FEBRUARY 03, 2021

By Shailesh Sheth, Advocate, M/s SPS LEGAL

"It is a terrible American weakness to believe that if you've got a problem, all you have to do is pass a law."
[Kingman Brewster, Jr.]

Introduction:

THE third consecutive Budget presented by the Finance Minister has proposed very few but extremely significant amendments on the GST front. No doubt, these amendments as proposed to certain provisions of the CGST Act, 2017 and IGST Act, 2017 effectuate the recommendations of the GST Council made in its past meetings, notably the 39th Meeting held on 14th March 2020. Nevertheless, a few of these proposed amendments are fundamental in nature and have far-reaching implications. It is also interesting to note that out of a total of 16 GST-related amendments, only two amendments are proposed to be retrospective w.e.f. 01st July, 2017. It is a different matter that barring the fact that both are retrospective in nature, these stand on absolutely opposite poles, if one were to go by the intention and purpose behind them!

This article briefly discusses the proposed retrospective amendments to S.7 and Schedule II of the CGST Act, 2017 and their implications insofar as the levy of GST on the clubs, associations, societies, etc. is concerned.

1. Amendments to S.7 and Sch. II - A bolt from the blue ...!

a. Nature of the amendment:

S.7 of the CGST Act, 2017 is being amended so as to insert the following clause after clause (a) of sub-section (1) thereof:

"(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice- versa, for cash, deferred payment or other valuable consideration.

Explanation.--For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another."

The aforesaid clause (aa) is deemed to have been inserted in S.7 w.e.f. 1st July, 2017.

[See Clause 99 of the Bill]

Simultaneously, Schedule II of the CGST Act is also being amended so as to omit paragraph 7 thereof that, at present, reads as under:

"7. Supply of goods -

The following shall be treated as supply of goods, namely:

Supply of goods by any unincorporated association or body of persons to a member thereof for cash, defer payment or other valuable consideration."

This amendment is also being given retrospective effect from 01 st July, 2017

[See Clause 113 of the Bill].

b. Background:

i. "Doctrine of mutuality" and its application under the erstwhile VAT/Service Tax regimes:

"No man, in my opinion, can trade with himself; he cannot, in my opinion, make, in what is its true sense of meaning, taxable profit by dealing with himself…."

[Palles C.B. in Dublin Corporation v. McAdam (Surveyor of Taxes)

- (1887) 2 Tax Case 387 (D)].

The seeds of the 'principle of mutuality' probably lies in this age-old English decision. The concept of the 'principle of mutuality' is undoubtedly borrowed by Indian Courts from numerous decisions of the English Courts and has been applied with much refinement in the context of Indian Tax Laws over a long period of time. The concept was mainly applied in the context of Income Tax and the erstwhile VAT/Sales Tax regime. Its applicability in the erstwhile Service Tax regime has also been severely tested time and again but here also, has held its ground with great fortitude! However, the journey involving the applicability of this principle has never been smooth and at times, has even been torturous. There have been conflicting judgements of High Courts and Tribunals over the applicability of the principle, particularly under the erstwhile VAT/Sales Tax and Service Tax regimes. The moot question that had arisen was 'whether the doctrine of mutuality was still applicable to incorporated clubs or any club after 46th amendment to the Constitution of India and the insertion of clause (29A) in Article 366 thereof?'

The above question and other related issues arising under the erstwhile VAT/Sales Tax and Service Tax regimes came up for consideration before the Larger Bench of the Hon'ble the Supreme Court in the State of West Bengal & Ors. Vs. Calcutta Club Limited [C.A. No. 4184 of 2019]. The Larger Bench, in its landmark decision dated 3rd October, 2019 reported in - 2019-TIOL-449-SC-ST-LB, inter alia, held that the supply/sale of goods or rendering of services by the incorporated/unincorporated associations or clubs to their members are not liable to sales tax/service tax by application of the principle of mutuality even after the 46th amendment to the Constitution. The Larger Bench also held that the judgement in C.T.O. vs. Young Men's Indian Association - 2002-TIOL-2727-SC-CT-LB which applied the doctrine of mutuality continues to hold the field even after the 46th amendment to the Constitution.

ii. Applicability of the 'Doctrine of Mutuality' under the GST regime:

While, with this historic judgement of the Supreme Court, it was almost curtains for conflicts arising in the context of the applicability of the doctrine under the erstwhile VAT/Sales Tax and Service Tax regimes, the issue once again started haunting every one with the introduction of the GST regime w.e.f. 01st July, 2017. The question that has frequently arisen is "Does the doctrine of mutuality apply under GST in view of the specific provisions of the CGST Act 2017?"

For better understanding of the question, a brief look at the relevant provisions of the CGST Act, 2017 will be advantageous.

S.9 of the Act is the charging provision and provides for the levy of GST on the supply of the goods or services or both.

S.7(1) defines the term 'supply' so as to include "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;"

(Emphasis provided)

S.2(17) of the Act defines the term 'business' and includes, at clause (e), "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;"

Schedule II of the Act categorises certain specified activities or transactions as 'supply of goods' or 'supply of services', as the case may be. Paragraph 7 of the Schedule II is as under:

"7. Supply of goods +

The following shall be treated as supply of goods, namely:

Supply of goods by any unincorporated association or body of persons to a member thereof for cash, defer payment or other valuable consideration."

Clause (d) of S. 7(1), prior to its omission by the CGST (Amendment) Act, 2018 w.e.f. 01st July 2017 read as under:

"(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II."

Clause (d) was, however, omitted retrospectively w.e.f. 01 st July, 2017 and simultaneously, a new clause (1A) was inserted in S.7(1), also retrospectively, w.e.f. 01 st July, 2017, by the CGST (Amendment) Act, 2018 and the same reads as under:

"S.7(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II."

On the critical but conjoint and harmonious reading of the aforesaid provisions, an unassailable inference can be drawn that the decision of the Larger Bench of the Supreme Court in Calcutta Club's case (supra) continues to be relevant and applicable even under the GST regime for the following, amongst other, reasons viz:

-  A close look at the definition of 'supply' under S.7(1) would reveal that it requires the pre-existence of two persons. Further, the supply must be for 'consideration' which necessarily requires the involvement of two persons. No two persons can be said to be existing in case of the provision or supply of goods or services by the club or association to its members.

-  While clause (e) of S.2(17) that defines the term 'business' includes 'provision by a club, association, society, or any such body (for a subscription or any other consideration) or the facilities or benefits to its members', there is no deeming fiction under S.7 so as to include such transactions.

-  While Schedule II of the Act was never nor was ever intended to be a 'deeming fiction' but merely served the purpose of classification of certain specified activities/transactions as 'supply of goods' or 'supply of service', the matter was put beyond any doubt by the retrospective amendment to S.7(1) and the insertion of clause (1A) therein w.e.f. 01 st July, 2017 so as to hammer the point home that Schedule II merely provides a 'classification guide' in case of the specified activities/transactions.

-  The ratio of the decision in Young Men's Indian Association's case (supra) continues to hold the field that in a member's club, the club acts as merely an agent for the principal and would be covered by the principle of mutuality.

c. GST Council's recommendations:

While the debate continued across the country about the applicability of the 'Doctrine of mutuality' under the GST regime, the GST Council probably realised the serious challenges that confronted the levy of GST on the clubs, associations, etc. in the wake of the Supreme Court's decision in Calcutta Club's case (supra). The issue was included in the Agenda for the 39th Meeting of the Council to be held on 14th March, 2020. The relevant Agenda Item 11 (viii) painstakingly traced the history of disputes surrounding the doctrine of mutuality and the constitutional challenges to the levy of VAT/Sales Tax and/or Service Tax on the members' club, associations, societies, etc. The Agenda Item also meticulously referred to various judgements including the judgement in Calcutta Club's case (supra) rendered by the Supreme Court and succinctly analysed the ratio of the principles laid down therein. The Agenda Item also deliberated upon the impact of the Supreme Court's judgement in Calcutta Club's case (supra) on the levy of GST on the supply of goods or services by members' clubs, associations, societies, etc. to their members in the light of the existing provisions of the CGST Act, 2017. Making a candid confession, the Agenda Item acknowledged that the shadow of the judgement in Calcutta Club's case (supra) would loom large over the levy of GST on the clubs, associations, etc. and categorically proposed the suitable amendments to S.7 and Paragraph 7 of Schedule II of the CGST Act, 2017. The relevant abstracts of the Agenda Item 11(viii) are reproduced below for ease of understanding and reference:

"7.5 Therefore, GST on supplies of goods or services by an unincorporated or incorporated entity to its members may become subject matter of litigation. There is no provision in the CGST Act, 2017 which stipulates that an unincorporated or incorporated entity and its members shall be distinct persons. In the absence of a provision to this effect, the subject judgment of the Hon'ble Supreme Court becomes squarely applicable. The doctrine of mutuality applies and thus supplies by unincorporated or incorporated entity to its members is a supply to self and not leviable to GST.

7.6 Therefore it is imperative to amend the CGST Act, 2017 so as to safeguard the levy of GST on supplies by an association or body of persons (whether incorporated or not) to its members. It is proposed that amendment to the CGST Act, 2017 as being proposed below may be carried out to prevent litigation on this count:-

(a) In Section 7(1) of the CGST Act, 2017, after clause (c), new clause (e) followed by an Explanation may be added with retrospective effect:

7. (1) For the purposes of this Act, the expression "supply" includes-

(a) 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;

(b) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and

(d) *

(e) the supply of goods or services or both, by an association or a body of persons, whether incorporated or not, to its members, for cash, deferred payment or other valuable consideration.

Explanation.- for the purpose of this section, an association or a body of persons, whether incorporated or not, and member thereof shall be treated as distinct persons.

(NOTE: Insertion of the above Explanation is suggested by TRU-II)

(b) Para 7 of Schedule II may be deleted, as the above amendment would more than fulfil its objective. In any case, it serves no purpose after deletion of clause (d) of sub-section (1) of Section 7.

8. The issue is placed before the GST Council for consideration and decision."

The issue was thereafter discussed at the 39th Meeting of the Council. The relevant abstracts of the minutes of the Meeting are reproduced below:

"25.8. Next, Table Agenda No. II (viii) was taken up for discussion by PC, GSTPW. It was explained that the proposal as for amendment in the CGST Act so as to explicitly include the transactions and activities involving goods and services or both, by, to its members, for cash, deferred payment or other valuable consideration along with an explanation stating that for the purpose of this section, an association or a body of persons, whether incorporated or not as taxable supply w.e.f 01.07.2017, It is also proposed that such an association or a body of persons, whether incorporated or not and member thereof shall be treated as distinct persons under section 7(1) of the CGST Act. Consequently, para 7 of Schedule II of the CGST Act is proposed to be deleted. It was informed that this had become necessary to make this retrospective amendment in view of pronouncement in this regard by the Hon'ble Supreme Court in a case involving levy of service tax on supplies of taxable services by the Clubs to its Members. PC, GSTPW informed that this had also been agreed to in the Officers' Committee meeting held on 13.03.2020."

The final decision of the Council on this Agenda Item was recorded as under:

"26. For Agenda Item 11, the Council: -

"viii. Approved amendment in the CGST Act, subject to vetting by the Union Law Ministry, so as to include the supply of goods and services or both, between an association or a body of persons, whether incorporated or not, to its members, for cash, deferred payment or other valuable consideration under the ambit of GST."

Interestingly, going by the Table Agenda 11 (viii) as minuted, the State of Maharashtra appeared to have expressed the view that amendment was not required in view of definition of 'business' and 'person' in the GST Act.

Be that as it may, the aforesaid proposed amendments to S.7(1) and Schedule II of the CGST Act, 2017 retrospectively w.e.f. 01st July, 2017 are the culmination of the discussion on the subject issue by the GST Council at its 39th Meeting held on 14th March, 2020 and the decision taken thereon.

It may be worth mentioning here that even while the GST Council was seized of the issue, the Authority for Advance Ruling continued to wreak havoc with its rulings on the issue ignoring, not only the retrospective amendments to S.7(1) of the Act by the CGST (Amendment) Act, 2018 as briefly explained above, but also the ratio of the principle laid down by the Supreme Court in Calcutta Club's case (supra). Readers may refer to the Ruling of the AAR in Re: Apsara Co-op. Housing Society Ltd. - 2020-TIOL-166-AAR-GST and upheld by the AAAR in 2020-TIOL-65-AAAR-GST. The only saving grace has been the ruling of the Appellate AAR in the case of In Re: Rotary Club of Mumbai Queens Necklace - 2020-TIOL-09-AAAR-GST. However, in this case the AAAR carefully steered clear of the controversial and difficult task of applying the ratio of the principle laid down by the Supreme Court in Calcutta Club's case (supra) and exonerated the Applicant- Club of the burden of levy of GST by holding that the Applicant cannot be said to be doing any business in terms of S. 2(17) of the CGST Act, 2017 and, therefore, their activities would not come under the scope of 'supply' as envisaged under S. 7(1) of the Act.

d. Proposed clause (aa) - Horrendous drafting…!

Even if one were to accept the need for such retrospective amendments, the language of the clause (aa) proposed to be inserted in S.7(1) is extremely poor and leaves a bad taste. The readers may compare the language of the draft provisions as put up before the GST Council and the actual provisions which are being inserted in S.7(1) through the Bill. For the ease of reference, both the provisions are reproduced below:

Draft provisions as per Agenda Item 11 (viii):

The following new clause (e) followed by an Explanation was proposed to be inserted in S.7(1) as per Agenda Item 11 (viii):

"(e) the supply of goods or services or both, by an association or a body of persons, whether incorporated or not, to its members, for cash, deferred payment or other valuable consideration.

Explanation.- for the purpose of this section, an association or a body of persons, whether incorporated or not, and member thereof shall be treated as distinct persons."

The text of the provisions as per the Finance Bill, 2021, however, reads as under :

"(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice- versa, for cash, deferred payment or other valuable consideration.

Explanation.--For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another."

As will be observed, there is a stark difference between the original draft provisions which were discussed at the meeting of the GST Council and the actual provisions which are being introduced through the Finance Bill, 2021. While this may be due to the fact that the final draft might have been vetted by the Ministry of Law & Justice, the language of the proposed provisions is extremely poor and even, incomprehensible!

New clause (aa) says "the activities or transactions, by a person… to its members or constituents or vice versa…". One can only wonder as to how can there be 'the activities or transactions to a person or vice versa'? Does it really make any sense?

The language of the Explanation is even worse! How can there be 'supply of activities or transaction'?

What does this phrase convey? The phrase is inside out, upside down with no middle! To say that it is vague will be an understatement. It is, indeed, regrettable that the drafting quality of the statutory provisions is simply deteriorating day by day. More and more instances are being witnessed that show utter disregard for the clarity, decency, and the grammatical accuracy in the statutory provisions! Let me recall here the words of the Hon'ble Prime Minister from his Address on the eve of the Sesquicentennial Function of the Advocates Association of Western India on 14th February 2015.

The Hon'ble Prime Minister said:

"Government's primary job is to make laws. However, as I see it, Government does not have the quality (skilled) manpower for drafting the laws. Today, judiciary is being criticized for the pendency of cases in the Courts. But let me say this- we are more responsible for this state of affairs as we are making the laws which lead to ten different interpretations. Where do we begin from? Shall we construct a grand building for the Court or make good laws in the Parliament? That's why, these days, I insist upon putting any draft law online for feedback from the people. It is my appeal to the members of the Bar to undertake, if necessary, even 'hair-splitting' job and dissect the draft law and bring it to our notice any lapses or errors in it. Then only there would be a "good law", a law with minimum errors-I cannot say that there cannot be any errors as we are all human beings, a law with 'minimum grey areas'. I don't think the judiciary will find any difficulty if good laws are made in this manner...."

Will the lawmakers and the draftsmen even take a cue from these sage words of the Hon'ble Prime Minister!

2. Implications of the proposed amendments:

Needless to say, the proposed amendments are aimed at discouraging/ warding off any legal/constitutional challenge to the levy of GST on the clubs, Associations, Societies, etc. on the basis of the 'doctrine of mutuality' as upheld by the Supreme Court in the Calcutta Club's case (supra) and also in safeguarding the Government's revenue.

While there has not been any serious legal challenge to the levy of GST on the clubs, etc, the GST Council probably thought it better to preamp the issue and in a precipitated move, has attempted to create a protective shield around the levy through these amendments.

3. Issues for consideration:

Notwithstanding the proposed retrospective amendments, a few issues may remain which would be begging for the answers. Let us have a brief look at some of these issues.

i. The first and foremost issue that would arise is: Whether the amendments would apply to the co-operative housing societies (CHS)/ Residents' Welfare Associations (RWA) or not? Will the test of 'businesses' continue to be relevant even after the amendments become effective? In the author's respectful opinion, the amendments notwithstanding, the co-operative housing societies or the Residents' Welfare Associations cannot be subjected to the levy of GST.

ii. The next issue that may need a serious consideration is: Whether the 'Agency principle' would be relevant and applicable in case of the members' clubs like the Lions Club, Rotary Club, Social Groups of the Community like Jain Social Group, etc.? Will the reasoning of the AAAR in the case of Rotary Club of Queens' Necklace (supra) be relevant in the specific cases?

iii. The other issue is whether the proposed amendments dispense with the test of 'consideration'? As the definition of 'consideration' has not undergone any change, will it have any bearing on the scope and impact of the proposed amendments?

The above are, but only few of the issues which would continue to arise even post-amendments and may turn out to be the hotbed of litigation.

4. Retrospective amendments - Justifiability and validity:

While the GST Council might have considered the amendments to S.7 and Schedule II inevitable, the retrospective effect being given to them is unfortunate. The late Finance Minister Shri Arun Jaitley had repeatedly assured the investors and the businesses at large that the retrospective amendments to the tax laws will be undertaken with extreme caution. While presenting his Budget for F.Y. 2014-15, he had said:

"The sovereign right of the government to undertake retrospective legislation is unquestionable. However, this power has to be exercised through extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate.

This government will not ordinarily bring any change retrospectively which creates a fresh liability."

It seems that no heed is paid to this assurance given by the late Finance Minister! The Finance Minister ought to have appreciated that the levy of GST on the members' clubs, Associations, etc. came into the realm of uncertainty due to lack of foresight and prudence as well as extremely poor language of the statutory provisions. The judgement of the Supreme Court in Calcutta Club's case only brought this deficiency in the statutory provisions in sharp focus! It is, therefore, unfair and unjustified to subject the taxpayers to the burden of tax for the past period due to callousness and complacency reflected in the drafting of the statutory provisions.

Moreover, majority of the clubs, associations, Industry or Professional Bodies, societies, etc. have already registered themselves under GST and have been paying the GST since beginning. The amendments, if made prospectively, will not make any major dent in the Revenue nor the retrospective amendments are likely to garner any substantial revenue for the exchequer. One need not have any apprehension about the claims of refund also as it would be well-nigh impossible for such entities to cross the barriers of the 'unjust enrichment'. The Finance Minister, therefore, could have afforded to be magnanimous and could have proposed the amendments prospectively!

In any event, the validity of the retrospective amendments is certain to be challenged before the Courts. It is pertinent to note here that the proposed amendments are being made nearly 3½ years after the CGST Act,2017 came into force. Considering the fact that the 'Doctrine of mutuality' was already being tested before the Supreme Court and various High Courts in the context of the erstwhile VAT/ Sales Tax and Service Tax laws when the GST laws were being framed, the Lawmakers could have been more cautious and alert so as to avoid any possibility of the challenge to the levy of GST on the clubs, etc. on the basis of very 'Doctrine of mutuality'. Further, there was ample time to undertake the damage control and suitably amend the law at the earliest instead of waiting for almost 4 years!

Needless to say, a fierce legal battle will be round the corner once the Bill is passed and the amendments take effect retrospectively after the same are notified. Here, it may be stated that not only the recovery of tax but also the recovery of interest and penalty for the past periods may also become the subject of an intense legal battle.

One may refer to the following judgements of the Supreme Court in this regard:

1. Star India (P) Ltd. Vs. CCE - 2005 -TIOL- 163- SC- LB

2. J. K. Spg.& Wvg. Mills Ltd. vs. UOI - 2002-TIOL-559-SC-CX-LB

To sum up...

It is quite interesting to note that even after all these years and numerous court battles over the applicability of the ' Doctrine of mutuality', it continues to be the cause of fresh legal disputes! The Legislature is, therefore, compelled to employ every tool at its disposal so as to ensure that the doctrine does not prove to be a hindrance in the smooth collection of the tax. The proposed amendments to S.7 and Schedule II of the CGST Act, 2017 retrospectively by the Bill reflect only one such tool deployed by the Legislature to collect the escaped tax for the past periods and pave way for the unhindered collection of the tax in future from certain entities. However, while the retrospective application of the proposed amendments may pass the legal test, it will never pass the tests of fairness and justice!

Those who cannot learn from history are doomed to repeat it - George Santayana

[The views expressed are strictly personal.]