2016 (9) TMI 145 - AAR - Service Tax

Taxability of club membership fee scope of the term service u/s 65(44) - is money / contribution received in form of shares and contribution is taxable as service as per the provisions of the Finance Act, 1994? - Held that - provision of service by one person (service provider) to another person (service receiver) for the purpose of Section 65B (44) of the Finance Act, 1994 read with Sections 66B, 66D and Section 66E of the Finance Act, 1994 and accordingly, the Membership fee, Annual fee and other charges received from members from time to time liable for Service Tax. Explanation 3 (a) to said Section states that for the purposes of this chapter, an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons. The money/contribution received by company against shares from the prospective members for raising funds which can be used for achieving the sole object of the company i.e. establishing a luxurious club, is taxable as service as per the provisions of the Finance Act, 1994 - However, refundable security deposit should not be subjected to Service Tax as per provisions of the Finance Act, 1994.

Summary

Issues:
Taxability of money/contribution received by a company against shares from prospective members for raising funds for establishing a luxurious club as a service under the Finance Act, 1994.

Analysis:

Issue 1: Taxability of money/contribution against shares as a service

The applicant argued that for an activity to be considered a service under Section 65B (44) of the Finance Act 1994, there must be an activity, carried out by one person for another, with consideration. They contended that receiving money against shares issuance does not constitute an activity and thus cannot be termed as a service. Additionally, they claimed that securities, including shares, are classified as goods under the Finance Act, further supporting their stance that receiving money against shares is not a service.

Issue 2: Interpretation of consideration and future actions

The revenue authority argued that the money collected from shareholders for share capital is akin to a membership fee for the club. They highlighted that even though the company is not currently providing services, the intention to provide club services in the future constitutes a valid consideration under the Indian Contract Act. They emphasized that the relationship between the company and members should be considered a service, as seen in a similar case precedent involving M/s Emerald Leisures Ltd., Mumbai.

Issue 3: Definition of "activity" and tax implications

The Authority ruled that the relationship between the company and members should be viewed as a provision of service under the Finance Act, 1994. They noted that the term "activity" has a broad interpretation, encompassing both active and passive elements, including the provision of club facilities. The Authority highlighted that the proposed club services, such as restaurant, swimming pool, and gymnasium, along with incidental activities, constitute activities falling under the definition of service.

Issue 4: Treatment of shares and refundable security deposit

The applicant argued that shares are goods and thus receiving money against shares issuance should not be considered a service. The Authority referenced a previous case involving M/s Emerald Leisures Ltd., Mumbai, where it was held that refundable security deposits should not be subject to service tax. The Authority extended this ruling to the present case, distinguishing between the taxability of shares and refundable deposits.

Conclusion:

The Authority ruled that the money/contribution received by the company against shares from prospective members for establishing a luxurious club is taxable as a service under the Finance Act, 1994. However, they clarified that refundable deposits from prospective members are not taxable as a service under the same provisions. The judgment emphasizes the broad interpretation of "activity" and the distinction between shares and refundable deposits in determining taxability under the Finance Act, 1994.