Provision related to levy of GST on service provided by club/ association to its member is Unconstitutional-Kerala High Court
In recent case of Indian Medical Association, Kerala State Branch, Kerala High Court, held that, the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017 and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the KGST Act are declared as unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India.
Fact of the case:- The petitioner runs various mutual Schemes for the benefit of its member-doctors, All the Schemes are to support fellow doctors, while one or two Schemes support their immediate family members. The member-doctors contribute an admission/annual fee, and in cases of certain Schemes also a fraternity contribution upon the death/disability of a fellow member doctor; the pooled sum is paid out to the widow of deceased doctors, disabled doctors, doctors afflicted with specified diseases, etc. Each Scheme is run by a separately elected committee, in which the Secretary and President of the petitioner are ex officio members. The Schemes have separate bank accounts, and accounts of each Scheme are drawn up and separately audited.
Action from the Directorate General of GST Intelligence (DGGI) for recovery of tax on various services rendered as mentioned above by it to its members. DGGI served with summons requiring it to produce details of the registration taken by it under the GST Act and their audited books of accounts and other financial documents for the financial years from 2017-18 to 2021-22.
Submission from Petitioner
The Constitution 101st Amendment defined goods and services tax as a “tax on supply of goods or services or both”, per Article 366(12A). The plain meaning of “supply of goods or services” is supply by one person to another. In other words, it is evident that “supply”, by its very nature, requires two persons. There can be no supply to oneself.
Thus, the scope of the legislative power granted by the Constitution to levy GST is that such a tax can be levied only where there is supply of goods/service by one person to another.
by the Finance Act, 2021, Parliament introduced Section 7(1)(aa) retrospectively w.e.f. the date of commencement of the GST regime (01-Jul-17) thereby inserting a legal fiction and artificially deeming a club/association and its members to be two separate persons. Further, the taxable event was also artificially enlarged to include “activities or transactions” between a club/association and its members.
On the aspect of Enlarging scope of “supply” by amending Section 7 of CGST Act without amending the Constitution – impermissible and unconstitutional. a power given to tax “supply of goods and services” can only be construed as applying to sale/service by one person to another, and not to sale/service to oneself (which is the case with respect to clubs/associations, since the club/association and its members are one and the same).
If this legislative power granted by the Constitution is to be expanded beyond the known legal connotations, it can be done only by a constitutional amendment doing away with the long-established and well-recognised concept of mutuality i.e., by a constitutional amendment which invests the Parliament and State legislature with the power to levy GST on self-sale/self-services between a club and its members. A statutory amendment, howsoever creatively worded, and ingeniously couched as a clarification, would not suffice.
Even the 46th Amendment has done away with mutuality and would stand in aid of the impugned statutory provisions, it has done so only with respect to goods. As regards services, the position would continue to be governed by the known legal connotations of mutuality.
Article 246A speaks only of “supply of goods and services”. Section 7(1)(aa) though expands it to mean “activities or transactions”. If indeed, supply naturally meant activities or transactions there would have been no need for such an artificial definition.
Where the retrospective law is confiscatory, it would unreasonable and thereby unconstitutional. Section 7(1)(aa) and Explanation thereto, created a new levy, this is done by overturning a long-held position of law i.e., the mutuality of clubs and association.
Section 7(1)(aa) itself states employs “deemed” twice amply demonstrates that the pre-amendment position was different from the post-amendment position, and that the use of “it is clarified” is but a vain smokescreen.
The submissions of the Additional Solicitor General,
The source of power for enacting the Central Goods and Services Tax Act and Kerala Goods and Services Tax Act is from Article 246A and Article 366(12A). Parliament and Legislature of every State shall have power to make laws with respect to Goods and Services Tax. Article 366(12A) provides that Goods and Services Tax means tax on any supply of goods or services or both, except taxes on supply of alcoholic liquor for human consumption.
As such nothing in Articles 246 or 254 or any judgment interpreting a law under the said Articles and referable to List 1 entry 97 and entry 54 of List 2 would be applicable, as Article 246A is an enabling provision notwithstanding Articles 246 and 254 of the Constitution.
When there are no limitations or restrictions imposed by the Constitution, no such limitations or restrictions can be read into such power.if at all it is considered that the judgment in Calcutta Club case would be applicable even after Articles 246A and 366A introduced by the 101st amendment, it is always open to the Legislature to amend the law to remove the basis of the judgment.
While amending Section 7(1) by introduction of 7(1)(aa) amendment has been introduced to the word ‘supply’ but not to the word ‘service’. However there is no flaw in the same since under Section 9 the taxable event is supply of goods or services or both. Since it is the supply of goods and services which is a taxable event, the definition of supply and amending the said definition of supply to include an association and its members as two different persons would be sufficient and there is no necessity to define service in such way that service by an association to its member would be a taxable service. There is no flaw in the amendment and the amendment as it is would serve the purpose and object to be achieved.
Findings and conclusion by the court.
The legislature has the power to enact validating laws that remove the basis of invalidity pointed out by the courts in relation to the earlier unamended law.
While analyzing the Scheme of levy of GST under the Constitution, we find that GST is envisaged as a levy of tax on the “supply” of “goods or services or both”. The words “goods”, “supply” and “services” are understood in a particular sense under the Constitution. When the words used in the Constitutional text have acquired a meaning through judicial interpretation over the years, one must assume that that is the same sense in which the word is used when inserted into the Constitution through a later amendment.
“Goods” is a standalone concept, meaning thereby that it is not something that requires a plurality of persons to infer its existence, the concepts of “supply” and “service” do require a plurality of persons to infer their existence.
Article 246A of the Constitution, that confers simultaneous legislative powers on the Union and the States to make laws with respect to goods and service tax, uses the word “supply” without giving it an artificial meaning that would take in even a “deemed supply”.
Under Article 366(29A), a tax on the “supply of goods” by an incorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration, was deemed to be a “tax on the sale or purchase of goods”. In contrast to the above, what has been done through the present amendment to the CGST/SGST Act is merely to amend the definition of “supply” to include “activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration”. such supply has not been deemed to be a “service”, and the concept of “service” itself has not undergone a change, to include within its fold such activities or transactions.
It is always open to the legislature to provide an artificial meaning to a word for the purposes of the Statute, and that the mere fact that the said meaning of the word in the Statute differs from its popular meaning can be of no avail.
While we do not doubt the correctness of the proposition laid down in the aforecited precedents, the factual situation that obtains in the instant case, as already noticed, is slightly different. We are not presently considering the legality of a legislative exercise that gives an artificial definition to a word/concept that differs from it’s accepted or popular meaning.
The levy of GST is on the “supply” of taxable “goods” or “services” or both for a consideration. The concept of “supply” and “service” as understood under the Constitution and the CGST/SGST Acts (before their amendment) both excluded transactions informed by the principle of mutuality ie. a supply/service from one entity to itself (self supply/self service). Thus, even if there is now a deemed “supply”, based on the amendments effected to the CGST/SGST Acts, there is no deemed “service” in circumstances where the service is rendered by a club or association to its members, since the definition of service has not been amended.
The principle of mutuality has survived under the Constitution even after the 46th Amendment. If that be so, then the amendment exercise carried out by the Parliament would itself have to be seen as unconstitutional since it incorporates a definition of supply that militates against the constitutional understanding of the term.
The concepts of “supply” and “service” having been judicially interpreted as requiring at least two persons – a provider and a recipient, for inferring their existence, and the Supreme Court having held in Calcutta Club [supra] that the principle of mutuality has survived the 46th amendment to the Constitution, so long as the said judgment holds sway as a binding precedent and/or the Constitution is not amended suitably to remove the concept of mutuality from the concepts of supply and service thereunder, the impugned amendment to the CGST/SGST Acts must necessarily fail the test of constitutionality.
The statutory provisions impugned in these proceedings suffer from a definitive lack of legislative competence. Accordingly the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017 and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the KGST Act are declared as unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India.
The insertion of a statutory provision that alters the basis of indirect taxation with retrospective effect, so as to tax persons for a prior period when they had not anticipated such a levy and, consequently, had not obtained an opportunity to collect the tax from the recipient of their services, militates against the concept of Rule of Law.
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