2012 (6) TMI 636 - HC - Service Tax

Members' club not liable for service tax or sales tax when operating on mutuality and supplying members as agent

Ranchi Club Ltd. Versus Chief Commissioner of Central Excise & Service Tax

HC held the club not liable for service tax or treated sales under club/association services where it operates on mutuality and supplies to members as ... Denial of liability to pay service tax under 'Mandap Keeper's Services' or under the ''Club or Association Services' by assessee, i.e. Club - The petitioner is giving service to its members but the club is formed on the principle of mutuality - Held that:- As considered by the Hon'ble Supreme Court in the case of Joint Commercial Tax Officer, Harbour Division, II-Madras v. The Young Men's Indian Association [1970 (2) TMI 87 - SUPREME COURT], that in spite of the definition contained in Section 2(n)of the Madras General Sales Tax Act, 1959 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 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. Members' clubs to which category the clubs in the present case belong cannot be made subject to the provisions of the Licensing Acts concerning sale because the members are joint owners of all the club property including the excisable liquor. The supply of liquor to a member at a fixed price by the club cannot be regarded to be a sale - Where such a club has all the characteristics of a members' club consistent with its incorporation, where every member is a shareholder and every shareholder is a member, no licence need to be taken out if liquor is supplied only to the members. sale and service are different but the basic feature common in both transaction requires existence of the two parties - in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another as foundational facts of existence of two legal entities in such transaction is missing - in favour of assessee. Issues Involved:1. Applicability of Service Tax on services provided by a club to its members.2. Interpretation of mutuality principle in taxation.3. Distinction between sale and service in the context of club transactions.4. Applicability of precedent judgments on similar tax issues.Issue-wise Detailed Analysis:1. Applicability of Service Tax on services provided by a club to its members:The petitioner, a club, sought a declaration that it is not liable to pay service tax under the Bihar Finance Act, 1994 for services provided to its members. The court initially ruled on 13.08.2007 that the club is not liable to pay service tax for services utilized by its members, but it is liable for services provided to non-members. This decision was challenged and eventually set aside, leading to a re-hearing of the issue.2. Interpretation of mutuality principle in taxation:The petitioner argued that the club operates on the principle of mutuality, meaning transactions between the club and its members are not between two separate entities. The club cited the Supreme Court's judgment in Joint Commercial Tax Officer v. The Young Men's Indian Association, which held that transactions within a club based on mutuality do not constitute a sale. The Full Bench of the Patna High Court in CIT v. Ranchi Club Limited also supported this by stating that income tax cannot be imposed on transactions between a club and its members due to the mutuality principle.3. Distinction between sale and service in the context of club transactions:The respondents contended that sale and service are distinct, with service not involving a transfer of property. They argued that the statutory provisions under the Finance Act, 1994, specifically Section 65(25a), 65(105)(zzze), and the explanation appended to Section 65, clearly define taxable services provided by a club to its members. They emphasized that the language of the statute should be interpreted strictly, without relying on analogies from other tax laws.4. Applicability of precedent judgments on similar tax issues:The court considered the precedents set by the Supreme Court and the Full Bench of the Patna High Court. The Supreme Court in Joint Commercial Tax Officer v. The Young Men's Indian Association and the Full Bench in CIT v. Ranchi Club Limited had established that transactions within a club based on mutuality do not constitute a sale or service due to the absence of two distinct entities. The court found these precedents applicable to the case at hand, concluding that the foundational requirement of two distinct entities is missing in transactions between a club and its members.Conclusion:The court held that services provided by the petitioner-club to its members are not taxable under the Finance Act, 1994, due to the principle of mutuality. The writ petition was allowed, confirming that the club is not liable to pay service tax for services rendered to its members. However, the club remains liable for services provided to non-members.