2013 (7) TMI 510 - HC - Service Tax

Sections 65(25a), 65(105)(zzze), and 66 amendments on club service tax ruled ultra vires

The HC held that provisions under Sections 65(25a), 65(105)(zzze), and 66, as amended to levy service tax on services provided by a club to its members, ... Mutuality principle - Service tax leviability on services provided by clubs to members - Ultra vires levy - Legal entity versus mutual concernMutuality principle - Service tax leviability on services provided by clubs to members - Ultra vires levy - Legal entity versus mutual concern - Validity of levy of service tax under the amendments to the Finance (No.2) Act, 1994 insofar as it purports to tax services rendered by petitioner clubs to their members. - HELD THAT: - The High Court accepted the reasoning of the Division Bench of the Jharkhand High Court (Ranchi Club Ltd.) and of the Patna Full Bench that the principle of mutuality precludes treating transactions between a members' club and its members as transactions between two distinct persons for purposes of taxation. Relying on authorities which hold that where a club operates on the basis of mutuality there is no transfer between two persons (and thus no taxable sale or service), the Court concluded that services provided by the petitioner clubs to their members lack the requisite adversarial two-party character to attract service tax. The Court noted that the Department has challenged the cited decision before the Supreme Court, but held that the Jharkhand Division Bench decision retains persuasive value and that no convincing ground was shown to depart from it. Applying that principle to the facts before it, the Court held that the impugned provisions as amended cannot be enforced to levy service tax on services provided by the clubs to their members. [Paras 6, 8]Section 65(25a), Section 65(105)(zzze) and Section 66 of the Finance (No.2) Act, 1994 as incorporated/amended by the Finance Act, 2005 are ultra vires insofar as they purport to levy service tax on services provided by the petitioner clubs to their members; petitions allowed.Final Conclusion: Petitions allowed; the specified service-tax provisions are declared ultra vires to the extent they seek to tax services by the clubs to their members. Rule made absolute; no order as to costs. Judgment stayed for six weeks to enable the Department to take further steps. ISSUES: Whether the imposition of service tax under Section 65(25a), Section 65(105)(zzze), and Section 66 of the Finance (No.2) Act, 1994 as amended by the Finance Act, 2005 on services provided by clubs to their members is constitutionally valid and within the legislative competence of Parliament.Whether the principle of mutuality exempts transactions between a club and its members from being considered taxable services or sales.Whether a club incorporated under the Companies Act can be treated as a separate legal entity for the purpose of levying service tax on services provided to its members.Whether the transactions between a club and its non-members are taxable under service tax laws. RULINGS / HOLDINGS: The Court declared that the provisions of Section 65(25a), Section 65(105)(zzze), and Section 66 of the Finance (No.2) Act, 1994 as amended by the Finance Act, 2005, to the extent they levy service tax on services purportedly provided by clubs to their members, are ultra vires, beyond the legislative competence of Parliament, unconstitutional, illegal and void.The Court held that the principle of mutuality applies, meaning that transactions between the club and its members do not constitute a transaction between two distinct persons or legal entities, and therefore no taxable service or sale is involved.The Court rejected the argument that incorporation under the Companies Act negates the principle of mutuality, affirming that even incorporated clubs acting on the principle of mutuality do not provide taxable services to their members.The Court noted that services provided by the club to non-members are outside the principle of mutuality and may be subject to service tax, as such transactions involve two distinct legal entities. RATIONALE: The Court relied on the principle of mutuality as established in precedent, including the judgment of the Supreme Court in Joint Commercial Tax Officer Vs. The Young Men's Indian Association, which held that 'for a transaction of sale, there must be two persons' and that 'no sale would be involved as the element of transfer would be completely absent' when a club provides services to its members.The Court considered the Full Bench decision of the Patna High Court in Commissioner of Income Tax Vs. Ranchi Club Limited, which recognized that income or transactions between a club and its members are not taxable due to mutuality, but income from non-members is taxable.The Court acknowledged that 'sale and service are different and distinct transactions,' but emphasized that both require the existence of two legal entities, which is absent in transactions between a club and its members.The Court noted that the Department's challenge to the cited precedents does not diminish their persuasive value, especially given the consistency of the principle of mutuality in Indian jurisprudence.There was no dissenting or concurring opinion; the Court followed existing precedent and applied it to the facts before it, resulting in a ruling that the impugned service tax provisions are unconstitutional insofar as they apply to services provided by clubs to their members.