act, 1872, which require consideration to be paid by one person to the other. However, in this case, applying the doctrine of mutuality, it follows that supply made to self and consideration made to self would not qualify as consideration.

[The views expressed are strictly personal.]