2024 (6) TMI 1458 - AT - Service Tax

Eligibility of an incorporated members club to claim a refund of Service Tax paid under the category of Club or Association Services post 1st July 2012 - HELD THAT - The matter is no longer res-integra as the Hon ble Supreme Court in its decision in case of State of West Bengal and Ors. Vs Calcutta Club Ltd and Chief Commissioner of Central Excise and Service Tax Vs Ranchi Club Ltd 2019 (10) TMI 160 - SUPREME COURT has already decided the matter in favour of respondent holding that service tax does not apply to incorporated members clubs. Conclusion - The refund claims of the incorporated club for Service Tax paid post 1st July 2012 allowed. The department s appeal is accordingly dismissed.

Summary

The core legal questions considered in this judgment revolve around the eligibility of an incorporated members' club to claim a refund of Service Tax paid under the category of "Club or Association Services" post 1st July 2012. Specifically, the issues are:

1. Whether the principle of mutuality exempts an incorporated club from liability to pay Service Tax on membership fees and related charges after 1st July 2012.

2. Whether the club and its members are distinct persons for the purposes of Service Tax liability under the Finance Act, 1994, particularly in light of Explanation 3(a) to Section 65B(44) inserted post 1st July 2012.

3. Whether the refund claims filed by the club for Service Tax paid post 1st July 2012 are legally sustainable.

4. The applicability and interpretation of relevant judicial precedents, including the binding effect of the Supreme Court decision in the case involving incorporated clubs and Service Tax liability.

Issue-wise Detailed Analysis:

Issue 1 & 2: Principle of Mutuality and Distinctness of Club and Members Post 1st July 2012

The legal framework centers on the Finance Act, 1994, specifically Sections 65(25a), 65(25aa), and the expanded definitions under Section 65B(37) and 65B(44) introduced post 1st July 2012. Prior to this date, the principle of mutuality was applied, exempting members' clubs from Service Tax liability on the basis that the club and its members were not distinct persons, but one and the same entity. This was supported by earlier High Court judgments.

However, Explanation 3(a) to Section 65B(44), inserted post 1st July 2012, provides that for the purposes of service tax, an unincorporated association or body of persons and its members shall be treated as distinct persons. The department relied on this to argue that the club and its members are separate entities, thus making the provision of club services taxable.

The department further contended that the club was registered as a 'Club' under the Service Tax department and that the services rendered by the club to its members were liable to Service Tax, negating the principle of mutuality. They also argued that refunding the tax paid would result in unjust enrichment to the club, contrary to Rule 73A(2) of the Service Tax Rules, which mandates that any amount collected as Service Tax but not payable must be paid to the government.

The Tribunal, however, referred extensively to the Supreme Court's decision in the case involving the State of West Bengal and others versus Calcutta Club Ltd and others, which clarified the scope of the term "club or association" and the applicability of Service Tax on such entities post 1st July 2012.

The Supreme Court held that incorporated clubs or associations are "constituted" under law and thus excluded from the Service Tax net under the pre-2012 scheme. The Court analyzed the meaning of "constituted" and held that companies and cooperative societies registered under respective Acts are indeed "constituted" under law, thereby excluding them from the definition of "body of persons" liable for Service Tax under Sections 65(25a) and 65(25aa).

Post 1st July 2012, while the definition of "service" was widened and Explanation 3(a) introduced to treat unincorporated associations and their members as distinct persons, the Supreme Court interpreted this as not extending to incorporated clubs. The Court reasoned that the term "body of persons" in Explanation 3(a) does not include incorporated entities such as companies or cooperative societies. Therefore, the principle of mutuality continues to apply to incorporated clubs, exempting them from Service Tax liability on membership fees and related charges.

This interpretation was supported by the Court's analysis of constitutional provisions and prior case law, which distinguished between incorporated and unincorporated entities for tax purposes. The Court explicitly rejected the department's contention that post-2012 amendments altered the exemption status of incorporated clubs.

Issue 3: Legality of Refund Claims for Service Tax Paid Post 1st July 2012

The appellant club had filed refund claims for Service Tax paid during October 2016 to June 2017 under the category of "Club or Association Services." The original adjudicating authority sanctioned the refund claims, but the department challenged this on the grounds that the tax was correctly paid and thus not refundable.

The Commissioner (Appeals) upheld the refund, finding that the club had wrongly paid Service Tax under the said category. The department appealed to the Tribunal.

The Tribunal, guided by the Supreme Court's authoritative ruling, held that the club, being an incorporated entity, was not liable to pay Service Tax on membership fees and related services. Therefore, the refund claims were sustainable. The Tribunal rejected the department's argument that refunding the tax would amount to unjust enrichment, as the tax was not legally payable in the first place.

Issue 4: Applicability of Judicial Precedents

The department relied on earlier Authority for Advance Rulings decisions and High Court judgments that applied the principle of mutuality differently, particularly those predating or not considering the post-2012 amendments.

The Tribunal distinguished these precedents, emphasizing that the Supreme Court's 2019 decision is binding and directly on point. The Supreme Court clarified the legal position post-2012, overruling earlier interpretations that did not account for the distinction between incorporated and unincorporated clubs. The Tribunal also noted that the department's reliance on High Court decisions was misplaced as the facts and legal context differed.

The Tribunal further highlighted that the Supreme Court declared show-cause notices and demands raised against incorporated clubs for Service Tax as void, reinforcing the position that such clubs are exempt from Service Tax liability on membership fees and related services.

Significant Holdings:

"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 prior to 1st July, 2012 were not included in the service tax net."

"The expression 'body of persons' would not, within these definitions, include a body constituted under any law for the time being in force."

"Explanation 3(a) to Section 65B(44) does not apply to members' clubs which are incorporated."

"From 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members' clubs in the incorporated form."

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

In conclusion, the Tribunal upheld the Commissioner (Appeals) order allowing the refund claims of the incorporated club for Service Tax paid post 1st July 2012. The department's appeal was dismissed, reaffirming that incorporated clubs are distinct legal entities exempt from Service Tax on membership fees and related services by virtue of their constitution under statutory law and the principle of mutuality as interpreted by the Supreme Court.