GST UPDATE ON LANDMARK SUPREME COURT DECISION REGARDING SERVICE TAX ON CLUB PART-1:-

We all are aware of the tremendous litigation that has been held in past regarding leviability of service tax on services provided by club to its members in view of the ‘mutuality concept’. There have been number of judicial pronouncements rendered by various High Courts denying the leviability of service tax on services provided by club to its members, prominent amongst them being RANCHI CLUB LTD. VS CHIEF COMMISSIONER OF C.E. & S.T., RANCHI ZONE [2012 (26) S.T.R. 401 (JHAR.)] and SPORTS CLUB OF GUJARAT LTD. VS UNION OF INDIA [2013 (31) S.T.R. 645 (GUJARAT)]. These decisions were challenged by the service tax authorities in the Larger Bench of Supreme Court of India and were recently decided by the Hon’ble Larger Bench of the Supreme Court of India. The present update seeks to analyse the conclusion arrived at by the Hon’ble Supreme Court and its applicability in GST era.

Background of the High Court decisions:-It is submitted that the Hon’ble Jharkhand in the case of Ranchi Club has relied on the decision given by full member bench of Supreme Court in the case of Joint Commercial Tax Officer Vs Young Men’s Indian Association wherein it was held that in order to levy sales tax, property in goods should pass but in case of club, there was no transfer of property and rather club was acting as an agent on behalf of members and so the transaction could not be considered as sales so as to levy sales tax. The hon’ble Gujarat High Court concluded that in order to levy sales tax or service tax, it is necessary that there should be two persons and the issue whether there are two persons or two legal entities in transactions between club and its members has already been decided by the Hon’ble Supreme Court in the case of Young Men’s Indian Association case whereby the concept of mutuality has been affirmed. Similar view was taken by the Hon’ble Gujarat High Court in the case of Sports Club of Gujarat Ltd. Now, the moot question that arises is the impact of the decision given by the Supreme Court and its applicability in the GST regime.

Contentions of Service Tax Authorities before the Supreme Court:-The service tax authorities pleaded before the Hon’ble Supreme Court that the reliance placed by the Jharkhand and Gujarat High Court on the decision given by the Apex Court in the case of Young Men’s Indian Association is misplaced as in service tax laws, the principle of mutuality in case of incorporated entities has been dispensed with. It was pleaded that with the introduction of negative list in service tax w.e.f. 01.07.2012, term ‘person’ was defined under section 65B(37) of Finance Act, wherein person includes “an association of persons or body of individuals, whether incorporated or not”. Likewise, according to section 65B(44) of Finance Act, service means any activity carried out by a person for another for consideration and includes declared service. Hence, two persons are necessary for an activity to be termed as service. Moreover, according to the Explanation 3(a) to the definition of service, “an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons”.
Reasoning adopted by the Supreme Court:-The judgment was delivered for both positive list tax regime and negative list tax regime separately as follows:-
Service tax liability for the period 16.06.2005 to 30.06.2012:-It was concluded that the definition of ‘club or association’ contained in section 65(25a) of the Finance Act levied tax on any person or body of persons providing services for subscription or any other amount to its members. It is pertinent to note that definition of person was not there in the Finance Act during this period. Moreover, the definition of “club or association” under section 65(25a) of the Finance Act, specifically excluded “any body established or constituted under any law for the time being in force”. Hence, anybody “established or constituted” by or under any law for the time being in force is not included. Therefore, it was concluded that incorporated clubs or associations (under Companies Act/Cooperative Society Act) were not included in service tax net for this mentioned period. The service tax was payable only by un-incorporated clubs.
Service tax liability post 01.07.2012:-It was held that the definition of service is very wide meaning any activity carried out by a person to another for consideration. Furthermore, the definition of person includes association of persons or body of individuals whether incorporated or not. Now, the question before the Supreme Court was that whether the doctrine of agency, trust and mutuality as held to be applicable in the Sales Tax judgment of Supreme Court in Young Men’s Indian Association was applicable for service tax also or not? It was however mentioned that the analogy that in members’ club, there is no sale by one person to another for consideration as one cannot sell something to oneself would equally apply for services also. Thereafter, the provision contained in the explanation 3(a) to the definition of service, “an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons” was analysed. It was concluded that this explanation was similarly worded as Article 366(29-A)(e) of the Constitution of India which reads as follows:-
Article 366(29A) tax on sale or purchase of goods includes-
(e) a tax on the supply of goods by any unincorporated association or body of persons to a memberthereof for cash, deferred payment or other valuable consideration
The Supreme Court analysed the term “body of persons” in detail in the judgment of Calcutta Club Ltd. pertaining to sales tax and has held that according to the principle of “ejusdem generis” will apply and the term body of persons used indicates reference to unincorporated body of persons. Therefore, incorporated body of persons will not be covered under the ambit of Article 366(29A) (e) of the Constitution of India. Similarly, it was held that the same principle would apply for analysing the provision contained in explanation 3(a) and so in the negative list era, the incorporated association or body of persons would not be liable to service tax. This is for the reason that the explanation 3(a) used the term “an unincorporated association or body of persons” instead of using the term “person” or the term “an association of persons or body of individuals, whether incorporated or not”. It was concluded that the legislature has continued with the pre-2012 scheme of not taxing members’ club when they are in the incorporated form. The expression “body of persons” may subsume within it persons who come together for a common
purpose, but cannot possibly include a company or a registered cooperative society. Thus, Explanation 3(a) to Section 65B(44) does not apply to members’ clubs which are incorporated.

Hence, it was held that the Jharkhand High Court and the Gujarat High Court are correct in following the Supreme Court decision given in the case of Young Men’s Indian Association. It was held that from 2005 onwards, Finance Act does not purport to levy service tax on incorporated clubs.

The implication of this judgment in the GST era will be discussed in our next update.
The content of this GST update is for educational purpose only and not intended for solicitation.
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GST UPDATE ON LANDMARK SUPREME COURT DECISION REGARDING SERVICE TAX ON CLUB PART-1:-

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