2017 (5) TMI 79 - HC - VAT and Sales Tax

Penalties imposed under Section 17A of the Kerala Tax on Luxuries Act, 1976 - whether the facilities availed by the members of the unique, newly developed Time-share arrangements can be brought under the definition of luxuries and taxed under the LT Act - Held that - The petitioners are having Resorts where residential accommodation is by way of a business and renting out of rooms is for monetary consideration. The Resorts maintained by the assessee within the State of Kerala, hence, comes within the definition of Hotel . Luxury is defined as a commodity or service that ministers comfort or pleasure and that provided in a hotel is accommodation for residence or use and other amenities and services provided in a hotel. The right to enjoy a holiday, the members of a timeshare arrangement, by their membership is entitled to, is crystallized in the fundamental facility provided of accommodation in the various Resorts. The enjoyment is relative and what a member gets assured, is the facility of accommodation; which is the luxury as per the definition. The charge is also on any luxury provided in a hotel, meaning the accommodation provided for residence and the rate varies with the charges for such an accommodation. What comes out from the above is that the assessee itself has been treating the membership, resulting in an obligation, continued over the years in which the timeshare arrangement or membership remains valid. The promise to be fulfilled by and the obligation of, the assessee is to provide accommodation to the member who books his holiday in any one of the resorts of the assessee. There can be no confusion in finding the measure. It is also pertinent that the assessee has not offered details of the amounts received from each of the members, to compute the charges for accommodation for the period in which they enjoyed the stay within the State of Kerala. In such circumstances, there can be no fault found in adopting the fixed room rent or tariff per day for the purpose of levying the tax. In this context, it is also to be noticed that the tax applied under the LT Act is one on the person who enjoys the accommodation and the assessee could collect such tax from the members. The mere fact that advance payment was taken as membership fee cannot lead to a conclusion that the accommodation provided/offered to the member is free of cost. The assessee itself, as contended before the IT Appellate Tribunal, splits up the membership fees to the subsequent years to cover the obligation of providing for an accommodation for residence or use. On the penalty imposed this Court found that the turnover having been disclosed and there being a bona fide debatable issue, there could not have been an imposition of penalty. SeeM/s. Chakkiath Brothers Versus The Assistant Commissioner, Commercial Taxes Special Circle-1, Ernakulam 2014 (6) TMI 974 - KERALA HIGH COURT This Court has answered the issue of coverage under the L T Act against the assessee; but on the imposition of penalty it is answered against the Department

Issues Involved:
1. Whether the facilities availed by members under timeshare arrangements can be taxed as "luxuries" under the Kerala Tax on Luxuries Act, 1976.
2. The validity of assessment orders and penalties imposed under Section 17A of the LT Act.
3. The applicability of the LT Act to timeshare arrangements.
4. The methodology for determining the charges for accommodation for members.
5. The imposition of penalties for incorrect returns and the presence of contumacious conduct.

Issue-wise Detailed Analysis:

1. Taxability of Timeshare Arrangements as Luxuries:
The primary issue was whether timeshare arrangements fall under the definition of "luxuries" and can be taxed under the LT Act. The Court concluded that timeshare arrangements do provide a form of luxury as defined under the LT Act. The accommodation provided to members is for monetary consideration, and the right to enjoy holidays in various resorts constitutes a luxury. The Court emphasized that the taxable event is the accommodation provided, and the person on whom the levy is imposed is the member enjoying the accommodation.

2. Validity of Assessment Orders and Penalties:
The Court upheld the assessment orders, finding that the accommodation provided to members under timeshare arrangements is taxable under the LT Act. However, the Court found that the penalties imposed under Section 17A were not justified due to a lack of contumacious conduct by the petitioners. The Court noted that the petitioners had a bona fide belief that the accommodation provided to members was not taxable and had disclosed other taxable facilities in their returns.

3. Applicability of the LT Act to Timeshare Arrangements:
The Court rejected the argument that the LT Act does not contemplate timeshare arrangements. It was held that the definition of "hotel" and "luxury provided in a hotel" under the LT Act includes the accommodation provided under timeshare arrangements. The Court also noted that the absence of specific provisions for timeshare arrangements in the Kerala Act, as compared to the Goa and Himachal Pradesh Acts, does not exclude such arrangements from being taxed under the Kerala Act.

4. Methodology for Determining Charges for Accommodation:
The Court found that the charges for accommodation for members can be determined based on the fixed room rent or tariff applicable to non-members. The membership fees and annual subscription fees paid by members are in lieu of the charges for accommodation, and the measure for applying the tax rates can be the per-day charges of accommodation. The Court rejected the argument that the per-day accommodation charges are alien to the concept of timeshare arrangements, noting that the membership fees are based on the same factors as the determination of room tariffs in any hotel.

5. Imposition of Penalties:
The Court found that the penalties imposed under Section 17A were not warranted due to the absence of contumacious conduct by the petitioners. The Court noted that the petitioners had disclosed the taxable facilities and had a bona fide belief that the accommodation provided to members was not taxable. The Court relied on precedents to conclude that the mere submission of incorrect returns without a guilty mind does not justify the imposition of penalties.

Conclusion:
The Court upheld the assessment orders, finding that the accommodation provided under timeshare arrangements is taxable under the LT Act. However, the penalties imposed under Section 17A were set aside due to the lack of contumacious conduct by the petitioners. The Court directed the Department to proceed with the assessment without imposing penalties. The appeal filed by one of the petitioners was to be considered in light of the Court's findings, with a stay on the demand until the appeal is disposed of.

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