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Calcutta Club ruling - whether binding on GST and during negative list regime?

OCTOBER 19, 2019

By K Srinivasan

THERE is nothing called right or wrong in taxation, in absolute terms. It is all highly relative and revenue centric, largely based on some principles of equity, no doubt.

Clause 29-A of Article 366 got retained and well supported by the Rajya Sabha select committee, not consenting to delete it, for a reason, of interpreting provisions of GST law, if and when required, I should think.

Please refer to Circular No. 35/9/2018 dated 5/3/2018 on the laws of taxability of transactions between members of a Joint Venture Company.

It clarifies that such transactions attract GST, despite possible presence of mutuality and despite Para 7 of Schedule II to the GST Act, referring only to transaction in goods between them, as taxable.

The publication of the Circular was surely preceded by consultations with the officials of the Law Ministry and after deliberations on possible legal issues involved, in this matter.

In my opinion, the intention behind the above exercise by the Government is to rely on it, for defining from time to time, the scope of supply in such matters where mutuality may become an issue in deciding their taxability.

In fact, ahead of all these developments, to nullify various decisions of the High Courts in the above matter, effective from 01.07.2012, the Government by way of clause (a) to Explanation 3 to Sec. 65B, had already introduced an amendment if you remember.

It was to the effect that an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons.

Same is reproduced for ready reference hereunder:

Explanation 3. - For the purposes of this Chapter,

(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

In light of above, the Authority for Advance Ruling in the case of Emerald Leisures Ltd - 2015-TIOL-07-ARA-ST held that judgment of Jharkhand High Court ( Ranchi Club Ltd v. Chief Commissioner - 2012-TIOL-1031-HC-JHARKHAND-ST shall not apply post amendment, as law clearly provides that club and its members are to be treated as distinct persons.

Hence any service by club to its members shall be taxable. Relevant paragraph of the decision of the AAR is reproduced below for ready reference:

"Applicant also relied upon the judgments of the Hon'ble High Court in case Saturday Club Ltd. v. A.C. Service Tax Cell, Calcutta - 2004-TIOL-48-HC-KOL-ST and Sports Club of Gujarat Ltd. v. U.O.I. - 2013-TIOL-528-HC-AHM-ST to emphasize that in view of principles of mutuality, no service tax is payable by the applicant."

The Hon'ble High Court observed that principally there should be existence of two sides/entities for having transaction as against a consideration. In a members club, there is no question of two sides - members and club, both are same entity.

We observe that with effect from 1/7/2012, 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 the 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 1/7/2012 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, it was held that the contention of the applicant that club and its members are not two distinct persons is incorrect.

It is in the context of GST, TRU has once again issued a Circular No. 35/9/2018-GST (Supra) explaining the taxability between members of a Joint Venture.

Relevant portion of the Circular is reproduced below:

"GST is levied on intra-State and inter-State supply of goods and services. According to section 7 of CGST Act, 2017, the expression "supply" includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business, and includes activities specified in Schedule II to the CGST Act, 2017."

The definition of "business" in section 2(17) of CGST Act states that "business" includes provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members.

Therefore there is ample coverage under the said Section of business to bring under its fold whether unincorporated or not even members-only Clubs, Residential Welfare Associations and other Societies of like kind.

The term person similarly defined in section 2(84) of the CGST Act, 2017 to include an association of persons or a body of individuals, whether incorporated or not, in India or outside India, should equally take care of such association of persons of the above kind and the taxability of transactions between them, under the new GST regime and as well as the post-negative list regime.

Further, Schedule II of CGST Act, 2017 enumerates activities which are to be treated as supply of goods or as supply of services.

It states in Para 7 that supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods.

A conjoint reading of the above provisions of the law implies that supply of services by an unincorporated association or body of persons (AOP) to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of services.

The above entry in Schedule II is analogous to and draws strength from, the provision in Article 366 (29-A) (e) of the Constitution according to which a 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 only other extreme possibility, if you like the tax not to survive despite Article 366 (29-A) being still in vogue, is to invoke the doctrine of implied repeal as held by the Hon'ble SC in the famous Ratan Lal Adukia v Union of India, [1989] 3 SCC 537, case as follows;

"The doctrine of implied repeal is based on the postulate that the legislature which is presumed to know the existing state of the law did not intend to create any confusion by retaining conflicting provisions. Courts, in applying this doctrine, are supposed merely to give effect to the legislative intent by examining the object and scope of the two enactments."

But in a conceivable case, the very existence of two provisions may by itself, and without more, lead to an inference of mutual irreconcilability if the later set of provisions is by itself a complete code with respect to the same matter.

In such a case the actual detailed comparison of the two sets of provisions may not be necessary.

It is a matter of legislative intent that the two sets of provisions were not expected to be applied simultaneously. (At Para 18)

Be that as it may, for that may not be and can't be repealed.

In the meantime, the long awaited judgement in the case of Calcutta Club is just out, wherein the top court has held that Sales Tax did not extend to members-only clubs whether such clubs are incorporated or not and further extended the ratio to service tax as it existed prior to 2012, in its pre-negative list regime. [See 2019-TIOL-449-SC-ST-LB

Whereas Service Tax Law excluded mutuality in the case of unincorporated entities by deeming that such unincorporated entities and members thereof are distinct, expressly with effect from 1/7/2012 and extended it to GST scenario as well vide Circular dated 5/3/2018 (Supra)

When by above judgement the Hon'ble SC was satisfied with the exclusion of mutuality in the law of Income Tax, in the case of mutual insurance and co-operative societies, through deeming provisions in the IT Act, why not in Service Tax and GST Laws, will be anybody's question?

A statutory deeming provision in Indirect Tax Law is no less or inferior, if it also chooses to exclude mutuality by a deeming provisions as delineated above and as also followed it up by advisories in the form of Circulars by its Board on par with direct tax, as applied to mutual insurance and Co-operative Societies.

Under erstwhile service tax regime, Central Board of Excise and Customs (CBEC) had issued Circular No. 179/5/2014 - ST dated 24 September 2014 and clarified that Service tax was applicable on taxable services provided: a) By the members of the Joint Venture (JV) to the JV and vice versa; and b) Inter se between the members of the JV.

In addition, the Circular also clarified that if cash calls were merely in the nature of capital contribution then they could be treated as transaction in money and thus excluded from the definition of service.

In some cases, cash calls could be in the nature of advance payments made by the members for taxable services provided by JV, to them. Further, payments could be made by JV, out of the pooled cash calls, for taxable services received from a member such as administrative services.

In both cases, such payments were in the nature of consideration and hence attract tax. The field formations were accordingly advised to carefully examine the applicability of Service tax with reference to the specific terms / clauses of each JV agreement.

Since, Goods and Services Tax (GST) has replaced Service tax, post the Negative list regime, CBEC had to issue a similar circular No. 35/9/2018 dt 5/3/2018 under GST law, reiterating its clarifications on GST implication, in such similar types of transactions.

The present Circular states that the clarification given in the earlier circular in the context of Service Tax is equally applicable for the purpose of levy of GST.

There is a mistaken notion that Department is placing reliance on sub-clause (e) for levy of tax on services in the above instance as well, while the said sub-clause is all about supply of goods.

Whereas circular attempts to clarify levy of tax in the name of services by using Para 7 of Schedule II to the Act, to only cite it as an example of levy on goods in a similar situation

The Circular reaffirms the settled legal position that services provided by an unincorporated association or body of persons to its members and vice versa are within the ambit of GST.

This may be due to the fact, that the subject transaction of JV, is not getting adequately covered by the said limb of Para 7 of Schedule II, which in turn relies upon Sub-clause (e) of Clause (29- A) of Article 366, and it is therefore merely used for drawing an analogy and not for reaching the above conclusion, entirely on that basis.

The scope of the old circular and as also the old levy, could very well exceed the brief of Article 366(29-A) (e) when read with Section 66B (44) and 66 E of the Erstwhile Finance Act, 1994 since the Aspect theory was in place and in its favour, to go beyond the scope of deemed sale, to tax the service aspect of the transactions covered under 366(29-A) (e) ibid.

Similarly Section 7 defining supply with the help of Sections 2(17) and 2(74), respectively of the scope of definitions of business and person, has all the liberty to traverse the scope of Para 7 of Schedule II to the GST Act, 2017 which is after all only subaltern to main definition of Supply under Section 7 of the GST Act read with the attendant definitions, connected therewith.


From the foregoing, it can be clearly seen that the Government had pre-empted the portended danger of such possible outcomes to revenue as in the case of Calcutta club and even much before.

It had accordingly set right its provisions, by creating suitable amendments and by issue of circulars pari materia with IT Act, which has similar deeming provisions to tackle mutuality issue in reference to mutual insurance and co-operative societies while applying IT Act to them.

Therefore, any transaction between an unincorporated association or body of persons /association or club and its member/s thereof for cash, deferred payment or other valuable consideration, will remain covered within the scope of Section 65B (44) and 66 E of the Erstwhile Finance Act, 2012 and under Sections 7 and 9 read with Sections 2(17) and 2(74) of the scope of definitions of business and person, under the current regime under the GST Act, 2017.

Hence the ratios of the above cited judgments need not be feared to have any adverse impact on the levy of inter-party transactions of AIO's and its members, and the same shall be squarely taxable within the four corners of the present GST Law and as also during the post-negative list regime of Service Tax Law, is the considered view of the Author.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

Sub: Calcutta Club ruling,continued

In continuation of the above Article on Calcutta club I have a few more important observations to make.
The Honble SC has disposed off the case, vide points E,F and G, that too only with reference to the limited aspect of Article 366 29 A f which deals with the solitary case of

f. a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink whether or not intoxicating, where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

The relevant points of E, F and G are also reproduced for a close look and appreciation.

E. The doctrine of mutuality continues to be applicable to incorporated and unincorporated members clubs after the 46 th Amendment adding Article 366 29 A to the Constitution of India. There is no intention to do away with mutuality unlike in the case of certain provisions of the Income tax Act involving mutual insurance business. Para 45 of the judgment

F. Young Mens Indian Association and other judgments which applied this doctrine continue to hold the field even after the 46 th Amendment.

G. Sub clause f of Article 366 29A has no application to members clubs

Even while saying so, it restricts the levy in the case of such supplies of food and drinks by the club to its members only and upholds the levy of such supplies made to outsiders, having been approved by the 46th Amendment of such composite supply of food and drinks.

It can be well understood by referring to the relevant point D of the said judgment itself, reproduced below

D. Members clubs are an example of a mutual undertaking, but, where a club extends facilities to non members, to that extent the element of mutuality is wanting.

The large body of the issue of taxability of items covered under Article 366 29A f, namely 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 is not covered under the subject judgment under discussion.

It is needless to say or add therefore that the same with reference to supply of services, by the UAOP to its members, remains equally not dealt or touched by the Honble SC, in the cited judgment above.

It is important that what is not sought to be dealt with in the said judgment is taken clear note of and the relevant portion of the subject matter of transaction between an unincorporated association of persons UAOP and its members and its taxability, is precisely the subject matter not dealt with therein and therefore clearly lying outside the scope of the above judgment.

In respect of the same, namely transactions between UAOP and its members as referred to under Article 366 29A f with reference to goods and as also services as clarified by the Board vide its circulars in the post negative list regime of Service Tax from 1.7.2012, with reference to services and during the Post GST regime from 1.7.2017, with reference to both goods and services, in tune with the relevant amendment of the Act provisions of the Finance Act, 2012 and the CGST Act,2017, will be taxable under the respective Acts for the period commencing from 1.7.2012, is once again the view of the Author, in the light of the above discussion.

Posted by Sonal Arora