Time Share Accommodation Not Taxable as Club or Association Service: CESTAT Hyderabad

Lahari Holiday Homes Ltd. Vs Commissioner of Central Tax (CESTAT Hyderabad)

Summary: The CESTAT Hyderabad partly allowed the appeal of Lahari Holiday Homes Ltd. against an Order-in-Original confirming service tax of Rs.1,63,15,458/- with interest under “Club or Association Service”, besides penalties under Sections 76, 77 and 78 of the Finance Act, 1994 and smaller demands under Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service. The appellant operated Lahari Resorts and had introduced a Time Share Holiday Scheme under which customers acquired a contractual right to occupy specified accommodation for one week every year for 12 years against predetermined consideration.

The Tribunal examined whether persons enrolled under the Time Share Scheme could be regarded as “members” of a club or association merely because the agreement used that terminology. It held that taxability must depend upon the real legal and commercial character of the arrangement rather than nomenclature. The customers acquired no proprietary, voting, management or shareholding rights in the appellant company. Their relationship with the appellant remained that of customer and service provider, and they merely purchased accommodation rights for specified periods.

The Tribunal also noted that the appellant was incorporated under the Companies Act, 1956 and that the time-share customers did not become members of the company in accordance with that Act. They neither subscribed to the memorandum, became shareholders, nor had their names entered in the register of members. Therefore, the foundation for treating them as members of a “Club or Association” was held to be legally unsustainable.

The Tribunal relied heavily upon State of West Bengal Vs Calcutta Club Ltd. and noted that the Supreme Court had explained that incorporated clubs and associations constituted under statutory enactments stood on a different footing and that charging provisions must be interpreted strictly. The Tribunal further observed that commercial hospitality arrangements could not become “Club or Association Service” merely because customers were described as members. It also relied upon Bharat Hotels Ltd. and Adarsh Realty & Hotel Pvt. Ltd., where loyalty or membership programmes of hotels were treated as commercial hospitality arrangements rather than club membership.

A further significant factor was the introduction of “Short Term Accommodation Service” under Section 65(105)(zzzzw) of the Finance Act, 1994 with effect from 01.05.2011. According to the Tribunal, creation of this specific taxable category supported the conclusion that hotel and resort accommodation was not intended to be taxed earlier under “Club or Association Service”. The dominant object of the appellant’s Time Share Scheme was accommodation, not the provision of club facilities or privileges.

On the facts, the consideration paid by each customer was directly linked to the category of accommodation selected. Customers acquired only a contractual right to occupy accommodation for one week each year during the tenure of the scheme. No evidence established separate consideration for recreational facilities, sports, club privileges or similar amenities. The Tribunal therefore held that the Time Share Scheme did not satisfy the essential ingredients of “Club or Association Service”, and the principal service-tax demand under that category was set aside.

As regards Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service, the appellant had voluntarily paid the entire service tax together with applicable interest before issuance of the show-cause notice. The Department did not dispute either the quantum or the fact of payment. In the absence of evidence of deliberate fraud or wilful suppression, the Tribunal held that the appellant was entitled to the benefit of Section 73(3) of the Finance Act, 1994.

The Tribunal also rejected the finding of suppression. The appellant maintained regular books of account, its Time Share receipts were reflected in audited financial statements, agreements were maintained in the ordinary course of business and the Department’s case itself was founded on documents produced by the appellant. The dispute arose from classification and interpretation rather than concealment or clandestine activity. Accordingly, penalties under Sections 76, 77 and 78 were held unsustainable.

Ultimately, the CESTAT set aside the entire demand under “Club or Association Service”, extended Section 73(3) benefit in respect of the remaining taxable services and set aside all penalties under Sections 76, 77 and 78. The Order-in-Original was modified accordingly and the appeal was partly allowed.

Cases Discussed / Relied Upon

1. State of West Bengal & Ors. Vs Calcutta Club Limited [2019 (29) GSTL 545 (SC)] — Incorporated clubs or associations constituted under statutory enactments were outside the service-tax net before 1 July 2012; charging provisions must be interpreted strictly.
2. Bharat Hotels Ltd. Vs CCE, New Delhi [2017 (6) TMI 233 (CESTAT Delhi)] — Hotel loyalty or membership programmes constitute commercial hospitality arrangements and do not create a club or association merely because customers are called members.
3. Adarsh Realty & Hotel Pvt. Ltd. Vs CCT, Bangalore North [2018 (12) TMI 945 (CESTAT Bangalore)] — Hospitality services do not become Club or Association Service merely because customers are enrolled under membership programmes; substance prevails over nomenclature.
4. Perundurai Common Effluent Treatment Plant Vs CCE & Customs [2020 (3) TMI 1003 (Madras High Court)] — Cited concerning the scope and taxability of services provided by clubs or associations.
5. Karnataka Golf Association Vs CST, Bangalore [2023 (6) TMI 1326 (CESTAT Bangalore)] — Cited concerning service-tax liability of clubs or associations and the legal relationship between an association and its members.
6. Divya Yog Mandir Trust Vs Commissioner of Central Excise, Meerut-I [2022 (12) TMI 1147 (CESTAT Delhi)] — Cited on the taxability of receipts and services under Club or Association Service.
7. Springfield Project Pvt. Ltd. — A specifically introduced taxable category for accommodation could not be used to classify the same activity retrospectively under an earlier taxable entry.

FULL TEXT OF THE JUDGMENT/ORDER OF CESTAT HYDERABAD

The present appeal has been preferred by M/s Lahari Holiday Homes Ltd., against the Order-in-Original No. 15/2013-(ST)-Commr dated 26.02.2013 passed by the Commissioner of Central Excise and Service Tax, Hyderabad, whereby service tax amounting to Rs. 1,63,15,458/- together with applicable interest has been confirmed under the taxable category of “Club or Association Service”. Besides the aforesaid demand, the Adjudicating Authority has also confirmed penalties under Section 76, 77 and 78 of the Finance Act, 1994 and imposed penalties relating to Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator 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 Holiday Scheme, under which interested persons could purchase a right to occupy specified accommodation for one week in every year for a period of 12 years upon payment of pre-determined consideration. On the said scheme, customers were required to execute a Membership application and pay the prescribed amount corresponding to the category of accommodation selected by them. The appellant recognized the receipt from such Time Share Scheme proportionately over the tenure of 12 years in its books of account in accordance with accepted accounting principles.

4. The appellant commenced commercial operations on 01.02.2006. During investigation conducted by the Department, it was alleged that the consideration received from persons enrolled under the Time-share Scheme represented subscription collected from Members of a Club or Association and therefore attracted service tax under the taxable category of Club or Association service defined under Section 65(25a) read with Section 65(105)(zzze) of the Finance Act, 1994.

5. Apart from the aforesaid demands, the Department also noticed that the appellant had rendered taxable services under the categories of Mandap Keeper Service, Internet Cafe Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service. It was alleged that service tax had not been discharged within the prescribed period.

6. Summons were issued during August and September, 2011. Statements of responsible Officers of the appellant company were recorded and documents were called for. Thereafter, Show Cause Notice No.22/2011 dated 24.04.2012 came to be issued proposing recovery of service tax amounting to Rs. 1,63,15,458/- under Club or Association Service besides smaller demands under the remaining taxable services together with interest and penalties under Section 76, 77 and 78 of the Finance Act, 1994.

7. The appellant filed a detailed reply denying the allegations and also appeared for personal hearing before the Adjudicating Authority.

8. After considering the submissions of the appellant, the Learned Commissioner passed the impugned Order-in-Original dated 26.02.2013 confirming the proposed demand substantially on the following grounds:

i. The appellant enrolled the persons as Members under the Time Share Scheme and collected subscription from them;

ii. The Members became entitled to various 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 is essentially engaged in the hospitality industry and merely sells accommodation rights to customers for specified periods. The so-called Members neither participate in the management of the company nor acquire any proprietary or voting rights. The relationship with the appellant remains purely contractual and commercial.

11. Learned Counsel submits that the definition of Club or Association contained in Section 65(25a) contemplates an organization which provides facilities, services or advantage primarily to it’s Members. The essential ingredient of Membership is absent in the present case, since the Time-share customers are merely purchasers of accommodation rights.

12. It is further submitted that the appellant is a company incorporated under the Companies Act, 1956. The persons enrolled under the Time-share Scheme do not become Members of the company within the meaning of the Companies Act. Consequently, the appellant cannot be treated as a Club or Association merely because the expression “Member” has been used in the Membership Agreement. The Learned Counsel has placed reliance upon the judgment of the Hon’ble Supreme Court in the case of State of West Bengal Vs Calcutta Club Ltd., [2019 (29) GSTL 545 (SC)] to contend that incorporated entities stand on a different footing and the principle governing Clubs has been authoritatively explained by the Apex Court. Reliance is also placed upon the decision in the case of Bharat Hotels Ltd., Vs CCE, New Delhi [2017 (6) TMI 233 (Tri-Del)], Adarsh Realty & Hotel Pvt Ltd., Vs CCT, Bangalore, North [2018 (12) TMI 945 (Tri-Bang)], Perundurai Common Effluent Treatment Plant Vs CCE & Cus [2020 (3) TMI 1003 (Madras HC)], Karnataka Golf Association Vs CST, Bangalore [2023 (6) TMI 1326 (Tri-Bang)], Divya Yog Mandir Trust Vs CCE, Meerut-I [2022 (12) TMI 1147 (Tri-Del)] and several other decisions to submit that hospitality services rendered by the hotels through loyalty or Time Share Schemes cannot automatically be classified as Club or Association Services.

13. It is next submitted that the Finance Act 2011 specifically introduced the taxable category of Short Term Accommodation Service with effect from 01.05.2011 under Section 65(105)(zzzzw) of the Finance Act, 1994. According to the appellant, once the legislature consciously introduced a new taxable entry covering accommodation services rendered by hotels 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 inpermissable. 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 supports the impugned order and submit that the appellant itself enrolled the customers as Members under the Time Share Scheme and collected substantial Membership consideration. The facilities provided to such Members were not confined merely to accommodation but extended to various amenities available within the resort.

17. According to the Revenue, the arrangement squarely satisfies the ingredients of Club or Association Service since facilities and privilages were made available exclusively to enrolled Members on payment of consideration.

18. It is further contended that merely because the appellant is an incorporated under the Companies Act would not exclude the activity from the ambit of taxable service. The nomenclature adopted by the parties is not decisive and the real nature of the transaction has to be examined.

19. The Learned AR further submits that the appellant had failed to obtain registration under the appropriate taxable category, had not discharged service tax within the prescribed period and had suppressed the true nature of its activities from the Department. Accordingly, the extended period as well as penalties have rightly been invoked. The Revenue therefor prays for dismissal of the appeal.

20. Upon consideration of the pleadings, submissions and records, the following questions arise for determination:

i. Whether the Time Share Scheme operated by the appellant is liable to service tax under the category of Club or Association Service ?

ii. Whether the appellant, being a company incorporated under the Companies Act, can be treated as Club or Association for the purpose of Section 65(25a) of the Finance Act, 1994 ?

iii. Whether the activity undertaken by the appellant is more appropriately classifiable as Short Term Accommodation Service introduced only with effect from 01.05.2011 ?

iv. Whether penalties under Section 76, 77 and 78 are sustainable in the facts of the present case ?

v. Whether the appellant is entitled to benefit of Section 73(3) of the Finance Act, 1994 ?

21. The principal issue arising for determination is whether the consideration received by the appellant under its Time Share Holiday Scheme is liable to service tax under the taxable category of “Club or Association Service” during the disputed period extended from December 2006 to March 2011.

22. The Department 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 agriculture, horticulture or animal husbandry; or

(iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or

(iv) any person or body of persons associated with press or media;

24. The taxable service contemplates an organization providing facilities, services or advantages primarily to its Members for a subscription or any other amount. The definition itself indicates that the following essential ingredients must co-exits:

(i) There must exist a Club or Association,

(ii) There must be genuine Members,

(iii) Services, facilities or advantages must be provided primarily to such Members and

(iv) Consideration should be received in the form of subscription or similar amount

Unless, all these ingredients co-exist, levy under this taxable entry cannot be sustained.

25. The Revenue has proceeded upon the assumption that since the application form uses the expression “Member”, the purchasers automatically become Members of a Club. We are unable to agree, it is settled principle that taxability cannot depend merely upon the terminology employed in an agreement. Courts are required to ascertain the real nature of the transaction. A careful reading of the Time Share Agreement demonstrates that the customer merely acquires a contractual right to occupy specified accommodation for limited duration every year for a fixed number of years. The consideration is directly linked with the category of accommodation selected. The agreement neither confers any ownership rights nor any management rights in the company. The customer is not entitled to participate in the affairs of the company. No voting rights are created. No shareholding is transferred. The customer has no role in management. The relationship therefore remains that of a service provider and customer. Merely because the agreement loosely implies the expression “Member”, such expression cannot determine the true legal character of the transaction.

26. Another important circumstance cannot be ignored. The appellant is admittedly incorporated under the Companies Act, 1956. Section 41 of the Companies Act defines who can become a Member of a company. Membership of a company is acquired only in accordance with the provisions of the Companies Act. 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 statute carries legal consequences and the charging provision must be interpreted strictly.

28. The appellant has rightly relied upon the judgment wherein the Hon’ble Supreme Court observed incorporated clubs and associations constituted under statutory enactments were outside the scope of service tax prior to the amendment introduced with effect from 01.07.2012. The relevant para of the judgment is thus:

“72. The definition of “club or association” contained in Section 65(25a) makes it plain that any person or body of persons providing services for a subscription or any other amount to its members would be within the tax net. However, what is of importance is that anybody “established or constituted” by or under any law for the time being in force, is not included. Shri Dhruv Agarwal laid great emphasis on the judgments in DALCO Engineering Private Limited v. Satish Prabhakar Padhye and Ors. Etc. (2010) 4 SCC 378 (in particular paragraphs 10, 14 and 32 thereof) and CIT, Kanpur and Anr. v. Canara Bank (2018) 9 SCC 322 (in particular paragraphs 12 and 17 therein), to the effect that a company incorporated under the Companies Act cannot be said to be “established” by that Act. What is missed, however, is the fact that a Company incorporated under the Companies Act or a cooperative society registered as a cooperative society under a State Act can certainly be said to be “constituted” under any law for the time being in force. In R.C. Mitter & Sons, Calcutta v. CIT, West Bengal, Calcutta (1959) Supp. 2 SCR 641, this Court had occasion to construe what is meant by “constituted” under an instrument of partnership, which words occurred in Section 26A of the Income Tax Act, 1922. The Court held:

“The word “constituted” does not necessarily mean “created” or “set up”, though it may mean that also. It also includes the idea of clothing the agreement in a legal form. In the Oxford English Dictionary, Vol. II, at pp. 875 & 876, the word “constitute” is said to mean, inter alia, “to set up, establish, found (an institution, etc.)” and also “to give legal or official form or shape to (an assembly, etc.)”. Thus the word in its wider significance, would include both, the idea of creating or establishing, and the idea of giving a legal form to, a partnership. The Bench of the Calcutta High Court in the case of R.C. Mitter and Sons v. CIT [(1955) 28 ITR 698, 704, 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 companies and cooperative societies which are registered under the respective Acts, can certainly be said to be constituted under those Acts. This being the case, we accept the argument on behalf of the Respondents that incorporated clubs or associations or prior to 1 st July, 2012 were not included in the service tax net.”

Even for the period post 01.07.2012, the provision remains same despite insertion of explanation. Relevant para is cited below:

“82. We have already seen how the expression “body of persons” occurring in the explanation to Section 65 and occurring in Section 65(25a) and (25aa) does not refer to an incorporated company or an incorporated cooperative society. As the same expression has been used in Explanation 3 post-2012 (as opposed to the wide definition of “person” contained in Section 65B(37)), it may be assumed that the legislature has continued with the pre-2012 scheme of not taxing members’ clubs when they are in the incorporated form. 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.”

29. Although the present appellant is engaged in hospitality business rather than functioning as a conventional members’ club, the ratio laid down by the Apex Court reinforces the principle that taxability under the entry “Club or Association Service” cannot be determined merely because certain persons are described as Members. The real legal relationship has to be examined.

30. The appellant has also relied upon the decision of the Tribunal in the case of Bharat Hotels Ltd., supra, in that case also the appellant hotel introduced a loyalty programme under which customers became Members upon the payment of specified consideration. The Department sought to levy service tax under Club or Association Service. Rejecting the Departmental contention, the Tribunal held that such loyalty programmes merely promote customers relations and do not result in creation of any Club or Association. The Tribunal categorically observed that customers enrolled under such schemes cannot be equated with Members of a club merely because they become entitled to discounts or accommodation benefits. The Tribunal further held that the statutory 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 appellant is directly linked with accommodation. The entire pricing mechanism depends upon the category of apartment selected. No independent consideration is charged for club facilities. No subscription exist in the conventional sense. The commercial substance therefore clearly establishes that the appellant is selling accommodation rights and not Membership of a Club.

33. An equally important aspect deserves consideration. The Finance Act 2011 introduced a completely new taxable category namely “Short Term Accommodation Service” under Section 65(105)(zzzzw) with effect from 01.05.2011. The newly introduced taxable entry specifically brought within the tax net accommodation provided by hotels, inns, guest houses, clubs, campsites and similar establishments. The legislative introduction of a specifically taxable entry is highly significant. It is a well settled rule of statutory interpretation that where Parliament introduced a new taxable entry covering a particular activity without merely clarifying an existing provision, it ordinarily indicates that such activity was not intended to pay tax under the earlier entry. The Legislature consciously chose to tax hotel accommodation only from 01.05.2011. If accommodation provided through Time Share Scheme was already taxable under Club or Association Service, there was little necessity for Parliament to create an entirely separate taxable entry. This Legislative development therefore strongly supports the appellant’s contention.

34. The records also demonstrate that under the Time Share Scheme:

• Accommodation is booked in advance;
• Consideration is determined according to the category of the appellant;
• Revenue is recognized proportionately over the contractual period;
• No recurring subscription is collected;
• Customers merely enjoy accommodation rights;
• No management or governance rights are conferred.

These characteristics unmistakably established that the arrangement is essentially one of accommodation service. The Department has not produced any evidence to show that the appellant was functioning as a recreational club providing facilities exclusively to Members. Rather, records indicate that the resort was open even to ordinary guests. These circumstances further weaken the Department’s case.

35. Having considered the statutory provisions, 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 category of “Short Term Accommodation Service” with effect from 01.05.2011.

37. The appellant submits that under the Time Share Scheme it merely provides accommodation to its customers for a specified duration every year. No independent service, facility or advantage is provided except the right to occupy the allotted accommodation. It is therefore argued that the activity is essentially that of providing accommodation in a hotel or resort. The Revenue, however, contents that the appellant is not merely providing accommodation but is extending various privileges to Members and therefore the activity is distinguishable from ordinary hotel accommodation.

38. Section 65(105)(zzzzw) of the Finance Act, 1994, introduced by the Finance Act 2011 with effect from 01.05.2011 specifically brought within the ambit of service tax;

“service provided to any person by a hotel, inn, guest house, club or campsite, by whatever name called, in relation to providing accommodation for a continuous period of less than three months.”

39. The language employed by Parliament is significant. The Legislature consciously called out a separate taxable entry to dealing exclusively with accommodation provided by hotels, resorts, inns, guest houses, clubs and similar establishments. The very creation of a separate charging provision indicates that such activity was not intended to be covered by the earlier taxable entries. It is settled principle of statutory interpretation that where Parliament introduced a fresh taxable entry without describing it as clarificatory, the Court must presume that the activity was not taxable under the earlier provision. This principle has consistently been applied by the Hon’ble Supreme Court while interpreting physical statutes.

40. The Membership Agreement placed before us clearly reveals that the amount paid by every customer is directly linked with the category of accommodation selected by him. The customer acquires only a contractual right to occupy the accommodation for one week in every year during the agreed tenure. No evidence has been brought on record by the Department to establish that the appellant separately charged any consideration for recreational facilities, sports, club privileges or similar amenities. Even assuming certain incidental facilities were available within the resort, such facilities remain ancillary to the 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 Springfield 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 records reveal that after investigation commenced, the appellant examined its tax liability and voluntarily discharged the entire service tax payable under the aforesaid taxable categories together with applicable interest prior to issuance of the Show Cause Notice. The details furnished by the appellant demonstrate payment of service tax together with interest before issuance of Show Cause Notice. The Department has not disputed either the quantum or the fact of such payment. Thus, the factual position stands admitted.

43. Section 73(3) of the Finance Act, 1994 provides that where an assessee pays service tax together with applicable interest before issuance of the Show Cause Notice, no notice shall ordinarily be served in respect of the amount so paid unless the case falls within the exceptions contained in the proviso. The object of the Section 73(3) is to encourage voluntary compliance and avoid unnecessary litigation. Once the tax together with interest stands voluntarily paid before the issuance of the notice, initiation of adjudication proceedings ordinarily becomes unnecessary.

44. In the present case, the Department has not produced any material establishing deliberate fraud or willful suppression in relation to the aforesaid taxable services. The appellant has consistently explained that after being informed during investigation regarding the Department’s understanding of taxability, it immediately discharged the entire tax together with interest. Such conduct is consistent with bona fide compliance rather than deliberate evasion. Therefore, the benefit contemplated under Section 73(3) deserves to be extended to the appellant.

45. The appellant submits that VAT had already been discharged on the receipts from Mandap keeper Service and therefore it entertained a bona fide belief that service tax was not separately payable. Though such belief may not completely distinguish the statutory liability, it certainly explains the circumstances in which tax was not initially discharged. Immediately after the Department pointed out the liability, the appellant deposited both tax and interest. There is nothing on record suggesting that any amount remained unpaid after issuance of the notice. Accordingly, continuation of proceeding only for the purpose of imposing penalties cannot be justified.

46. The appellant has further submitted that it is essentially 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 examining any concluded information on the correctness of the appellant’s legal contention regarding taxability for the earlier period, we find that the admitted fact remains that tax and interest already stood deposited before issuance of the notice. This circumstance further strengthens the appellant’s plea for invoking Section 73(3) of the Finance Act, 1994.

49. Having carefully examined the entire record, we find that;

i. The appellant voluntarily discharged service tax relating to Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service before issuance of the Show Cause Notice;

ii. Applicable interest was also paid;

iii. The Department has not established any independent evidence of fraud, collusion or willful suppression in relation to these taxable services;

iv. The conduct of the appellant demonstrates voluntary compliance immediately upon being pointed out by the Department.

In these circumstances, we hold that the appellant is entitled to the benefit of Section 73(3) of the Finance Act, 1994 in respect of the aforesaid taxable services. Consequently, continuation of proceedings for imposition of penalties in relation to these demands cannot be sustained.

50. In view of the above discussion, we hold as follows;

a) The activity undertaken by the appellant is essentially one of providing accommodation and cannot be classified as “Club or Association Service”;

b) Introduction of “Short Term Accommodation Service” with effect from 01.05.2011 itself supports the conclusion that such activity was not taxable under the earlier entry;

c) The appellant had voluntarily discharged service tax together with interest relating to Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service before the issuance of the Show Cause Notice;

d) The appellant is therefore entitled to statutory benefit under Section 73(3) of the Finance Act, 1094.

Having held that the principal demand under Club or Association Service is not sustainable and that the appellant is entitled to the benefit of Section 73(3) in respect of the remaining taxable services, the next issue which survives for consideration is whether the penalties imposed under Section 76, 77 and 78 of 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 facts with intent to evade payment of service tax. However, upon careful scrutiny of the record, we find no material to support such allegation. The appellant is a company maintaining regular books of accounts. The Time Share receipts were duly reflected in the audited financial statements. The agreements entered into with customers were maintained in the ordinary course of business. The Department has not alleged that parallel accounts were maintained or that receipts were concealed from the statutory records. The investigation itself proceeded on the basis of documents produced by the appellant. Thus, the entire demand has been raised by drawing legal inferences regarding classification of the activity and not on account of discovery of any clandestine transactions. It is well settled that mere failure to adopt the Department’s interpretation of law does not amount to suppression of facts. Where all relevant facts are available in the statutory records and the dispute relates only to interpretation of law, ingredients necessary for invoking Section 78 of the Finance Act, 1994 are absent. Accordingly, the finding recorded by Adjudicating Authority regarding suppression cannot be sustained.

53. Another significant circumstance deserves notice. The principal controversy in the present case concerns classification of Time Share Membership under the taxable category of “Club or Association”. The issue itself has witnessed divergent judicial opinion over the years and has ultimately been clarified through various decisions of the Tribunal and the Hon’ble Supreme Court. The subsequent introduction of Short Term Accommodation Service with effect from 01.05.2011 itself demonstrates that legislative position was not free from doubt. Where two views are reasonably possible regarding taxability of an activity, the assessee cannot be accused of deliberate evasion. The existence of substantial judicial debate itself establishes bona fide belief. Therefore, the present case clearly falls within the category of interpretational disputes, where penal provisions deserve to be applied with great caution.

54. Learned Commissioner has imposed penalties simultaneously under Section 76 and 78 of the Finance Act, 1994. The appellant has challenged the legality of such simultaneous penalties. Since, we already hold that penalties under Section 78 itself is not sustainable for 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, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service are concerned, the appellant had voluntarily discharged the entire service tax together with applicable interest before issuance of the Show Cause Notice and is therefore entitled to the benefit of Section 73(3) of the Finance Act, 1994.

(v) The allegation of suppression of facts has not been established by any cogent evidence.

56. Therefore, we pass the following order:

(i) The confirmation of demand under the taxable category of Club or Association Service is set aside.

(ii)The appellant is held entitled benefit under Section 73(3) of the Finance Act, 1994 in respect of the demands related to Mandap Keeper Service, Internet Café Service, Rent-a-Cab Scheme Operator Service and Renting of Immovable Property Service, since the entire service tax was discharged together with the applicable interest prior to issuance of Show Cause Notice.

(iii) Consequently, all penalties imposed under Section 76, 77 and 78 of the Finance Act, 1994 are set aside.

57. The impugned Order-in-Original is modified to the above extent and the appeal filed by the appellant is allowed accordingly.

58. Appeal allowed partly.

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