2025 (4) TMI 872 - HC - GST

Amendments made to Sections 2 (17) (e) and 7 (1) (aa) of the Central Goods and Services Tax Act 2017 (CGST Act) and the Kerala Goods and Services Tax Act 2017 (KGST Act) are unconstitutional and void for being ultra vires the Constitution of India - retrospective operation of the amendments - applicability of principle of mutuality - HELD THAT - Article 246A of the Constitution that confers simultaneous legislative powers on the Union and the States to make laws with respect to goods and service tax uses the word supply without giving it an artificial meaning that would take in even a deemed supply . In fact even by the Constitution 46th Amendment Act 1982 when a deeming provision was introduced to bring transactions that did not fit into the traditional concept of sale of goods to sales tax the exercise that was done was to amend the Constitution to deem those transactions as Sales or Purchases . Thus under Article 366 (29A) a tax on the supply of goods by an incorporated association or body of persons to a member thereof for cash deferred payment or other valuable consideration was deemed to be a tax on the sale or purchase of goods . The levy of GST is on the supply of taxable goods or services or both for a consideration. The concept of supply and service as understood under the Constitution and the CGST/SGST Acts (before their amendment) both excluded transactions informed by the principle of mutuality ie. a supply/service from one entity to itself (self supply/self service). Thus even if there is now a deemed supply based on the amendments effected to the CGST/SGST Acts there is no deemed service in circumstances where the service is rendered by a club or association to its members since the definition of service has not been amended. The concepts of supply and service having been judicially interpreted as requiring at least two persons a provider and a recipient for inferring their existence and the Supreme Court having held in Calcutta Club 2019 (10) TMI 160 - SUPREME COURT that the principle of mutuality has survived the 46th amendment to the Constitution so long as the said judgment holds sway as a binding precedent and/or the Constitution is not amended suitably to remove the concept of mutuality from the concepts of supply and service thereunder the impugned amendment to the CGST/SGST Acts must necessarily fail the test of constitutionality. The principle of fairness is one that must inform all actions of a State including legislation since it is an essential aspect of the Rule of Law that is recognised as a basic feature of the Constitution. The insertion of a statutory provision that alters the basis of indirect taxation with retrospective effect so as to tax persons for a prior period when they had not anticipated such a levy and consequently had not obtained an opportunity to collect the tax from the recipient of their services militates against the concept of Rule of Law. On its part the State too would be found wanting in offering a valid justification for it s legislative action - there are no justification for the retrospective operation of the impugned statutory provisions. Conclusion - The amendments to the CGST and KGST Acts are declared unconstitutional and void. The retrospective application of these amendments was also held to be illegal. Appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core issues considered in this legal judgment are:

• Whether the amendments to the Central Goods and Services Tax Act, 2017 (CGST Act) and the Kerala Goods and Services Tax Act, 2017 (KGST Act) that redefine "supply" to include transactions between clubs/associations and their members are constitutional.
• Whether the retrospective application of these amendments, making them effective from July 1, 2017, is valid.
• Whether the principle of mutuality, which traditionally exempts transactions within clubs/associations from taxation, remains applicable under the GST regime.

ISSUE-WISE DETAILED ANALYSIS

1. Constitutionality of the Amendments

The amendments to Sections 2(17) and 7(1) of the CGST and KGST Acts were challenged on the grounds that they violate the constitutional understanding of "supply" and "service," which require the existence of two distinct entities. The court analyzed the legislative competence to redefine these terms in a manner that contradicts their judicially established meanings under the Constitution.

Legal Framework and Precedents: The court referred to the principle of mutuality, which has been upheld in various judgments, including the Supreme Court's decision in Calcutta Club Ltd. The principle posits that transactions within a club/association do not constitute a "supply" as the club and its members are considered a single entity.

Court's Interpretation and Reasoning: The court found that the amendments attempt to artificially create a taxable event where none exists constitutionally. It emphasized that the Constitution requires a plurality of persons for a "supply" or "service" to exist, and the amendments fail to meet this requirement.

Conclusion: The court declared the amendments unconstitutional, as they exceed the legislative competence by contradicting the constitutional understanding of "supply" and "service."

2. Retrospective Application of the Amendments

The retrospective operation of the amendments was contested on the grounds of fairness and the rule of law. The amendments were applied retroactively from July 1, 2017, imposing unexpected tax liabilities on clubs/associations.

Legal Framework and Precedents: The court referred to principles of fairness and the rule of law, emphasizing that retrospective taxation should not impose unforeseen burdens on taxpayers.

Court's Interpretation and Reasoning: The court agreed with the Single Judge's finding that the retrospective application was illegal, as it violated the principles of fairness and the rule of law by imposing tax liabilities without prior notice or opportunity for taxpayers to adjust their practices.

Conclusion: The retrospective application of the amendments was deemed illegal, reinforcing the principle that legislative actions must be justified and fair.

SIGNIFICANT HOLDINGS

The court established several significant principles through its judgment:

• The principle of mutuality remains applicable under the GST regime, preventing the taxation of transactions between clubs/associations and their members as "supplies."
• The legislative competence to redefine "supply" and "service" in a manner that contradicts their constitutional meanings is limited.
• Retrospective taxation must adhere to principles of fairness and the rule of law, requiring justification and prior notice to affected parties.

The final determination was that the amendments to the CGST and KGST Acts were unconstitutional and void, and their retrospective application was illegal. The appeals by the Union and State were dismissed, while the appeal by the petitioner was allowed, granting consequential reliefs.