GST may not be applicable on Housing Scocieties

GST may not be applicable on Housing Societies

1. Recently Hon. Supreme Court has given a landmark judgement with regard to levy of sales tax on goods supplied by clubs to its members and service tax on services provided by clubs to its members. Surely this is going to cast shadow on the levy of GST on the services of clubs including that of housing societies.

2. The divisional bench of the Hon Supreme Court had referred the following cases to its larger bench;

a. State of West Bengal v. Calcutta Club Limited (2017) 5 SCC 356 -with regard to levy of sales tax on club,

b. Ranchi Club Vs. CCCE&ST, Ranchi W.P.(T) No. 2388 of 2007-with regard to levy of service tax on club,

c. Sports Club of Gujarat Ltd. v/s Union of India Special Civil Application Nos. 13654-13656 of 2005-with regard to levy of service tax on club.

SALES TAX:

3. With regard to levy of sales tax, the question posed before the larger bench were;

(i) Whether the doctrine of mutuality is still applicable to incorporated clubs or any club after the 46th Amendment to Article 366(29-A) of the Constitution of India?

(ii) Whether the judgment in Young Men’s Indian Assn. [CTO v. Young Men’s Indian Assn., (1970) 1 SCC 462] still holds the field even after the 46th Amendment of the Constitution of India; and whether the decisions in Cosmopolitan Club [Cosmopolitan Club v. State of T.N., (2017) 5 SCC 635 : (2009) 19 VST 456 (SC)] and Fateh Maidan Club [Fateh Maidan Club v. CTO, (2017) 5 SCC 638 : (2008) 12 VST 598 (SC)] which remitted the matter applying the doctrine of mutuality after the constitutional amendment can be treated to be stating the correct principle of law?

(iii) Whether the 46th Amendment to the Constitution, by deeming fiction provides that provision of food and beverages by the incorporated clubs to its permanent members constitute sale thereby holding the same to be liable to sales tax?

4. It was held by the Apex Court that, Article 366(29A)(e) provides for tax on supply of goods by any unincorporated association or body of persons to a member thereof. It cannot refer to incorporated associations. With regard to 46^th amendment to Constitution, the Law Commission was of the view that the Constitution ought not to be amended so as to bring within the tax net members’ clubs. It gave three reasons for so doing. First, it stated that the number of such clubs and associations would not be very large; second, taxation of such transactions might discourage the cooperative movement; and third, no serious question of evasion of tax arises as a member of such clubs really takes his own goods

5. In the case of an unincorporated society, club or a firm or an association, ordinarily the supply and distribution by such a society, club, firm or an association, of goods belongs to its members, may not result in sale of the goods which are jointly held for the benefit of the members of the society, club, firm or the association, when, by virtue of the relinquishment of the common rights of the members, the property stands transferred to a member in payment of a price, and the transaction may not prima facie be regard as a ‘sale’ within the meaning of the Act.

6. What is essential is that the holding of the property by the trustee or agent must be a holding for and on behalf of, and not a holding antagonistic to, the members of the club.

7. The judgement in the case of Young Men’s Indian Association made no distinction between a club in the corporate form and a club by way of a registered society or incorporated by a deed of trust. What is the essence of the judgment is that the holding of property must be a holding for and on behalf of the members of the club, there being no transfer of property from one person to another. Proprietary clubs were distinguished, as there the owner of the club would not be the members themselves, but somebody else.

8. It is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered.

9. What is of essence, therefore, in applying this doctrine is that there is no sale transaction between two persons, as one person cannot sell goods to itself.

10. the 46th Amendment used the expression “any unincorporated association or body of persons”. This expression, when read with the Statement of Objects and Reasons, makes it clear that it was only clubs which are not in corporate form that were sought to be brought within the tax net, as it was wrongly assumed that sale of goods by members’ clubs in the corporate form were taxable.

11. The expression “unincorporated associations” would include persons who join together in some common purpose or common action.

12. Even otherwise, on the assumption that “unincorporated association or body of persons” must be read disjunctively, “a body of persons” cannot be equated with “person”

13. The definition of “person” in other Acts such as the Income Tax Act, 1961 is also very wide, and includes an association of persons or body of individuals, whether incorporated or not – see Section 2(31) of the Income Tax Act, 1961. Quite clearly, this language was available and in common usage by the legislature, as the definition of “person” under the Income Tax Act has stood in the statute book since 1961. The contrast in the language of the Income Tax Act, 1961 and Article 366(29-A)(e) again leads to the conclusion that “body of persons” would not refer to the corporate form unless “person” by itself is accompanied by the expression “whether incorporated or not”.

14. In view of the above, the Apex Court concluded that (i) the doctrine of mutuality still exists even after insertion of Article 366(29A), (ii) the judgment in Young Men’s Indian Assn. still holds the correct principles of law after the said Constitutional amendment and (iii) supply of food by club to its members does not constitute sale.

SERVICE TAX:

15. Further, with regard to applicability of service tax on the services of the clubs and co-operative societies to its members, the Apex Court held as under;

16. Section 65(25a), of the Finance Act, 1994 (‘Act’) defines “club or association” as follows:

“club or association” means any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include-

(i) anybody established or constituted by or under any law for the time being in force, or

(ii) any person or body of person engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry, or

(iii) any person or body of person 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.

17. Section 65(105)(zze) of the Act defines “taxable service” as follows:

“Taxable service” means any service provided to its members by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount.”

18. With effect from 1st May, 2011, “club or association” was defined by Section 65(25aa) as follows:

“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) anybody established or constituted by or under any law for the time being in force, or

(ii) any person or body of person engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry, or

(iii) any person or body of person 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.

19. Likewise, in Section 65(105)(zzze), the expression “or any other person” was added after the expression “to its members”, thus making it clear that the tax net had now been widened so as to include non-members of clubs or associations as well.

20. Wef 01.07.2012, Section 65B(37), the term “person” was defined as follows: “person” includes,-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a society,

(v) a limited liability partnership

(vi) a firm,

(vii) an association of persons or body of individuals, whether incorporated or not,

(viii) Government,

(ix) a local authority, or

(x) every artificial juridical person, not falling within any of the preceding sub-clauses;

21. 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.

22. Explanation 3 has been incorporated in the definition of service which states, unincorporated associations or body of persons and their members are statutorily to be treated as distinct persons.

23. The explanation to Section 65, which was inserted by the Finance Act of 2006, reads as follows:

“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:”

24. It will be noticed that “club or association” was earlier defined under Section 65(25a) and 65(25aa) to mean “any person” or “body of persons” providing service. In these definitions, the expression “body of persons” cannot possibly include persons who are incorporated entities, as such entities have been expressly excluded under Section 65(25a)(i) and 65(25aa)(i) as “anybody established or constituted by or under any law for the time being in force”. “Body of persons”, therefore, would not, within these definitions, include a body constituted under any law for the time being in force.

25. It can be seen that the definition of “service” contained in Section 65B(44) is very wide, as meaning any activity carried out by a person for another for consideration. “Person” is defined in Section 65B(37) as including, inter alia, a company, a society and every artificial juridical person not falling in any of the preceding sub-clauses, as also any association of persons or body of individuals whether incorporated or not.

26. What has been stated in the present judgment so far as sales tax is concerned applies on all fours to service tax; as, if the doctrine of agency, trust and mutuality is to be applied qua members’ clubs, there has to be an activity carried out by one person for another for consideration. We have seen how in the judgment relating to sales tax, the fact is that in members’ clubs there is no sale by one person to another for consideration, as one cannot sell something to oneself. This would apply on all fours to construe the definition of “service” under Section 65B(44) as well.

27. 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, the incorporated clubs or associations prior to 1st July, 2012 were not included in the service tax net.

28. After introduction of negative list in July 2012, services were taxable if they were carried out by “one person” for “another person” for consideration. “Person” is very widely defined by Section 65B(37) as including individuals as well as all associations of persons or bodies of individuals, whether incorporated or not. 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 persons” when juxtaposed with “an unincorporated association”.

29. It is already 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.

30. 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.

31. In view of the above, the Apex Court held that the Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following Young Men’s Indian Association judgement. Therefore, from 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members’ clubs in the incorporated form.

SERVICE TAX ON HOUSING SOCIEITIES:

32. The housing societies are formed under the provisions of Cooperative Societies Act of the State. It is an incorporated person. The housing societies are formed by the members of the housing society. The purpose of incorporation of such housing societies is to provide or facilitate the service to its own members. Housing societies does not provide service to any person other than its members. Therefore, it is a member’s club.

33. In view of above discussion of the judgement of the Apex Court, service tax was not leviable on the housing societies.

REFUND OF SERVICE TAX PAID?

34. Article 265 of the Constitution provides that no tax shall be levied or collected except by the authority of law. The Government cannot retain the money collected without authority of law, the same must be refunded. Solonah Tea Co. Ltd. Vs. Supdt of Taxes, Nowgang. 1987(12) TMI 3 SC, U.P. Pollution Control Board and Other V. Kanoria Industries Ltd. And others. 2001(1) TMI 83 SC.

35. The Apex Court in the case of Cawasi & Co case [1978 E L T (J 154)] observed that the period of limitation prescribed for recovery of money paid under a mistake of law is three years from the date when the mistake is known, be it 100 years after the date of payment.

36. In view of the above, housing societies may apply for refund of the service tax paid all these years. Since it is a members’ club, the doctrine of unjust enrichment should also not be applicable. Money, if refunded to the housing societies, no unjust enrichment accrues to housing societies as the benefit goes to members only. In case of Karnavati Club Ltd V. CST, Ahmedabad 2013(031) STR 0445 (Tri. Ahmd.) it was held that where doctrine of mutuality is applicable, there is no need to pass the test of unjust enrichment for refund as the provisions of section 12B of the Central Excise Act, 1944 is not applicable.

 APPLICABILITY OF GST ON HOUSING SOCIEITES:

37. It is important to refer to certain legal provisions of GST to understand the implication of the above judgement of the Apex Court. Sec. 2 (17) of the CGST Act, 2017, defines “business” includes–

(a) ….(e)

(f) 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;..

38. Further, Sec. 2 (84) defines “person” includes—

(a)….(e);

(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g)..(h)

(i) a co-operative society registered under any law relating to co-operative societies;

39. Thus, under the provisions of GST law, the term business includes services provided by club, association and societies. The term ‘service’ under GST is inclusively defined to cover vide range of activities. To attract levy, the activity must be for a consideration and in the course of business.

40. In view of the fact that the concept of mutuality is being upheld by the Hon. Supreme Court, this principle could be applicable in the GST regime also. One cannot supply or do business with oneself. The supply to distinct person is an exception carved out in the GST law. Whether the tenability of this provision will withstand the legal scrutiny is yet to be seen as already challenges are before many courts.

CONCLUSION:

41. In my view, GST should not be applicable to services provided by housing societies to its members. To have a cautious approach the societies may approach Authority for Advance Ruling (AAR) to obtain decision on the same to safeguard the interest of the members. However, it may be noted that most of the decisions of the AARs so far, are found to be in favour of department irrespective of merit of the case.

Disclaimer:

The views expressed herein are the views of the paper writer and cannot be used in framing of opinions or devising methodologies for the purpose of compliance without an independent evaluation- vasant.bhat@hiregange.com.