Indian Medical Association Vs Union of India (Kerala High Court)
In a significant verdict, the Kerala High Court has declared key amendments to the Central Goods and Services Tax (CGST) Act, 2017, and the Kerala Goods and Services Tax (KGST) Act, pertaining to the taxation of transactions between clubs/associations and their members, as unconstitutional and void. The division bench, hearing appeals against a single judge’s order, ruled that these amendments, which sought to redefine “supply” to include such transactions, overstepped the constitutional understanding of the term and lacked legislative competence.
Also Read: GST on Club Members’ Contributions: Unconstitutional & Void – Kerala HC
The case, Indian Medical Association Vs Union of India, centered on the constitutional validity of Section 2(17)(e) and Section 7(1)(aa) along with the Explanation added to both the CGST and KGST Acts. These amendments aimed to overcome the principle of mutuality, which, as established by the Supreme Court in earlier judgments, held that transactions between an entity and its own members do not constitute a “supply” or “service” as they lack the essential element of two distinct persons.
Principle of Mutuality and Constitutional Interpretation
The High Court bench, comprising Justices, meticulously examined the constitutional framework of GST. It emphasized that while the legislature possesses the power to enact validating laws to remove the basis of invalidity pointed out by courts, this power is not absolute. The crucial question, the court stated, was whether the legislature could levy tax on a transaction when the Constitution itself does not recognize it as a taxable event.
Drawing upon the Supreme Court’s rulings in Ranchi Club v. Chief Commissioner of Central Excise & Service Tax and State of West Bengal and Others v. Calcutta Club Ltd., the bench reiterated that the concepts of “supply” and “service” under the Constitution inherently require the existence of two parties – a provider and a recipient. The principle of mutuality, which dictates that there cannot be a transaction between oneself, has been a long-standing principle in tax law and has been upheld by the apex court even after the 46th Constitutional Amendment.
The court observed that while “goods” is a standalone concept, “supply” and “service” necessitate a plurality of persons. Article 246A of the Constitution, which grants concurrent legislative powers for GST, uses the term “supply” without any artificial meaning that would encompass a “deemed supply” in the context of member-club transactions.
Distinction from Earlier Constitutional Amendments
The High Court further highlighted the contrast between the current amendments and the 46th Constitutional Amendment Act, 1982. The latter introduced Article 366(29A) to specifically deem certain transactions, which did not traditionally qualify as “sale of goods,” as such for the purpose of sales tax. This amendment included deeming the supply of goods by an incorporated association to its members as a “tax on the sale or purchase of goods.”
However, the recent amendments to the CGST/SGST Acts merely altered the definition of “supply” to include activities between a non-individual entity and its members, without a corresponding amendment to the constitutional understanding of “service.” The court noted the significant absence of a constitutional amendment deeming the supply of service by a club or association to its members as a taxable service under GST.
Legislative Competence and Constitutional Meaning
The bench firmly rejected the argument put forth by the Additional Solicitor General, relying on precedents like Karnataka Bank v. State of Andhra Pradesh and Ramanlal Bhailal Patel v. State of Gujarat, that the legislature has the prerogative to assign an artificial meaning to a word within a statute. The court clarified that while this principle holds in general statutory interpretation, it cannot override the established meaning of a word or concept as understood within the Constitution itself, particularly when that meaning defines the very scope of the legislature’s power to enact laws on that subject.
The High Court asserted that when the Supreme Court has interpreted a word or concept in the Constitution in a specific manner, a legislative body deriving its power from the Constitution cannot ascribe a contradictory meaning to that same word or concept. Doing so would be an overreach of legislative competence.
Precedents on Statutory Definitions Distinguished
The court also distinguished the present case from the Supreme Court’s decisions in Navnit Lal C. Javeri v. K.K. Sen and Skill Lotto Solutions Pvt. Ltd. v. Union of India. In Navnit Lal, the court upheld the inclusion of loans to shareholders as “income” under the Income Tax Act, noting the broad interpretation of “income” within the relevant entry of the Constitution’s List I. However, the court emphasized that this interpretation was within the context of the Income Tax Act and did not involve altering a constitutionally defined term.
Similarly, in Skill Lotto, the Supreme Court upheld the inclusion of actionable claims within the definition of “goods” under the CGST Act, finding no conflict with the constitutional understanding of the term. The Kerala High Court pointed out that in the present case, the judicially established meaning of “supply” and “service” under the Constitution, requiring two distinct persons, directly contradicts the expanded definition introduced by the amendments.
Retrospective Application Held Illegal
While the declaration of unconstitutionality rendered the issue of retrospective application moot, the High Court explicitly concurred with the single judge’s finding that the retrospective operation of the impugned amendments was illegal. The bench emphasized that fairness is a fundamental principle of the Rule of Law, a basic feature of the Constitution. Imposing a tax liability retrospectively, especially when individuals or entities had no prior anticipation of such a levy and consequently no opportunity to collect it from service recipients, violates this principle. The court found no valid justification provided by the state for such retrospective application.
Conclusion and Implications
In its final order, the Kerala High Court allowed the appeal challenging the single judge’s decision and dismissed the appeals filed by the state. The court declared Section 2(17)(e) and Section 7(1)(aa) along with the Explanation of the CGST Act, 2017, and the KGST Act as unconstitutional and void, being ultra vires Article 246A, Article 366 (12A), and Article 265 of the Constitution of India.
This judgment carries significant implications for clubs, associations, and self-help groups across the country, providing relief from the GST levy on transactions with their members. It also underscores the importance of adhering to the constitutional meaning of taxable events when enacting tax legislation and the limitations on the legislature’s power to redefine constitutionally understood terms. The ruling is likely to be challenged in the Supreme Court.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
