2019 (10) TMI 160 - SC - Service Tax

Club and association services - Doctrine of mutuality - Nature of transaction - sale or service - scope of sale and service - Failure to make payment of sales tax - sale of food and drinks to the permanent members during the quarter ending 30-6-2002 - scope of sale in terms of Section 2(30) of the West Bengal Sales Tax Act, 1994 - Deemed transfer - club and association services -taxability under service tax - situation post 1/7/2012. HELD THAT - When profits and gains of a mutual insurance company are sought to be brought to tax, they are so done by express reference to the fact that the business of insurance is carried on by a mutual insurance company. The absence of any such language in subclause (e) of Article 366(29-A) is also an important pointer to the fact that the doctrine of mutuality cannot be said to have been done away with by the said 46th Amendment. Deemed transfer - HELD THAT - It can be seen from the provision of Deemed Transfer that profits or gains arising from a transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business, is by a deeming fiction brought to tax, despite the fact that there is no transfer in law by the owner of a capital asset to another person. Modalities such as these to bring to tax amounts that would do away with any doctrine of mutuality are conspicuous by their absence in the language of Article 366(29-A)(e). The service tax was thus leviable on all services as defined, short of a negative list of services which was set out in Section 66D of the Act - After exhaustively reviewing a number of judgments, the Court stated that Parliament has legislative competence to levy service tax under Entry 97 List I of the Constitution of India. The definition of club or association contained in Section 65(25a) makes it plain that any person or body of persons providing services for a subscription or any other amount to its members would be within the tax net. However, what is of importance is that anybody established or constituted by or under any law for the time being in force, is not included - It is, thus, clear that companies and cooperative societies which are registered under the respective Acts, can certainly be said to be constituted under those Acts. This being the case, we accept the argument on behalf of the Respondents that incorporated clubs or associations or prior to 1st July, 2012 were not included in the service tax net. Position post 1st July, 2012 - HELD THAT - It can be seen that the definition of service contained in Section 65B(44) is very wide, as meaning any activity carried out by a person for another for consideration. Person is defined in Section 65B(37) as including, inter alia, a company, a society and every artificial juridical person not falling in any of the preceding sub-clauses, as also any association of persons or body of individuals whether incorporated or not. What has been stated in the present judgment so far as sales tax is concerned applies on all fours to service tax; as, if the doctrine of agency, trust and mutuality is to be applied qua members clubs, there has to be an activity carried out by one person for another for consideration - We have seen how in the judgment relating to sales tax, the fact is that in members clubs there is no sale by one person to another for consideration, as one cannot sell something to oneself. This would apply on all fours when we are to construe the definition of service under Section 65B(44) as well. The Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following THE JOINT COMMERCIAL TAX OFFICER, HARBOUR DIVISION II, MADRAS VERSUS YOUNG MEN S INDIAN ASSOCIATION, MADRAS AND OTHERS 1970 (2) TMI 87 - SUPREME COURT - Young Men s Indian Association is expressly based upon the English judgments which disregarded the corporate form and stated that there could not be a sale, on the facts of those cases, between two persons because Foster, i.e. a member of the club, could be regarded as vendor as well as purchaser - What is essential is that the holding of the property by the trustee or agent must be a holding for and on behalf of, and not a holding antagonistic to, the members of the club. Young Men s Indian Association (supra) made no distinction between a club in the corporate form and a club by way of a registered society or incorporated by a deed of trust. What is the essence of the judgment is that the holding of property must be a holding for and on behalf of the members of the club, there being no transfer of property from one person to another. Proprietary clubs were distinguished, as there the owner of the club would not be the members themselves, but somebody else. Also it must be noted that from 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members clubs in the incorporated form. Appeal dismissed - decided against Revenue.

Summary

Issues Involved:
1. Applicability of the doctrine of mutuality to incorporated and unincorporated members’ clubs post the 46th Amendment.
2. Whether the judgment in Young Men’s Indian Association still holds the field after the 46th Amendment.
3. Application of Article 366(29-A)(f) to members’ clubs.
4. Levy of service tax on members’ clubs.

Detailed Analysis:

1. Applicability of the Doctrine of Mutuality to Incorporated and Unincorporated Members’ Clubs Post the 46th Amendment:
The Supreme Court examined whether the doctrine of mutuality, which implies that a person cannot make a profit from themselves, continues to apply to incorporated and unincorporated members’ clubs after the 46th Amendment to the Constitution. The Court reaffirmed that the doctrine of mutuality remains applicable. The key point is that there is no sale transaction between a club and its members, as one cannot sell something to oneself. This principle was upheld, indicating that the 46th Amendment did not alter the fundamental nature of transactions within members' clubs.

2. Whether the Judgment in Young Men’s Indian Association Still Holds the Field After the 46th Amendment:
The judgment in Young Men’s Indian Association, which established that supplies by a club to its members do not constitute sales due to the doctrine of mutuality, was scrutinized. The Supreme Court concluded that this judgment continues to hold the field even after the 46th Amendment. The Court emphasized that the amendment did not intend to change the established legal understanding that transactions within members' clubs are not sales.

3. Application of Article 366(29-A)(f) to Members’ Clubs:
Article 366(29-A)(f) was analyzed to determine if it applies to members' clubs. The Court clarified that this sub-clause, which pertains to the supply of food and drinks, was intended to address the taxability of such supplies in hotels and restaurants, not members' clubs. The Court noted that applying this sub-clause to members' clubs would lead to inconsistencies, as it would only cover food and drinks and not other goods supplied by the clubs. Therefore, Article 366(29-A)(f) does not apply to members' clubs.

4. Levy of Service Tax on Members’ Clubs:
The applicability of service tax on members' clubs was examined, particularly in light of the changes introduced by the Finance Act, 2012. The Court noted that the definition of "service" includes any activity carried out by one person for another for consideration. However, the doctrine of mutuality implies that there is no service provided by one person to another within a members' club. The Court also considered Explanation 3 to Section 65B(44), which treats unincorporated associations and their members as distinct persons, and concluded that this does not apply to incorporated clubs. Consequently, the Court held that service tax does not apply to incorporated members' clubs.

Conclusion:
The Supreme Court upheld the doctrine of mutuality for both incorporated and unincorporated members' clubs, affirming that the judgment in Young Men’s Indian Association remains valid post the 46th Amendment. It clarified that Article 366(29-A)(f) does not apply to members' clubs and that service tax cannot be levied on incorporated members' clubs. The appeals by the Revenue were dismissed, and actions to levy and collect service tax from incorporated members' clubs were declared void.