2025 (6) TMI 1585 - AT - Service Tax

Liability of trust incorporated by deed of Trust in terms of India Trust Act 1882 for payment of service tax - Club or Association service - applicability of doctrine of mutuality even in respect of Trust incorporated by Deed of Trust - invocation of extended period of limitation - Penalty. Extended period of limitation - HELD THAT - It is an admitted fact that Appellant had paid service tax for the period from 01.05.2006 after insertion of explanation; for the purposes of this section taxable service includes any taxable service provided or to be provided or any unincorporated associations or body of persons to a member thereof for cash deferred payment or any other valuable consideration below Section 65 of the Act though they are claiming that it was under mistake of law. As regards invoking the extended period of limitation the appellant submitted that they were under bonafide believe that prior to insertion of explanation to Section 65 no service tax was payable. Further there is no allegation that Appellant had willfully suppressed the facts for evasion of tax - in the absence of any such willful intention for evasion of tax and considering the nature of the dispute the demand of service tax by invoking the extended period is unsustainable. Liability to pay service tax - Club or Association service - doctrine of mutuality - HELD THAT - Hon ble Supreme Court in the matter of State of West Bengal Vs. Calcutta Club Ltd. 2019 (10) TMI 160 - SUPREME COURT categorically held that It is thus clear that companies and cooperative societies which are registered under the respective Acts can certainly be said to be constituted under those Acts. This being the case we accept the argument on behalf of the respondents that incorporated clubs or associations or prior to 1st July 2012 were not included in the Service Tax net . The dispute in the present appeal is for the period from 16.06.2005 to 30.04.2006. In view of the above discussion and considering the ratio of the judgment of the Hon ble Apex Court in State of West Bengal Vs. Calcutta Club Ltd. the appellant is not liable to pay service tax for the period from 16.06.2005 to 30.04.2006 under the category Club or Association service. Conclusion - The Court held that the appellant trust is not liable for service tax under the club or association category for the disputed period the extended limitation period cannot be invoked and penalties imposed are unsustainable. Appeal allowed.

Summary

The core legal questions considered in this appeal are: (1) Whether a 'trust' incorporated by a deed of trust under the Indian Trusts Act, 1882, is liable to pay service tax under the category of 'Club or Association' service as defined in Section 65(25a) read with Section 65(105)(zzze) of the Finance Act, 1994; and (2) Whether the doctrine of mutuality applies to such a 'trust' thereby exempting it from service tax liability. Additionally, (3) the applicability of the extended period of limitation for demand of service tax and (4) the justification for penalties imposed under the Finance Act were also considered.

Regarding the first issue, the relevant legal framework comprises the Indian Trusts Act, 1882, defining the nature, obligations, and fiduciary duties of a trust and trustee, and the Finance Act, 1994, particularly the provisions relating to service tax on 'Club or Association' services. The appellant is a trust created by a deed dated 15.09.1994 by a corporate settlor exclusively for the welfare of its employees, holding and administering a trust fund contributed to by beneficiaries (employees). The appellant had obtained service tax registration under 'Club or Association' and paid service tax from 01.05.2006 onwards but was later demanded service tax for the period 16.06.2005 to 30.04.2006, which was contested.

The Court examined the nature of a trust under the Indian Trusts Act, 1882, highlighting that a trust is an obligation annexed to ownership of property, arising from confidence reposed in the trustee for the benefit of beneficiaries. It emphasized that a trust is a fiduciary relationship, not a separate legal entity or 'person' in law, unlike a corporate body. The trustee holds equitable ownership and owes fiduciary duties to the beneficiaries, including preservation of the trust fund and impartial administration. The Court noted that the Finance Act does not define 'person' to include a trust, and the appellant trust does not fit within the statutory definition of a 'club or association' providing taxable services.

Precedents cited by the appellant included authoritative decisions establishing that trusts, especially private trusts for employee welfare, do not constitute taxable entities under 'club or association' services. The doctrine of mutuality, a fundamental principle in tax jurisprudence, was invoked to argue that there is no service provider-service recipient relationship between the trust and its beneficiaries. The doctrine posits that no person can trade with themselves or make a taxable profit by dealing with oneself. The appellant trust, created exclusively for the benefit of its beneficiaries, is therefore not engaged in a taxable transaction. The Court referred to the Supreme Court ruling in State of West Bengal v. Calcutta Club Ltd., which held that incorporated clubs or associations prior to 1st July 2012 were not included in the service tax net, reinforcing the applicability of the doctrine of mutuality.

On the issue of limitation, the appellant contended that the demand for service tax for the period before 01.05.2006 was barred by limitation, as the extended period under proviso to Section 73(1) of the Finance Act could not be invoked without evidence of willful suppression or evasion. The appellant had paid service tax post-insertion of the Explanation to Section 65 under a bona fide belief that no tax was payable prior. The Court found no willful suppression or intention to evade tax and held that invoking the extended period of limitation was unsustainable.

Regarding penalties, the appellant argued that penalties under various sections, including Section 78, were unjustified due to lack of mens rea or culpable mental state and absence of deliberate defiance or loss to revenue. The Court agreed that penalties were not warranted in the circumstances.

In applying the law to the facts, the Court recognized that the appellant trust is a private express trust created solely for employee welfare, with fiduciary trustees managing a distinct trust fund contributed by beneficiaries. There is no evidence of a commercial or membership-based relationship akin to a club or association providing taxable services. The fiduciary nature and absence of distinct service provider-recipient relationship preclude the applicability of service tax under the 'club or association' category. The Court also applied the doctrine of mutuality to reject the tax liability for the disputed period.

Competing arguments by the revenue, asserting that admission of service tax payment for subsequent periods negates ignorance of law and justifies extended limitation, were rejected by the Court due to absence of willful concealment and the bona fide nature of the dispute.

The Court concluded that the appellant trust is not liable to pay service tax under the 'club or association' category for the period 16.06.2005 to 30.04.2006. The extended period of limitation for demand was improperly invoked, and penalties were unjustified. The impugned order confirming the demand and penalties was set aside.

Significant holdings include the Court's reliance on the Supreme Court's authoritative statement that "incorporated clubs or associations prior to 1st July 2012 were not included in the Service Tax net," affirming the doctrine of mutuality's applicability to trusts. The Court preserved the principle that a trust, being a fiduciary relationship without separate legal personality, cannot be treated as a distinct taxable person under service tax law in the absence of a service provider-recipient relationship.

Verbatim, the Court observed: "No man can trade with himself; he cannot make in what is its true sense or meaning, taxable profit by dealing with himself", underscoring the doctrine of mutuality as a bar to taxing the appellant trust under the impugned provisions.

In final determination, the Court held that the appellant trust is not liable for service tax under the 'club or association' category for the disputed period, the extended limitation period cannot be invoked, and penalties imposed are unsustainable. The appeal was allowed with consequential relief as per law.