2022 (5) TMI 482 - AT - Service Tax

Levy of Service Tax - Club and association services - appellant is an association of its members - applicability of principles of mutuality - time limitation - whether the services provided by the appellant to its own members (who are also separate legal entities) can be considered as service provided by one entity to another? - HELD THAT - The Constitution Bench of the Supreme Court has in STATE OF WEST BENGAL AND OTHERS VERSUS CALCUTTA CLUB LIMITED AND ANOTHER 2008 (2) TMI 837 - CALCUTTA HIGH COURT discussed at length the doctrine of mutuality under Article 366 (29A) (e) of the Constitution and held that doctrine of mutuality continues to be applicable to incorporated and unincorporated members clubs after the 46th Amendment to the Constitution and, therefore, no sales tax is payable to the State by the Calcutta Club. It was further held that the same logic applies to service tax levied on members clubs. The law laid down in Calcutta Club is that a club and its members are one and the same and the club is formed for the purpose for mutual benefit of its members. Therefore, any amount paid by the members to the club and the services rendered by the club to its members are self service and cannot be taxed. The fact that the club is incorporated as a separate legal entity makes no difference. There are no good reason not to apply the same principle to the appellant, which is also a cooperative federation of milk unions who are its members. Although the milk unions (district cooperative societies) and the appellant (apex society) are registered under the Cooperative Societies Act of the State and are, therefore, distinct legal entities, the nature of relationship between the appellant and the milk unions continues to that of club to its members. Therefore, no service tax is payable on the services rendered by the appellant to the milk unions. Thus, in view of the judgment of the Constitution Bench of the Supreme Court in Calcutta Club, it has to be held that no service tax was payable by the appellant for the services rendered to its members - the interest on the demand and the penalties imposed also need to be set aside and are set aside - appeal allowed - decided in favor of appellant.

Issues Involved:
1. Applicability of service tax on services rendered by the appellant to its members under the principle of mutuality.
2. Classification of services as ‘business support services’.
3. Limitation period for the demand.
4. Allegation of willful suppression with intent to evade payment of tax.
5. Applicability of penalties under Sections 77 and 78.
6. Consideration of receipts as cum-tax values.
7. Applicability of Section 73(3) regarding the issuance of show cause notice.

Issue-wise Detailed Analysis:

1. Applicability of Service Tax on Services Rendered by the Appellant to its Members under the Principle of Mutuality:
The appellant argued that no service tax is leviable as it is an association of its members, akin to a club or association rendering services to its own members. The principle of mutuality applies, and no service provider-service recipient relationship exists. This argument was supported by various case laws, including the Supreme Court’s judgment in State of West Bengal Vs. Calcutta Club Ltd., which held that the doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs, and no service tax is payable on services rendered by such clubs to their members.

2. Classification of Services as ‘Business Support Services’:
The Department argued that the services provided by the appellant fall under the definition of ‘business support services’ as per Section 65(104c) of the Finance Act, 1994. The services included marketing support, coordination with government and financial institutions, finalizing rate contracts, plant management assistance, and MIS system support, among others. The appellant charged 1.25% of the annual turnover of milk unions for these services, termed as RCDF cess.

3. Limitation Period for the Demand:
The appellant contended that the demand is barred by limitation. The show cause notice was issued on 20.04.2015, covering the period from March 2010 to June 2012. The Department invoked the extended period of limitation, alleging suppression of facts by the appellant.

4. Allegation of Willful Suppression with Intent to Evade Payment of Tax:
The Department argued that the appellant had suppressed facts, enabling the invocation of the extended period of limitation. The appellant had written a letter seeking exemption from service tax but did not seek clarification regarding the applicability of service tax on its activities. The taxable activities were discovered during an audit.

5. Applicability of Penalties under Sections 77 and 78:
The appellant argued that it had no mens rea as it is a government-organized body, and penalties under Sections 77 and 78 should not be levied. The Department contended that penalties under Section 78 are mandatory, and there is no provision for preferential treatment for public sector undertakings.

6. Consideration of Receipts as Cum-Tax Values:
The appellant argued that if service tax is held to be liable, the receipts should be considered as cum-tax values.

7. Applicability of Section 73(3) Regarding the Issuance of Show Cause Notice:
The appellant contended that it had already deposited the service tax on the disputed taxable value before the issuance of the show cause notice, and therefore, no show cause notice should have been issued as per Section 73(3) of the Finance Act.

Judgment:
The Tribunal held that the services rendered by the appellant to its members (milk unions) are not taxable under the principle of mutuality. The relationship between the appellant and the milk unions is akin to that of a club and its members, and no service tax is payable on such services. The judgment of the Constitution Bench of the Supreme Court in Calcutta Club Ltd. was applied, which held that services rendered by a club to its members are self-services and cannot be taxed. Consequently, the demand for service tax, interest, and penalties imposed by the impugned order were set aside, and the appeal was allowed with consequential benefits to the appellant.

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