Club or an Association- Relevance of Concept of Mutuality under GST

Levy of GST is on an event called “supply”. In case of an association or club, can it be said that an association or club is supplying services to its own members ?

As an illustration to understand the issue let us assume that a housing association is formed by the resident members to facilitate common maintenance of the society. The purpose of forming such association is only to pool the resources for common expenditure. Such resident members contribute funds to the association which in turn are used by the association to procure various goods or services for the common maintenance. In fact any surplus or deficit arising in such association is either used for subsequent expenditure in case of surplus or the shortfall is met by further contributions from members.

No. 77 of Notification No. 12/2017-Central Tax (Rate) provides for exemption to the services by an unincorporated body or a non-profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution up to an amount of seven thousand five hundred rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex. Hence as per said entry exemption is provided to the services rendered by housing association to its members if the contribution from members is upto INR 7,500/- per member per month. Earlier the said limit was INR 5,000/-.

However the above limit may not cover every housing association especially when the cost of maintenance of luxurious societies now-a-days is much more than INR 7,500/- per member per month. Moot question before us is whether tax is payable in cases where the amount exceeds the exemption limit ? It must also be noted that said exemption does not apply to club or commercial complexes. Hence again the issue is whether tax is payable on contributions received from members of club or commercial complexes ? For the purpose of our analysis we are assuming that aggregate turnover of such association or club exceeds INR 20 lakhs.

CAN ASSOCIATION PROVIDE SERVICE TO ITS OWN MEMBERS ??

As per Sec. 9 of the Central Goods & Services Tax (“CGST”) Act, 2017, levy of tax is on an event called ‘supply’. Scope of supply is stated u/s 7. Relevant portion of said provision is reproduced below for ready reference:

‘Sec. 7. (1) For the purposes of this Act, the expression “supply” includes––

a. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business

c. the activities specified in Schedule I, made or agreed to be made without a consideration’

To tax the transaction between an association or club and its members, said transaction must either fit either under clause (a) or clause (c) above.

Clause (a) covers all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

Hence following ingredients must be satisfied:

a. There must be supply of goods or services or both for a consideration

b. And such supply must be in the course or furtherance of business

Now let us examine whether both the ingredients are fulfilled in the transaction between an association and its members. It must be noted that both the ingredients must be satisfied to tax the transaction. If only one is satisfied, transaction cannot be taxed under the referred clause.

BUSINESS

The term ‘business’ is defined u/s 2(17). For our discussion clause (e) of said definition is relevant and hence reproduced below for ready reference:

‘(17) “business” includes––

(e) 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’

From the above definition it is clear that the term “business” includes provision by an association of facilities or benefits to its members. Hence if the transaction between an association and its members satisfies the other ingredient that it is a supply of goods or services for a consideration, the same will be taxed.

Transaction of providing services to its members is clearly a transaction of service. Hence the only question which remains is that can it be said that said service has been provided for a consideration ?

It is worthwhile to refer to the definition of “supplier” as provided u/s 2(105) & “recipient” as provided u/s 2(93). Both the definitions are reproduced below:

Sec. 2(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied

Sec. 2(93) “recipient” of supply of goods or services or both, means —

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied

Conjoint reading of both the definitions provides that where a consideration is involved in a transaction, the recipient is the “person” who pays the consideration to the “supplier”. Hence two different persons have been envisaged in the law to tax a transaction as a supply made for a consideration.

CAN AN ASSOCIATION & MEMBERS’ BE TREATED AS DIFFERENT PERSONS ??

Finance Act, 1994 i.e. Service Tax Law as in existence before 01.07.2012 provided for levy of tax on clubs/associations. Relevant provisions are reproduced for ready reference:

‘Sec. 65(25a) “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’

[Explanation. — For the purposes of this section, taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration :]

Said levy was challenged in the case of Ranchi Club Ltd v. Chief Commissioner [2012] 26 S.T.R. 401 (Jhar.) before Hon. Jharkhand High Court. Main contention before the court was that considering the concept of mutuality a club/association cannot provide service to itself. Only service provided to other person is taxable. Thus despite the explanation provided in the law, in absence of deeming fiction treating club/association and its members as distinct person, service tax shall not be payable.

High Court accepted the contention of petitioner and held that the levy is ultra vires to the extent of money collected from members. Relevant extract is reproduced below:

‘It is true that sale and service are two different and distinct transaction. The sale entails transfer of property whereas in service, there is no transfer of property. However, the basic feature common in both transaction requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver. Since the issue whether there are two persons or two legal entity in the activities of the members’ club has been already considered and decided by the Hon’ble Supreme Court as well as by the Full Bench of this Court in the cases referred above, therefore, this issue is no more res integra and issue is to be answered in favour of the writ petitioner and it can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of existence of two legal entities in such transaction is missing. However, so far as services by the club to other than members, learned counsel for the petitioner submitted that they are paying the tax.’

Subsequently Hon. Gujarat High Court in the case of Sports Club of Gujarat Ltd v. UOI [2013] 40 STT 486 (Guj.) concurred with Hon. Jharkhand High Court and has taken a view as club and members are not distinct persons, levy of service tax on such clubs/associations is ultra vires.

Thereafter to nullify the above referred decisions w.e.f. 01.06.2012 clause (a) to Explanation 3 to Sec. 65B provided that an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons. Same is also reproduced for ready reference:

‘Explanation 3. — For the purposes of this Chapter,—

(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;’

Thereafter Authority for Advance Ruling in the case of Emerald Leisures Ltd [2016] 41 STR 321 (AAR) held that judgment of Jharkhand High Court (supra) shall not apply post amendment as law clearly provides that club and its members are to be treated as distinct persons. Hence any service by club to its members shall be taxable. Relevant paragraph is reproduced below for ready reference:

‘Applicant also relied upon the judgments of the Hon’ble High Court in case Saturday Club Ltd. v. A.C. Service Tax Cell, Calcutta [2006 (3) S.T.R. 305 (Cal.)] and Sports Club of Gujarat Ltd. v. U.O.I. [2013 (31) S.T.R. 645 (Guj.)] to emphasize that in view of principles of mutuality, no service tax is payable by the applicant. The Hon’ble High Court observed that principally there should be existence of two sides/entities for having transaction as against consideration – In a members club, there is no question of two sides – members and club, both are same entity. We observe that with effect from 1-7-2012, new system of taxation of services has been introduced by the Government. Besides other changes, the word “service” has also been defined under Section 65B (44) of the Finance Act, 1994. Explanation 3(a) to said Section states that for the purposes of this Chapter, an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons. Therefore, deeming provision has been introduced with effect from 1-7-2012 to the effect that the club and members are deemed to be separate persons. In view of these recent changes, the judgments of Hon’ble High Courts relied upon by the applicant, are no more applicable to facts of the case before us. Therefore, the contention of the applicant that club and its members are not two distinct persons, is incorrect.’

In the context of GST, definition of person is provided u/s 2(84) of the CGST Act, 2017. As per said definition, there is no deeming fiction to treat association and members as different persons. Hence we conclude that the decisions of Jharkhand High Court as well as Gujarat High Court shall apply in the context of GST. Association or club and its members cannot be treated as different persons. Hence key condition to tax a transaction u/s 7(1)(a), that supplier and recipient must be different, is not satisfied. Hence the transaction of providing services by an association to its members cannot be taxed u/s 7(1)(a).

RECENT CONTROVERSIAL CIRCULAR

TRU has issued a recent circular (Circular No. 35/9/2018-GST) explaining the taxability between members of a Joint Venture. Relevant portion of the circular is reproduced below:

“GST is levied on intra-State and inter-State supply of goods and services. According to section 7 of CGST Act, 2017, the expression “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business, and includes activities specified in Schedule II to the CGST Act, 2017. The definition of “business” in section 2(17) of CGST Act states that “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. The term person is defined in section 2(84) of the CGST Act, 2017 to include an association of persons or a body of individuals, whether incorporated or not, in India or outside India. Further, Schedule II of CGST Act, 2017 enumerates activities which are to be treated as supply of goods or as supply of services. It states in para 7 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. A conjoint reading of the above provisions of the law implies that supply of services by an unincorporated association or body of persons (AOP) to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of services. The above entry in Schedule II is analogous to and draws strength from the provision in Article 366(29A)(e) of the Constitution according to which a tax on the sale or purchase of goods includes a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.”

Following observations may be noted in reference to the above circular:

a. Above circular has not considered the definition of “supplier” as well as “recipient” before taxing a transaction u/s 7(1)(a). There must be two different persons to tax a transaction under said provision. Merely because an association of person has been included as person u/s 2(84) does not imply that members of such association are different persons.

b. Circular has invoked the concept of deemed sale as provided under Article 366(29A) of the Constitution. It must be noted that clause (e) of said Article only enables to tax supply of goods by an association to its members as deemed sale. It does not enable to tax supply of service as a deemed service. Even para 7 of Schedule II only covers supply of goods by any unincorporated association. It does not cover supply of services. Unless provision similar to that of deemed sale is made either in the Constitution or the Act, services provided by an association to its members cannot be taxed.

c. Invoking the concept of “deemed sale” shall result in countless litigations. This is because Schedule – II of the CGST Act, 2017 is at any many places in direct conflict with Article 366(29A). Hence the said circular will open Pandora’s Box full of litigation.

Now, let us examine whether the transaction between an association and its members can be taxed u/s 7(1)(c). Said clause covers the activities specified in Schedule I, made or agreed to be made without a consideration. If self-supply is taxable, it must be covered under Schedule I. Entry number 2 of Schedule I provides that supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business shall be taxable. Members are not covered under section 25 as distinct person. Hence only thing to be checked is whether an association and its members are related person.

Explanation u/s 15 of CGST Act, 2017 defines related person. Said explanation is also reproduced below for ready reference:

‘Explanation. — For the purposes of this Act, —

(a) persons shall be deemed to be “related persons” if —

(i) such persons are officers or directors of one another’s businesses;

(ii) such persons are legally recognised partners in business;

(iii) such persons are employer and employee;

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;

(v) one of them directly or indirectly controls the other;

(vi) both of them are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person; or;

(viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.’

On perusal of above list one can conclude that there must be two or more persons who can be considered as related owing to the above conditions. As an association and its members are the same because of principle of mutuality they cannot be regarded as related person.

CONCLUSION

From the foregoing analysis we conclude that transaction between an association or club and its members will not be covered within the scope of supply u/s 7 of the CGST Act, 2017. Hence the same shall not be taxable.