2019 (10) TMI 160 - SC - Service Tax

Incorporated clubs not liable for service tax before July 2012 under mutuality doctrine

The SC held that incorporated clubs and associations were not liable for service tax prior to July 1, 2012, based on the doctrine of mutuality. The Court ... Doctrine of mutuality - deemed sale by unincorporated association or body of persons - Article 366(29-A) of the Constitution - sub-clause (f) of Article 366(29-A) - taxability of members' clubs under sales tax - taxability of members' clubs under service tax - Explanation 3 to Section 65B(44) - distinction between incorporated and unincorporated clubsDoctrine of mutuality - deemed sale by unincorporated association or body of persons - Article 366(29-A) of the Constitution - Whether the doctrine of mutuality continues to apply to members' clubs after the Forty-sixth Amendment to Article 366(29-A). - HELD THAT: - The Court examined the effect of Article 366(29-A)(e) on the line of authorities applying the doctrine of mutuality (notably Young Men's Indian Association). It held that sub-clause (e) was directed to bringing within the tax net transactions by unincorporated associations or bodies of persons and did not abolish the mutuality principle as applied to members' clubs generally. The Court construed the phrase 'body of persons' as not embracing incorporated entities and emphasised that the 46th Amendment did not and could not negate the foundational proposition that there can be no sale where the supplier and recipient are effectively the same persons. Accordingly, Young Men's Indian Association and related authorities which recognise the mutuality doctrine continue to govern the position. [Paras 49]The doctrine of mutuality continues to be applicable to incorporated and unincorporated members' clubs after the 46th Amendment.Sub-clause (f) of Article 366(29-A) - deemed sale by unincorporated association or body of persons - taxability of members' clubs under sales tax - Whether sub-clause (f) of Article 366(29-A) applies to supply of food and drinks by members' clubs. - HELD THAT: - The Court analysed the object and scope of sub-clause (f), the Statement of Objects and Reasons, and the saving/exemption provisions in the 46th Amendment Act. It concluded that sub-clause (f) was enacted to meet the specific problem of taxation of food and drink supplied in hotels and restaurants (to overrule Associated Hotels and Northern India Caterers), and was not intended to bring members' clubs generally within its ambit. The Court noted textual and purposive reasons - including that sub-clause (f) is limited to food and drink and the existence of transitional/exemption provisions - which preclude reading (f) as abolishing mutuality in clubs. [Paras 49]Sub-clause (f) of Article 366(29-A) has no application to members' clubs.Taxability of members' clubs under service tax - Explanation 3 to Section 65B(44) - distinction between incorporated and unincorporated clubs - Whether members' clubs incorporated as companies or registered cooperative societies are liable to service tax (pre- and post-1 July 2012), and whether Explanation 3 to Section 65B(44) treats unincorporated associations and their members as distinct for service-tax purposes so as to tax incorporated clubs. - HELD THAT: - The Court traced the legislative history of service tax and the statutory definitions. It held that prior to 1 July 2012 the scheme and specific definitions (including exclusions for bodies 'established or constituted by or under any law') excluded incorporated clubs from the service-tax net. Post-2012, although the definition of 'person' was widely framed, Explanation 3 to Section 65B(44) uses the expression 'a body of persons' juxtaposed with 'unincorporated association'. Applying the same interpretive approach adopted for Article 366(29-A), the Court concluded that 'body of persons' in this statutory context does not encompass bodies corporate or incorporated cooperative societies. Therefore Explanation 3(a) does not apply to incorporated members' clubs, and the mutuality principle continues to prevent treating services rendered by a members' club to its members as a taxable service. The Court upheld the High Courts of Jharkhand and Gujarat in this view. [Paras 82, 83, 84, 85]Incorporated members' clubs (including Section 25 companies and registered cooperative societies) are not liable to service tax for services rendered to their members; Explanation 3 to Section 65B(44) does not bring such incorporated clubs within the service-tax net.Taxability of members' clubs under service tax - Validity of show-cause notices and demand actions for service tax levied on incorporated members' clubs. - HELD THAT: - Following the determination that incorporated members' clubs are not liable to service tax for services to their members, the Court addressed the consequential legal effect on notices and demands. It held that actions taken to levy and collect service tax from incorporated members' clubs in respect of such services are without legal foundation. [Paras 85]Show-cause notices, demand notices and other action taken to levy and collect service tax from incorporated members' clubs are void and of no effect.Final Conclusion: The Court answered the referred questions by holding that the doctrine of mutuality remains applicable to members' clubs after the Forty-sixth Amendment; Young Men's Indian Association and allied authorities continue to govern; Article 366(29-A)(f) does not apply to members' clubs; and incorporated members' clubs are not liable to service tax for services rendered to their members, with attendant show-cause and demand notices in respect of such levy declared void. The core legal questions considered by the Court in these appeals can be grouped as follows:(i) Whether the doctrine of mutuality applies to incorporated members' clubs after the insertion of Article 366(29-A) into the Constitution by the 46th Amendment, particularly sub-clause (e) thereof, which deems certain supplies by unincorporated associations or bodies of persons to their members as sales liable to sales tax;(ii) Whether the Supreme Court's earlier decision in CTO v. Young Men's Indian Association, which held that supplies by members' clubs to their members do not constitute sales due to the doctrine of mutuality, continues to hold good post the 46th Amendment;(iii) Whether sub-clause (f) of Article 366(29-A), which deals with supply of food or drink by way of or as part of any service, applies to members' clubs;(iv) Whether service tax is leviable on services provided by members' clubs to their members, particularly those clubs incorporated under Section 25 of the Companies Act or registered as cooperative societies, and whether the principle of mutuality applies in the service tax context;(v) The proper interpretation of the expressions 'unincorporated association', 'body of persons', and 'person' in the constitutional and statutory provisions governing sales tax and service tax, and whether incorporated clubs fall within the tax net.Issue-wise Detailed Analysis(i) Doctrine of Mutuality and Applicability Post 46th AmendmentThe doctrine of mutuality is a legal principle that no person can make a profit from himself; thus, transactions within a mutual association, where the contributors and beneficiaries are the same persons, do not constitute sales or taxable transactions. The Court examined the doctrine's applicability to members' clubs, including those incorporated under Section 25 of the Companies Act.Relevant precedents include the Constitution Bench decision in CTO v. Young Men's Indian Association (1970), which held that supplies of food and drink by clubs to their members do not amount to sales because the club acts as an agent or trustee for its members, and there is no transfer of property between distinct persons. The Court also relied on English authorities such as Graff v. Evans and Trebanog Working Men's Club, which emphasized that members are joint owners of club property and that there is no sale between the club and its members.The Court distinguished the decision in Deputy Commercial Tax Officer v. Enfield India Ltd., which held that a cooperative society supplying refreshments to its members for a price constituted a sale, on the ground that Enfield dealt with a body corporate not acting as an agent of its members, and the English cases dealt with criminal liability rather than taxation.The Court further analyzed the nature of Section 25 companies, which are non-profit entities that prohibit dividend distribution and apply profits to charitable or other objects. The Court held that such companies cannot be treated as separate from their members for the purpose of the doctrine of mutuality, following the reasoning in Cricket Club of India Ltd. v. Bombay Labour Union, which rejected the notion that incorporation alone obliterates the mutuality principle.(ii) Effect of Article 366(29-A)(e) of the ConstitutionArticle 366(29-A)(e) was inserted by the 46th Amendment to deem supply of goods by any unincorporated association or body of persons to a member thereof for consideration as a sale. The Court examined whether this provision abrogated the doctrine of mutuality and the Young Men's Indian Association decision.The Court held that the language of sub-clause (e) refers expressly to 'unincorporated association or body of persons' and does not include incorporated entities such as companies or cooperative societies. The Court relied on the principle of ejusdem generis and the contrast with the definition of 'person' in other statutes, which expressly include incorporated bodies. The Court also noted that the legislative history and Statement of Objects and Reasons indicate that the amendment was intended to bring unincorporated clubs within the tax net, based on a mistaken assumption that incorporated clubs were already taxable.The Court emphasized that the doctrine of mutuality remains intact for incorporated clubs, as the constitutional amendment does not expressly or impliedly repeal it in that context. The Court further observed that the definition of 'consideration' under the Indian Contract Act requires a transaction between distinct persons, which is absent in a mutual club setting.(iii) Applicability of Article 366(29-A)(f) to Members' ClubsSub-clause (f) of Article 366(29-A) deals with supply of food or drink by way of or as part of any service or in any other manner whatsoever, deeming such supply as a sale. The Court analyzed whether this provision extends to food and drink supplied by members' clubs to their members.The Court held that sub-clause (f) was enacted specifically to overturn earlier Supreme Court decisions that held that composite contracts for food and service in hotels and restaurants did not amount to sales. The Court observed that sub-clause (f) applies to hotels and restaurants and not to members' clubs, which are distinct entities. The Court reasoned that if sub-clause (f) applied to members' clubs, it would lead to anomalous results, such as only food and drink being taxable while other goods supplied by the club would not be.The Court relied on authoritative decisions interpreting sub-clause (f) as limited to the hospitality sector and not extending to clubs.(iv) Levy of Service Tax on Incorporated Members' ClubsThe Court considered whether service tax can be levied on services provided by members' clubs to their members, especially those incorporated under Section 25 of the Companies Act or registered as cooperative societies.It was noted that the Finance Act, 1994 initially imposed service tax on specified services, including services provided by clubs or associations to their members, but excluded those 'established or constituted' under any law, effectively exempting incorporated clubs.Post-2012, the service tax regime shifted to a negative list approach, with 'service' defined as any activity carried out by a person for another for consideration. 'Person' was defined broadly to include incorporated and unincorporated bodies. However, Explanation 3 to Section 65B(44) treats an unincorporated association or body of persons and its members as distinct persons for service tax purposes, but the Court held that 'body of persons' does not include incorporated entities.The Court held that the principle of mutuality applies equally in the service tax context: there is no service provided by one person to another where the 'persons' are effectively the same, as in an incorporated members' club acting for its members. Therefore, no service tax liability arises on services provided by incorporated members' clubs to their members.The Court rejected the Revenue's contention that the mutuality principle was abrogated in the service tax context, holding that the legislative scheme and statutory language do not support this view. The Court upheld the High Courts of Jharkhand and Gujarat, which had applied the doctrine of mutuality to exempt incorporated members' clubs from service tax.(v) Interpretation of Key Expressions in Constitutional and Statutory ProvisionsThe Court closely analyzed the expressions 'unincorporated association', 'body of persons', and 'person' as used in Article 366(29-A), the West Bengal Sales Tax Act, and the Finance Act.The Court held that 'unincorporated association' clearly excludes incorporated entities. The expression 'body of persons' is used in contexts that exclude companies or registered cooperative societies, as opposed to the broader term 'person', which includes incorporated bodies.The Court relied on principles of statutory interpretation, including ejusdem generis and the contrast of language in different provisions, to conclude that incorporated clubs are not covered by provisions aimed at unincorporated bodies.The Court also noted the definition of 'constituted' in related jurisprudence, holding that companies and cooperatives are 'constituted' under law and thus excluded from certain tax provisions aimed at unincorporated bodies.Significant Holdings'The doctrine of mutuality continues to be applicable to incorporated and unincorporated members' clubs after the 46th Amendment adding Article 366(29-A) to the Constitution of India.''Young Men's Indian Association and other judgments which applied this doctrine continue to hold the field even after the 46th Amendment.''Sub-clause (f) of Article 366(29-A) has no application to members' clubs.''The expression 'body of persons' occurring in Article 366(29-A)(e) and in the Finance Act does not include incorporated companies or cooperative societies.''The principle of mutuality applies equally in the service tax context; services provided by incorporated members' clubs to their members are not taxable services under the Finance Act.''The High Courts of Jharkhand and Gujarat were correct in applying the doctrine of mutuality to exempt incorporated members' clubs from service tax.''Show cause notices, demand notices and other actions taken to levy and collect service tax from incorporated members' clubs are declared to be void and of no effect in law.'The Court thus preserved the fundamental legal principle that no sale or service tax liability arises on supplies or services within incorporated members' clubs to their own members, as there is no transaction between distinct persons but an internal mutual arrangement. The 46th Amendment's provisions and subsequent service tax legislation do not abrogate this principle for incorporated clubs, and the tax net applies only to unincorporated associations or to supplies to non-members.