WHETHER MEMBERS CLUB PROVIDING FACILITES TO ITS MEMBERS IS LIABLE TO PAY SERVICE TAX?

[Mr. M. GOVINDARAJAN]

The Commissioner of Service Tax, New Delhi filed an appeal against the order of Commissioner (Appeals) setting aside the demand of service tax from Delhi Gymkhana Club Limited for the use of the club by its members as Mandap Keeper, after following the decisions of Hon'ble High Court, Kolkatta: (2008) 40 TAXCOM (Del) 636)

·  Saturday Club Ltd., V. Asst. Commissioner, Service Tax Cell, Calcutta 2005 -TMI - 206 - HIGH COURT CALCUTTA;

·  Dalhousie Institute V. Asst. Commissioner, Service Tax Cell, Calcutta 2005 -TMI - 204 - HIGH COURT CALCUTTA

The contention of the Revenue is that the respondent is a company limited by guarantee and registered under the Companies Act, 1956 and accordingly is a separate person altogether in the eye of the law.   The members of the club when using the facility of the club are acting as clients of the club.

The tribunal considered the arguments and analyzed the case laws which were relied by the respondents.

In 'Saturday Club Ltd., V. Asst. Commissioner of Service Tax Cell, Calcutta (Supra) the applicant filed a writ petition before Calcutta High Court praying inter alia declaration that the petitioner club is not a mandap keeper with in the meaning of Chapter V of the Finance Act, 1994 and is not liable to pay service tax.   It was contended by the applicant that:

The petitioner club is members' club but not a proprietary club;

· It is not supposed to pay service tax for using the space as mandap keeper as per requirement of the members;

· The question of giving service tax for using the club premises as mandap cannot be held to be a service or different from its usual services to the members so that service tax can be imposed.

The Calcutta High Court analyzed various judgments relied on by the applicant.  In 'Harbour Division - II, Madras V. Young Men's Indian Association, Madras and others' the Supreme Court held that if a members' club even though a distinct legal entity acts as only agent for its members in the matter of supply of various preparations and articles to them no sale would be involved as the element of transfer would be completely absent.  Members are joint owners of the properties.   Proprietary clubs stand on a different footing.  The members are not owners of or interested in the property of the club.   To show the difference of characteristics between the 'members' club' and 'proprietary club' the court held that where every member is a shareholder and every shareholder is a member, then the same would be called as 'members' club'.  In the members' club what is essential that the holding of the property by the agent or trustee must be holding for and on behalf of and not a holding antagonistic to the members of the club.   If a club even though a distinct legal entity, is only acting as an agent for its members in the matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent.

In 'Commissioner of Income Tax V. Darjeeling Club Ltd., 1985 (153) ITR 676 a Division Bench of Calcutta High Court held that there is a long line of decisions in which it has been held that supplies made by a club to its members or the facilities afforded by a club to its members for a price will not amount business activity of the club, even though there may be surplus of revenue over expenditure and the surplus could not be taxed as a business profit of the sales were confined to the members of the club only.

In this case the revenue contended that providing 'mandap' by a 'club' as a mandap keeper cannot be the usual course of business activities under the objects of the Memorandum of Association of the club.   The club authorities are using the space as against the consideration and thereby making profit out of it which cannot be called as usual privilege to the members.

The Court held that it is true to say that there is a clear distinction between the 'member's club' and 'proprietary club'.   No argument has put forward by the Department to indicate that the club is a proprietary club.  Therefore if the club space is allowed to be occupied by any member or his family members or by his guest for a function by constructing a 'mandap' the club cannot be called as 'mandap keeper' because the club is allowing his own member to do so who is, by virtue of his position, principal of the club.  If any outside agency is called upon to do the needful it may raise a bill along with the service tax upon the club and the club as an agent of its members, is supposed to pay the same.   There should be principally existence of two sides/entities for having transaction as against consideration.  In a members' club there is no question of two sides.  'Members' and 'club' both are same entity.  One may be called as principal when the other may be called as agent, therefore, such transactions in between themselves cannot be recorded as service.   The Court, therefore, did not find it precedent to say that members' club is liable to pay service tax in allowing its members to use its space as 'mandap'.

In 'Dalhousie Institute V. Asst. Commissioner, Service Tax cell, Calcutta [2005 -TMI - 204 - HIGH COURT CALCUTTA] the Court observed that all the members of the club jointly own all the immoveable properties as per the definition of the term 'mandap'.  The members of the club are allowed exclusively to participate in the services rendered by the club and the club fund, no third party is allowed to participate in the same.   Service tax is recoverable from such 'mandap keeper' who is having different and separate legal and physical entity and, let out mandap with commercial and trading object.   Hence the members have formed the club to serve themselves mutually and for this purpose the members are paying for such uses and any amount of receipt and expenditure of the club is enjoyed and/or participated and/or incurred by the members alone, not by third party.   In this case the facility of the use of the premises to the members by its club cannot be termed to be letting out nor can the members of the club using the facility of any portion of the premises for any functions be termed to be a client.

The Delhi tribunal in the case after considering the findings of the Calcutta High Court, upheld the order of Commissioner (Appeals).