GST applicability on member’s clubs
There are lot of debates still going on relating to applicability of GST on member’s club in the context of Supreme Court larger bench decision [landmark decision] in the case of State of West Bengal & Ors. Vs Calcutta Club Limited [Civil Appeal No. 4184 of 2009] and State of West Bengal & Ors. Vs Calcutta Club Limited [ Civil Appeal No. 4184 of 2009].
In this article, I have jotted down certain provisions of the constitution, my understanding of the judgement, comparable provisions of the Income-tax Act and the arguments favour and against member’s club on applicability of GST.
Sequence of discussion:
A. Certain provisions of the Indian Constitution (which provides some context for interpretation)
B. Principle of mutuality
C. Discussion on the Judgement
D. Comparable provisions under the Income-tax law
E. Relevant provisions under the GST law
F. Taxability under GST regime
A) Certain provisions of the Constitution:
1. India being a federal state there is a necessity for distribution of legislative power between the union and the states.
(i) Schedule VII of the Indian Constitution contain 3 parts (List I – Union list; List II – State list; and List III -Concurrent list.
Given below some of the entries provided in the list :
|List I : Union List||List II : State List|
|Entry 82: Taxes on income other than agricultural income||Entry 44: Taxes on agricultural income|
|Entry 85: Corporation tax||Entry 54: Taxes on the sale or purchase of goods other than newspaper, subject to the provisions of entry 92A of List I [Before 101st Amendment]
Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods
[After 101st Amendment]
|Entry 86: Taxes on the capital value of the assets, exclusive of agricultural land, of individual and companies; taxes on capital of companies.|
|Entry 92A: Taxes on sale or purchase of goods other than newspaper, where such sale or purchase takes place in the course of inter-state trade or commerce.|
|Entry 92B: Taxes on the consignments of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce.|
|Entry 97 : Any other matters not in the list II or list III including any tax not mentioned in either of those lists [Residual entry]|
(ii) Article 246(1) provides – Parliament has exclusive power to make laws with respect to the matters enumerated in the union list.
Article 246(2) provides – Parliament and state legislatures has the power to make laws enumerated in the concurrent list.
Article 246(3) – State legislatures has exclusive power to make laws in respect of matters enumerated in the state list. However, there are certain exceptions.
Article 248: Parliament has exclusive power to make laws with respect to any matter not enumerated in concurrent list or state list.
(iii) The list provided in the Schedule VII is not a source of power, it is an allocation of power. It is pertinent to note the decision of Supreme court in the case of State of Andhra Pradesh vs National Thermal Power Corporation Limited AIR 2002 SC 1895, held that the entries in three list of Seventh Schedule are only legislative heads or fields of legislation and not source of legislative empowerment. They do not confer any legislative competence of the Parliament and legislatures. The competence to legislate has to be traced from the provisions of the Constitution.
(iv) Article 246A reads as follows: [Amendment relating to GST]
(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Article 246A overrides Article 246, wherein it provides that both Parliament and State legislature has equal power to legislate goods and service tax when it is of intra-state nature [CGST and SGST] and it also provides exclusive power to the Parliament to legislate goods and service tax when it is of inter-state nature[IGST].
2. Article 265 of the Indian Constitution provides, “no tax shall be levied or collected except by authority of law.” In other words, there should be valid law in place to tax.
3. Article 13(2) provides that “the state shall not make any law which takes away or abridges the fundamental rights and any law made in contravention of this clause shall, to the extent of contravention to be void.” Here the State shall not mean only State Government. It Includes the Government and Parliament of India and the Government and the legislature of each of the states and all local or other authorities within the territory of India or under the control of the Government of India [Article 12].
Article 246 read with 248 (including Article 246A) gives enormous power to the legislators to legislate laws, however, the law made shall not infringe/ violate the fundamental rights [given in Part III of Indian constitution (runs from Article 12 to Article 35)] of the people.
It is also pertinent to note that the fundamental rights vested on the citizens of India are not absolute rights but are restricted rights.
4. According to Article 141 of the Indian constitution, the law declared by the Supreme court shall be binding on all courts within the territory of India” [Binding precedent]. Two concepts were evolved in this context:
(i) Ratio decidendi – The reasons of the decision not only bind the concerned parties but also forms as law to future generations.
(ii) Obiter dicta – “Something said by the way”, which does not form part of the rationale of the decision. The same is binding only on the parties and do not amount to law and hence not binding on the future generations.
5. Some of the relevant definitions provided in the Indian Constitution:
Article 366. Definitions – In this constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say –
(12) “goods” includes all materials, commodities, and Articles
(26A) “service” anything other than goods
(29-A) “tax on the sale or purchase of goods” – Discussed in the later part of the article.
B) Principle of Mutuality:
C) Case law:
The larger bench decision which is based on the reference order of the divisional bench, is divided into two parts:
Part A: Tax on sale of goods by club to its members
Part B : Tax on services by club to its members
Part A: Tax on sale of goods by Club to its members [State of West Bengal & Ors. vs Calcutta Club Limited]
2. Decisions at various forum (except Supreme Court, discussed in the latter part of the article):
3. Supreme Court decision in case of CIT vs. Young Men’s Indian Association [1970 decision] – Constitution Bench decision – Six Judge bench:
(it is relevant to discuss this case before proceeding to the questions placed before the larger bench and the decision pronounced by the apex court).
Whether supply of refreshment by a club to its members attract sales tax?
[There were three appeals involved in this case – (i) the club registered under the Companies Act (section 25 Company)’; (ii) the club registered under Society Registration Act, 1860; and (iii) a trust formed through trust deed].
a) This decision is expressly based on the English judgements which disregarded the corporate form which has made no distinction between the club in incorporated form and club by way of a registered society or incorporated by a deed of trust.
b) The essence of the judgement is-
(i) The holding of property must be holding for and on behalf of members of the club, there being no transfer of property from one person to another (to fall under the principle of mutuality).
(ii) The above is not applicable to proprietary club, since the owner of the club would not be the members themselves, but somebody else.
4. Divisional bench sets following three questions to be answered by the larger bench:
(i)Whether the doctrine of mutuality is still applicable to the incorporated clubs or any club after 46th Amendment to the constitution?
(ii) Whether the judgement in the case of Young men’s India Association still holds good?
(iii) Whether the 46th Amendment to the constitution by deeming provisions provides that the provision of foods & beverages by the incorporated clubs to its permanent members constitute sale thereby holding the same to be liable to sales tax?
5. Larger bench observations:
5.1 61st Law commission Report
The supply and distribution by unincorporated society, club, firm, or an association, of goods to the members for payment of price may not result in a sale. Because those entities hold the goods on benefit of all the members. However, it will get transfer to a particular member not because of sale but by virtue of relinquishment of rights by other members in relation to goods, for the payment of price by the concerned member. In other words, release of the rights of the other members to the purchaser.
Since, this is the then present position, whether it is desirable to expand the concept of “sale” to provide the legislative power to the state? (Recommendation of Law Commission)
(i) Clubs and association are not large.
(ii) Taxation of such transactions would discourage the co-operative movement.
(iii) No series question of evasion arises (as a member really takes his own goods)
Hence, we therefore do not recommend any change.
Despite the above, Article 366(29-A) included within its sub-clause (e).
5.2 Statement of object and reasons which led to 46th Amendment:
√ Parties competent to the contract
√ Mutual assent
√ Transfer of property in goods from one party to another party
It is pertinent to note that the statement of the object and the reasons of the amendment are drafted based on the presumption that the incorporated clubs/ association are always taxable.
5.3 Article 366(29-A) of Indian Constitution
Article 366 (29-A) of Indian Constitution defines Tax on sale of goods includes –
e) Tax on supply of goods by any unincorporated association or Body of Persons to a member thereof for cash, deferred payment, or valuable consideration.
f) Tax on the supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), were such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.
It is pertinent to note the following:
5.4 West Bengal Sales Act:
Explanation 1 : Co-operative society/ club/ any association which sell goods to its members is a dealer.
– Trade, commerce, manufacture etc.,
– Whether it has been carried out with profit motive or not
– Whether any profit accrues on such trade, commerce, manufacture etc.,
– Any transaction which is in connection with the above activities
6. Rationale for decision:
(i) The doctrine of mutuality continues to be applicable to incorporated and unincorporated member’s club after 46th amendment adding article 366(29-A) to the Constitution of India.
(ii) Young men’s India association (supra) and other judgements which applied this doctrine (principle of mutuality) continue to hold the field even after the 46th Amendment.
(iii) Sub-clause (f) of Article 366(29-A) has no application to members’ clubs.
Part B: Service tax – Context [Chief Commissioner of Central Excise and Service & Ors vs M/s Ranchi Club Ltd
There were various appeals made in the Service tax context, all the appeals were clubbed and decided by the Supreme Court.
1. Facts in most of the appeals:
Member’s club either registered under the companies Act or registered cooperative societies under Society Registration Act, 1860. It is also noted that the service provided by a club to other members, are paying taxes.
The question is whether the services provided by the Club to its members are subject to Service tax?
Decision and reasons provided by Jharkhand High Court in Ranch Club case:
2 Supreme court (larger bench) observations:
(the supreme court observed the relevant provisions under pre-negative list and post-negative list and various decisions of the Supreme Court).
A) Pre-negative list provisions and position:
There shall be levied the tax (referred to as “the service tax”) at the rate of 12% of the value of taxable services referred to in sub-clauses… (zzze) of clause (105) of section 65, and collected in such manner as may be prescribed.
Taxable service means any service provided to its members or any other person by any club or association in relation to provision of services, facilities or advantage for a subscription or any other amount.
“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, to its members, but does not include –
(i) any body established or constituted by or any other law for the time being force.
“For the purpose of this section, taxable service includes any taxable services 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”.
Position of law in pre-negative list regime:
– Even though the club is defined as any person or body of persons, it excludes any body established or constituted by or any other law for the time being in force.
– Thus, the companies and co-operative societies which are registered under the respective acts, can certainly considered as body constituted under those acts.
– The explanation (to section 65) is defined in same terms as Article 366(29-A)(e) of the constitution of India, Hence the expression, “body of persons” will not include an incorporated company, nor will it include any other form of incorporation including an incorporated co-operative society.
Accordingly, the members clubs are not subject to service tax in respect to services provided to its members.
B) Post-negative list provisions
– Section 65 and 65A were made inapplicable and new section 65B were introduced.
There shall be levied the tax (referred to as “the service tax”) at the rate of 14% of the value of all services other than those service specified in the negative list [Section 66D], provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
“Service” means any activity carried out by a person for another for consideration and includes a declared services but shall not include –
(a) An activity which constitutes merely-
(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) Such transfer, delivery, or supply of any goods, which is deemed to be sale within the meaning of clause (29A) of Article 366 of the Constitution; or
(iii) A transaction in money or actionable claim.
Explanation 3: For the purpose of this chapter –
(a) an unincorporated association or body of persons, as the case may be, and a member thereof shall be treated as distinct persons.
(i) an Individual
(vii) an association of persons or body of individuals whether incorporated or not.
Comparison of pre-negative list and post-negative list
– Earlier the term “Service” was not defined, but now defined.
– Earlier each “Individual Service” on which tax was levied was defined (taxable service). Now negative list has been defined.
Position of law in negative list tax regime [Decision and rationale of the Decision]
– What has been stated in the present judgement so far as sales tax is concerned applies on all fours to service tax [rendition of service pre- supposes two persons; for consideration; one cannot sale to same person]
– Even though the term “Person” has been widely defined under section 65B(37), explanation 3 to Section 65B(44), instead of using the expression “person” or the expression “an association of persons or bodies of Individuals, whether incorporated or not”, uses the expression “a body of person” when used together with the term unincorporated association.
– Hence, as explained in pre-negative tax regime, the body of person does not refer to an incorporated company or an incorporated co-operative society; as the same expression included in explanation 3, it may be assumed that the legislature has continued with the pre-2012 scheme of not taxing member’s club when they are in the incorporated form.
D) Comparable provisions under the Income-tax Act, 1961
(applicable to mutual association)
1.1 Charging section [Section 4]
(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person.
1.2 Definition of Income
Section 2(24) Income includes –
(i) profits and gains
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59 ;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule ;
(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members; ——–
1.3 Definition of Person
Section 2(31) “Person” includes—
(i) an individual,
(iii) a company,
(v) an association of persons or a body of individuals, whether incorporated or not,
 Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains.
1.4 Decisions in the context of mutuality under Income-tax Act
“14. The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of the Income Tax Act defines taxable income. The income of a cooperative society from business is taxable under Section 2(24)(vii) and will stand excluded from the principle of mutuality.”
D) Relevant provisions of Central Goods and Service tax Act
1. Charging section [Section 9]
There shall be levied a tax called the CGST on all intra-state supplies of goods or services or both, on the value determined under section 15 and at such rates, but not exceeding 20% as may be notified by the Government on the recommendation of council and collected in such manner as may be prescribed and shall be paid by the taxable person.
2. Scope of supply [Section 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.
(b) The activities specified in schedule I, made or agreed to be made without a consideration.
(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section(1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.
[Activities or transactions to be treated as supply of goods or supply of services]
7. Supply of goods –
The following shall be treated as supply of goods, namely:-
Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment, or other valuable consideration.
3. Section 2(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 the members.
4. Section 2(31) “Consideration” in relation to supply of goods or services or both includes –
(a) any payment or to be made, whether in money of otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or any other person but shall not include any subsidy given by the Central Government or a state Government.
5. Section 2(84) “person” includes:
(a) an Individual;
(f) an association of persons or body of individuals, whether incorporated or not, in India or outside India.
6. It is pertinent to note the following points based on above provisions:
a) The subject matter of levy is supply (not sales though supply includes sales as per the definition of supply).
b) In addition to any of forms of supply provided in section 7, the following ingredients shall also be present:
(i) Two persons
(ii) Consideration [unless fall under sub-clause (b) to section 7(1)]
(iii) Furtherance of business
c) Similar to post negative list regime, CGST Act, has defined the term “Person”, which includes association of person or body of individuals whether incorporated or not.
E) Taxability under GST regime:
a) Arguments in favour of member’s club
b) Arguments against the member’s club
(i) Opening phrase of Article 366 starts with following expression, “unless the context otherwise requires”. The rationale behind the insertion of Article 366(29-A) was that there were certain transactions which were not normally covered under the definition of sale (eg., Hire purchase) and further in certain kind of transactions both goods and services were involved (eg., works contract) , hence there was a need to define tax on sale of goods to provide jurisdiction to State legislature to tax the same in case of intra-state transaction in pre-GST regime (Accordingly, the Parliament does not have power to tax those transactions by virtue of residual power). It is relevant to note here that earlier laws (laws relating to tax on sale of goods and service tax) were made based on power vested under Article 246 read with Schedule VII to the Constitution.
(ii) Now, Article 246A provides equal rights both to the Parliament and State Legislature to tax on sale of goods and services in respect to intra-state transaction. Article 246A overrides Article 246.
(iii) Further under pre-GST regime, the subject matter of tax is supply (not sale even though the term supply includes sale).
Hence, the interpretation based on Article 366(29-A) may not completely applicable in GST context.
a) The term “Person” defined under section 2(84) of CGST Act, includes – (i) an Individual; and (ii) an association of persons or body of Individuals, whether incorporated or not.
(the supreme court also in the above decision, accepted the contention that the member’s club would fall under the category of association of persons or body of individuals whether incorporated or not).
b) Since the Individuals and the club are considered as two different persons, hence, the payment made by the members to the club for provision of goods/ service would form part of consideration.
c) The term business has been defined under Section 2(17) of CGST Act, which includes provision of club (for a subscription or any other consideration) of the facilities or benefits to the members.
Since all the ingredients provided under the definition of supply are satisfied, the same would be taxable under GST regime.
a) The subject matter of tax under Income-tax Act, is Income. Hence, there is necessity to carry on business/ have profit motive to tax under Income-tax regime. Unlike GST, the term business is not elaborately defined in income-tax Act [Section 2(13) of the Income-tax Act, 1961] to include provision by a club/ association/ society, or any such body (for a subscription or any other consideration) of the facilities or benefits to the members.
b) Most of the decisions rendered in the context of clubs are based on the law prevalent before insertion of Explanation to the definition of Person under section 2(31) of the Income-tax Act.
c) One may also interpret the ruling of Chelmsford club, by giving the meaning, the Income-tax Act excludes from the purview of tax (which are not considered as income due to mutuality principle) by including certain items [even though it is not an income as per mutuality principle similar to sub-clause (vii)], in the definition of income 2(24). In the GST context there is no such type of inclusion under the definition of Supply and accordingly it can be interpreted that all forms of supply (even though the same may not be sale as per principle of mutuality) would subject to tax.
It may not be easy to conclude GST is not applicable to members clubs based on the Apex Court Larger bench decision. One must understand the background and take the position based on the facts and circumstances of each case.
For any clarification, readers can be reached to the author at email@example.com.
 [(Section 28(iii) income derived by a trade, professional or similar association from specific services performed for its members]
 Explanation was inserted by the Finance Act, 2002.