Whether the club, who is basically engaged in promoting different games and sports, is liable to pay service tax on the services rendered to its members provided by it?

Prepared By:
CA. Rajani Thanvi &
Kavita Thanvi

Case: -KARNAVATI CLUB LTD. v/sUNION OF INDIA

Citation:- 2010 (20) S.T.R. 169 (Guj.)

Issue:- Whether the club, who is basically engaged in promoting different games and sports, is liable to pay service tax on the services rendered to its members provided by it?

Brief Facts:-The petitioner was a company registered under the companies act, 1956. The main objective of that company was to promote the game of cricket and other different games in Gujarat stateand to provide facilities and infrastructure in connection with such games, sports and for other purpose. The petitioner was a members club without any shareholders and makes available facilities exclusively for its members and their guests and recoups expensesTherefore the petitioner was a mutual undertaking which does not earn any profit and does not carry on any trade or business. The petitioner club is having open lawn and the said lawn of the club is provided for marriage ceremonies and other social functions to the members on charges. The service tax has been imposed upon the service rendered by the ‘Mandap Keeper’ to its clients and as insisted upon by the officers of the respondent, the petitioner has got themselves registered under provision of Finance Act, 1994 for making the payment of service tax as ‘Mandap Keeper’ provided by the petitioner to its members and started payment of service tax as per the provisions of Finance Act, 1994. The petitioner is in appeal before High Court to challenge the action of the respondents in holding the petitioner club liable to pay service tax being a ‘Mandeep Keeper’ within the contents of provision of the Finance Act, 1994.

Appellant’s Contention:- The appellant contended that:-

1. The services offered by the petitioners were only as a matter of convenience for the use by its members and the invitees, which is one of the objectives of the club. Therefore, the services provided by the petitioners to its members cannot be classified as a trading activity.
2. There is no element of transfer of property between the members and the club when the petitioner club provides its members the facility to use the lawn for the purpose of wedding and other functions and the petitioner club is not a Mandap Keeper. When the club provides its facilities to its members for official, social or business functions, there is no letting-out of its immovable property for any consideration. Moreover, no element of transfer is involved between the member and the club when the club provides its members the facility to u Therefore, under no circumstances, the petitioner can be classified as ‘mandap keeper’.
3. There was no constituent of transfer of property between the members and the club when the petitioner club provides its members the facility to use the lawn for the purpose of wedding and other functions and the petitioner club is not a Mandap Keeper. When the club provides its facilities to its members for official, social or business functions, there is no letting-out of its immovable property for any consideration. Hence, no ingredients of Clauses (66) or (67) of Section 65 of the Finance Act, 1994 get attracted. Further the aspect of transfer is involved between the member and the club when the club provides its members the facility to use its property for any function. Therefore, under no circumstances, the petitioner can be classified here as a ‘mandap keeper’.

4. The petitioner relied upon the following cases:

Dalhousie Institute v. Assistant Commissioner, Service Tax Cell reported in 2006 (3) S.T.R. 311 (Cal.) = 2005 (180) E.L.T. 18 (Cal.)
Saturday Club Ltd. v. Asst. Commissioner, Service Tax Cell, Calcutta reported in 2006 (3) S.T.R. 305 (Cal.) = 2005 (180) E.L.T. 437 (Cal.)

5. In continuous to the above the petitioner further submitted that keeping in mind the principle laid down in the aforesaid decisions, the Union Government has also amended the Finance Act, by introducing the Finance (Amendment) Act, 2005, which came into force w.e.f. 16-6-2005. Therefore, the submissions canvassed by the petitioners have been indirectly endorsed by the Union Government as well. Hence, the impugned action of the respondents is illegal and bad in the eyes of law.

Respondent’s Contention:- The respondent argue that:-

The Memorandum of Association of the petitioners include the leasing or hiring of any movable or immovable property as one of its object. The kind and scope of services, which attract service tax levy, have been well-defined in the service tax legislation.The petitioners provided services in relation to the use of its lawns, etc. to its members and therefore, it is covered by the extent of “taxable service” provided by a “mandap keeper”. Furtherthe terms “mandap” and “mandap keeper”, as defined in the Finance Act, 1994 describe the scope and nature of levy, the taxable event and the person who is liable to pay tax. The levy covers not only establishments having regular business but also, the conference rooms, halls, etc. which are let-out for conducting official, social or business functions.
The services rendered by the clubs in the form of temporary occupation of its premises, viz. lawns, etc., to its members, their families and guests, are charged for a consideration and the same are being paid by the members. Hence, the services rendered by the clubs of allowing its members by proving its premises will attract the levy of service tax. The clubs are already exempted from the levy of income-tax and therefore, it would not be proper to grant them exemption even under the Service Tax Act. The respondent has relied on the case of Tamil Nadu Kalyana Mandapam Assn. v. Union of India reported in 2006 (3)S.T.R.260 (S.C.) = 2004 (167)E.L.T.3 (S.C.).

Reasoning of Judgment:-The hon’ble Tribunalsaid that the service tax payable by the respondent is on the service and not on the service provider. Further the conjoint reading of the definitions of Mandap, Mandap Keeper and Taxable services as provided in section 65 of the Finance Act, 1994 shows that the services provided to a client, including the facilities provided in relation to its use and also the services, if any, rendered as a caterer, by a person who allows the temporary occupation of any immoveable property, as defined in Section 3 of the Transfer of Property Act, 1882 and which also includes any furniture, fixtures, light fittings and floor coverings therein, let out for consideration, for organizing any official, social or business function, in any manner, falls under the category of taxable service.

The words “let out for consideration” employed in the definition of “mandap” clearly intend the element of use by any person, including the third party, of an immoveable property as well as the furniture, fixtures and light fittings given by the landlord on consideration. Therefore, the meaning and definition of letting-out inheres transaction of commercial character, rather trading. Similarly, from the definition of “mandap keeper” it is clear that a person allows temporary occupation of a mandap for consideration, meaning thereby temporary parting with the possession to a third party for consideration. Thus, it is obvious that legislature intended this transaction must be for commercial purposes. Again, the words, “provided to a client” used in the definition of “taxable service” necessarily presupposes that the “mandap keeper” must be letting out an immoveable property to any person on consideration.
For deciding the issue that whether the members of the clubs fall under the definition of “client” or not so as to attract levy of tax under the provisions of the Act the Hon’ble High Court refer the meaning of the term “client” as defined in some of the leading dictionaries. In Concise Oxford Dictionary, the word “client” is defined as “a person using the services of a lawyer, architect, social worker or other professional person”. Wharton’s Law Lexicon, 1976 Edn. Defines client as “a person who seeks advice of a lawyer or commits his cause to the management of one, either in prosecuting a claim, or defending a suit in a Court of justice.” In the English Solicitors Act, 1870, (S.3) client is defined as “Client includes any person who, as a principal or on behalf of another person, retains or employs, or is about to retain or employ, a solicitor; and any person who is or may be liable to pay the solicitors Bill of costs, for any services, fees, costs, charges, or disbursements.” In Stroud’s Judicial Dictionary, it is defined as“any person who, as a principal or on behalf of another person, retains or employs or is about to retain or employ, a solicitor”. In Corpus Juris Secondum, it has been defined “a client is one who seeks advice of an attorney or retains him to prosecute or defend a suit. A client is one who applies to a lawyer or counselor for advice and direction in a question of law or commits his cause to his management in prosecuting a claim or defending him against a suit in a court of justice; one who retains the attorney who is responsible to him for his fees and to whom the attorney is responsible for the management of the suit; one who communicates facts to an attorney expecting professional advice”. The definition of the term “client” clearly shows that an element of agency is implicit between a person and the agency providing service to him. A “client” is one who applies for service or advice or who retains a solicitor in the management of his suit. A “member” of a club is not a client of the club.

It is a well-settled law that in between the principal and agent when there is no transfer of property available, the question of imposition of service tax cannot be made available. The petitioners herein are a “members” club and not a “proprietary club”. It is not even the case of the respondents that the petitioners are a “proprietary club”. Therefore, if the club space is allowed to be occupied by any member or his family members or by his guest, for a function, by constructing a “mandap”, the club cannot be called as “mandap keeper” because the club is allowing its own member to do so, who is, by virtue of his position, a principal of the club. If any outside agency is called upon to do the needful, it may raise a bill along with the service tax upon the club and the club as an agent of the members, is supposed to pay the same. The authority cannot impose service tax twice once upon the people carrying out the business of “mandap keeper” and then upon the members club for the purpose of using the space for constructing or using it as a “mandap”. Therefore, apart from any other question, the possibility of double taxation cannot be ruled out.
If, in a given case, a person, being an owner of a house, allows another to occupy the house for the purpose of carrying out any function in that house, then it will not be construed as transfer of property. But, if such person calls upon a third party, a “mandap keeper”, to construct a “mandap” in such house, then in that case, such “mandap keeper” can be able to raise bill upon the user of the premises along with the service tax. Therefore, it cannot be held that the “members club” is covered by the Finance Act, 1994 for imposition of service tax to use its space as “mandap”. For the applicability of service tax, there should be existence of two sides/entities, viz. transaction as against consideration. In a “members club” there is no question of two sides. “Members” and “Club” both are the same entity. One may be called as “principal” when the other may be called as “agent”. Therefore, such transaction, in between themselves, cannot be recorded as income, sale or service.

By relying upon the bye-laws of the clubs, a ground is sought to be raised that since the clubs also take on lease or hire moveable or immoveable property for its different purposes, they are liable to pay service tax. We have gone through the bye-laws and also the relevant rules and regulations of the Clubs and do not find any provision that the properties and/or the facilities, those are being made available by the members to themselves could be extended to third parties for any consideration whatsoever. The members of the clubs are allowed exclusively to participate in the services rendered by the clubs and no third party is allowed to participate in the same. Even, the facilities and amenities of the clubs are not extended to any third party who, of course, may come as a guest and/or invitee of the members. The above exclusiveness is given for a limited period and for a specific purpose and therefore, in any case, it cannot be termed as “lease” or “hire”. Thus, it is clear from the activities of the clubs, as stipulated in its bye-laws and the relevant rules and regulations that the “mandap keeper”, in this case, are the members collectively. Hence, we are of the opinion that the understanding of the respondents about the petitioners dealing is fallacious, for they mean the word “client”, relying on the dictionary expression, instead of reading and understanding the correct meaning.
Service tax is recoverable from the “mandap keeper”, who is having a different and distinct separate legal and physical entity and who lets-out the “mandap” with a commercial and trading object. Here, the members have formed the club to serve themselves mutually and for this purpose, the members are paying for such user and any amount of receipt and expenditure of the clubs is enjoyed and/or incurred by the members alone and not by third party. The principle of mutuality is squarely applicable in this case as going by the definitions of “mandap”, “mandap keeper” and “taxable service”, as reproduced herein above, the facility of use of the premises and/or the facilities attached thereto, by the members of the clubs cannot be termed to be “letting-out” nor the members of the club using the facility/s or any portion of the premises for any function can be termed to be client/s. The services rendered by any person to his client pre-suppose the element of commerciality and obviously this transaction must be involved with a third party, as opposed to the members of the Club.

It is further held that merely because of the reason that the clubs are exempted from the levy of income-tax, the respondents could not impose service tax, unless and until the same is permissible under the law. Therefore, the entire proceedings against the clubs about the applicability of service tax are required to be nullified and set aside. Further the subsequent amendment in the Act in 2005 clearly establishes that even the Legislature thought it fit to amend the relevant definition. In taxation matters, where a High Court is concerned with the interpretation of an all India statute, it should be a practice and policy that if one High Court has interpreted a provision or section of a taxing statute which is an all India statute and there is no other view in the field, another High Court must ordinarily accept that view in the interest of uniformity and consistency in matter of application of taxing statute so as to avoid the challenge of discrimination in application and administration of tax matters.

Decision:
The petition allowed.

-----------

Comments

PJ/Case Laws/2011-12/1002

Post a Comment

Query