TaxTMI 
TaxTMI 
2025 (4) TMI 872
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....AR, J. These Writ Appeals, one preferred by the petitioner in W.P. (C). No. 21297 of 2023 and the other two preferred by the GST Officials of the Union and the Kerala State, impugn the judgment dated 23.07.2024 of a learned Single Judge in W.P.(C). No. 21297 of 2023. The Facts in Brief: 2. The essential facts necessary for disposal of these Writ Appeals are as follows: W.P. (C). No. 21297 of 2023 was preferred by the Kerala State Branch of the Indian Medical Association apprehending coercive action from the Directorate General of GST Intelligence for recovery of tax on various services rendered by it to its members. While it was the petitioner's contention that it was not liable to pay tax on the supply of services to its members, it apprehended coercive action for recovery of tax when it was served with summons requiring it to produce details of the registration taken by it under the GST Act and their audited books of accounts and other financial documents for the financial years from 2017-18 to 2021-22. 3. The petitioner runs various mutual Schemes for the benefit of its member-doctors, e.g. Social Security Schemes or SSS (I, II, and III), Professional Di....
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.... in future. Professional Disability Support Scheme i) Object: The object of the scheme is to provide financial assistance to a member of the scheme who has become so temporarily / permanently disabled that it renders him unfit to practice her / his profession. ii) Payment: Any eligible member of the petitioner may become a member of this scheme upon payment of an admission fee that is graded based on age (Rs. 5,000/- to Rs.15,000)/-. An annual fee of Rs. 1,000/- is also payable by each member of the scheme. A member of the scheme is also required to make a disability contribution (graded) upon any member of the scheme suffering disability. iii) Benefit: As with the Social Security Schemes above the aggregate disability contribution is a paid out to the disabled member. Further, upon death, a fixed sum of Rs. 50,000/- is also paid to the family of the deceased member of the scheme. The total amount of such death benefits paid each year is also collected equally from the remaining members. Professional Protection Scheme i) Object: The two objects of this scheme are: (i) to protect members in the case of harassment, litiga....
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....iseases. ii) Payment: The admission fees range from Rs. 800/- to Rs. 6,000/- depending upon the age of the doctor. All beneficiary members are additionally required to pay an annual membership subscription of Rs. 100/- and Advance Finance Assistance Contribution ranging from Rs. 2400/- to Rs. 7500/- p.a. iii) Benefit: Upon diagnosis/hospitalisation for specified diseases, compensation ranging from Rs. 5,000/- to Rs.5 lakhs is paid. Pension Scheme i) Object: The object of this scheme is to provide pension to life members of the petitioner. ii) Payment: Admission fee is Rs. 3,000/- to Rs. 5,000/-. Every member of the scheme shall also pay an annual membership fee of Rs.500/-. Further, the minimum annual contribution to be made by every member of the scheme is Rs. 12,000/-. iii) Benefit: The pension is paid when a member of the scheme requests payment after she or he attains 60 years. 30% of the pension corpus of a member may be paid to the member at the time of starting the pension payment, if so requested by the member. The pension is then paid for the rest of the life of the member from the remaining 70% corpus amount of the mem....
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.... writ petitioner bona fide believed that it was not liable to pay GST on services rendered by it to its members under the aforesaid Schemes since it was well settled through a line of precedents that the principle of mutuality would insulate services rendered by a Club/Association to its members from the levy of GST on supply of services. The underlying basis for the non-taxability of such services was the concept that when a Club/Association provides services to its members, there is no separate recipient of the services provided by the Club/Association and that the services were effectively provided by the members of the Club/Association to themselves. The said basis of non-taxability was, however, removed by an amendment of the provisions of Section 2 (17) (e) and Section 7 (1) (aa) read with the Explanation thereto of the Central Goods and Services Tax Act, 2017 [CGST Act] and the Kerala Goods and Services Tax Act, 2017 [KGST Act] that introduced deeming provisions making the supply of services by a Club/Association to its members a taxable supply for the purposes of the levy of tax. The amendment that was introduced through the Finance Act, 2021 was also made retroactive with ....
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....petition, while the Union and the State are before us impugning the latter portion of the judgment that set aside the retroactive operation of the amendment. The submissions of the learned counsel: 7. We have heard Sri. Arvind P. Datar, the learned senior counsel, duly assisted by Sri. P.R. Renganath, the learned counsel for the appellant in W.A.No.1659 of 2024, Sri. AR. L. Sundaresan, the learned Additional Solicitor General in W.A.No.1487 of 2024 and Sri. Mohammed Rafiq, the learned Special Government Pleader (Taxes) for the appellant in W.A. No. 468 of 2025. 8. The submissions of Sri. Arvind P. Datar, the learned senior counsel, duly assisted by Sri. P.R. Renganath, the learned counsel for the appellant in W.A.No.1659 of 2024, on the unconstitutionality of levy of GST on activities/transactions between a Club and its members are as follows: A. On the aspect of mutuality, the learned senior counsel would submit as follows: ● Identity between club and members: It is long established common law that there is identity between a club/association and its members, under the principle of mutuality. Consequently, there can be no sale/service by a....
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....Men's Indian Association (Regd.) - [(1970) 1 SCC 462]. ● 46th Amendment attempts to bring clubs to tax: In an attempt to legitimise levy of sales tax on a club/association, the Constitution 46^th Amendment (1981) had sought to define "tax on sale or purchase of goods" as including a tax on the supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration. ● Mutuality survives 46th Amendment: Even the 46th Amendment did not do away with the basis of the principle that the club/association and its members are one and the same, further, even on its terms, the 46th Amendment extended only to supply of goods (and not to provision of services). ● The Supreme Court in State of West Bengal & Ors. v. Calcutta Club Ltd. - [2019 (29) GSTL 545 (SC)] emphatically held that the principle of mutuality continued even after the 46th Amendment. The said decision also recognises that the law has always been that the principle of mutuality extends even to incorporated clubs and not just to unincorporated clubs and that the 61st Law Commission Report which prece....
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....eby inserting a legal fiction and artificially deeming a club/association and its members to be two separate persons. Further, the taxable event was also artificially enlarged to include "activities or transactions" between a club/association and its members. ● It is in this context that the ratio laid down in State of Madras v. Gannon Dunkerley & Co. - [AIR 1958 SC 560], and a long line of cases, becomes relevant. While the constitutional power was to levy only a "tax on sale or purchase of goods", the State legislatures sought to expand this power by inserting an artificial definition in the sales tax legislations to the effect that "sale" would include a "works contract". This was struck down in Gannon Dunkerly ibid on the ground that the accepted meaning of a term in a constitutional phrase could not be statutorily expanded. ● What a constitutional provision is aimed at is to be construed based on the state of the law then in force. To expand the scope of such a provision by a statute would be to overreach the Constitution. In short, a phrase in the Constitution granting legislative power should be construed according to "known legal connotations" ....
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....hat all enumerated cases contemplate the involvement of two parties. ● Only the Constitution can expand what the Constitution has given: If this legislative power granted by the Constitution is to be expanded beyond the known legal connotations, it can be done only by a constitutional amendment doing away with the long-established and well-recognised concept of mutuality i.e., by a constitutional amendment which invests the Parliament and State legislature with the power to levy GST on self-sale/self-services between a club and its members. A statutory amendment, howsoever creatively worded, and ingeniously couched as a clarification, would not suffice. ● Why a validating statute will not suffice: If judgments [e.g. YMIA, Ranchi Club, Calcutta Club] merely state a position of statutory law, it could be undone by a validating statute. But where the judgments recognise a long-standing principle of law, which has a bearing on the extent of a power bestowed by the Constitution to legislatures, then, that power can be enlarged only by a constitutional amendment and not by the legislatures through a statutory amendment. ● What could be done on....
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....en recognised that legislatures have the power to pass retrospective laws. However, such laws cannot be unreasonable or arbitrary. Where the retrospective law is confiscatory, it would unreasonable and thereby unconstitutional [Jayam & Co. v. Asst Commr - (2016) 15 SCC 125]. ● New levy by overturning long-established position: In the instant case, given, inter alia, the ratio in Calcutta Club, there could have been no levy of GST on clubs and associations prior to the insertion of Section 7 (1) (aa) and Explanation thereto. The said insertions thus created a new levy. This is done by overturning a long-held position of law i.e., the mutuality of clubs and association. Jayam & Co. cited above [see para 19 of the SCC report], held that a new provision inserted for determining input tax credit could not be retrospective. ● Substantial unforeseen prejudice: The new levy is made effective from the year 2017. Consequently, SCN no. 58/2024-25 (GST) dt. 02-Aug-24 has been issued by the DRI (the 1st appellant herein) seeking to demand a huge sum of money from the appellant association for transactions done over the last 6 years. The appellant could have had no ....
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....tates employs "deemed" twice amply demonstrates that the pre-amendment position was different from the post-amendment position, and that the use of "it is clarified" is but a vain smokescreen. d) Even assuming the two phrases are equally balanced, the interpretation in favour of the assessee is to be adopted. ● No interest: No GST was payable prior to the Finance Act, 2021 amendment, which was notified on 01-Jan-22. The impugned amendments were inserted by Section 108 of Finance Act, 2021. Under Section 1(2) of Finance Act, 2021, the Government was empowered to specify the date of commencement of any provision thereof. In exercise of the said power under Section (2), the Government issued notf. no.39/2021 dt. 21-Dec-21 specifying 01-Jan-22 as the date on which the aforesaid Section 108 comes into force. However, the said Section 108 itself states that the insertion of Section 7 (1) (aa) in CGST ACT 2017 shall be deemed to have been made with effect from 01-Jul-17. Thus, prior to 01-Jan-22 (or in any case 21-Dec-21) it could not have been known that GST ought to be paid by clubs/associations. Interest is merely compensation for belated payment of what ought t....
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....9; Retrospectivity falls foul of govt-constituted committee report #2 - manifestly arbitrary / unreasonable: In 2013, the World Bank published a report downgrading India in the index of investment friendliness-from its position of 131 in 2011, India was moved to 134. India's position remained below countries like Uganda, Ethiopia, Yemen etc. while its smaller neighbours like Sri Lanka fared better. To address this fall in confidence, the government appointed a committee headed by another eminent Indian Mr. Damodaran. The remit of this committee was generally to examine issues which contributed to this decline, the committee squarely addressed the question of retrospective taxation and had the following to say: It has often been said that death and taxes are equally undesirable aspects of human life. Yet, it can be said in favour of death that it is never retrospective. Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India. While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it mig....
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....re not taxable. The amendment is attempted to apply GST to medical associations for the first time through Section 7 (1) (aa) and the Explanation thereto. Further, the present appeal involves welfare schemes for doctors where neither supply of goods nor supply of services is made. c) Other assessee's acts cannot/do not determine constitutionality/statutory meaning: The Department contends that most clubs/associations in the country had taken registration and started paying GST even before the insertion of Section 7 (1) (aa) without any doubt as to the liability to pay GST even going by Section 7 (1) (a). Such an argument needs to be stated only to be rejected. The action of assessees cannot determine the interpretation of taxation provisions. Indeed such a dare is dangerous even for the broader interests of the Revenue, for, if this proposition were to be accepted, it would, simply put, mean that henceforth all batch tax litigations ipso facto ought to be ruled in favour of the assessees. d) Income Tax PAN in the name of the respondent does not nullify mutuality: The contention of the Department that the respondent and its members have all along been different per....
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....A and Article 366 (12A). As extracted above in Articles 246 and 254, Parliament and Legislature of every State shall have power to make laws with respect to Goods and Services Tax. Article 366 (12A) provides that Goods and Services Tax means tax on any supply of goods or services or both, except taxes on supply of alcoholic liquor for human consumption. c) As such nothing in Articles 246 or 254 or any judgment interpreting a law under the said Articles and referable to List 1 entry 97 and entry 54 of List 2 would be applicable, as Article 246A is an enabling provision notwithstanding Articles 246 and 254 of the Constitution. d) Neither in Article 246A nor 366 (12A) there are any limitations imposed on the Parliament or State Legislature with regard to imposition of such tax. e) When there are no limitations or restrictions imposed by the Constitution, no such limitations or restrictions can be read into such power. f) When no limitation or restriction with regard to the term supply or person has been provided for in the Constitution, the field is wide open for the Parliament and the Legislature to identify the person to be taxed and to define wha....
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....-wisdom of the Legislature and would not substitute its wisdom for that of the Legislature. Law enacted by the Legislature can be struck down by the courts only if: (i) It lacks legislative competence. (ii) It offends any of the fundamental rights guaranteed under Part III of the Constitution and; (iii) Later the third ground was also conceived by the Hon'ble Supreme Court, namely, that the law is so manifestly arbitrary and capricious. The present Section 7 (1) (aa) does not come within anyone of the above vice to be declared as unconstitutional. ● Without prejudice to the above submissions, if at all it is considered that the judgment in Calcutta Club case would be applicable even after Articles 246A and 366A introduced by the 101st amendment, it is always open to the Legislature to amend the law to remove the basis of the judgment. The judgment in Calcutta Club case was on the basis of the words used in Article 366 (29A) and the relevant provisions of the Finance Act and the West Bengal Sales Tax Act which did not provide that an Association and its members can be considered as two different persons. The phrase used in Article 366A (....
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....ed on (1991) 2 SCC 87 - Surjit Singh Kalra v. Union of India and Anr. para 19. ● The respondent respectfully submits that the purport of the definition of the word 'supply' so as to include supply made by an association to its members should be read as referable both to goods as well as services as it was never the intention of the Legislature and could not have been the intention of the Legislature to treat supply of goods by the association to its members as taxable and supply of service by the association to its members as not taxable. If such an interpretation is given it would be absurd and defeat the object of taxation and hence such an interpretation ought not to be given and the Court should liberally interpret the provision in a harmonious way to give life to the Section. ● The appellant is a registered Society under the Travancore-Cochin Literary Scientific and Charitable Societies Registration ct, 1955. It is an admitted position that in the event of termination of a member and even dissolution of the society, property of the association is not allowed to be distributed among the members, but is to be given to any other non-profitabl....
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....cannot claim the benefits of mutuality of a membership association. ● The accounts of IMA Kerala including various schemes was audited by as many as seven different Chartered Accountants but they never informed the department about their activities except that of IMAGE which was functioning after obtaining another PAN. Only after the inspection proceedings by the department, the association started paying GST on various schemes floated by IMA. ● Retrospective effect a) In so far as Section 7 (1) (aa) is concerned, it comes to effect from 01.07.2017. Such retrospectivity is valid and the contention against the same deserves to be rejected for the following reasons:- (i) The Legislature has power to make laws prospectively and retrospectively. (ii) Clarificatory amendments are always retrospective in operation. (iii) The present amendment introducing Section 7 (1) (aa) and the explanation are clarificatory. The liability was always there even under Section 7 (1) (a). (b) So far as the arguments of the appellant that the amendments cannot given retrospective effect, the same is untenable and deserves t....
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....aharlal v. State of Rajasthan) 2. (1985) 2 SCC 197 - Para 28 nd 29 (Lohia Machines Ltd. v. Union of India 3. (1989) 3 SCC 488 - Para 65, 66 (Ujar Prints and Others v. Union of India) 4. (2005) 7 SCC 725 - (RC Tobacco Pvt. Ltd. v. Union of India) 5. (2020) 20 SCC 57 - Para 21. & 24 (Union of India v. Exide Industries Ltd.) 6. (2020) 5 SCC 274 - Para 44 (Union of India v. Exide Industires Ltd.) 7. (2020) 14 SCC 785 - Para 30 (Prashanti Medical Services and Research Foundation v. Union of India and Others). So far as retrospective effect is concerned, respondents submit that the provisions as they stood even prior to the amendment enabled levy of tax on supply of goods and services from an association to its members. The amendment was only clarificatory in nature. Other clubs and associations have subjected themselves to GST regime in respect of supply of goods and services to its members. Hence IMA is not taken by surprise and the demand of GST are not unconscionable and they could have well been contemplated. Under such circumstances the judgment of the Ld. Single Judge holding that the provisions will only have prospective ef....
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....ly opposed by this Court over the years. For these reasons, the principle of interpretation elucidated in State of Madras v. Gannon Dunkerley & Co. - [AIR 1958 SC 560] must be used cautiously by Courts. ● The definition provided in sub clause (e) of clause 29A of Article 366 is not applicable in the context of a levy of tax under Article 246A. ● Article 366 (29A) defines the specific expression "tax on sale or purchase of goods," which relates only to the legislative field under Entry 92A of List I of the Seventh Schedule and the assignment of taxes levied thereunder to the States as provided in Article 269(1). ● The power conferred to the Parliament and the State legislatures under Article 246A is to make laws with respect to "goods and services tax," and the expression "tax on sale or purchase of goods" defined under Article 366 (29A) (e) is absent in Article 246A. ● The definitions provided in Article 366 (29A) would apply to the specific expressions defined thereunder wherever such expressions are used in the Constitution, that too if the context demands [See Geo Miller & Co. (P) Ltd. v. State of M.P. - [(2004....
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....nd Service Tax, 2017. ● The doctrine of mutuality relates to the notion that a person cannot make a profit from himself, and it has its origin in common law. [Bangalore Club v. CIT - [(2013) 5 SCC 509]. ● Quoting with approval the decisions in Rana Girders Ltd. v. Union of India - [(2013) 10 SCC 746] and Union of India v. SICOM Ltd - [(2009) 2 SCC 121] a five-judge Constitution Bench in Indore Development Authority v. Manoharla - [(2020) 8 SCC 129] observed that, there is no doubt that common law principles have to be weighed upon the statutory provision and latter has to prevail. ● By Section 9(1) read with clauses (a) and (aa) of Section 7 (1), 2 (84) (f) and 2 (17) (e) of the Central/State Goods and Service Tax Acts, clubs, associations, societies, any such bodies etc. are subjected to goods and service tax in respect of facilities or benefits provided to its members, and thus the common law doctrine of mutuality has no application in so far as the levy in question. ● Application of English Common Law beyond the limits of erstwhile Presidency Towns is a question of fact. ● A nine-judge Constitution Bench ....
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....h persons, to their members, or constituents, or vice versa, for cash, deferred payment, or other valuable consideration. ● The Explanation newly added along with clause (aa) to Section 7 further clarifies that the person and its members or constituents shall be deemed to be two separate persons, and the supply inter se shall be deemed to take place from one such person to another. ● Furthermore, by the non-obstante clause and the legal fiction couched in the Explanation, the doctrine of mutuality either as a law in force or a principle recognised by any judgment to govern the provision of facilities or benefits by the incorporated or un-incorporated bodies to their members has been expressly prevailed over. ● Retrospective operation of the amendments made to Section 7 vide the Finance Act, 2021. ● The question of whether provisions operate retrospectively or not does not arise at all since retrospective operation with effect from 01.07.2017 in express terms has been given to the provisions by the Amendment Act. ● From the point of view of the economist and as an economic theory, a sales tax may be an indire....
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....recognises only members of an 'unincorporated association or a body of persons' as distinct persons. The Court ruled that the expression body of persons cannot take in incorporated bodies, and hence, the principle of mutuality is not ousted so far as incorporated bodies and their members are concerned. ● Whereas by Section 9(1) read with Section 7 (1) (a), 2 (84) (f) and 2 (17) (e), clubs, associations, societies, any such bodies, etc., are subjected to goods and service tax in respect of facilities or benefits to its members, notwithstanding the status of such bodies as incorporated or unincorporated. Further, the sub-clause (aa) and the Explanation loaded with a non-obstante clause and legal fiction incorporated in Section 7 (1) with express retrospective effect from 01.017.2017 in clear terms clarifies that dictum to the contrary laid down in any judgment has no application. Therefore, the dictum laid down in Calcutta Club (supra) cannot be pressed into service to hold that the common law doctrine of Mutuality survives in the GST regime as well. Discussion and Findings: (i) On the constitutionality of the impugned amendments. 11. We have considere....
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....es liable to the levy of GST; that their activities cannot be treated as 'service' since the concept of service under the GST law itself contemplates the existence of two entities viz. a service provider and a service recipient, and excludes the concept of self service for the purposes of the levy. 13. When we analyse the Scheme of levy of GST under the Constitution, we find that GST is envisaged as a levy of tax on the "supply" of "goods or services or both". The words "goods", "supply" and "services" are understood in a particular sense under the Constitution. When the words used in the Constitutional text have acquired a meaning through judicial interpretation over the years, one must assume that that is the same sense in which the word is used when inserted into the Constitution through a later amendment. While "goods" is a standalone concept, meaning thereby that it is not something that requires a plurality of persons to infer its existence, the concepts of "supply" and "service" do require a plurality of persons to infer their existence. This aspect was recognised in Ranchi Club v. Chief Commissioner of Central Excise & Service Tax - [2012 SCC Online SC 306], where it was....
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....poses of the Statute, and that the mere fact that the said meaning of the word in the Statute differs from its popular meaning can be of no avail. While we do not doubt the correctness of the proposition laid down in the aforecited precedents, the factual situation that obtains in the instant case, as already noticed, is slightly different. We are not presently considering the legality of a legislative exercise that gives an artificial definition to a word/concept that differs from it's accepted or popular meaning. What we are confronted with in these proceedings is a situation where the statutory exercise undertaken by the legislative body has given a meaning to a word/concept therein that differs from the accepted meaning of the same word/concept under the Constitution. We are of the view that when a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, a legislative body, that derives its legislative competence to enact a Statute from the Constitution, cannot give to the word/concept a meaning that goes against the meaning assigned to the same word/concept by the Supreme Court in the context of its setting under the Constitution. This....
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....titution had to be amended to add six sub-clauses [(a) to (f)] to the newly inserted Article 366 (29A) of the Constitution. Accordingly: i. Article 366 (29A) (a) was inserted to get over the decision in New India Sugar Mills Ltd v. CST - [1963 (14) STC 316] that held that a compulsory sale through Control Orders was not a sale; ii. Article 366 (29A) (b) was inserted to get over the decision in State of Madras v. Gannon Dunkerley & Co. - [AIR 1958 SC 560] that held that a works contract is not a sale; iii. Article 366 (29A) (c) was inserted to get over the decision in K.L. Johar and Co. v. CTO - [AIR 1965 SC 1082] that held that a hire-purchase was not a sale; iv. Article 366 (29A) (d) was inserted to get over the decision in A.V. Meiyappan v. CCT - [1967 (20) STC 115 (Mad)] that held that a transfer of the right to use goods was not a sale; v. Article 366 (29A) (e) was inserted to get over the decision in CTO v. Young Men's India Association (Regd) - [(1970) 1 SCC 462] that held that there could be no sale between a club/association and its members; and vi. Article 366 (29A) (f) was inserted to get over the decision in Northern ....
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....d. If the legislature realises that the private controlled companies generally adopt the device of making advances or giving loans to their shareholders with the object of evading the payment of tax, it can step in to meet this mischief, and in that connection, it has created a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him. We have already explained how a small number of shareholders controlling a private company adopt this device. Having regard to the fact that the legislature was aware of such devices, would it not be competent to the legislature to device a fiction for treating the ostensible loan as the receipt of dividend ? In our opinion, it would be difficult to hold that in making the fiction, the legislature has travelled beyond the legislative field assigned to it by entry 82 in List I." 20. What is significant is that the interpretation of the word 'income' as contained in earlier precedents was in the context of the Income Tax Act and not in the context of the Constitution itself. The Court held that the use of the word 'income' in the E....
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....a constitutional infirmity. We do however find that the statutory provisions impugned in these proceedings suffer from a definitive lack of legislative competence. Accordingly the provisions of Section 2 (17) (e) and Section 7 (1) (aa) and the Explanation thereto of the CGST Act, 2017 and the provisions of Section 2 (17) (e) and Section 7 (1) (aa) and the Explanation thereto of the KGST Act are declared as unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India. (ii) On the validity of retrospective/retroactive operation of the impugned amendments: 24. In the light of our above finding with regard to the unconstitutionality of the impugned statutory provisions, it is unnecessary for us to go into the validity of the retrospective/retroactive operation given to the said provisions. However, we might record our agreement with the findings of the learned Single Judge that held the said retrospective operation to be illegal. The principle of fairness is one that must inform all actions of a State, including legislation, since it is an essential aspect of the Rule of Law that is recognised ....