TaxTMI 
TaxTMI 
2026 (8) TMI 791
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.... Service and Renting of Immovable Property Service. 2. The Appellant challenges the impugned order primarily on the ground that the activity undertaken by it under the "Time Share Scheme" is not classifiable as Club or Association Service, that the members enrolled under the scheme are merely customers purchasing accommodation rights and not members of any Club or Association, that the activity is more appropriately covered under the taxable category of Short-term Accommodation Service, which itself was introduced only with effect from 01.05.2011, and therefore no service tax could have been demanded under Club or Association service for the period in dispute. The appellant has further challenged the imposition of penalties on various grounds including the applicability of Sections 73(3), 76, 77, 78 and 80 of the Finance Act, 1994. 3. The facts in brief are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in operating a holiday resort under name "Lahari Resorts" situated in the State of Telangana. Besides, providing accommodation facilities to ordinary guests visiting the resort, the appellant introduced a Time Share ....
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....facilities available in the resort and therefore the activity squarely fell within the ambit of Club or Association Service; iii. The accommodation enjoyed by the Members could not be equated with ordinary hotel accommodation since the appellant guaranteed accommodation over a period extending to 12 years after receiving consideration in advance; iv. Merely because accommodation was also provided to non-members, the appellant could not seizes to be a Club or Association; v. The appellant had failed to discharge service tax under the remaining taxable categories within time and therefore penalties were also imposable; vi. The appellant was held to have suppressed material facts with intent to evade payment of service tax and consequently penalties under Section 78 were held to be justified. 9. Being aggrieved by the aforesaid findings, the appellant has preferred the present appeal before this Tribunal. 10. Learned Counsel for the appellant submits that the impugned order proceeds upon an erroneous understanding of the Time Share Scheme and completely ignores the statutory definition of "Club or Association". It is argued that the appellant ....
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....and resorts, it necessarily follows that such activity was not intended to be covered under Club or Association service during the earlier period. The subsequent introduction of a specific taxable entry is itself indicative of legislative intent that the activity in question was outside the scope of the earlier charging provision. 14. In so far as the smaller demands relating to Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service are concerned, Learned Counsel submits that the entire service tax together with applicable interest had already been discharged before issuance of the Show Cause Notice. Therefore, in view of Section 73(3) of the Finance Act, 1994, issuance of the Show Cause Notice itself was unwarranted and consequentially no penalties could have been imposed. 15. It is also argued that simultaneous penalties under Section 76 and 78 are legally in-permissible. The appellant further submits that the facts of the case clearly establish a bonafide interpretational dispute and therefore complete waiver of penalties is warranted under Section 80 of the Finance Act, 1994. 16. The Learned AR ....
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....artment seeks to levy service tax on the premise that person purchasing time share rights become "Members" of the appellant and the appellant consequently becomes "Club or Association" providing facilities to its Members. The appellant, on the other hand, contends that the so-called Members are merely customers purchasing accommodation rights and the relationship remains purely contractual without creating Membership of any Club or Association. Thus, the controversy essentially revolves around the true nature of the transaction rather than the nomenclature adopted by the parties. 23. For appreciating the controversy, it is necessary to refer to the statutory definition of Club or Association under Section 65(25a) of the Finance Act, 1994. The definition is as follows: (25aa) "club or association" means any person or body of persons providing services, facilities or advantages, primarily to its members, for a subscription or any other amount, but does not include :- (i) any body established or constituted by or under any law for the time being in force; or (ii) any person or body of persons engaged in the activities of trade unions, promotion of agricul....
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..... The persons enrolled under the Time Share Scheme admittedly do not satisfy the statutory requirements for becoming Members of the Company. They neither subscribes to the Memorandum nor become shareholders. Their names are not entered in the register of Members maintained under the Companies Act. Consequently, they cannot legally be regarded as Members of the appellant company merely because the commercial agreement describes them as Members. Therefore, the very foundation adopted by the Adjudicating Authority becomes legally not sustainable. 27. The issue regarding taxability of services rendered by Clubs came up for exhaustive consideration before the Hon'ble Supreme Court in the case of State of West Bengal Vs Calcutta Club Ltd., [2019 (29) GSTL 545 (SC)]. Hon'ble Supreme Court undertook a detailed examination of the doctrine of mutuality and the statutory provisions governing Clubs. The Apex Court held that incorporated clubs and associations constituted under various enactments stand on a different footing and explained the legal concept governing relationship between a incorporated entity and its Members. The Supreme Court further observed that incorporation under a statu....
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....04, 705] under examination now, was not, therefore, right in restricting the word "constitute" to mean only "to create", when clearly it could also mean putting a thing in a legal shape. The Bombay High Court, therefore, in the case of Dwarkadas Khetan and Co. v. CIT [(1956) 29 ITR 903, 907], was right in holding that the section could not be restricted in its application only to a firm which had been created by an instrument of partnership, and that it could reasonably and in conformity with commercial practice, be held to apply to a firm which may have come into existence earlier by an oral agreement, but the terms and conditions of the partnership have subsequently been reduced to the form of a document. If we construe the word "constitute" in the larger sense, as indicated above, the difficulty in which the learned Chief Justice of the Calcutta High Court found himself, would be obviated inasmuch as the section would take in cases both of firms coming into existence by virtue of written documents as also those which may have initially come into existence by oral agreements, but which had subsequently been constituted under written deeds." 73. It is, thus, clear that co....
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....tory definition of Club or Association was not intended to cover commercial hospitality arrangements of hotels. The ratio of the above decision squarely applies to the appellant case. Here also the Time Share Scheme merely enables customers to avail accommodation rights over a specified period. Such arrangement remains purely commercial. No Club comes into existence. 31. Similar view has been taken by the Bangalore Bench of this Tribunal in the case of Adarsh Realty & Hotel Pvt Ltd., supra. The Tribunal held that hospitality services rendered by hotels cannot automatically be classified under Club or Association merely because customers are enrolled under Membership programmes. Tribunal emphasizes that the real substance of the transaction has to prevail over nomenclature. We respectfully agree with the above reasoning. 32. The impugned order repeatedly proceeds upon the expression "Membership". However, settled law requires that taxation must be based upon substance rather than form. The Supreme Court has consistently held that the true nature of the transaction must prevail over the terminology used by the parties. In the present case, the consideration received by the appe....
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....the nature of the agreements and the judicial precedents cited before us, we are of the considered opinion that Time Share Scheme operated by the appellant does not satisfy the essential ingredient of "Club or Association Service". The so-called Members are merely customers purchasing contractual accommodation rights. The appellant continues to function as a commercial hospitality establishment. The relation between the parties remains one of service provider and customer. Neither the appellant nor the time share purchasers acquire the legal characteristics of a Club and its Members. Consequently, the consideration received under the Time Share Scheme cannot be subjected to Service Tax under the taxable category of Club or Association Service for the period in dispute. The findings recorded by the Adjudicating Authority on this issue are therefore not sustainable and liable to be set aside. 36. Having held that the activity undertaken by the appellant does not fall within the scope of "Club or Association Service", it is now necessary to examine whether the activity undertaken by the appellant is in substance an accommodation service and the effect of introduction of the taxable....
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.... Member by the principal object of providing accommodation. It is well settled that classification must be determined according to the dominant nature of the transaction. The dominant object of the present transaction is undoubtedly accommodation. 41. The appellant has relied upon the decision of the Kolkata Bench of the Tribunal in Spring field Project Pvt Ltd., supra, the Tribunal held that once Parliament introduced a specific taxable category for accommodation services with effect from 01.05.2011, the same activity could not be artificially classified under another pre-existing taxable entry for an earlier period. We respectfully agree with the above principle. Applying the same reasoning accommodation provided by the appellant during December, 2006 to March, 2011 cannot be retrospectively brought within the field of Club or Association Services. Accordingly, we hold that the principal demand of service tax under Club or Association Service cannot be sustained. 42. The next issue pertains to service tax demanded under the category of Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service. The recor....
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....ly engaged in the hotel business and not in the business of operating an independent internet café. The receipts involved are insignificant. More importantly, even before issuance of the Show Cause Notice, the appellant voluntarily deposited the entire service tax together with applicable interest. The Revenue has not disputed these facts. Consequently, the appellant becomes entitled to the statutory protection under Section 73(3) of the Finance Act, 1994. 47. Similarly, the liability relating to Rent-a-cab Scheme Operator Service also stood discharged along with interest before issuance of the Show Cause Notice. The Department has not alleged any subsequent default. Once tax and interest stand fully paid prior to initiation of adjudication proceedings, continuation of penal proceedings requires strong evidence of deliberate suppression. No such evidence is forthcoming in the present case. 48. The appellant also challenges the taxability of Renting of Immovable Property Service by contending that leasing of land for erection of telephonic towers became taxable only from 01.20.2010. The appellant has nevertheless discharged the tax together with interest. Without examin....
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....f the Finance Act, 1994 can nevertheless be sustained. 51. Learned Commissioner has imposed penalties under Section 76, 77 and 78 principally on the ground that the appellant failed to discharge service tax in time and had suppressed material facts from the Department. The appellant, on the other hand, submits that the dispute involved is purely one of interpretation of the charging provisions of the Finance Act, 1994. It is argued that the issue regarding taxability of Time Share Membership under "Club or Association Service" had been highly debatable issue and the appellant entertained a bona fide belief that its activity was not covered under the said taxable entry. It is further submitted that immediately after the Department point out the liability in respect of the remaining taxable services, the appellant voluntarily discharged the entire tax together with applicable interest even before issuance of the Show Cause Notice. Therefore, neither penalty under Section 76(3) nor penalty under Section 78 could legally survive. 52. The entire foundation for invocation of the extended period and imposition of penalty under Section 78 rests upon the allegation of suppression of f....
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.... want of suppression, the question of sustaining simultaneous penalty under Section 76 of the Finance Act, 1994 does not survive. Even otherwise, the dispute being purely interpretational and the appellant having discharged tax together with interest before issuance of the Show Cause Notice in respect of remaining taxable services, no penalty under Section 76 is warranted. Likewise, the normal penalty imposed under Section77 also deserves to be set aside. 55. From the foregoing discussion, the following conclusions emerge; (i) The Time Share Membership Scheme operated by the appellant essentially provides contractual accommodation rights and does not amount to rendering Club or Association Service. (ii) The appellant, being a company incorporated under the Companies Act, 1956 cannot be treated as a "Club or Association" merely because the agreement describes customers as Members. (iii) The principal demand of service tax under Club or Association Service is therefore liable to be set aside in its entirety. (iv) In so far as Mandap Keeper Service, Internet Café Service, Renta-Cab Scheme Operator Service and Renting of Immovable Property ....