- Apprentice Lawyer
The levy of goods and services tax (GST) on incorporated clubs has been challenged before the Madras High Court as unconstitutional by the Ooty-based Ootacamund Club.
The provisions of the Central GST Act, to the extent that they seek to levy goods and services tax on "members’ club in an incorporated form" are ultra vires the Constitution of India, the petitioner asserts.
The Bench of Chief Justice Sanjib Banerjee and Justice Senthilkumar Ramamoorthy issued notice in the matter on Wednesday to both Central and State authorities after brief submissions made by advocate Suhrith Parthasarathy for the petitioner-club.
The petitioner's case is premised upon the contention that the principle of mutuality applies to clubs of an incorporated nature such as the Ootacamund Club, which was incorporated in 1889 and also registered as a company under Section 25 of the Indian Companies Act, 1956.
Members of the club are shareholders in the club, forming an integral part of the club, thereby constituting a single entity, the petition highlights.
While so, it is exempt from service tax and its activities cannot be covered under the definition of "supply" of goods under the Central and State GST Acts. This is because the principle of mutuality entails an exemption from service or sales tax, given that service or sales transactions must involve two or more persons or entities.
"The principle of mutuality posits that a person or an entity cannot make a profit from himself or itself. An amount received from oneself cannot be regarded as income, just as an act of serving oneself cannot be regarded as provision of service, amendable to any form of taxation. In the petitioner’s submission, since it is a club governed by the principle of mutuality, any transaction by the petitioner with one of its members is not a transaction between two parties and is not amendable to levy of GST. This contention is strengthened by the decision of the Supreme Court in Calcutta Club Limited," the petitioner has explained.
Since the club’s services are only for members, and since both the club and its members are viewed as one entity, the question of GST does not arise because the principle of mutuality is clearly applicable, it has been submitted.
Principles of Mutuality applicable to incorporated clubs under the earlier tax regime
The earlier service tax regime had recognised that the principles of mutuality are applicable to incorporated clubs, the petitioner has pointed out.
Although the club briefly collected service tax for the use of rooms between 2005 and 2014, this was stopped from April 2014 in view of the decisions of the Gujarat High Court in Sports Club of Gujarat v. Union of India and the Jharkhand High Court in Ranchi Club Limited v. Chief CCE and ST. From these rulings, it was clear that incorporated clubs were not liable to collect and remit service tax.
Both Gujarat and Jharkhand HighCourt have read down Section 66 (25a) an 66(105)(zee) of the Finance Act, 1994 and held that the said provisions violate the principle of mutuality inasmuch as they seek to impose service taxes on transactions of clubs with their members.
In Ranchi Club, the Jharkhand High Court extended the applicability of the principle of mutuality as laid down in the Joint CTO v. Young Men’s Indian Association for sales tax to service tax as well because of a basic common feature between sale and service, i.e. the existence of two parties.
While an appeal was filed against the decision of the Jharkhand High Court in Ranchi Club Limited, this was eventually dismissed by the Supreme Court in the case of State of West Bengal and ors v. Calcutta Club Limited.
In the Calcutta Club case, the Supreme Court ruled that the Gujarat High Court and Jharkhand High Court were correct in following the Supreme Court’s view in Joint CTO v Young Men’s Indian Association (1970). The top court opined that from 2005 onwards, the Finance Act does not purport to levy service tax on members’ club in incorporated form.
The Supreme Court also held that the definition of "services" under Section 65B (44) of the Finance Act, 1994 requires the provision of services by one person to another. On the other hand, the services by a members’ club does not constitute a service under the said section, and therefore, is not taxable, it was held.
Demands made for the remittance of service tax under the Finance Act, 1994 were successfully challenged by the club in writ petitions filed in the Madras High Court for different periods between 2016 and 2020. The High Court ruled in the club's favour in view of the Supreme Court's ruling in the Calcutta Club case.
By logical extension, the principles of mutuality will continue to apply to incorporated clubs under the GST regime
The Supreme Court in Calcutta Club Limited held that any services provided by incorporated clubs to its members is governed by the principle of mutuality and accordingly not liable to service tax under the Finance Act, 1994.
In not extending this principle of mutuality to incorporated clubs under the GST regime, the GST Act's provisions are arbitrary, unreasonable and violative of Article 14 of the Constitution.
The principle of mutuality must, by logical extension, apply to the Central GST Act and corresponding State provisions. This is especially so, given that the GST Act has replaced the erstwhile sales and service tax regime in a unified manner. The GST regime has merely replaced the earlier regimes of both sales and service tax in the country.
The services rendered by incorporated clubs do not constitute ‘supply’ within the meaning of Section 7 of the CGST Act. "Supply" would require the flow of consideration from one person to another. Since the club members are covered by the principle of mutuality, any transaction between the club and members is not a transaction between two members. Therefore, such clubs are not amenable to GST under the CGST Act or the Tamil Nadu Goods and Services Act, 2017.
The parliament does not have the power to levy GST on incorporated clubs by seeking to bring the services rendered by it within the ambit of section 7 of the CGST Act.
Any levy of GST on members’ clubs in incorporated form is inherently without jurisdiction and ultra vires the Constitution of India.
Neither the Parliament nor the State Legislature has the legislative competence to levy GST on incorporated clubs under Articles 246A or 366 (12A) of the Constitution. It also violates Article 265, the petitioner adds.
That the principle of mutuality as an exemption to the levy of service tax is also recognised in Supreme Court rulings such as Supreme Court in Commissioner of Income Tax (CIT) v. Bankipur Club, Bangalore Club v. CIT, and Yumi Restaurants (Marketing) Private Limited v. CIT. To not recognise the well-settled principle as an exemption to goods and services tax is arbitrary and unreasonable.
Levy of GST on incorporated clubss violates right to form associations and unions under Article 19 (1) (c) ofthe Consitution.
The income tax department has also consistently accepted the club's submission that the principles of mutuality are absolutely applicable to its dealings with its members. The same principle will squarely apply to the case of the petitioner under the CGST Act as well.
The petition has been filed through Advocates Arun Karthik Mohan and Suhrith Parthasarathy. The matter will be taken up next after six weeks.