Services to members under mutuality principle not taxable supply under GST section 7(1)

The AAR Jharkhand ruled that services provided by the applicant to its members do not constitute supply under GST law. The authority determined that the applicant operates on the principle of mutuality, where the entity and its members are considered one and the same rather than separate parties. Since the applicant does not conduct business as defined under section 2(17) of the CGST Act 2017, its activities fall outside the scope of supply under section 7(1). The ruling established that transactions between the applicant and members are not taxable supplies due to the mutual relationship structure.

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Issues Involved:
1. Whether the service provided by the assessee to its members comes within the definition of 'Supply' under the Central/ Jharkhand Goods and Services Tax Act, 2017.
2. Whether the assessee is governed by the principle of mutuality.
3. Whether the assessee and its members are one and the same.

Issue-wise Detailed Analysis:

1. Definition of 'Supply':
The primary issue is whether the services provided by the assessee to its members qualify as 'Supply' under Section 7 of the CGST Act, 2017. The definition of 'Supply' includes all forms of supply of goods or services made for a consideration by a person in the course or furtherance of business. The term 'business' under Section 2(17) includes the provision by a club of facilities or benefits to its members for a subscription or consideration. The applicant is a Not-for-Profit corporate entity, and its activities do not constitute business as defined under the CGST Act. Therefore, the services provided to its members do not fall under the scope of 'Supply' as envisaged under Section 7(1) of the CGST Act, 2017.

2. Principle of Mutuality:
The applicant argued that the principle of mutuality applies to its operations. The club was established for non-profit motives, and its members do not have any right to any surplus generated by the club. The principle of mutuality implies that the club and its members are not distinct entities. This principle has been upheld by the Hon'ble Supreme Court in various cases, including the case of Commissioner of Income Tax vs. Ranchi Club Ltd. and Chief Commissioner of Central Excise and Service Tax vs. Ranchi Club Ltd. The principle of mutuality dictates that transactions between the club and its members are not transactions between two separate parties, thus not subject to GST.

3. Assessee and Its Members as One Entity:
The assessee contends that it and its members are one and the same entity. This argument is supported by the principle of mutuality, which states that the club and its members are indistinguishable. The Hon'ble Supreme Court's judgments in the cases of Calcutta Club Ltd. and Ranchi Club Ltd. affirm that the club and its members are not separate entities for tax purposes. Therefore, the services provided by the club to its members do not constitute a 'Supply' under GST law.

Ruling:
1. The service provided by the applicant to its members does not come within the definition of 'Supply' as envisaged under the Central/ Jharkhand Goods and Services Tax Act, 2017.
2. The applicant is governed by the principle of mutuality.
3. The applicant and its members are one and the same.

Note:
The Finance Bill, 2021 amended Section 7 of the CGST Act, 2017, effective from July 1, 2017, to clarify that the club and its members are deemed to be two separate persons, making the supply of activities or transactions between them taxable. This amendment overrides any previous judgments or orders to the contrary.

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