Levy of Sales Tax and Service Tax on Clubs and Doctrine of Mutuality: What Supreme Court held

The Supreme Court has ruled that the doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs after the 46th Amendment adding Article 366(29-A). Thus, Sales Tax cannot be levied on Clubs, whether incorporated or unincorporated for the supply of food and drinks to permanent members..Further, the Court also held that Service Tax cannot be levied from 2005 onwards on Clubs which are incorporated..The Judgment was delivered by a Bench of Justices Rohinton Nariman, Surya Kant, and V Ramasubramanian..Sales Tax.In the lead petitions in this case, the Assistant Commissioner of Commercial Taxes had issued a notice to the respondent Club assessee apprising it that it had failed to make payment of sales tax on the sale of food and drinks to the permanent members. After the receipt of the notice, the respondent Club submitted a representation and the assessing authority required the respondent Club to appear before it. The notice and the communication sent for personal hearing was assailed by the respondent before the Tribunal praying for a declaration that it is not a dealer within the meaning of the West Bengal Sales Tax Act, 1994 as there is no sale of any goods in the form of food, refreshments, drinks, etc. by the Club to its permanent members..Hence, it is not liable to pay sales tax under the Act. A prayer was also made before the Tribunal for nullifying the action of the Revenue threatening to levy tax on the supply of food to the permanent members..It was contended before the Tribunal that there could be no sale by the respondent Club to its own permanent members, for the doctrine of mutuality would come into play. To elaborate, the respondent Club treated itself as the agent of the permanent members in entirety and advanced the stand that no consideration passed for supplies of food, drinks or beverages, etc. and there was only reimbursement of the amount by the members and therefore, no sales tax could be levied..The Tribunal referred to Article 366(29-A) of the Constitution of India, Section 2(30) of the Act, its earlier decisions and, eventually, opined that supplies of food, drinks and refreshments by the petitioner clubs to their permanent members cannot be treated as “deemed sales” within the 4 meaning of Section 2(30) of the 1994 Act. We find that the payments made by the permanent members are not considerations and in the case of Members’ Clubs the suppliers and the recipients (Permanent Members) are the same persons and there is no exchange of consideration.” Being of this view, the Tribunal accepted the contention of the respondent Club and opined that it is not eligible to tax under the Act..The High Court upheld the view leading to the appeal in Supreme Court..When the matter came before a Division Bench of the Supreme Court, it referred the matter to a larger Bench after framing the following questions for consideration:.(i) Whether the doctrine of mutuality is still applicable to incorporated clubs or any club after the 46th Amendment to Article 366(29-A) of the Constitution of India?.(ii) Whether the judgment of this Court in Young Men’s Indian Assn. [CTO v. Young Men’s Indian Assn., (1970) 1 SCC 462] still holds the field even after the 46th Amendment of the Constitution of India; and whether the decisions in Cosmopolitan Club [Cosmopolitan Club v. State of T.N., (2017) 5 SCC 635 : (2009) 19 VST 456 (SC)] and Fateh Maidan Club [Fateh Maidan Club v. CTO, (2017) 5 SCC 638 : (2008) 12 VST 598 (SC)] which remitted the matter applying the doctrine of mutuality after the constitutional amendment can be treated to be stating the correct principle of law?.(iii) Whether the 46th Amendment to the Constitution, by deeming fiction provides that provision of food and beverages by the incorporated clubs to its permanent members constitute sale thereby holding the same to be liable to sales tax?.The Court first proceeded to discuss the doctrine of mutuality. It noted that the doctrine of mutuality as applied to clubs is elaborately discussed in Bangalore Club v. Commissioner of Income Tax and Anr. [(2013) 5 SCC 509]..As per the same, it is clear that if persons carry on a certain activity in such a way that there is a commonality between contributors of funds and participators in the activity, a complete identity between the two is then established. This identity is not snapped because the surplus that arises from the common fund is not distributed among the members – it is enough that there is a right of disposal over the surplus, and in exercise of that right they may agree that on winding up, the surplus will be transferred to a club or association with similar activities..Most importantly, the surplus that is made does not come back to the members of the club as shareholders of a company in the form of dividends upon their shares. Since the members perform the activities of the club for themselves, the fact that they incorporate a legal entity to do it for them makes no difference..This is further reinforced by the last part of Article 366(29-A), as under this part, the supply of such goods shall be deemed to be sale of those goods by the person making the supply, and the purchase of those goods by the person to whom such supply is made. The Court also placed reliance on the judgment in CTO v. Young Men’s Indian Association and the doctrine of mutuality to hold that there is no sale transaction between a club and its members..The Court then proceeded to deliberate on whether the 46th Amendment had done away with the principles contained in Young Men’s Indian Association and the other judgments on the doctrine of mutuality, as applied to members’ clubs. The 46th Amendment Act inserted Clause 29A to Article 366..The Court analysed the Statement of Objects and Reasons of the 46th Amendment and the judgment in Young Men’s Indian Association. It noted that the Statement of Objects and Reasons had an error in that it did not read the case of Young Men’s Indian Association in its correct perspective, the Court said..Young Men’s Indian Association had three separate appeals before it, in one of which a company was involved. To state, therefore, that under the law as it stood on the date of the 46th Amendment, a sale of goods by a club having a corporate status to members is taxable, is wholly incorrect..Proceeding on this incorrect basis, what the 46th Amendment sought to do was to then bring to tax sales by clubs that have no separate existence from that of their members. In so doing, the 46th Amendment used the expression “any unincorporated association or body of persons”. This expression, when read with the Statement of Objects and Reasons, makes it clear that it was only clubs which are not in corporate form that were sought to be brought within the tax net, as it was wrongly assumed that sale of goods by members’ clubs in the corporate form were taxable already..““Any” is the equivalent of “all”. This word, therefore, also lends itself to the aforesaid interpretation, as the emphasis of the legislature is on all unincorporated associations or bodies being brought within subclause (e)..As seen through the object that the legislature sought to achieve, would lead to the aforesaid expression applying only to clubs which were not in the corporate form. Even otherwise, on the assumption that “unincorporated association or body of persons” must be read disjunctively, “a body of persons” cannot be equated with “person”.”.Even otherwise, the Court held that the “supply” of goods by an unincorporated association or body of persons has to be to a member for cash, deferred payment or other valuable consideration. The definition of “consideration” in Section 2(d) of the Indian Contract Act, 1872 necessarily posits consideration passing from one person to another..As the Young Men’s Indian Association case and the doctrine of mutuality state, there is no sale transaction between a club and its members. There cannot be a sale of goods to oneself. The ratio of Young Men’s Indian Association has not been done away with by the limited fiction introduced by Article 366(29-A)(e), the Court held..Another argument advanced by the Department was that even if clause (e ) does not apply, clause (f) will apply..The Court noted that subject matter of sub-clause (f) does not include “goods” in their entirety, but only food or any other article for human consumption, or any drink, which is the serving of such food or drink in hotels or restaurants. This is further made clear by Section 6 of the 46th Amendment Act, which is a validation and exemption provision. Section 6(1)(a) specifically refers to transactions referable to two Supreme Court judgments and the object of clause (f) is to do away with those two judgments, the Court held..“The 46th Amendment Act, therefore, when read as a whole, would make it clear that Article 366(29-A)(f) refers only to an undoing of the aforesaid two judgments, the subject matter 51 being the taxability of food or drink served in hotels and restaurants. This being the case, it is obvious that the taxability of food or drink served in members’ clubs is not the subject matter of sub-clause (f).”.The Court thus arrived at the following conclusions:.(1) The doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs after the 46th Amendment adding Article 366(29-A) to the Constitution of India..(2) Young Men’s Indian Association (supra) and other judgments that applied this doctrine continue to hold the field even after the 46th Amendment..(3) Sub-clause (f) of Article 366(29-A) has no application to members’ clubs..Service Tax.Another batch of appeals pertained to the levy of Service Tax on Clubs..Two High Courts, Jharkhand, and Gujarat had struck down levy of Service Tax in respect of services provided by the petitioner club to its members. Both the High Courts, to that extent, followed the judgment in Young Men’s Indian Association..Under Section 64(3), Chapter V of the Finance Act applied to taxable services as defined, with effect from June 16, 2005. Under Section 65(25a), “club or association” was defined. It excluded from its purview, any body established or constituted by or under any law for the time being in force..In 2012, amendments were made to the Finance Act and a new Section 66B was introduced. As per the same, Service tax was imposed on all taxable services, short of those which were in a negative list contained in Section 66D of the Finance Act..The Supreme Court noted that the definition of “club or association” contained in Section 65(25a) made 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. What was significant was that anybody “established or constituted” by or under any law for the time being in force, was not included..A Company incorporated under the Companies Act or a cooperative society registered as a cooperative society under a State Act can certainly be said to be “constituted” under any law for the time being in force..Dhruv Agarwal, Senior Advocate appearing on behalf of the Revenue had submitted that Service Tax was levied on members’ clubs with effect from 2005. With effect from 2012, after statutory changes had been made, Service Tax continued to be levied on such clubs and was attracted even to members’ clubs in incorporated form, i.e., as companies or as registered cooperative societies. According to Agarwal, the principle of mutuality that was laid down in Young Men’s Indian Association was expressly done away with, in the Service Tax context, as is in these cases, there was no transaction of sale, unlike the sales tax cases..The Court noted that a Company incorporated under the Companies Act or a cooperative society registered as a cooperative society under a State Act can certainly be said to be “constituted” under any law for the time being in force. That being the case, incorporated clubs or associations or prior to 1st July, 2012 were not included in the service tax net..The next question that arose was whether there has been any difference to this position after July 1, 2012?.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..Thus, the Court held that what has been stated in the present judgment so far as sales tax is concerned applies 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..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 construe the definition of “service” under Section 65B(44) as well, the Court ruled..However, Explanation 3 has now been incorporated, under sub-clause (a) of which unincorporated associations or body of persons and their members are statutorily to be treated as distinct persons..The Court went on to note that the expression “body of persons” occurring in the explanation to Section 65 and occurring in Section 65(25a) and (25aa) does not refer to an incorporated company or an incorporated cooperative society..As the same expression has been used in Explanation 3 post-2012 (as opposed to the wide definition of “person” contained in Section 65B(37)), it may be assumed that the legislature has continued with the pre-2012 scheme of not taxing members’ clubs when they are in the incorporated form. The expression “body of persons” may subsume within it persons who come together for a common purpose, but cannot possibly include a company or a registered cooperative society..The Court, therefore, ruled the Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following Young Men’s Indian Association..Thus, from 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members’ clubs in the incorporated form..[Read Judgment]