2025 (4) TMI 935 - AT - Service Tax

Eligibility of a club to claim refund of Service Tax paid on services provided to its members during the period from 01.04.2016 to 30.09.2016 - applicability of principles of mutuality - HELD THAT - The Apex Court after considering various facts of the levy held that principle of mutuality applies between the club and its members vide decision reported in the case of state of West Bengal other Vs. Calcutta Club Ltd. 2019 (10) TMI 160 - SUPREME COURT - Hon ble Supreme Court also held that post amendment in Finance Act 1994 vide amendment carried out on 1st July 2012 the definition of service contained in Section 65B(44) was still wide enough to include the doctrine of mutuality at least in relation to incorporated clubs or association to claim exemption from Service Tax. The basis of principle propounded was that there cannot be a service and therefore the levy between the club and members inter-se as the member collectively constitute the club and cannot be stated to be providing service mutually. There are force in the arguments advance by the Learned Commissioner (AR) who pointed out that the doctrine of mutuality cannot be extended beyond the scope of levy provisions and if the same is done absurd consequence shall follow. As a club will be able to claim tomorrow that all assets of its members are the assets of the club. The levy collected without force of law too is an asset of the member and enriching club by extending principle of mutuality beyond levy will amount to interpreting law in a manner that promotes misappropriation of members funds as well as probably the consumer Welfare Fund . His argument that the prayer of the department to subject the refund claim to unjust enrichment must be allowed even if silence on this aspect was maintained by the appellate authority while allowing the refund due to levy provision having been interpreted by the Hon ble Supreme Court in the matter of Calcutta Club - The provision of unjust enrichment enjoins upon the person who collects a tax which is refunded as not being covered by lawful levy to either pay back the same to the person from whom the same was recovered or if it cannot be paid back for any reason then the department has the right to apply provisions of unjust enrichment and recover the amount which could not be paid back and credit it to the Consumer Welfare Fund etc. Any interpretation that can encourage misappropriation defiance of rightful claims has to be eschewed. In the instant case it is not doubted that levy was collected from the members initially treating them as separate. Now even if levy is not sustainable on principle of mutuality the examination of unjust enrichment for refund cannot be allowed to be ignored as the same was applied by the Apex Court even for captive consumption within the same entity. Conclusion - i) Refund claims must be subjected to the test of unjust enrichment to ensure that only those who bore the tax burden receive refunds failing which amounts should be credited to the Consumer Welfare Fund. ii) The principle of mutuality does not apply post 01.07.2012 for incorporated clubs and the levy of Service Tax on services provided by the club to its members is valid. Appeal of Revenue Partly allowed.

Summary

The core legal questions considered in this judgment revolve around the eligibility of a club to claim refund of Service Tax paid on services provided to its members during the period from 01.04.2016 to 30.09.2016. The principal issues include:

1. Whether the principle of mutuality applies between the club and its members post 01.07.2012, thereby negating the levy of Service Tax on services rendered by the club to its members.

2. The legal effect of amendments introduced in the Finance Act, 1994, especially Section 65B(44), which treats an unincorporated association or body of persons and its members as distinct persons for taxation purposes.

3. The applicability of the doctrine of unjust enrichment in the context of refund claims made by the club for Service Tax collected from its members.

4. Whether the refund claim can be allowed when Service Tax was paid on self-assessment basis despite the club's prior knowledge of judicial decisions questioning the levy.

5. The interpretation and application of relevant statutory provisions, including Sections 70, 73A, 65B, 65(25aa), 65(105)(zzze), 66, 66B, and 11B of the Finance Act, 1994, and the constitutional mandate under Article 265.

6. The extent to which judicial precedents, including decisions of the Hon'ble Supreme Court and various High Courts, influence the determination of tax liability and refund claims in this context.

Issue-wise Detailed Analysis

1. Principle of Mutuality and Taxability Post 01.07.2012

The legal framework involves the Finance Act, 1994, particularly Section 65B(44), which defines "service" and includes an Explanation 3(a) stating that an unincorporated association or body of persons and its members shall be treated as distinct persons for the purposes of service tax. This amendment was introduced with effect from 01.07.2012.

The department contended that this amendment negates the principle of mutuality previously relied upon by clubs to claim exemption from Service Tax. The principle of mutuality, as held in earlier High Court decisions, posited that a club and its members are not distinct persons, and transactions between them do not amount to taxable services.

The Court examined precedents including the Gujarat High Court's 2013 decision, which applied the mutuality principle for periods prior to 01.07.2012, and the subsequent ruling of the Authority for Advance Rulings in 2015, which held that post-amendment, clubs and members are distinct persons, making services taxable.

The Court reasoned that the legislative intent behind Section 65B(44) was to create a legal fiction treating clubs and members as separate entities, thereby enabling levy of Service Tax on services rendered by clubs to members. The Court observed that the appellant club was registered under Service Tax as a distinct entity and collected tax accordingly, which supports the legal distinction.

Therefore, the Court concluded that the principle of mutuality does not apply post 01.07.2012 for incorporated clubs, and the levy of Service Tax on services provided by the club to its members is valid.

2. Payment of Service Tax on Self-Assessment and Refund Claims

Section 70 of the Finance Act, 1994 mandates self-assessment and filing of returns by taxable persons. The appellant club paid Service Tax on self-assessment during the disputed period. The department questioned why the club paid tax if it believed the levy was ultra vires, suggesting a modus operandi for unjust enrichment.

The Court noted that the payment of Service Tax on self-assessment reflects the club's acceptance of tax liability under the law as it stood, weakening the argument that the tax was not leviable. The department relied on Section 73A, which requires amounts collected as Service Tax not payable to be deposited with the government, arguing no refund arises in such cases.

However, the Court emphasized that refund claims must be adjudicated considering the entire legal framework, including judicial pronouncements and statutory amendments, rather than on isolated provisions.

3. Doctrine of Unjust Enrichment in Refund Claims

The doctrine of unjust enrichment prevents a person from profiting unjustly by recovering tax twice-once from the consumer and again as a refund from the government. The department argued that refunding the Service Tax to the club, which collected it from members, would unjustly enrich the club at members' expense.

The Court analyzed the Supreme Court's decision in Mafatlal Industries Ltd. v. Union of India, which laid down that refund claims must satisfy the test of unjust enrichment, requiring proof that the claimant has borne the tax burden and has not passed it on to others.

The Court distinguished the mutuality between the club and its members from mutuality among individual members. It found that while the club and members may be mutually related, individual members are distinct persons, and refunding tax collected from some members to the club, which benefits all members indiscriminately, could cause unjust enrichment.

The Court noted that the appellant club admitted to issuing refunds to members who paid the tax, indicating compliance with the unjust enrichment principle. However, the Court emphasized the need for a thorough verification to ensure refunds are made only to those who bore the tax burden, or else the amount should be credited to the Consumer Welfare Fund.

The Court relied on various judicial precedents affirming that the doctrine of unjust enrichment applies even in cases of captive consumption and intra-entity transactions, reinforcing the requirement of passing the burden test before refund sanction.

4. Judicial Precedents and Interpretation of Statutory Provisions

The Court extensively reviewed relevant judicial precedents, including:

• The Supreme Court's ruling in State of West Bengal v. Calcutta Club Ltd., which upheld the principle of mutuality between club and members for the levy of Service Tax but did not address unjust enrichment in refund claims.
• CESTAT Ahmedabad decisions in Karnavati Club Ltd. and Young Men's Christian Association cases, which applied mutuality to deny tax liability but were later distinguished on unjust enrichment grounds.
• Supreme Court decisions emphasizing literal interpretation of statutes and cautioning against extending judicial principles beyond their factual matrix.
• The Supreme Court's Mafatlal Industries judgment, which established the doctrine of unjust enrichment as a mandatory condition for refund claims.

The Court underscored that the amendments to the Finance Act, 1994, particularly Sections 65B(44) and 66B, reflect legislative intent to treat clubs and members as distinct taxable entities post 01.07.2012, overriding earlier judicial interpretations based on mutuality.

The Court also emphasized that judicial decisions must be interpreted in light of factual differences and statutory changes, cautioning against blind reliance on precedents without contextual analysis.

5. Application of Law to Facts and Treatment of Competing Arguments

The Court applied the amended statutory provisions to the facts, observing that the appellant club was registered and paid Service Tax as a separate entity providing taxable services to its members. It found that the principle of mutuality does not exempt the club from tax liability post 01.07.2012.

Regarding refund claims, the Court acknowledged the appellant's admission of refunding amounts to members who paid the tax, aligning with the doctrine of unjust enrichment. However, it expressed concern over the conditional refund process requiring members to submit proofs, which could delay or deny rightful refunds.

The Court accepted the department's contention that the refund order requires remand for detailed examination of unjust enrichment, ensuring that refunds are made only to members who bore the tax burden or, failing that, amounts are credited to the Consumer Welfare Fund.

The Court rejected the appellant's argument that the doctrine of unjust enrichment does not apply due to mutuality, holding that mutuality applies only to the levy of tax and not to the refund process, which must independently satisfy the unjust enrichment test.

6. Final Conclusions and Directions

The Court concluded that:

• The club and its members are distinct persons for Service Tax purposes post 01.07.2012, making the services taxable and negating the mutuality exemption.
• The refund claim for Service Tax paid on self-assessment is not sustainable without passing the unjust enrichment test.
• The appellant club must refund the Service Tax amounts to the individual members or their legal heirs from whom the tax was collected.
• Where refunds cannot be made due to non-availability of members or legal heirs, the amounts should be credited to the Consumer Welfare Fund.
• The matter is remanded to the adjudicating authority for detailed verification and adjudication of the unjust enrichment aspect, with a suggested time frame for completion.
• Interest earned on refunded amounts held by the club should be deposited in an escrow account without claim by the club, to prevent delay tactics.

Significant Holdings

"Explanation 3 (a) to said Section [65B(44)] explicitly 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."

"The principle of mutuality does not apply post 01.07.2012 for incorporated clubs, and the levy of Service Tax on services provided by the club to its members is valid."

"The doctrine of unjust enrichment is a just and salutory doctrine. No person can seek to collect the duty from both ends. In other words, he cannot collect the duty from his purchaser at one end and also collect the same duty from the State on the ground that it has been collected from him contrary to law. The power of the Court is not meant to be exercised for unjustly enriching a person."

"The mutuality between a club and its members, decided by the judgement of State of West Bengal v/s. Calcutta Club Ltd., cannot be directly inferred as a mutuality between one member of a club and another member of the same club."

"Refund claims must be subjected to the test of unjust enrichment to ensure that only those who bore the tax burden receive refunds, failing which amounts should be credited to the Consumer Welfare Fund."

"The principle of mutuality as propounded by Hon'ble Apex Court has to be with reference to levy of tax only and any extension beyond this, including non-applicability of unjust enrichment, requires rejection being 'ab incontinent' and having tendency to promote hardship, inconvenience and injustice."

"The language employed in a statute is the determinative factor of the legislative event and even assuming there is a defect or any omission in the words used in the legislature, the Court cannot correct or make up the deficiency, especially when a literal reading thereof produces an intelligible result and any departure from the literal rule would really be amending the law in the garb of interpretation, which is not permissible."

"The Court remands the matter to the adjudicating authority with directions that the club refund the collected Service Tax to the persons or legal heirs from whom it was recovered, deposit interest earned in escrow, and where refund is not possible, credit the amount to the Consumer Welfare Fund."