2024 (7) TMI 1448 - HC - GST

Kerala HC upholds GST levy on association services under Section 7(1)(aa) but rules provision applies prospectively from 2022

The Kerala HC dismissed constitutional challenges to Section 7(1)(aa) of the Central GST Act, 2017, which levies GST on services provided by associations ... Principle of mutuality - legislative competence under Article 246A and Article 366(12A) - retrospective legislation versus clarificatory amendment - prospective operation of statutory amendment - definition of person for taxing purposes - supply of goods or services - activity-wise assessment - remand for completion of assessmentPrinciple of mutuality - legislative competence under Article 246A and Article 366(12A) - definition of person for taxing purposes - Challenge to constitutionality of Section 7(1)(aa) and the Explanation r/w Section 2(17)(e) of the CGST/ KGST Acts on the ground that they negate the principle of mutuality and exceed legislative competence - HELD THAT: - The Court held that Article 246A read with Article 366(12A) confers plenary power on Parliament and State Legislatures to make laws in respect of goods and services tax (a tax on the supply of goods and services). Neither Article 246A nor Article 366(12A) restricts the legislature from defining the persons between whom such supply may be deemed to take place. Relying on the principle that the legislature may, for taxation purposes, adopt artificial or deeming classifications (as recognised in Karnataka Bank Ltd. and State of M.P. v. Rakesh Kohli), the Court found that the Parliament is within competence to enact a deeming fiction treating an entity and its members as separate persons for the purposes of levy. The judgment in Calcutta Club (and related mutuality reasoning) does not oust the power of Parliament to amend the taxable event by statutory definition. Consequently the impugned provisions are not ultra vires or manifestly arbitrary merely because they alter the application of the mutuality principle. [Paras 66, 67, 74]The constitutional challenge to Section 7(1)(aa) and the Explanation is dismissed; the provisions are within legislative competence.Retrospective legislation versus clarificatory amendment - prospective operation of statutory amendment - Whether Section 7(1)(aa) and its Explanation operate retrospectively from 01.07.2017 or should be given effect prospectively - HELD THAT: - Although the Parliament enacted the insertion with a deeming retrospective date, the Court exercised its interpretative function to prevent retrospective operation in the facts of this case. The Court observed that while legislatures may legislate retrospectively and may make clarificatory amendments retrospective, where the effect would impose an unforeseen liability on taxpayers who had acted in reliance on an established understanding of law, the Court may decline retrospective operation. Applying these considerations to the present petition, the Court concluded that Section 7(1)(aa) should not be given retrospective operation from 01.07.2017 in relation to the petitioner, and instead should operate prospectively from the date of its notification. [Paras 75]Section 7(1)(aa) and the Explanation shall have prospective operation with effect from 01.01.2022 and not from 01.07.2017.Supply of goods or services - activity-wise assessment - Whether the various activities and schemes run by the petitioner amount to taxable supplies to members - HELD THAT: - The Court declined to make any generalised finding that all activities of the petitioner involve taxable supply. It recorded that each scheme and activity must be examined independently by the assessing authority to determine whether the statutory elements of supply of goods or services are present. The petitioner remains free to satisfy the assessing authority that particular activities do not constitute taxable supplies. [Paras 76]Left open for adjudication by the assessing authority; assessment to examine each activity on its merits.Remand for completion of assessment - Procedure to be followed pending assessment in view of the court's rulings - HELD THAT: - The Court directed the petitioner to file responses to the show-cause notices and remitted the matters to the designated respondents to complete the assessment afresh in accordance with law, taking into account the prospectivity ruling and the requirement for activity-wise determination. The Court directed cooperation from the petitioner and preserved the interim order until completion of assessment. [Paras 77]Matters remanded to respondents 4 and 5 for completion of assessment; petitioner to respond to show-cause notices; interim order to continue until assessment is complete.Final Conclusion: The writ petitions contesting the constitutionality of Section 7(1)(aa) and the Explanation are dismissed; however, Section 7(1)(aa) and the Explanation shall operate prospectively from 01.01.2022 (and not retrospectively from 01.07.2017) in relation to the petitioner. The matters are remitted for activity-wise assessment and the petitioner is directed to participate in the assessment proceedings; the interim protection granted earlier remains in force until assessment is completed. Issues Involved:1. Constitutionality of Section 2(17)(e) and Section 7(1)(aa) of the CGST Act, 2017.2. Retrospective application of Section 7(1)(aa) of the CGST Act, 2017.3. Principle of mutuality and its applicability to the petitioner association.4. Legislative competence to define 'person' for taxation purposes.5. Specific activities of the petitioner association and their taxability under GST.Issue-wise Detailed Analysis:1. Constitutionality of Section 2(17)(e) and Section 7(1)(aa) of the CGST Act, 2017:The petitioner argued that Sections 2(17)(e) and 7(1)(aa) of the CGST Act, 2017, are ultra vires Article 246A read with Article 366(12A) and violate Articles 14, 19(1)(g), 265, and 300A of the Constitution of India. The court held that Article 246A empowers the Parliament and State Legislatures to enact laws with respect to GST, which includes the supply of goods and services. The court found that the Constitution does not restrict the Parliament from defining 'person' for taxation purposes, and thus, the legislative amendments were within the competence of the Parliament and not ultra vires.2. Retrospective application of Section 7(1)(aa) of the CGST Act, 2017:The petitioner contended that the retrospective application of Section 7(1)(aa) from 01.07.2017 is unconstitutional and imposes an unforeseen burden. The court held that while the Parliament has the power to make laws retrospectively, the amendment in Section 7(1)(aa) should not have retrospective effect from 01.07.2017. Instead, it should be effective from the date it was notified, i.e., 01.01.2022. The court reasoned that the petitioner did not collect GST due to the settled position of law, and retrospective application would be unjust.3. Principle of mutuality and its applicability to the petitioner association:The petitioner argued that the principle of mutuality applies, meaning there is no supply of goods and services between the association and its members. The court acknowledged the principle of mutuality as established in the case of Calcutta Club (supra) but noted that the Parliament amended the GST Act to include Section 7(1)(aa), which deems a club/association and its members as separate persons for the purpose of GST. The court held that this amendment is within the legislative competence and does not violate any constitutional provisions.4. Legislative competence to define 'person' for taxation purposes:The court referred to the judgments in Karnataka Bank Ltd v. State of Andhra Pradesh and State of Madhya Pradesh v. Rakesh Kohli, which upheld the legislature's power to define 'person' for taxation purposes, even if it deviates from the General Clauses Act. The court concluded that the Parliament and State Legislatures have the authority to define 'person' broadly to include clubs and associations for the purpose of GST.5. Specific activities of the petitioner association and their taxability under GST:The court noted that the petitioner association undertakes various activities, some of which involve the supply of goods and services to its members. The court directed the assessing authority to examine each activity independently to determine its taxability under GST. The petitioner was instructed to cooperate with the assessment proceedings, and the interim order was to remain in operation until the assessment was complete.Conclusion:The court dismissed the challenge to the constitutionality of Section 7(1)(aa) of the CGST Act, 2017, but held that the provision would have prospective operation from 01.01.2022. The matter was remanded back to the respondents for assessment, with the petitioner directed to file their responses to the impugned show-cause notices.