OCTOBER 28, 2019

By Abhijit Saha

RECENTLY, the Larger Bench of the Supreme Court has passed a Landmark judgment in the case of State of West Bengal Vs Calcutta Club Ltd [2019-TIOL-449-SC-ST-LB] on the applicability of sales tax and service tax on goods sold or services provided to its members. It is a comprehensive judgment which examined and analyzed the issue exhaustively. However, as per the understanding of the author, it raises more questions than it resolves. Let us examine:

SALES TAX / VAT

As per the 46 th amendment of the Constitution of India in 1982, concept of deemed sale was introduced vide Article 366(29A) of the Constitution. The said article reads as follows:

"tax on the sale or purchase of goods" includes –

(a)  ..........

(b)  .........

(c)  ..........

(d)  ..........

(e)  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;

(f)  ..........

.................

The State Sales tax laws also were amended accordingly in line with the above provision of the Constitution. Hence the Calcutta club has been demanded sales tax on sale of foods and drinks to its members.

The matter went up to Supreme Court which held that the club is selling goods to its members which is effectively selling to self and hence covered by the doctrine of mutuality . Accordingly, it held in Para 49 of the order " The doctrine of mutuality continues to be applicable to incorporated and unincorporated members club after the 46 th Amendment adding Article 366(29A) to the Constitution of India.Young Men's Indian Association and other judgments which applied this doctrine continue to hold the field even after the 46 th Amendment".

This, as per the understanding of the author, means that effectively the Supreme Court exempts sale by unincorporated club to its members also by applying the doctrine of mutuality . This is contrary to the provision of article 366(29A)(e) of the Constitution.

There are more inconsistencies in the evolution of the entire legislation. Law Commission Reports are the basis on which the laws are modified or changed generally. In the 61 st Law Commission Report on Certain Problems Connected With Powers of the States to Levy a Tax on the Sale of Goods and with Central Sales Tax Act, 1956, which preceded the enactment of the Article 366(29A) of the Constitution of India, deliberated the subject matter of sales by association to members under Chapter 1D of the Report. The said Report interalia referred to the decision of the Constitution Bench of the Supreme Court's in the case of CTO v. Young Men's Indian Association [(1970) 1 SCC 462] as follows:

"1D.3. Unincorporated Associations: Though the above case related to co-operative society. The court (Shah, J.)did make certain observations as to the position in regard to unincorporated societies, as follows:-

"In the case of an unincorporated society, club or a firm or an association, ordinarily the supply and distribution by such a society, club, firm or an association, of goods belonging to its members, may not result in sale of goods which are jointly held for the benefit of the members of the society, club, firm or the association, when by virtue of the relinquishment of the common rights of the members, the property stands transferred to a member in payment of a price, and the transaction may not prima facie be regard as a 'sale' within the meaning of the Act.

But the court made it very clear(towards the end of the judgment) that it was not called upon in this case to decide whether an unincorporated club which supplies goods for a priceto its members, may be regarded as selling goods to its members."

In Para 1D.6 of the61 st Law Commission Report it concluded – The broad general principle which constitute a common feature of these transactions, in the absence of the transfer of property, it would appear that these transactions are not "sale",because there is no transfer of property........We therefore, do not recommend any change "

It will be seen from the above that the Law Commission was of the view that the Constitution ought not to be amended so as to bring within the tax net, members club. However, the legislature ignored the above and included clause (e) to Article 366(29).

It was not understood as to why clause (e) was included in the Article 366(29A) inspite of the recommendation of the Law Commission not to include. This defies logic and reasoning.

Again, the Statement of Objects and Reasons which explains the insertion of clause (e) to Article 366(29A) states that while sale by a registered club or other association of persons (the club or association of persons having corporate status) to its members is taxable, sale 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 proposed amendment would help in the augmentation of the State revenues to a considerable extent…

It is evident from the above that Law Commission has recommended not for inclusion of clause (e) in Article 366(29A), however the Legislator ignored the recommendation and included the same. The justification given for such inclusion in the Statement of Objects and Reasons, is that the sale made by the incorporated club or association to its members is already taxable. Sale by unincorporated club or association to its members are not taxable because of the applicability of the doctrine of mutuality of interest. Hence it should be brought to tax net by introducing the deeming fiction vide clause (e) in Article 366(29A).

However, the Supreme Court in the Calcutta Club case held in Para 49 that Doctrine of Mutuality continued to be applicable to sale made to its members by both incorporated and unincorporated club or association and the same is not liable to sales tax. The SC held that Young Men's Indian Association and other judgments which applied this doctrine continue to hold the field even after the 46 th Amendment to the Constitution. Hence the views of the Legislator in Statement of Objects and Reasons that sale by incorporated club is taxable is negated by the Supreme Court.

This creates a peculiar situation -

- The provision of Article 366(29A)(e) of the Constitution of India mandates that sale by an unincorporated club or association to its members is liable to sales tax. There is justification why incorporated club is not included except in Statement of Objects and Reasons which was negated by Supreme Court .

- However, Supreme Court held that both incorporated and unincorporated club or association are not liable to sales tax.

- Law Commission held under both the form, they arenot liable to sales tax

- Statement of Objects and Reasons held that incorporated club or association is already taxable. Hence the clause (e)of Article 366(29A) is introduced to tax unincorporated club or association.

It seems there is no convergence of the essence of law and the issue seems far from resolved.

SERVICE TAX

Service tax on Club or Association was introduced with effect from 16 th June 2005. The relevant section 65(25a) defining the said service is reproduced below for ease of reference:

"club or association" means any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include –

(i)  Anybody established or constituted by or under any law for the time being in force,

(ii) ..........

(iii)  ..........

(iv) ..........

The Supreme Court held that incorporated club or association is covered under the above exclusion clause and hence not liable to service tax. In para 72 of the order the SC held that a Company incorporated under the Companies Act or a Co-operative Society registered as a Co-operative Society under a State Act can certainly be said to be "constituted" under any law for the time being in force.

Service tax law has undergone a structural change and with effect from 1 st July 2012 all services are taxable except the services mentioned in the negative list. The term "service" was defined for the first time under Section 65B(44) to mean any activity carried out by a person for another for consideration…explanation 3 (a)- an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons.

The Supreme Court held in Para 84 thatfrom 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members club in the incorporated form. In Para 85 it held that consequently, show cause notices, demand notices and other action taken to levy and collect service tax from incorporated members clubs are declared to be void and of no effect in law.

SUMMARY

It is evident from above that in case of Sales tax, the Supreme Court held that both incorporated as well as unincorporated clubs are not liable to tax by applying the Doctrine of Mutuality inspite of the clear mandate of Article 366(29A)(e) of the Constitution to tax unincorporated clubs .

However, in the case of Service tax, it held that only incorporated clubs are excluded from tax net. There is no mention of the applicability of the Doctrine of Mutuality for the purpose of interpretation of the law for levy of service tax on unincorporated clubs.

There is no justification for the discrimination between the incorporated club and the unincorporated club, both in the Article 366(29A)(e) of the Constitution, Service tax law as well as by the Supreme Court, although the Constitutional Bench of the Supreme Court in the case of CTO v. Young Men's Indian Association held that Doctrine of Mutuality applies to both the form, incorporated and unincorporated clubs.

As per the understanding of the author, the Larger Bench decision of the Supreme Court warrants a relook for resolving the contradictions.

GST

As per Section 2(17(e) of the CGST Act, "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.

The wording of the above definition implies that the provision of service by a club whether incorporated or unincorporated to its members would be construed as in course of business. The sale of goods by a club would not be considered as in course of business. The definition of "person" as per Section 2(84)(f) of the CGST Act includes an association of persons or a body of individuals, whether incorporated or not, in India or outside India. As per Section 7(1) any supply made in course or furtherance of business qualify as 'supply'.

A conjoint reading of the above provision of law stipulates that any service provided by an incorporated or unincorporated club or association to its members would be liable to GST. There is no discrimination between incorporated and unincorporated club or association in respect of the applicability of GST. As per the wording of the law there is no exclusion to incorporated club from tax net like that in the cases of service tax as explained above. However, the question remains as to whether the Doctrine of Mutuality which has been upheld by Supreme Court would equally apply to GST or not.

The Supreme Court in Calcutta Club case was silent about the applicability of Doctrine of Mutuality in the case of service tax on unincorporated club. However, they have held that Doctrine of Mutuality applies in case of sale of goods by the clubs, both incorporated as well as unincorporated club.

In respect of the sale of goods by an unincorporated associationor body of persons to a member, Para 7 of the Schedule-II of the CGST Act has clearly mentioned that it would qualify as 'Supply' liable to GST. Hence the sale of goods by an incorporated association or body of persons to a member is outside the tax net.

CONCLUSION

In view of the above , it is very clear that there are several loose ends which need to be plugged by making a harmonious interpretation of law. Although the wording of the law is important, the taxation law is gradually evolving towards economic and social justice also as envisaged in the Preamble and the Guiding Principles of State Policy adumbrated in Articles 38 and 39 of the Constitution of India.

As per the understanding of the Author, since the Doctrine of Mutuality has been upheld by the Constitutional Bench of the Supreme Court in the case of CTO v. Young Men's Indian Association (supra) as applicable to both sale and service by club or association, whether incorporated or unincorporated,to its members, economic and social justice demands that the both the Constitution as well as the relevant tax laws should be respecting the Constitutional Bench decision of the Supreme Court and exclude the entire gamut of the transactions between the clubs and its members as being outside the purview of the tax net.

(The views expressed are strictly personal.)