Constitutional Limits on GST: Principle of mutuality insulates transactions between clubs/associations and their members

Legal Commentary on the Indian Medical Association, Kerala Vs. Union of India, State of Kerala - 2025 (4) TMI 872 - Kerala High Court, Dated 11-04-2025

Introduction

The Kerala High Court's judgment dated 11-04-2025 addresses a critical controversy at the intersection of constitutional law and indirect taxation, specifically the application of Goods and Services Tax (GST) to transactions between clubs/associations and their members. The case arose from writ appeals challenging the imposition of GST on various mutual benefit and welfare schemes operated by the Kerala State Branch of the Indian Medical Association (IMA) for its members. The dispute centers on whether such transactions are insulated from GST by the doctrine of mutuality, or whether statutory amendments-especially those introduced by the Finance Act, 2021-validly bring these within the GST net, including with retrospective effect from July 1, 2017.

The case is significant as it tests the limits of legislative competence under Article 246A of the Constitution, the interpretative boundaries of constitutional entries regarding "supply" and "services," and the extent to which Parliament can, by statutory fiction, override long-standing common law doctrines such as mutuality. The judgment also addresses the contentious issue of retroactive tax legislation, with far-reaching implications for associations, professional bodies, and the broader GST framework in India.

Key Legal Issues

1. Whether the principle of mutuality insulates transactions between clubs/associations and their members from GST liability, despite statutory amendments to the CGST and SGST Acts.
2. Whether Parliament and State Legislatures, under Article 246A, have the constitutional competence to statutorily deem such transactions as "supplies" for GST purposes, notwithstanding the judicial interpretation of "supply" and "service" as requiring two separate persons.
3. Whether the retrospective application of the 2021 amendments to Section 7(1)(aa) of the CGST Act is unconstitutional and void, on the grounds of being ultra vires Article 246A read with Article 366(12A) of the Constitution.
4. Whether the impugned provisions are violative of fundamental rights under Articles 14, 19(1)(g), 265, and 300A of the Constitution.

Detailed Issue-wise Analysis

1. The Principle of Mutuality and Its Enduring Relevance

The doctrine of mutuality, a cornerstone of common law, posits that an association and its members are identical for certain legal purposes; thus, a person cannot make a profit from himself. This principle has been repeatedly affirmed in Indian jurisprudence, notably in Secretary, Madras Gymkhana Club Employees Union v. The Management of the Gymkhana Club - 1967 (10) TMI 67 - Supreme Court, Cricket Club of India Ltd v. Bombay Labour Union - 1968 (8) TMI 200 - Supreme Court, and, most significantly, in State of West Bengal v. Calcutta Club Ltd. 2019 (10) TMI 160 - Supreme Court.

The IMA's counsel, relying on these authorities, argued that the mutuality principle precludes the existence of two separate entities for the purposes of GST-there can be no "supply" by the association to its members, as the association and its members are the same. The argument is further bolstered by the Supreme Court's holding in Calcutta Club that the 46th Constitutional Amendment, even with its deeming fiction for sales tax, did not extend to services and did not abrogate the mutuality doctrine for clubs and associations.

The High Court, after an extensive review, concurred with this line of reasoning. It emphasized that the concept of "supply" and "service," as understood in constitutional and statutory contexts, inherently requires a plurality of persons-a provider and a recipient. Self-supply or self-service is not contemplated within the constitutional design, and any legislative attempt to artificially create such a dichotomy by deeming fiction must be measured against constitutional limitations.

2. Legislative Competence under Article 246A and the Boundaries of Statutory Fiction

The respondents (Union and State) asserted that Article 246A, introduced by the 101st Constitutional Amendment, conferred plenary and unconditional power upon Parliament and State Legislatures to legislate on GST, including the authority to define "supply" and "person" as they deem fit. They contended that the 2021 amendments to Section 7(1)(aa) and the accompanying Explanation, which deem clubs/associations and their members as separate persons for GST, are well within legislative competence and not constrained by the mutuality doctrine.

The High Court, however, drew a sharp distinction between the power to define terms within a statute and the power to override constitutional concepts as interpreted by the Supreme Court. Relying on precedents such as State of Madras v. Gannon Dunkerley & Co. - 1958 (4) TMI 42 - Supreme Court and the subsequent constitutional amendments [notably Article 366(29A)], the Court reasoned that when a constitutional phrase has acquired a settled judicial meaning, legislative competence cannot be exercised to give it a contrary meaning by ordinary statute. The proper route, as history demonstrates, is by constitutional amendment-not by statutory deeming fictions.

The Court also distinguished the present issue from cases like  Navnit Lal C. Javeri v. K.K. Sen - 1964 (10) TMI 16 - Supreme Court and Skill Lotto Solutions Pvt. Ltd. v. Union of India - 2020 (12) TMI 140 - Supreme Court, where statutory definitions were upheld because the corresponding constitutional entries were broad and had not acquired a restrictive judicial meaning. In contrast, "supply" and "service" in the context of GST had been judicially interpreted to require two persons, and the mutuality doctrine had been held to survive even after constitutional amendments.

The Court thus concluded that the amendments to Section 7(1)(aa) and the Explanation, to the extent they seek to treat transactions between associations and their members as "supplies," are ultra vires Article 246A and Article 366(12A) of the Constitution, being beyond the legislative competence of Parliament and the State Legislature.

3. Retroactive Operation of the 2021 Amendments: Constitutional and Practical Concerns

The Finance Act, 2021, by inserting Section 7(1)(aa) and the Explanation to the CGST Act (and the corresponding state law), purported to give these provisions retrospective effect from 1 July 2017. The IMA challenged this as manifestly arbitrary and unfair, citing the impossibility of compliance for past periods, the inability to recover tax from members for those years, and the absence of any legitimate expectation of such a levy prior to the amendment.

The Court accepted these arguments, aligning with the single judge's earlier finding that retrospective taxation, especially where it disrupts settled expectations and imposes unanticipated liabilities, is antithetical to the rule of law and fairness-a basic feature of the Constitution. The judgment referenced the Supreme Court's guidance in Jayam & Co. Versus Assistant Commissioner & Anr. - 2016 (9) TMI 408 - Supreme Court and Rai Ramakrishna v. State of Bihar - 1963 (2) TMI 2 - Supreme Court, which caution against retrospective laws that are unreasonable, confiscatory, or impose new, substantive burdens on past transactions.

The Court further noted that the legislative assertion that the amendment was merely "clarificatory" was unconvincing, given the profound change in the law and the express use of deeming fictions. The principle of fairness, the Court emphasized, requires that taxpayers not be ambushed by retroactive changes that disrupt their financial planning and settled rights.

4. Fundamental Rights and the Rule of Law

The IMA also invoked violations of Articles 14 (equality), Article 19(1)(g) (freedom to practice any profession or to carry on any occupation, trade or business), Article 265 (no tax except by authority of law), and Article 300A (right to property). While the Court's primary finding was on legislative competence, it also observed that the impugned provisions, by imposing arbitrary and retrospective burdens, would fail the test of fairness and reasonableness under Articles 14 and 19(1)(g). The Court underscored the modern constitutional ethos of a "culture of justification," where the State must offer sound reasons for any action impinging on citizens' rights, especially in the sensitive domain of taxation.

5. Arguments of the Respondents and Judicial Response

The respondents advanced several arguments in support of the constitutionality and fairness of the amendments:

• That Article 246A is a plenary power, unconstrained by prior judicial interpretations of mutuality.
• That the amendments were only clarificatory, as the liability existed even under earlier provisions.
• That most associations and clubs had already been paying GST, so the IMA could not claim surprise.
• That the doctrine of mutuality is inapplicable to incorporated associations, especially those engaged in commercial activities.

The Court meticulously addressed each of these contentions. It held that:

• Plenary legislative power is subject to constitutional limitations, especially where constitutional phrases have acquired settled judicial meanings.
• The amendments were substantive, not merely clarificatory; the express use of deeming provisions signaled a change in the law, not a clarification.
• The conduct of other assessees does not determine the constitutional validity of a statute.
• The mutuality doctrine applies regardless of incorporation, as affirmed by the Supreme Court.

 

Key Holdings and Reasoning

1. Unconstitutionality of the Impugned Provisions: The Court declared Section 2(17)(e), Section 7(1)(aa), and the Explanation thereto of the CGST Act, 2017 (and corresponding provisions of the Kerala GST Act) as unconstitutional and void, being ultra vires Article 246A, Article 366(12A), and Article 265 of the Constitution.
2. Legislative Competence and Constitutional Interpretation: The Court held that when a constitutional phrase such as "supply" or "service" has acquired a judicially settled meaning requiring two persons, Parliament cannot, by ordinary legislation, override that meaning by statutory fiction. Such a change, if at all, must be achieved by constitutional amendment.
3. Retrospective Operation Invalid: The Court agreed with the single judge that the retrospective operation of the amendments was invalid, as it violated the rule of law and fairness, and imposed disproportionate and unforeseen burdens on taxpayers.
4. Doctrine of Mutuality Survives: The Court reaffirmed that the principle of mutuality, as recognized in Calcutta Club and other precedents, continues to insulate transactions between clubs/associations and their members from GST, unless and until the Constitution is amended to the contrary.
5. Rejection of Respondents' Arguments: The Court rejected the respondents' arguments regarding legislative plenitude, the supposed clarificatory nature of the amendments, the irrelevance of mutuality, and the conduct of other assessees.

The Court's reasoning is encapsulated in the following extract:

"We are of the view that when a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, a legislative body, that derives its legislative competence to enact a Statute from the Constitution, cannot give to the word/concept a meaning that goes against the meaning assigned to the same word/concept by the Supreme Court in the context of its setting under the Constitution. ... The concepts of 'supply' and 'service' having been judicially interpreted as requiring at least two persons ... 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 ... the impugned amendment to the CGST/SGST Acts must necessarily fail the test of constitutionality."

 

Conclusion

The Kerala High Court's decision is a robust reaffirmation of constitutional supremacy and the limits of legislative power, especially in the sensitive area of taxation. The judgment underscores that where constitutional phrases have acquired settled judicial interpretations, Parliament and State Legislatures cannot, by ordinary statute, override those meanings through deeming fictions. The doctrine of mutuality, as it stands, continues to shield transactions between associations and their members from GST, unless and until the Constitution is amended to expressly provide otherwise.

The Court's categorical rejection of retrospective tax legislation, absent compelling justification and fairness, is also a significant contribution to the jurisprudence of tax law and the rule of law. The judgment is likely to have far-reaching implications for the taxation of clubs, associations, and professional bodies across India, and may prompt legislative or constitutional reconsideration at the highest levels. Future developments may include an appeal to the Supreme Court or, potentially, a constitutional amendment to clarify the GST regime's application to such transactions.

 

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Full Text:

2025 (4) TMI 872 - KERALA HIGH COURT