2020 (6) TMI 686 - HC - Service Tax

High Court rules on service tax liability for time share club, exempts pre-2005 contracts

The High Court ruled in favor of the petitioner, a club providing time share services, in a case regarding liability for service tax. The court held that ... Club or association - taxable service - incorporated members' clubs - service tax not leviable on incorporated members' clubs - continuous service - application of precedentIncorporated members' clubs - club or association - taxable service - Levy of service tax on services rendered by the petitioner (an incorporated time share/club) to its members with effect from 16.06.2005, including amounts collected by way of installments/EMIs for contracts entered prior to 16.06.2005. - HELD THAT: - The Court applied and followed the ratio of the Supreme Court in State of West Bengal v. Calcutta Club Limited [MANU/SC/1367/2019], which held that the Finance Act, from 2005 onwards, does not levy service tax on incorporated members' clubs; the expression 'body of persons' in the statutory scheme does not encompass bodies corporate. Given that principle, the respondents are not entitled to levy, demand or collect service tax on services provided by the petitioner to its members, including post 16.06.2005 instalment receipts arising from contracts entered before that date. The administrative characterization of the service as a 'continuous service' and the consequent attempt to tax instalments received after 16.06.2005 cannot sustain a demand against an incorporated members' club where the Supreme Court's decision precludes such levy.The writ petitions are allowed insofar as they challenge levy of service tax on the petitioner for services to its members with effect from 16.06.2005; demands, show cause notices and other actions to that effect are set aside.Rate of service tax - application of precedent - Challenge to imposition of service tax at the higher rate (12.24%) on portions of entrance fees collected in instalments falling due after 18.04.2006 for contracts entered between 16.06.2005 and 18.04.2006. - HELD THAT: - Since the Court concluded-following the Supreme Court decision-that service tax could not be levied on the petitioner as an incorporated members' club for the services in question, the respondents' contention that portions of entrance fees collected after 18.04.2006 attract a higher rate is rendered immaterial. The attempted levy at the enhanced rate in respect of the petitioner is therefore unsustainable.The petitioners' challenge to levy of service tax at 12.24% on the questioned portions is allowed; corresponding demands and actions are quashed.Final Conclusion: Both writ petitions are allowed. Following the Supreme Court's decision in State of West Bengal v. Calcutta Club Limited [MANU/SC/1367/2019], the respondents are prohibited from levying, demanding or collecting service tax from the petitioner in respect of services to its members (including instalment/EMI receipts and contested portions of entrance fees); connected miscellaneous petitions are closed and there shall be no costs. Issues:1. Liability to pay service tax on contracts for time share services rendered by a club or association.2. Clarification on the rate of service tax on entrance fees collected in installments.3. Applicability of service tax on contracts entered before and after a specific date.Analysis:1. The petitioner, a club incorporated in 1996 for time share services, was asked to furnish details for service tax by the third respondent. The first respondent clarified that all services provided after 16.06.2005 are taxable, including time share services to members. The petitioner contested the tax on entrance fees collected post-16.06.2005 for contracts pre-dating that date. The petitioner filed two writ petitions seeking prohibition on levying service tax on pre-16.06.2005 contracts and on entrance fees exceeding 10.2%. The High Court noted the issue was covered by a Supreme Court decision regarding unincorporated associations and held in favor of the petitioner, disallowing the service tax levied on the services provided to its members.2. The High Court referenced the Supreme Court decision, stating that incorporated members' clubs were not subject to service tax post-2005. Following this interpretation, the court found no basis for the respondents to levy service tax on the petitioner for the services provided to its members. The court allowed the writ petitions, ruling in favor of the petitioner and concluding that no costs were to be imposed. The connected miscellaneous petitions were closed accordingly.