Collection Of Charges By Flat Owners Association- GST Implications

In a recent ruling in the case of M/s. Vaishnavi Splendor Homeowners Welfare Association[1],the AAAR has held that collection by Association from its member is a taxable under GST Law. The Appellate Authority has distinguished the doctrine of mutuality as laid down by the Apex court in the case of State of West Bengal v. Calcutta Club Limited[2]. We have discussed the said decision of the AAAR and analysed the correctness of the same for the benefit of the readers.

Facts of the case :

The Appellant is an association of apartment owners in the condominium known as “Vaishnavi Splendour”. The association has 88 members and each of them contribute towards the maintenance of common area / facilities, lightings in the common areas, water, etc. The contributions of each member work out to more than Rs.7500/- per month. The Appellant Association made an application before the Authority for Advance Ruling (“AAR”).

Question before AAR :

  • Whether the Applicant Association is liable to pay GST on amount of contribution received from its members ?
  • Whether benefit of Notification no. 12/2017 CT(R) dt. 28/06/2017 (Sl. No. 77) r.w. Notification no. 02/2018 dt. 25/01/2018 which provides for exemption from tax where the value of supply upto an amount of Rs. 7500/- per month per member can be availed by the Appellant Association?
  • Whether GST is leviable on amount collected from members towards corpus fund?

AAR verdict :

The AAR ruled that :

  • Applicant is liable to pay GST oncontribution amount received by itfrom its members as their activities amount to taxable supply of its service.
  • Benefit of exemption as per above mentioned Notifications is available only if the contribution does not exceed Rs.7500/- per month per member. In case, contribution exceeds the said amount, the entire amount is taxable and not only the excess.
  • Applicant is eligible to claim ITC subject to restrictions u/s. 17(2) of CGST Act r.w. Rule 42 of CGST Rules and other restrictions applicable, if any.
  • GST is not leviable on collections from members for setting up corpus fund.

Aggrieved the Appellant Association filed an appeal before the Appellate Authority for Advance Ruling (“AAAR”)

Questions before AAAR :

Appellants’ submission before AAAR as to why GST shall not be levied :

  • Supply made to members by the members association is governed by principal of mutuality.
  • There has to be privity of contract between the supplier and receipient for levy of GST. Here, the supplier and recipient are one and the same. Thus, no privity of contract exist.
  • The Appellant is acting merely as an agent of the members and contribution of the members are mere reimbursement of amount spent for outsourcing goods and services and not in nature of consideration. The Appellant relied on the decision of State of West Bengal v. Calcutta Club Limited(supra) wherein the Apex Court held that there could be no sale by Respondent club to its own permanent members, for doctrine of mutuality would come into play. The Apex court has held that the club acted as agent of its members in entirety and that no consideration passed for supplies of food, drinks, etc. and there was only reimbursement of amount by members. Therefore, no sales tax could be levied.
  • Rule 33 of CGST rules provides for excluding amounts received as reimbursement of expenses from the value of supply of goods or service or both.
  • Where there is “no consideration”, the activity will not amount to “supply” and the levy will not get attracted.
  • Notification no. 25/2012 – Service Tax dt. 20/06/2012 reveals that contribution less than Rs.5000/- per month per member is fully exempted and contribution more than Rs.5000/- is exempted upto Rs.5000/- and tax was required to be paid on amount over and above Rs.5000/-. Similar interpretation applies for Notification no. 12/2017 CT(A) dt. 28/06/2017 under GST.
  • Interpretations which are more beneficial / favourable to the assessee should be adopted.
  • The Appellant source electricity and water, the supply of which is exempt from tax under CGST Act.

AAAR’s verdict :

Issue 1 : Supply of service by Association Appellant to its members is taxable under GST:

The AAAR analysed the various provisions of the CGST Act. The Authority held that to bring a transaction within the ambit of GST, there should be a supply of goods or services or both against consideration by a person in the course of or furtherance of its business. Accordingly, the Authority analysed scope of the term “Supply” in terms of sec. 7 and definition of the terms “service” as defined u/s. 2(102), “Consideration” as defined u/s. 2(31) and “Business” as defined in section 2(17) of CGST Act. The Appellate Authority broadly held as under:

1. The term “Service” as defined in section 2(102) is to be interpreted from the recipient’s point of view. The Activity performed by the Association for ensuring maintenance and upkeep of residential complex by procuring the services and goods from third party, benefits each member. Hence, since the members are getting the service of the association, the transaction is covered within the definition of the term “Service” and it can be said there is “service” rendered by Association to its members.

2. The monthly contribution made by the Member to the association is a “Consideration” as defined u/s. 2(31) of the Act. The association use the said consideration for sourcing the supplies for the members.

3. The Association is carrying on “Business” as defined in section 2(17) of the Act. Sub Clause (e) of section 2(17) specifically states that activity of providing facilities or benefits by an association to its members for a subscription is a business. Hence, the transaction between Association and members is a “service”.

Hence all the ingredients are presentfor the transaction to qualify for levy of GST in a transaction between the members and the association. The Appellate Authority further held that the decision of Apex court in the case of State of West Bengal v. Calcutta Club Limited (Supra) cannot be relied upon under the GST Law since the said decision applied to Service Tax as provided for in Finance Act, 1994. Under the said Act, the taxable event is terms of sec. 66B was on service “provided or agreed to be provided by on person to another”. Under GST, supply should necessarily be in course of or furtherance of business and business has been defined to include club, association, society or anybody which provides facilities to its members for a subscription. There is no provision that mandates that the service be from one person to another. Thus, as per the decision of the Appellate Authority, the GST law and service tax law operate differently.

Issue 2 : Entire contribution will be liable for tax under GST :

The Appellate Authority further held that the exemption as per Entry 77 of Notification no. 12/2017 CT(R) is available only when a member’s contribution per month is upto an amount of Rs.7500. A member who contributes an amount which is more than Rs.7500/, will not be eligible for the exemption under entry no. 77 and the entire contribution amount will be liable to be taxed.

While interpreting the said notification, the AAAR relied on the decision of Apex Court in the case of Commissioner of Customs (Import), Mumbai v. M/s. Dilip Kumar and Co.[3]wherein the apex Court held that the benefit of ambiguity in exemption notification cannot be claimed by the assessee and it must be interpreted in favour of the revenue.

Authors Analysis :

  • The above decision of AAAR has not considered certain aspects of the functioning of a residents’ association. The housing societies / associations are usually governed by the bye laws which have statutory recognition. Society are governed by the statutory provisions as provided under Co-operative Societies Act. Accordingly, the societies are incorporated bodies formed by the members for the members and is of the members. For instance, in Maharashtra, the Maharashtra Co-operative Societies Act, 1960 (“MCS Act”) is the codification of such residential associations. The managing committee of the said associations / society are constituted under MCS Act and is constituted from the members themselves. Hence, there is no separation between the members and the society. The said enactments lay down the collection and use of funds and the functions and duties of the managing committee. Thus, there is no element of any “consideration” being payable to the managing committee for the services rendered by them. The Managing Committee constituted out of members itself acts as trustees of the members and utilse the money strictly as mandated under the bye laws. The Managing Committee is answerable to the members and have to present the accounts of receipts and applications of funds periodically to the members in the Annual General Meeting and get the same approved.
  • Secondly, even u/s. 2(102), the term “service”, there is no inclusion of service to oneself. The decision of the Apex court in the Calcutta Club Limited (supra) has provided extensive literature on this aspect. The AAAR has jumped to the conclusion that the definition of the term “service” has to be seen from the eyes of the recipient without providing any reason for the same. Simultaneously the AAAR has not dealt with the decision of Apex court in entirety, which eloquently discusses the doctrine of mutuality which in view of the authors has not been done away under the GST Act. If the view of the AAAR is accepted, then the service rendered by a partner to the partnership firm would also become liable for GST which is not the intent of the legislature. In effect, the AAAR has totally done away with the application of concept of mutuality principle to GST by holding that there need not be duality of persons for service under GST law.
  • The AAAR has also erred in incorrectly interpreting the sub clause (e) in section 2(17) defining the term business. What the said sub clause states is if any facility or benefit is given for subscription or consideration by the club, association or society to its members, it will be treated as “business” of such club, society or association. There is no dispute to this observation. However, the act of collecting the common expenses in a pool and rendering that expense on behalf of its members is not a “facility” or benefit” against consideration. The sub clause would apply totransactions where such club, society or association has charged consideration to the member and provided some benefit or facility which is not common in nature or not from the common pool. For instance, if the housing society has charged some consideration and provided the common area of the building to its member to hold a function, would fall in such sub clause (e). Reimbursement of common expenses by member cannot be said to be consideration for “facility” or benefit” provided to members by the society.
  • Probably the biggest error committed by the AAAR was while interpreting the term “Consideration”. The AAAR in para 15 states that “the monthly contribution made by the members to the association is in the return for receiving the services of the Association in ensuring the maintenance and upkeep of the residential complex”. This is a grossly erroneous observation. The monthly maintenance charges usually reflect the reimbursement of the expenses being incurred by the members collectively for the maintenance of the residential complex. The common pool of collection of such money is maintained and managed by the members themselves through the collectively elected managing committee under the statutory norms. Such monthly contribution is used for payment of various charges including statutory charges like common electricity, water, property tax, sinking fund (a statutory levy), salaries of security, cleaners etc. The said contribution is not the “consideration” payable to the society for so called services rendered by them. No payment in nature of remuneration is made to the managing committee by the members for managing and maintaining the residential complex as it is governed by the concept of mutuality and common co-operation. Even if any surplus is generated that again belong to the members themselves in a collective manner and have to be utilized in the manner strictly as provided under the codified law and by laws. The managing committee is answerable and accountable to the members for the money collected and applied.
  • The AAAR has not considered that the concept of GST is based upon the value added tax. While collecting the reimbursement of expenses for the common facilities and services, there is no element of any value addition. Hence, any interpretation against the basic philosophy of the tax is not tenable.

Conclusion:

We believe that this matter has not yet seen the end of the road. There would be more litigation in the offing. Large number of resident associations and society being affected by the said decision would challenge the same until final word is received from the highest court. In the meantime, the Government would not spare these associations and would like to maximize the revenue by making them taxable.

[1] Order no. KAR/AAAR-10/2019-20 dated 21/01/2020

[2] Civil Appeal no. 4184 of 2009 (SC), order dt. 03/10/2019

[3] Civil Application no. 3327/2007 (SC), order dt. 30/07/2018

(Article is Authored by Adv Bharat Agarwal and CA Sneha Sarbhushan)

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2 Comments

  1. vswami says:

    Authors/ ADmn.
    The concluding remarks would have been helpful, and be of guidance to the aggrieved taxpayers’community; had those been made after a mindful study of the host of insightful material avilable, for free, in public domain say , on itatonline- apart from the FEED- Input on this website itself .
    courtesy (driven by pure compassion for the one and all concerned/ impacted by such adverse decisions/ rulings !
    OVER To…..

  2. vswami says:

    wrt – “Hence all the ingredients are present for the transaction to qualify for levy of GST in a transaction between the members and the association. The Appellate Authority further held that the decision of Apex court in the case of State of West Bengal v. Calcutta Club Limited (Supra) cannot be relied upon under the GSTLaw since the said decision applied to Service Tax as provided for in Finance Act, 1994. ………………….. THERE IS NO PROVISION THAT MANDATES that the service be from one person to another. Thus,…..”

    What has been blatantly oversighted is that, –
    the ‘doctrine of mutuality’ is a well known and firmly established “comon law principle”; which, as conceded / given effect to by courts, has/ should be regarded to have an overriding effect on any legislative. provision.
    For a dilation of the above stated propostion, go through the several posts on this very website – Articles, etc.
    The referred proposition does not seem to have been addressed or stressed ; hence not been considered or made a conscious note of. Had that been done, most certainly the decision might have been rendered , to the contrary, in taxpayers favour.

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