2014 (12) TMI 1097 - HC - Service Tax

High Court Invalidates Tax on Club Services, Petitioners Absolved

The High Court declared Section 65(25a), 65(105)(zzze), and Section 66 of the Finance Act, 1994, as amended by the Finance Act, 2005, unconstitutional in ... Levy of service tax on services provided by clubs or associations to their members (Section 65(25a) and Section 65(105)(zzze) of the Finance Act, 1994 as amended) - club or association service - doctrine of mutuality - vires of statutory provisions - retrospective exemption by notificationVires of statutory provisions - levy of service tax on services provided by clubs or associations to their members (Section 65(25a) and Section 65(105)(zzze) of the Finance Act, 1994 as amended) - doctrine of mutuality - Constitutionality of the provisions insofar as they purport to levy service tax on services purportedly provided by the petitioner society/club to its members. - HELD THAT: - The Court held that the question was covered by the Division Bench decision in Sports Club of Gujarat Ltd. v. Union of India, which declared Section 65(25a), Section 65(105)(zzze) and Section 66 of the Finance Act, 1994 as amended by Finance Act, 2005, ultra vires insofar as they purport to levy service tax on services purportedly provided by a club/association to its members. The earlier reasoning, which addressed the distinct legal identity of a club or association vis-a -vis its members and the applicability of the doctrine of mutuality, was treated as determinative. In view of that precedent, the impugned statutory classification and levy insofar as applied to the petitioner could not be sustained. [Paras 4, 5]Provisions impugned were held to be covered by earlier Division Bench precedent and therefore unconstitutional to the extent they purport to levy service tax on services provided by a club/association to its members.Club or association service - retrospective exemption by notification - Validity of the adjudicating authority's order confirming service tax demand, interest and penalties against the petitioner society. - HELD THAT: - Applying the legal conclusion that the statutory provisions were ultra vires as to services by a club/association to its members, the Court found the adjudicating authority's confirmation of service tax demand (for the period identified) unsustainable. The Court additionally noted that the revenue had issued a notification granting retrospective exemption for such services, which provided an additional ground to set aside the adjudication. Consequently, the impugned order confirming demand, interest and penalties was set aside. [Paras 3, 6, 7]Impugned adjudication order dated 9.10.2007 confirming service tax demand with interest and penalties was set aside.Final Conclusion: The petition is allowed; the impugned adjudication order confirming service tax demand, interest and penalties is set aside in view of the Division Bench precedent declaring the relevant provisions ultra vires as applied to services by a club/association to its members, and in light of the retrospective exemption; rule made absolute with no costs. Issues:Challenge to vires of Section 65(25a) and 65(105)(zzze) of Finance Act, 1994 regarding service tax on services provided by a cooperative society to its members.Analysis:The petitioners contested the constitutionality of Section 65(25a) and 65(105)(zzze) of the Finance Act, 1994, which imposed service tax on services offered by a society to its members. The petitioner society operated a common effluent treatment plant for its members under the Gujarat Cooperative Societies Act. They argued that since the society was formed solely to provide services to its members, there was no commercial service provided to consumers, and thus, should not be subject to taxation. The adjudicating authority had confirmed a substantial service tax demand against the petitioners, leading to a separate challenge by the petitioners against this order.The Commissioner of Service Tax justified the tax demand by categorizing the services provided by the society as 'club or association services' under Section 65(25a) of the Finance Act, 1994. The Commissioner rejected the petitioners' argument that the society and its members were not separate entities, emphasizing that the existence of 'club or association service' implied a legal distinction between the society and its members. The Commissioner upheld the tax liability for the services rendered by the society, leading to the significant tax demand against the petitioners.However, the petitioners cited a previous judgment by a Division Bench of the High Court that declared Section 65(25a) unconstitutional in a similar case involving a sports club. The High Court concurred with this precedent, declaring Section 65(25a), 65(105)(zzze), and Section 66 of the Finance Act, 1994, as amended by the Finance Act, 2005, to be ultra vires in levying service tax on services provided by a club or society to its members. Consequently, the impugned order confirming the tax demand was set aside based on the unconstitutionality of the relevant provisions.Moreover, the Court noted that retrospective exemptions had been granted for such services, providing an additional basis for overturning the adjudication order. As a result, the High Court set aside the impugned order dated 9.10.2007 passed by the Commissioner of Service Tax, ruling in favor of the petitioners and absolving them from the tax liability. The judgment concluded by making the rule absolute, with no costs imposed on either party.