Facts
Calcutta club was an incorporated company under section 26 of the Companies Act. It supplied food, drinks, refreshments etc. to its permanent members on payment. The club did not pay any sales tax thereon on the ground that there was no sale of goods since the club and its members have same identity. However, the club paid sales tax when the goods were provided to non-members or guests. The doctrine of mutuality would come into play. The club acted only as agent between the vendors from whom supplies were procured and the members. The payment by the members was not consideration for any sale. The club was not a “dealer” under the Sales Tax Act. The sales tax authorities sought to tax the said transactions as “sales”.
The Tribunal accepted the contention of the club and held that receipts from the members were not exigible to sales tax based on the principle of mutuality. The revenue filed writ petition before the High Court of Calcutta which opined that members collectively were the real life and club was a superstructure only. The facts of presentation of bills, non-payment thereof and subsequent expulsion of members do not prove otherwise. The High Court referred to the Constitution Bench judgment in the case of CTO v. Young Men’s Indian Association (1970) 1 SCC 462 and held that there was no sale by the club to its members.
The matter was then taken before the Division Bench of the Supreme Court at the behest of the Revenue. The Division Bench then referred three questions to the larger Bench:
- Whether doctrine of mutuality is applicable to incorporated clubs or any clubs after 46th amendment to Article 366(29A) ofthe Constitution?
- Whether decision of CTO Young Men’s Indian Association (1970) 1 SCC 462 (SC) still holds field after 46thamendment to Constitution?
And whether decisions of Cosmopolitan Club v. State of TN (2009) 19 VST 456 (SC) and Fateh Maidan Club v. CTO 12 VST 598 (SC) which applied doctrine of mutuality after 46th amendment to Constitution lay down correct law?
- Whether 46th amendment by its deeming fiction affirms the position that provision of food, beverages etc. by an incorporated club to its permanent members constitutes ‘sale’ liable to sales tax?
The revenue referred to 61st Law Commission report which preceded 46th amendment and “Statement of Objects and Reasons” to the said amendment to Constitution and contended that clause (e) to Article 366(29A) was inserted to specifically do away with doctrine of agency/trust or mutuality in case of Members’ Club and sought to overcome the decision of CTO v. Young Men’s Indian Association (1970) 1 SCC 462. They also argued that the words “unincorporated associations” and “body of persons” employed in clause (e) were to be read disjunctively which meant that “body of persons” may include incorporated companies, co-operative societies etc. Further clause (f) of the said Article covers supply of food, drinks for human consumption and employs the expression “in any other manner whatsoever” which has a very wide import to cover provision of food/drinks even by incorporated entities to its members. They heavily relied on the judgment of Deputy Commercial Tax Officer, Saidapet
v. Enfield India Ltd, Co-operative Canteen Ltd. (1968) 2 SCR 421 (SC) to
bring home the point that the English judgments which propounded doctrine of mutuality had no application in taxing statute since they dealt with criminal law. Further, it was stated that doctrine of mutuality had no application when the members’ club was in a corporate form. For this proposition, they relied upon the decision of Bucha F. Guzdar v. CIT (1955) 1 SCR 876 (SC) wherein it was held that shareholder is not the owner of the assets of a company. The same principle would apply to member’s club since member and club would be two different persons.
On the other hand, the respondent club contended that clause (e) of Article 366(29A) referred to unincorporated associations andclearly did not include incorporated entities. The club is registered under section 25 of the Companies Act, 1956 which prohibited distribution of dividends and required application of the profits only for carrying out the objects of the company. Therefore, ratio of Bucha F. Guzdar v. Commissioner of Income Tax, Bombay (1955) 1 SCR 876 (SC) would not apply to the club. The expression “unincorporated association” has to be read ejusdem generis with “body of persons” so that incorporated body of persons are not covered by the said clause. Further, there was no profit motive behind the activities of the club and therefore, club will not be covered under the definition of “dealer”. Clause (f) is inserted only to nullify the effect of the judgement of Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (1978) 4 SCC 36 (SC).
View
The Supreme Court perused the 61st Law Commission report wherein clause 1D had made certain pertinent observations. The case of Enfield India Ltd (supra) which was heavily relied by the department was examined. It was observed that in case ofunincorporated club, society, association etc. the property is jointly held by the members for common benefits and relinquishment of rights by other members in favour of one member who pays the price is not a transaction of sale. The Court in that case also stated that it was not called upon to consider the aforesaid situation. The court also considered the case of Young Men’s Indian Association wherein it was unequivocally held that there is no sale by the incorporated club to its members. The ratio of an English case of Graff vs Evans was also considered wherein it was held that no liquor license is required for a club which provides liquor to its member out of the common stock since it is not a sale. The crux lies in the fact that when the goods are provided to a member from the common property of all members, there is no transfer of property in those goods and hence, no sale. In view of this legal position, the Commission opined that there was no need to amend the Constitution to tax the supply of goods by an unincorporated club/association to its members. It gave mainly three reasons 1) Number of such clubs/associations is not very large 2) the taxation would scuttle the cooperative movement 3) there is no serious evasion of tax since members takes their own goods.
The Court thereafter considered the Statement of Objects and Reasons which led to amendments in Constitution. It referred to various Supreme Court judgments wherein transactions which resembled sale were held as not amounting to sale. In respect of clause (e) of Article 366(29A), it was mentioned that while registered clubs/associations having corporate status are liable to sales tax on their supply of goods to their members, unincorporated clubs/associations are not so liable since, in law, they have no separate existence from that of the members. This statement in respect of incorporated clubs however, was found by the Court as contrary to the law declared by it inthe case of Young Men’s Indian Association (supra).
The Court also referred to the case of BSNL v. UOI (2006) 3 SCC 1(SC) where it is observed, while commenting upon the necessity of 46th amendment, that incorporated clubs/associations were not liable to tax on the supplies to their own members and therefore, amendment in Constitution to make it a deemed sale was necessary. Although this statement cannot be called as ratio of this judgment, it took note of the legal position prevalent at that time.
The Court also acknowledged the principles of law laid down by Graff v. Evans and Trebanog working Men’s Club andInstitute Ltd. v. Macdonald (1940) 1
- B. 576. Both the cases held that legal property in the goods held by the club necessarily belongs to the members jointly and hence, there cannot be any sale. Various legal entities may be entrusted with the property of the members but the
arrangement remains the same. The legal status of such entities does not change the transaction into sale.
The court also noted that various High Courts too dragged the same line and held that clubs held the property belonging to the members, whether as a separate legal entity or otherwise, and supply of goods to the members did not amount to sale. E.g. Bengal Nagpur Cotton Mills Club v. Sales Tax officer, Raipur (8 STC 781)(MP) (HC) and Century Club v. State of Mysore (16 STC 38)(Mysore) (HC).
The Court distinguished the case of Bucha v. Guzdar (supra) where it was held that shareholders of a company are not owners of the assets of the company. The said judgment dealt with two tea companies and not section 25 companies which are formed to promote certain charitable objects and do not distribute the profits as dividends to the shareholders. Therefore, the observations in above case were not relevant.
In this context, the case of Cricket Club of India v. Bombay Labour Union (1969) 1 SCR 600 (SC) was also considered by the court to bring home the point that the fact of being incorporated as a limited company is not important. Under the Contract law and for the purposes of filing suit or being sued, the separate legal status is required. These legal technicalities cannot be used to change the fact that club is merely holding the property of the members as a trustee. There is no sale transaction between the members and the club.
The Court thereafter examined the proposition whether 46th amendment changed the legal position laid down by Young Men’s Indian Association as narrated above.
The Court observed that terms “unincorporated association” and “body of persons” used in clause (e) of Article 366(29A) cannot be read disjunctively. For the purpose, the definition of “person” under General Clauses Act was referred. It was inferred that the said clause does not use the expression “person” which includes corporate person but employs the expression “body of persons” which definitely does not cover corporate person. The definitions of “person” in various other Acts is succeeded by an expression “whether incorporated or not” which suggests that “body of persons” does not cover corporate person.
The last part of Article 366(29A) specifies that supply of such goods shall be deemed to be sale of those goods by person making such supply and purchase of those goods by the person to whom such supply is made. This explanation presupposes two persons and they are absent in case of member’s club. Therefore, it suggests that the ratio of Young Men’s Indian Association is not been done away with.
The revenue also proposed that the transactions can fall under clause (f) of Article 366(29A) which reads as under:
“(f) A tax on the supply by way of or as part of any service or in any other manner whatsoever of goods being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration and such transfer, delivery and supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”
The Court based on “Statement of Objects and Reasons” inferred that the said clause was inserted to annul the ratio of judgments inthe cases of State of Punjab v. Association of Hotels of India Ltd. 1972 1 SCC 472 and two judgments of Northern India Caterers Ltd. [(1979) 1 SCR 557 (SC) & (1980) 2 SCC 167 (SC)]. The said decisions had held that supply of food in hotels or restaurant is a composite contract of sale and service and they could not be segregated for the purpose of levy of tax. In order to remove this lacuna, clause (f) was inserted. It therefore, did not apply to clubs which are not hotels or restaurants. Further, clause (f) dealt with only food, drinks for human consumption whereas the club can supply many other goods like soaps, paste, medicines etc. Therefore, Court came to the conclusion that clause (f) was not applicable to clubs.
In view of the entire analysis, the Court came to the following conclusions:
- The doctrine of mutuality continues to be applicable to incorporated or unincorporated members’ club after the 46th Amendment adding Article 366(29A) to the
- Young Men’s Indian Association (supra) and other judgments which applied this doctrine continue to hold the field even after the 46th
- Sub-clause (f) of Article 366(29A) has no application to Members’
Service Tax Facts
The High Court of Jharkhand and Gujarat delivered judgments in the cases of Ranchi Club and Calcutta Club respectively and held that service tax is not leviable on the services like mandap keeper service rendered by the Member’s Club to its members. The Division Bench of Supreme Court heard the matters in civil appeal proceedings and referred them to the Larger Bench of the Supreme Court. Thus, the appeals are heard by this Court.
The Court observed that both High Courts have held that Young Men’s Indian Association ratio is applicable so far as members’ club liability for service tax is concerned and they are not liable to service tax. It was pleaded before them by
the revenue that Young Men’s Indian Association decision was in respect of sales tax and not service tax and hence, not applicable. But the High Courts observed that both in sales tax and service tax, two persons are required namely, seller and buyer to effect a sale and service provider and service recipient in case of service. The members’ club and its members are one and the same and there cannot be sale or provision of service by one to oneself. The ratio of Young Men’s Indian Association decision is squarely applicable even under Finance Act, 1994 levying service tax.
The service tax was levied on the clubs and associations w.e.f. 16-06-2005 which were defined under section 65(25a) to mean “any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members but doesnot include—
“(a) any body established or constituted by or under any law for the time being in force
……..”
The various provisions under the Finance Act 1994 seeking to levy service tax on the clubs/associations were in force for the period from 16-06-2005 till 30-06-2012. Up to 30-06-2012, the service tax was being levied on selective services only.
From 01-07-2012, the service tax law underwent paradigm shift and all services became taxable except those in the negative list specified in section 66D. The definition of “service” was inserted for the first time under section 65B(44) which read as follows:
Service means any activity carried out by a person for another for consideration and includes a declared service but shall not include—
………
……….
Explanation 3– For the purposes of this chapter;
(a) An unincorporated association or body of persons, as the case may be, and the member thereof shall be treated as distinctpersons
(b) ……..
The Court was required to take a view whether the ratio of Young Men’s Indian Association still held the field under aforesaid provisions in two periods.
View
For the period prior to 30-06-2012, the Court considered the exclusion from the definition of club/association as under section 65(25a) namely, “any body established or constituted by or under any law for the time being in force”. The majority of the clubs were either registered under section 25 of the Companies Act or under the Co-operative Societies Registration Act. The contention of the revenue that such clubs are not “established” under those Acts was not accepted by the Court. The judgments cited by the revenue namely, Dalco Engineering Pvt. Ltd. v. Satish Prabhakar Padhye (2010) 4 SCC 378 (SC) and were distinguished by referring to the case of R. C. Mitter & Sons, Calcutta v. CIT, West Bengal, Calcutta (1959) 2 SCR 641 (SC). It is held therein that the word “constituted” does not necessarily mean “created” or “set up” though it may mean so. It also includes the idea ofclothing the agreement in a legal form. The decision of Dwarkadas Khetan & Co. v. CIT (1956) 29 ITR 903 (Bom) (HC) was also referred in this context. In view of this legal position, the Court came to the conclusion that companies and cooperative societies which are registered under the respective Acts, can certainly be said to be ‘constituted’ under those Acts and hence, excluded from the definition of “club”.
For the period after 01-07-2012, the Court compared the explanation 3 clause (a) below the definition of “service” under section 65B (44) and exclusion under section 65(25a) as regards “any body established or constituted under any Act” prior to 30-06-2012 and came to the conclusion that both in substance were same. A Member’s club in a corporate form is identical with its members and one cannot provide service to oneself. The Court held that Member’s club as opposed to proprietary club is not liable to service tax in both the periods. (CA No. 4184 of 2009, 7497 of 2012 CA No. 7773 of 2019 (Arising out of SLP (C) No. 26883 of
2013, dt. 3-10-2019)
Editorial : Member’s Club other than proprietary club is not liable to sales tax or service tax even if clothed in a corporate form. Under CGST/SGST Act, definition of “business” includes “provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members. There is no distinction between incorporated and unincorporated clubs/associations. The definition of “person” under section 2(84) includes “an association of persons or a body of individuals, whether incorporated or not, in India or outside India”. Entry 7 of schedule II stipulates that supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods. Although the activities of a club are treated as business, in order to
constitute a supply, there has to be a supplier and a recipient. If two parties are missing, there cannot be a supply as laid down by this judgment. However, the matter needs to be contested in Court keeping in view the GST provisions.
“There is a higher court than court of justice and that is the court of consciousness. It supercedes all other courts.”
– Mahatma Gandhi