With effect from 16.06.2005, service tax was levied1 on club or association services. The term2 "club or association" means any person or body of persons providing services, facilities or advantages, for a subscription or any amount to its members. There was another school of thought which contends that service tax cannot be levied on services provided by a club or an association to its members by way of operation of the doctrine of mutuality.
Post introduction of negative list based taxation regime under service tax, the concept of distinct person has been introduced vide an explanation to the term "service" so as to include, services provided by unincorporated body or a non-profit entity registered under any law to its own members by way of reimbursement of charges or share of contribution, within its ambit
Further, an exemption3 has been provided for contributions made upto Rs. 7,500/- for all such expenditure which are collected from the members in the nature of reimbursement towards sourcing of goods or services from a third person for the common use of members in a residential/housing society.
The concept of taxability including the very amendment as explained supra i.e. concept of distinct person as introduced vide an explanation to the definition of service was challenged in light of the established concept "principles of mutuality" until Supreme Court upheld4 that principles of mutuality persist in the transaction and accordingly no tax is payable.
The doctrine of mutuality as applied to clubs is elaborately discussed5 wherein it is observed that in members' clubs contributors and participators are identical and hence treated as a single person. The Supreme Court held as under:
....17...."... it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered....
18. .............Complete identity between contributors and participators. - '... The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid.' The Madras, Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves : it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects."
From the above, it can be understood that under the concept of taxation, any tax can be levied on such amount which is identified as surplus. Conceptually, surplus can be arrived when the participants receives anything excess in requirements. For the concept of mutuality to exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods/services were sold/provided. Such a surplus is regarded as their own money and returnable to them. Accordingly, for any amount to be identified as "surplus" the identity of contributors contributing any amount and that of participants receiving such amount should be different which is not in the case of a society and hence the principles of mutuality hits them and accordingly there are no two separate persons in the transaction.
Further, the amount contributed by such members towards the society be classified as consideration in the hands of society? For understanding the same we need to understand as to what construe "consideration". The term "consideration" has not been defined under the chapter V of the Finance Act, 1994 and accordingly on reference to Section 2(d) of the Indian Contract Act, 1872 & various references6 it can be substantiated that only such transfer of money which possesses an idea of reciprocity can be termed as "consideration". This means that any transfer made towards any gratuitous remark cannot be termed as consideration. Thus, the idea of reciprocity is the test for determining any transfer as consideration which is absent in a transaction between a member and a society as the funds are transferred towards meeting common expenditure which are ultimately incurred by the society on third party vendors wherein the society will benefit as whole.
For taxability7 of any transaction under the ambit of service tax, three ingredients should be present – activity, consideration and two persons. As explained supra, since two important aspects are absent in the said transaction, taxability of the same is unsustainable.
Further, the amended term "service" & "person" has expanded the scope of taxability. The instant explanation was challenged before the Supreme Court8 wherein it was observed that the new inserted explanation and amended definition of person cannot overrule the erstwhile concept of the principles of mutuality and accordingly the instant constant of mutuality will still prevail. The court while pronouncing the same made following observation –
82. ....... The expression "body of persons" may subsume within it persons who come together for a common purpose, but cannot possibly include a company or a registered cooperative society. Thus, Explanation 3(a) to Section 65B(44) does not apply to members' clubs which are incorporated..................
84. We are therefore of the view that the Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following Young Men's Indian Association (supra). We are also of the view that from 2005 onwards, the Finance Act of 1994 does not purport to levy Service Tax on members' clubs in the incorporated form.
Relying on the ratio of the above mentioned judgment, it can be said that the classification of service for the transaction between members and co-operative societies itself is ultravires under the operation of the principles of mutuality.
The same question was once again challenged under the GST regime wherein there were several controversial views until finally Maharashtra AAAR9 pronounced that the amount collected as membership subscription and admission fees from members is not liable for GST as the same do not amount to supply of services.
KSAA Comments:
The instant AAAR while pronouncing its judgment has barely touched the concept of mutuality and concluded that GST cannot be made applicable on such organizations which do not undertake any business activities. It further added that the income so collected from members of such organizations was not incurred towards any business activity but for meeting various administrative expenditure. Accordingly, the activity of collection of fees/subscription for meeting expenses squarely falls outside the purview of supply10.
In our opinion, the instant AAAR has redefined the scope of supply which is very interesting. On referring to para 44 to 50 of the said order it can be said that all such organizations which have the objects similar to that of the applicant i.e. promotion of peace, fight against diseases, providing clean-water & sanitation, support education etc. and which can demonstrate that the income so collected from its members is applied towards meeting administrative expenditure can conclude that they do not fall under the purview of GST.
The instant judgment has redefined the term 'business11' and restricted its application, which was wide enough to include plethora of activities. As per many reference materials12 the term business is not driven by the idea of making profit or retention of money but the paramount importance was stressed upon exchange of any goods or services irrespective of profits.
However, irrespective of the above mentioned observations the arguments of principles of mutuality will still prevail under the GST regime and hence the concept of applicability of GST on co-operative societies would remain to be a bigger challenge until finality is attained.
Footnotes
1. Section 65(105)(zzze) of the Finance Act, 1994
2. Section 65(25a) of the Finance Act, 1994
3. Entry 28 of Notification 25/2012 dated 20.06.2012
4. State of West Bengal vs Calcutta Club Limited 2019 (29) GSTL 545 [SC]
5. Bangalore Club v. Commissioner of Income Tax and Anr., (2013) 5 SCC 509
6. 'Pollock and Mulla, The Indian Contract & Specific Relief Acts (16th ed.)', been taken from an old English case Currie v. Misa, (1875) LR 10 EX. 153
7. Section 6B of the Finance Act, 1994
8. State of West Bengal vs Calcutta Club Limited 2019 (29) GSTL 545 [SC]
9. Order No. MAH/AAAR/SS-RJ/15/2019-20 dated 06.11.2019 in the case of M/s. Rotary Club of Mumbai Queens Necklace [Appellant]
10. Section 7 of the CGST Act, 2017
11. Section 2(17) of the CGST Act, 2017
12. Reference to Black Law's Dictionary, investopedia.com, business dictionary, Merriam – Webster's dictionary
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