2025 (6) TMI 188 - AT - Service Tax

Rejection of refund claim filed by the appellant under section 11B of the Central Excise Act 1944 - rejection of refund on the ground of unjust enrichment - only reason assigned by the Commissioner (Appeals) for holding that the appellant was not entitled to refund of service tax already paid by it is that the appellant was required to pay service tax with effect from 01.07.2012 in view of the provisions of the Finance Act - HELD THAT - In view of the aforesaid Judgment of the Supreme Court in Calcutta Club 2019 (10) TMI 160 - SUPREME COURT that deals with the legal position as it existed prior to 01.07.2012 and as it exists w.e.f. 01.07.2012 the finding recorded by the Commissioner (Appeals) that the appellant would be liable to pay service tax on the services rendered by a club to its members w.e.f. 01.07.2012 is not correct. Similarly reliance placed by the Commissioner (Appeals) on the decisions rendered by the Authority for Advanced Ruling in Emerald Leisures Ltd. 2015 (10) TMI 297 - AUTHORITY FOR ADVANCE RULINGS and Avadh Infratech Ltd. 2016 (9) TMI 145 - AUTHORITY FOR ADVANCE RULINGS is mis-placed. Though the Commissioner (Appeals) has not dealt with issue of unjust enrichment but the Assistant Commissioner also introduced the theory of unjust enrichment though without recording reasons. In Karnavati Club Ltd. vs. Commissioner of Service Tax Ahmedabad 2013 (5) TMI 752 - CESTAT AHMEDABAD the Tribunal examined whether the claim of unjust enrichment can be raised against a club when it provide services to its members. It was held that the principle of unjust enrichment would not be applicable. Conclusion - The Tribunal set aside the impugned order dismissing the refund claim and allowed the appeal. Appeal allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the appellant, an incorporated club providing services to its members, was liable to pay service tax on such services rendered after 01.07.2012 under the Finance Act, 1994, as amended by the Finance Act, 2012.

2. Whether the principle of mutuality exempts the appellant from service tax liability on services provided to its members.

3. Whether the refund claim filed by the appellant for service tax paid mistakenly is admissible on merits.

4. Whether the doctrine of unjust enrichment applies to deny refund to the appellant.

5. Whether the appellant could directly claim refund without challenging the self-assessment order under the provisions governing service tax assessment and refund.

Issue 1: Liability to Service Tax on Services Rendered by an Incorporated Club Post 01.07.2012

The relevant legal framework includes the Finance Act, 1994, as amended by the Finance Act, 2012, particularly sections 65B(37), 65B(44), and 66B, which define "person," "service," and impose service tax on taxable services respectively. The negative list regime introduced w.e.f. 01.07.2012 widened the scope of taxable services to include any activity carried out by one person for another for consideration, except those specified in the negative list.

The Commissioner (Appeals) interpreted these provisions to mean that an incorporated club and its members are distinct persons under the definition of "person" and "service," and therefore services provided by the club to its members are taxable. The Commissioner relied on Explanation 3(a) to Section 65B(44), which treats an unincorporated association or body of persons and its members as distinct persons, and argued that the club's services fall within the taxable ambit.

The appellant contested this view by relying on the Supreme Court's judgment in the Calcutta Club case, which examined the position both prior to and after 01.07.2012. The Supreme Court held that prior to 01.07.2012, incorporated clubs were excluded from the service tax net as they were "established or constituted by or under any law." Post 01.07.2012, although the definition of "person" was broadened, the Supreme Court clarified that Explanation 3(a) applies only to unincorporated associations and bodies of persons, not to incorporated entities such as companies or societies. Hence, the legislative intent was not to tax services rendered by incorporated clubs to their members.

Applying this to the facts, the appellant was registered under the Rajasthan Societies Registration Act, 1958, qualifying it as an incorporated entity. Therefore, the Supreme Court's reasoning in Calcutta Club directly applies, negating the Commissioner (Appeals)'s conclusion that the appellant's services were taxable post 01.07.2012.

The Commissioner (Appeals)' reliance on Authority for Advance Ruling decisions was found misplaced in light of the Supreme Court's authoritative pronouncement.

Issue 2: Applicability of the Principle of Mutuality

The appellant argued that the principle of mutuality exempts it from service tax liability because the club and its members are the same entity in substance, and no service is provided from one distinct person to another. The Commissioner (Appeals) rejected this, emphasizing the statutory definitions that treat the club and its members as distinct persons post 01.07.2012, thereby excluding the principle of mutuality.

However, the Supreme Court's detailed analysis in Calcutta Club clarified that Explanation 3(a) does not apply to incorporated clubs, and thus the club and its members are not treated as distinct persons for service tax purposes. This re-establishes the principle of mutuality's applicability, as no taxable service is rendered between distinct persons. The Tribunal, therefore, accepted the appellant's contention that the principle of mutuality applies, exempting the appellant from service tax liability.

Issue 3: Admissibility of Refund Claim on Merits

The Assistant Commissioner rejected the refund claim on merits, holding that the appellant was liable to pay service tax and that the refund was not admissible. The Commissioner (Appeals) upheld this view, relying on the statutory definitions effective from 01.07.2012.

However, the Tribunal, considering the Supreme Court's ruling, found that the services rendered by an incorporated club to its members are not taxable services. Hence, the tax paid was not legally payable, making the refund claim admissible on merits.

Issue 4: Doctrine of Unjust Enrichment

The Assistant Commissioner also rejected the refund on the ground of unjust enrichment but failed to provide any reasoned basis for this conclusion. The Commissioner (Appeals) did not address this issue.

The Tribunal referred to the Tribunal's earlier decision in Karnavati Club Ltd., which held that the principle of unjust enrichment does not apply to clubs providing services to their members because the club and members are not separate persons. The service tax paid by the club is not passed on to members as a separate charge, and claiming refund does not unjustly enrich the club.

Applying this precedent, the Tribunal concluded that the appellant's refund claim cannot be denied on the ground of unjust enrichment.

Issue 5: Requirement of Challenging Self-Assessment Order Before Claiming Refund

The Department contended that the appellant could not claim refund without first challenging the self-assessment order, relying on the Supreme Court's decision in ITC Ltd. However, neither the show cause notice nor the orders passed by the Assistant Commissioner or Commissioner (Appeals) raised this issue, nor did the Department file a cross-appeal.

The Tribunal held that since this plea was not raised or adjudicated in the proceedings below, and no cross-appeal was filed, the Department cannot raise it at this stage. Therefore, this argument was rejected.

Significant Holdings and Core Principles Established

"We are therefore of the view that the Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following Young Men's Indian Association (supra). We are also of the view that from 2005 onwards, the Finance Act of 1994 does not purport to levy Service Tax on members' clubs in the incorporated form."

This principle firmly establishes that incorporated clubs are excluded from service tax liability on services rendered to their members, both prior to and after 01.07.2012, despite the introduction of the negative list regime and expanded definitions.

The Tribunal also held that Explanation 3(a) to Section 65B(44) applies only to unincorporated associations and does not extend to incorporated clubs or societies, thereby preserving the principle of mutuality in such cases.

Further, the Tribunal reaffirmed that the doctrine of unjust enrichment is not applicable to refund claims by clubs providing services to their members, as the club and members are not separate persons for this purpose.

Finally, procedural safeguards require that issues not raised or decided in lower forums, and not appealed against by the Department, cannot be introduced at the appellate stage.

On these bases, the Tribunal set aside the impugned order dismissing the refund claim and allowed the appeal with consequential relief.