KERALA HIGH COURT ON GST ON Indian Medical Association

[K Balasubramanian]

1. The High Court of Kerala on 11/04/2025 in the case of INDIAN MEDICAL ASSOCIATION, KERALA VERSUS UNION OF INDIA, STATE OF KERALA, GST COUNCIL, ADDITIONAL DIRECTOR GENERAL, DIRECTORATE GENERAL OF GST INTELLIGENCE, KOCHI, DEPUTY DIRECTOR, DIRECTORATE GENERAL OF GST INTELLIGENCE, KOZHIKODE (VICE VERSA). - 2025 (4) TMI 872 - KERALA HIGH COURT has held that Section 2(17) (e) as well as 7(1)(aa) and explanation thereto of the CGST Act 2017 are unconstitutional. This decision shall have far reaching consequences and many Resident Welfare Associations may take advantage of this case for any DEMAND pertaining to the past.

2. Section 2 (17) (e) which is in force since inception of GST is only to establish that services of RWA are in the nature of supply of services. This requirement alone is not sufficient to attract GST on services rendered by RWA. There must be two distinct persons as Supplier as well as Receiver. So far as the RWA is concerned, suppler and receiver are not two distinct persons.

3. Section 7 (1) (aa) was inserted on 01/01/2022 with retrospective effect from 01/07/2017 itself without any constitutional background and accordingly, The Kerala High Court is of the view that Section 7(1) (aa) as well as the explanation thereto are invalid.

4. The High Court has concluded as above after thoroughly analysing all the provisions contained in Article 366 (29A) of the Constitution of India which are briefly furnished hereunder.

5. Clauses under Article 366 (29A) from a to f were added on six different occasions to either increase the scope of supply or to make certain transactions as taxable which were not taxable earlier.

6. Clause a was inserted to nullify the decision of the Supreme Court in the case of New India Sugar Mills Ltd. Versus Commissioner of Sales Tax Bihar   - 1962 (11) TMI 21 - Supreme Court wherein it was held that a compulsory sale through control orders was not a sale.

7. Clause b was inserted to nullify the decision of the Supreme Court in the case of The State of Madras Versus Gannon Dunkerley & Co. (Madras) Ltd.   - 1958 (4) TMI 42 - Supreme Court wherein it was held that work contract is not a sale

8. Clause c was inserted to get over the decision of the Supreme Court in the case of KL. Johar and Co. Versus Deputy Commercial Tax Officer, Coimbatore III and Others - 1964 (11) TMI 58 - Supreme Court wherein it was held that hire-purchase was not a sale.

9. Clause d was inserted to get over the decision of AV Meiyappan Versus Commissioner of Commercial Taxes, Board of Revenue, Madras and Another - 1967 (3) TMI 93 - MADRAS HIGH COURT wherein it was held that transfer of right to use goods was not a sale

10. Clause e was inserted to get over the decision of The Joint Commercial Tax Officer, Harbour Division II, Madras Versus Young Men´s Indian Association, Madras and Others   - 1970 (2) TMI 87 - Supreme Court wherein it was held that there  could be no sale between a club/association and its members.

11. Clause f was inserted to get over the decision of the Supreme Court in the case of Northern India Caterers (India) Ltd. Versus LT. Governor of Delhi - 1978 (12) TMI 157 - Supreme Court wherein it was held that supply of food and beverages in restaurants was not a sale.

12. Having analysed the entire background elaborately in the above cases, the High Court has concluded that 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. (Para 24 of the order dated 11/04/2025.

13. It is to be noted that the above view of the Keral High Court is likely to be challenged in the Supreme Court by the Union of India. Nevertheless, as the Kerala High Court has concluded as in para 24 above only after looking in to various connected aspects, this order of the Kerala High Court may be accepted by the Supreme Court. However, there are equal chances that the Supreme Court may set aside this order as well depending on how the case is presented by the Union of India before the Supreme Court.

14. So far as RWA and GST is concerned, there are conflicting views on applicability of GST when the monthly charges exceeds 7500 per member. Those RWA who pay on entire monthly fees have opportunity to utilize optimum ITC. However, those RWA which pay GST on amount collected over and above 7500 per member per month may also take advantage of the above ruling in case there is any demand in future.

15. The view of the High court that a retrospective amendment to collect GST which was neither collected by the registered person from the customers nor there was a possibility to assume that the particular provision is likely to be amended in future with retrospective effect stands on fundamental principles.

16. It may be concluded that the decision of the Kerala High Court has opened the views on GST when the supplier and recipient happen to be one and the same. Though REVENUE may get over on this view of the High Court either through Supreme Court or proper amendment to ensure that GST is collected from RWA, this decision shall help all RWA who have either SCN pending on this issue or for those RWA which may get SCN in future on this issue for  the period up to March 2025.

Discussions to this article

[Sadanand Bulbule]

Dear Sir

My questions:

Whether the similar logic can be applied to Section 17[5][d] which has undergone retrospective amendment?

Significantly both these sections have seen retrospective effect to nullify the rulings of the Hon'ble Supreme Court.

Is there no need to preserve the sanctity of rulings of the Apex Court rendered in favour of the taxpayers?

Is drifting from core taxation principles justifiable in the name of revenue?

What happens to the concept of ease of doing business, if retrospective amendment is the only solution?

[YAGAY andSUN]

Your questions delve into significant constitutional and legal principles concerning retrospective taxation, the sanctity of Supreme Court rulings, and the broader implications for ease of doing business.

Let's address each point systematically:

1. Applicability of Similar Logic to Section 17(5)(d) Retrospective Amendment

Section 17(5)(d) of the CGST Act, which pertains to the denial of Input Tax Credit (ITC) on motor vehicles and other specified goods, underwent a retrospective amendment. The Kerala High Court's decision in the IMA case primarily focused on the retrospective application of Section 7(1)(aa), which expanded the scope of 'supply' under GST to include activities between clubs/associations and their members. While the principles discussed in that case—such as the retrospective imposition of tax and its constitutional implications—could inform discussions on Section 17(5)(d), each provision's context and impact must be considered individually.

2. Sanctity of Supreme Court Rulings and Legislative Amendments

The retrospective amendment of laws to nullify Supreme Court rulings raises concerns about the sanctity of judicial decisions. The Kerala High Court acknowledged the principle of mutuality in taxation, which was well-established before the amendment. However, it upheld the legislative competence of Parliament to amend the law, even if it affects past judicial interpretations. This stance aligns with the view that while courts interpret laws, legislatures have the authority to amend them, potentially overriding judicial precedents.

3. Justifiability of Departing from Core Taxation Principles for Revenue Generation

Departing from established taxation principles, such as mutuality, solely for revenue generation purposes can be contentious. The Kerala High Court's decision reflects a balance between legislative authority and established principles. While the court recognized the long-standing principle of mutuality, it also acknowledged the legislature's power to redefine the scope of taxable activities. This approach suggests that departures from core principles may be justified if they are within the legislative competence and do not violate constitutional rights.

4. Implications for Ease of Doing Business Due to Retrospective Amendments

Retrospective amendments can undermine the ease of doing business by introducing uncertainty and unexpected financial burdens. In the IMA case, the Kerala High Court ruled that the amendment should have prospective effect from January 1, 2022, rather than from July 1, 2017, as originally stated. This decision aims to mitigate the impact on entities that operated under the assumption that their activities were not subject to GST. It underscores the importance of clear and predictable tax laws to foster a conducive business environment.

In summary, while the Kerala High Court upheld the retrospective amendment of Section 7(1)(aa), it also recognized the need for such changes to be implemented prospectively to avoid undue hardship. This approach reflects a nuanced understanding of the balance between legislative authority and the protection of established legal principles.

 

[Sadanand Bulbule]

Dear Yagan Sir

Thank you very much your deep thoughts on the subject.

Democracy always endorses that, the Legislature and the Judiciary should integrate mutually to bring out the best output in the larger interest of nation's inclusive growth. Revenue alone is not the means for sustainable growth, but the way it is generated matters much. It is more significant, if these constitutional institutions function under their respective purpose,without usurping others' exclusive domain.

[YAGAY andSUN]

Thanks Sir.