2019 (10) TMI 160 - SC - Service Tax

Club and association services - Doctrine of mutuality - Nature of transaction - sale or service - scope of sale and service - Failure to make payment of sales tax - sale of food and drinks to the permanent members during the quarter ending 30-6-2002 - scope of sale in terms of Section 2(30) of the West Bengal Sales Tax Act 1994 - Deemed transfer - club and association services -taxability under service tax - situation post 1/7/2012. HELD THAT - When profits and gains of a mutual insurance company are sought to be brought to tax they are so done by express reference to the fact that the business of insurance is carried on by a mutual insurance company. The absence of any such language in subclause (e) of Article 366(29-A) is also an important pointer to the fact that the doctrine of mutuality cannot be said to have been done away with by the said 46th Amendment. Deemed transfer - HELD THAT - It can be seen from the provision of Deemed Transfer that profits or gains arising from a transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock-in-trade of a business is by a deeming fiction brought to tax despite the fact that there is no transfer in law by the owner of a capital asset to another person. Modalities such as these to bring to tax amounts that would do away with any doctrine of mutuality are conspicuous by their absence in the language of Article 366(29-A)(e). The service tax was thus leviable on all services as defined short of a negative list of services which was set out in Section 66D of the Act - After exhaustively reviewing a number of judgments the Court stated that Parliament has legislative competence to levy service tax under Entry 97 List I of the Constitution of India. The definition of club or association contained in Section 65(25a) makes it plain that any person or body of persons providing services for a subscription or any other amount to its members would be within the tax net. However what is of importance is that anybody established or constituted by or under any law for the time being in force is not included - 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. Position post 1st July 2012 - HELD THAT - It can be seen that the definition of service contained in Section 65B(44) is very wide as meaning any activity carried out by a person for another for consideration. Person is defined in Section 65B(37) as including inter alia a company a society and every artificial juridical person not falling in any of the preceding sub-clauses as also any association of persons or body of individuals whether incorporated or not. What has been stated in the present judgment so far as sales tax is concerned applies on all fours to service tax; as if the doctrine of agency trust and mutuality is to be applied qua members clubs there has to be an activity carried out by one person for another for consideration - We have seen how in the judgment relating to sales tax the fact is that in members clubs there is no sale by one person to another for consideration as one cannot sell something to oneself. This would apply on all fours when we are to construe the definition of service under Section 65B(44) as well. The Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following THE JOINT COMMERCIAL TAX OFFICER HARBOUR DIVISION II MADRAS VERSUS YOUNG MEN S INDIAN ASSOCIATION MADRAS AND OTHERS 1970 (2) TMI 87 - SUPREME COURT - Young Men s Indian Association is expressly based upon the English judgments which disregarded the corporate form and stated that there could not be a sale on the facts of those cases between two persons because Foster i.e. a member of the club could be regarded as vendor as well as purchaser - What is essential is that the holding of the property by the trustee or agent must be a holding for and on behalf of and not a holding antagonistic to the members of the club. Young Men s Indian Association (supra) made no distinction between a club in the corporate form and a club by way of a registered society or incorporated by a deed of trust. What is the essence of the judgment is that the holding of property must be a holding for and on behalf of the members of the club there being no transfer of property from one person to another. Proprietary clubs were distinguished as there the owner of the club would not be the members themselves but somebody else. Also it must be noted that from 2005 onwards the Finance Act of 1994 does not purport to levy service tax on members clubs in the incorporated form. Appeal dismissed - decided against Revenue.

Summary

The core legal questions considered by the Court in these appeals can be grouped as follows:

(i) Whether the doctrine of mutuality applies to incorporated members' clubs after the insertion of Article 366(29-A) into the Constitution by the 46th Amendment, particularly sub-clause (e) thereof, which deems certain supplies by unincorporated associations or bodies of persons to their members as sales liable to sales tax;

(ii) Whether the Supreme Court's earlier decision in CTO v. Young Men's Indian Association, which held that supplies by members' clubs to their members do not constitute sales due to the doctrine of mutuality, continues to hold good post the 46th Amendment;

(iii) Whether sub-clause (f) of Article 366(29-A), which deals with supply of food or drink by way of or as part of any service, applies to members' clubs;

(iv) Whether service tax is leviable on services provided by members' clubs to their members, particularly those clubs incorporated under Section 25 of the Companies Act or registered as cooperative societies, and whether the principle of mutuality applies in the service tax context;

(v) The proper interpretation of the expressions "unincorporated association", "body of persons", and "person" in the constitutional and statutory provisions governing sales tax and service tax, and whether incorporated clubs fall within the tax net.

Issue-wise Detailed Analysis

(i) Doctrine of Mutuality and Applicability Post 46th Amendment

The doctrine of mutuality is a legal principle that no person can make a profit from himself; thus, transactions within a mutual association, where the contributors and beneficiaries are the same persons, do not constitute sales or taxable transactions. The Court examined the doctrine's applicability to members' clubs, including those incorporated under Section 25 of the Companies Act.

Relevant precedents include the Constitution Bench decision in CTO v. Young Men's Indian Association (1970), which held that supplies of food and drink by clubs to their members do not amount to sales because the club acts as an agent or trustee for its members, and there is no transfer of property between distinct persons. The Court also relied on English authorities such as Graff v. Evans and Trebanog Working Men's Club, which emphasized that members are joint owners of club property and that there is no sale between the club and its members.

The Court distinguished the decision in Deputy Commercial Tax Officer v. Enfield India Ltd., which held that a cooperative society supplying refreshments to its members for a price constituted a sale, on the ground that Enfield dealt with a body corporate not acting as an agent of its members, and the English cases dealt with criminal liability rather than taxation.

The Court further analyzed the nature of Section 25 companies, which are non-profit entities that prohibit dividend distribution and apply profits to charitable or other objects. The Court held that such companies cannot be treated as separate from their members for the purpose of the doctrine of mutuality, following the reasoning in Cricket Club of India Ltd. v. Bombay Labour Union, which rejected the notion that incorporation alone obliterates the mutuality principle.

(ii) Effect of Article 366(29-A)(e) of the Constitution

Article 366(29-A)(e) was inserted by the 46th Amendment to deem supply of goods by any unincorporated association or body of persons to a member thereof for consideration as a sale. The Court examined whether this provision abrogated the doctrine of mutuality and the Young Men's Indian Association decision.

The Court held that the language of sub-clause (e) refers expressly to "unincorporated association or body of persons" and does not include incorporated entities such as companies or cooperative societies. The Court relied on the principle of ejusdem generis and the contrast with the definition of "person" in other statutes, which expressly include incorporated bodies. The Court also noted that the legislative history and Statement of Objects and Reasons indicate that the amendment was intended to bring unincorporated clubs within the tax net, based on a mistaken assumption that incorporated clubs were already taxable.

The Court emphasized that the doctrine of mutuality remains intact for incorporated clubs, as the constitutional amendment does not expressly or impliedly repeal it in that context. The Court further observed that the definition of "consideration" under the Indian Contract Act requires a transaction between distinct persons, which is absent in a mutual club setting.

(iii) Applicability of Article 366(29-A)(f) to Members' Clubs

Sub-clause (f) of Article 366(29-A) deals with supply of food or drink by way of or as part of any service or in any other manner whatsoever, deeming such supply as a sale. The Court analyzed whether this provision extends to food and drink supplied by members' clubs to their members.

The Court held that sub-clause (f) was enacted specifically to overturn earlier Supreme Court decisions that held that composite contracts for food and service in hotels and restaurants did not amount to sales. The Court observed that sub-clause (f) applies to hotels and restaurants and not to members' clubs, which are distinct entities. The Court reasoned that if sub-clause (f) applied to members' clubs, it would lead to anomalous results, such as only food and drink being taxable while other goods supplied by the club would not be.

The Court relied on authoritative decisions interpreting sub-clause (f) as limited to the hospitality sector and not extending to clubs.

(iv) Levy of Service Tax on Incorporated Members' Clubs

The Court considered whether service tax can be levied on services provided by members' clubs to their members, especially those incorporated under Section 25 of the Companies Act or registered as cooperative societies.

It was noted that the Finance Act, 1994 initially imposed service tax on specified services, including services provided by clubs or associations to their members, but excluded those "established or constituted" under any law, effectively exempting incorporated clubs.

Post-2012, the service tax regime shifted to a negative list approach, with "service" defined as any activity carried out by a person for another for consideration. "Person" was defined broadly to include incorporated and unincorporated bodies. However, Explanation 3 to Section 65B(44) treats an unincorporated association or body of persons and its members as distinct persons for service tax purposes, but the Court held that "body of persons" does not include incorporated entities.

The Court held that the principle of mutuality applies equally in the service tax context: there is no service provided by one person to another where the "persons" are effectively the same, as in an incorporated members' club acting for its members. Therefore, no service tax liability arises on services provided by incorporated members' clubs to their members.

The Court rejected the Revenue's contention that the mutuality principle was abrogated in the service tax context, holding that the legislative scheme and statutory language do not support this view. The Court upheld the High Courts of Jharkhand and Gujarat, which had applied the doctrine of mutuality to exempt incorporated members' clubs from service tax.

(v) Interpretation of Key Expressions in Constitutional and Statutory Provisions

The Court closely analyzed the expressions "unincorporated association", "body of persons", and "person" as used in Article 366(29-A), the West Bengal Sales Tax Act, and the Finance Act.

The Court held that "unincorporated association" clearly excludes incorporated entities. The expression "body of persons" is used in contexts that exclude companies or registered cooperative societies, as opposed to the broader term "person", which includes incorporated bodies.

The Court relied on principles of statutory interpretation, including ejusdem generis and the contrast of language in different provisions, to conclude that incorporated clubs are not covered by provisions aimed at unincorporated bodies.

The Court also noted the definition of "constituted" in related jurisprudence, holding that companies and cooperatives are "constituted" under law and thus excluded from certain tax provisions aimed at unincorporated bodies.

Significant Holdings

"The doctrine of mutuality continues to be applicable to incorporated and unincorporated members' clubs after the 46th Amendment adding Article 366(29-A) 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 46th Amendment."

"Sub-clause (f) of Article 366(29-A) has no application to members' clubs."

"The expression 'body of persons' occurring in Article 366(29-A)(e) and in the Finance Act does not include incorporated companies or cooperative societies."

"The principle of mutuality applies equally in the service tax context; services provided by incorporated members' clubs to their members are not taxable services under the Finance Act."

"The High Courts of Jharkhand and Gujarat were correct in applying the doctrine of mutuality to exempt incorporated members' clubs from service tax."

"Show cause notices, demand notices and other actions taken to levy and collect service tax from incorporated members' clubs are declared to be void and of no effect in law."

The Court thus preserved the fundamental legal principle that no sale or service tax liability arises on supplies or services within incorporated members' clubs to their own members, as there is no transaction between distinct persons but an internal mutual arrangement. The 46th Amendment's provisions and subsequent service tax legislation do not abrogate this principle for incorporated clubs, and the tax net applies only to unincorporated associations or to supplies to non-members.