1970 (2) TMI 87 - SC - VAT / Sales Tax

Clubs supplying refreshments to members as agents not liable for sales tax, no property transfer constitutes sale

The Joint Commercial Tax Officer, Harbour Division II, Madras Versus Young Men´s Indian Association, Madras and Others  

The SC held that clubs supplying refreshments to members are not liable for sales tax when acting as agents rather than transferring property. The court ... Levy of sales tax there must be a sale of refreshments, beverages and other preparations by the club to its members - Clubs as 'Dealers' under Section 2(g) within the meaning of section 2(g) read with Explanation I - Whether the supply of the various preparations by each club to its members involved a transaction of sale within the meaning of the Sale of Goods Act, 1930? GROVER, J. - Held that:- The State Legislature being competent to legislate only under entry 54, List II of the Seventh Schedule to the Constitution the expression 'sale of goods' bears the same meaning which it has in the aforesaid Act. Thus in spite of the definition contained in section 2(n) read with Explanation I of the Act if there is no transfer of property from one to another there is no sale which would be exigible to tax. If the 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. This position has been rightly accepted even in the previous decision of this court. The final conclusion of the High Court in the judgment under appeal was that the case of each club was analogous to that of an agent or mandatory investing his own moneys for preparing things for consumption of the principal, and later recouping himself for the expenses incurred. Once this conclusion on the facts relating to each club was reached it was unnecessary for the High Court to have expressed any view with regard to the vires of the Explanation to section 2(g) and 2(n) of the Act. As no transaction of sale was involved there could be no levy of tax under the provisions of the Act on the supply of refreshments and preparations by each one of the clubs to its members. The appeals must fail and are dismissed but there will be no order as to costs. SHAH, J.- HELD THAT:- In each case the liability to tax of the transaction will depend upon its strictly legal form. If an incorporated members' club supplies its property to its members at a fixed tariff, the transaction would readily be deemed to be one for sale, even if the transaction is on a non-profit basis; such a transaction would be liable to sales tax. Where, however, the club is merely acting on behalf of the members to make available to them refreshments, beverages and other articles, the transaction will not be regarded as a sale, for the club is the agency through which the members have arranged that the refreshments, beverages and other articles should be made available. The test in each case is whether the club transfers property belonging to it for a price or the club acts as an agent for making available property belonging to its members. The analogy of the cases decided under the Licensing Acts in the United Kingdom concerning the supply by clubs of alcoholic drinks to their members is not appropriate. In a criminal trial or a quasi-criminal proceeding, the court is entitled to consider the substance of the transaction and determine the liability of the offender. But in a taxing statute the strict legal position as disclosed by the form and not the substance of the transaction is determinative of its taxability: see Bank of Chettinad Ltd. v. Commissioner of Income-tax, Madras [1940 (6) TMI 16 - PRIVY COUNCIL]., Commissioner of Income-tax, Andhra Pradesh v. Motors & General Stores (P.) Ltd. [1967 (5) TMI 3 - SUPREME COURT], and Commissioner of Income-tax Gujarat v. B.M. Kharwar [1968 (8) TMI 14 - SUPREME COURT]. It appears on the findings recorded by the High Court that the clubs or associations sought to be rendered liable in these appeals were not transferring property belonging to them but were merely acting as agents for and on behalf of the members. They were not selling goods but were rendering a service to their members. I agree therefore that the appeals must fail. Appeals dismissed. Issues Involved:1. Whether the clubs could be regarded as 'dealers' under section 2(g) of the Madras General Sales Tax Act, 1959.2. Whether the supply of food, snacks, beverages, and other articles by the clubs to their members or guests constituted a 'sale' under section 2(n) of the Act.3. The applicability of English legal principles and previous Indian case law to the interpretation of 'sale' and 'dealer' in the context of members' clubs.4. The relevance of the legal form versus the substance of transactions in determining tax liability.Detailed Analysis:1. Clubs as 'Dealers' under Section 2(g):The judgment examined if the clubs could be considered 'dealers' under section 2(g) of the Madras General Sales Tax Act, 1959. The High Court held that the clubs could not be regarded as 'dealers' within the meaning of section 2(g) read with Explanation I of the Act. Explanation I specifies that a society, club, or association which buys, sells, or distributes goods to its members for cash or other valuable consideration shall be deemed a dealer. However, the High Court found that the clubs were not engaged in any business or trade but were merely facilitating the provision of refreshments to their members without profit, thus not fitting the definition of a 'dealer.'2. Supply Constituting 'Sale' under Section 2(n):The judgment analyzed whether the supply of food, snacks, beverages, and other articles by the clubs to their members or guests constituted a 'sale' under section 2(n) of the Act. Section 2(n) defines 'sale' as every transfer of property in goods by one person to another in the course of business for cash or other valuable consideration. The High Court concluded that no sale was involved in the clubs' activities as there was no transfer of property from the club to its members. The clubs were seen as agents of the members, purchasing and preparing refreshments on their behalf, thus lacking the essential element of a sale, which is the transfer of property.3. Applicability of English Legal Principles and Previous Case Law:The judgment referenced English legal principles and previous Indian case law to support its conclusions. English cases, like Graff v. Evans and Trebanog Working Men's Club, established that members' clubs are joint owners of club property, and supplies to members do not constitute sales. Indian cases, such as Cosmopolitan Club, Madras v. Deputy Commercial Tax Officer and Bengal Nagpur Cotton Mills Club v. Sales Tax Officer, followed similar reasoning, holding that supplies by members' clubs to their members were not sales. The judgment emphasized that the legal relationship in members' clubs is one of agency, not sale.4. Legal Form vs. Substance of Transactions:The judgment highlighted the importance of the legal form of transactions over their substance in determining tax liability. It referenced the principle that in taxation, the strict legal form of a transaction is determinative, as seen in cases like Duke of Westminster v. Inland Revenue Commissioners and Commissioner of Income-tax v. Motors & General Stores (P.) Ltd. The High Court found that the clubs were not transferring property belonging to them but were merely acting as agents for their members, thus not engaging in taxable sales.Conclusion:The Supreme Court upheld the High Court's decision, concluding that the clubs were not 'dealers' under section 2(g) and that their supply of refreshments to members did not constitute a 'sale' under section 2(n) of the Act. The appeals were dismissed, affirming that no sales tax could be levied on the clubs' activities. The judgment reiterated that the legal form of transactions is crucial in determining tax liability, and the clubs' activities were not taxable sales but services rendered to their members.