Service Tax on Membership Subscription on “Club of Association Service” (An analysis of levialbility of Service tax on Trade/Industry Associations)
With effect from 16.06.2005, Service Tax was levied on Club or Association Services. Club or Association was defined under Section 65(25a) as, Club or Association means any person or body of persons providing services, facilities or advantages, for a subscription or any amount to its members. The purpose of this paper to examine as to whether trade or industry association can be liable to pay Service Tax under this head or under any other head.
In general a trade or industry association is a society registered under Societies Registration Act. Various business units are its members. They pay a subscription charges to the association. The association uses that money to provide services to its members like diffusion of knowledge, trade fairs, seminars/workshop etc. The association is a non profit organization controlled by the members themselves. They decide what activities will be undertaken by the association. If any surplus left with the association, it is further used for the benefits of the association. The accounts of the associations are periodically checked by the members.
Can it be argued that association and members are same, i.e. they are not two different persons to establish a service provider/client relationship necessary for levy of service tax.
No Service Tax on Self-Service:
It is a settled principle in law of service tax that to impose liability of service tax, there must be two parties, one service provider and the other, service receiver. When service provider and service receiver is same, it is “self service” and there is no service tax on self service. In Precot Mills Ltd. v. Commissioner of Central Excise [2006(2) STR 495], Hon’ble Tribunal held,
“In a member’s club, there is no question of two sides. Members and Club both are the same/entity. One may be called as principal when the other may be called as agent, therefore, such transaction in between themselves cannot be recorded as income, sale or service as per applicability of the revenue tax of the country. Hence, members club are not liable to pay service tax in allowing its members to use its space as mandap. The ratio of the above case law is clearly applicable to the present case. M/s. Precot Mills Ltd. is a Corporate entity. It has got various units which function as separate profit centers. When service is rendered by one unit to the other, debit note is raised for the value of service in order to evaluate the performance of a particular unit. Ultimately there is only one Balance sheet for the legal entity for M/s. Precot Mills Ltd. and not for the separate unit. In other words, the appellants, M/s. Precot Mills Ltd. do not receive any valuable consideration for services rendered by one unit of the appellant to the other unit, in view of the fact that the each unit is part of the same legal entity which is the appellant. To put it differently, when one renders service to oneself, as in the present case, there is no question of leviability of service tax. The Asst. Commissioner’s order is correct and legal. Hence we do not find any merit in the impugned orders of the Commissioner which ignore the main point that there is no client relationship in the present transactions. In these circumstances, no penalty is leviable. Thus we allow the appeal with consequential relief.”
It is submitted that applying the ratio of the above judgment in the present case, it is seen that trade association does not get any consideration to provide services to its members, as whatever surplus is left belong to the members themselves and used for the benefits of members only. Thus a trade association and its members are not two different entities, but one and same. Thus a trade association is merely and instrumentality of the members to serve themselves.
It is submitted that a trade association is a mutual association; formed and controlled by members to avail services themselves. Such transaction is not even a business transaction. Such services are self service, not tainted with commerciality and hence not liable to service tax. The principle has been approved by Supreme Court in case of CIT v. Darjeeling Club [1985 (153) ITR 676], CIT v. Bankipur Club [1997 (226) ITR 97] and Chelmsford Club v. CIT [2000 (243) ITR 89]. The principle of mutuality laid down in these cases was squarely applied in Service Tax law by Kolkata High Court in Saturday Club Ltd. v. Assistant Commissioner of Service Tax [2005 (180) ELT 437], wherein the Hon’ble High Court held,
“So far as the merit is concerned, law is well-settled by now that in between the principal and agent when there is no transfer of property available question of imposition of service tax cannot be made available. It is true to say that there is a clear distinction between the ‘members’ club’ and ‘proprietary club’. No argument has been put forward by the respondents to indicate that the club is a ‘proprietary club’. Therefore, if the club space is allowed to be occupied by any member or his family members or by his guest for a function by constructing a ‘mandap’ the club cannot be called as ‘mandap keeper’ because the club is allowing his own member to do so who is, by virtue of his position, principal of the club. If any outside agency is called upon to do the needful it may raise a bill along with the service tax upon the club and the club as an agent of the members, is supposed to pay the same. The authority cannot impose service tax twice once upon the people carrying out the business of ‘mandap keeper’ as well as the members’ club for the purpose of using the space for constructing or using it as ‘mandap’. Therefore, apart from any other question possibility of double taxation cannot be ruled out. If I explain my first query as above it will be crystal clear that if a person being an owner of the house allows another to occupy the house for the purpose of carrying out any function in that house it will not be construed as transfer of property. But if such person calls upon a third party ‘mandap keeper’ to construct a ‘mandap’ in such house then in that case such ‘mandap keeper’ can be able to raise bill upon the user of the premises along with the service tax. Therefore, I cannot hold it good that members’ club is covered by the Finance Act, 1994 for imposition of service tax to use its space as ‘mandap’. So far as the other point is concerned whether the ratio of the judgments can be acceptable herein or not I like to say ‘yes it is applicable’. Income-tax is applicable if there is an income. Sales tax is applicable if there is a sale. Service tax is applicable if there is a service. All three will be applicable in a case of transaction between two parties. Therefore, 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. One may be called as principal when the other may be called as agent, therefore, such transaction in between themselves cannot be recorded as income, sale or service as per applicability of the revenue tax of the country. Hence, I do not find it is prudent to say that members’ club is liable to pay service tax in allowing its members to use its space as ‘mandap’.
Therefore, the entire proceedings as against the club about the applicability of service tax stands quashed. Interim order, if any, stands confirmed. However, no order is passed as to costs. Thus, the writ petition stands disposed of.”
It is submitted that in that case the entire proceeding was quashed at the Show Cause Notice stage itself by Kolkata High Court. Further, the order was accepted by the Board and no appeal was filed against the order in Supreme Court.
It is seen that the principle of mutuality was applied in numerous cases by the Hon’ble Tribunal, wherein the tribunal held that there is no service tax liability in cases of mutual association. Some of the cases are as follows:
A. Shri Mulam Club v. CCE [2006 (1) STR 111]
B. Breach Candy Swimming Bath Trust v. CCE [2007 (5) STR 146]
C. India International Centre v. Commissioner of Service Tax [2007 (7) STR 235]
D. Dehradun Club Limited v. CCE [2007 (7) STR 519]
E. Phase 1 Entertainment v. Commissioner, Service Tax [2008 (10) STR 49]
It is further submitted that on numerous occasions Hon’ble Supreme Court and High Courts examined the nature of Trade association and held that such associations are mutual association and their activity is not tainted by commerciality and hence principle of mutuality is applicable.
A. Mill Owners Mutual Insurance Association Ltd. v. CIT [6 ITC (Bom) 7]
B. CIT v. Ferozpur Ice Manufacturer’s Association [1972 (84) ITR 607].
C. CIT v. West Godavari District Rice Millers Association [1984 (150) ITR 394]
D. CIT v. Northern India Motion Pictures Association [1994 (207) ITR (St.) 10]
Principle of Mutuality:
When principle of mutuality is accepted, both a parties of the transaction are treated as one and same and there cannot be business transaction. Between two such entities these can not be sale (no body can sell something to oneself), there cannot be generation of Income (no body ca earn income from oneself) or there cannot be service (no body can provide service to oneself). The principle which is widely known in the Income Tax is squarely applicable in Sevice Tax.
Existence of Separate Legal Entity is not relevant:
Sometime it is argued that a registered society is a separate legal entity from its members. Similarly an incorporated company is a separate legal entity. The issue was examined in various cases. In CIT v. Royal Western India Turf Club [(1953) 24 ITR 551 (SC)], Supreme Court held that mere incorporation is no bar to mutuality. The proposition was based on Style’s Case [(1889) 2 TC 460 (HL)], wherein three points was seen,
(a) Identity of the contributors of the fund and recipient of the fund.
(b) Where incorporation was merely for convenience of the members.
(c). Impossibility of the contributors to derive benefit from the contribution made by themselves.
The question come up specifically before Supreme Court in a group of Sales Tax cases, Joint Commercial Tax Officer v. Young Men’s Indian Association [1970 (26) STC 241], wherein it was specifically held that mere incorporation does not rule out principle of mutuality. It is seen that the Kolkata High Court applied principle of mutuality in case of Saturdays Club Limited, which is an incorporated company.
When the principle of mutuality is applicable, service tax cannot be levied irrespective of the fact that under what category the services are falling. The questions raised in Saturday Claub case was with respect to Mandap Keeper Service.
Service Tax on trade Association can also be assailed on other grounds. The club and association service exclude charitable organizations and trade union. Normally these exclusion clauses will be applicable to trade associations. A detailed examination of these issues is beyond the ambit of this paper. However, examination of such issues is required only when the principle of mutuality is excluded, i.e. the association is not a mutual association. Once an association is not a mutual association then only examination of these exclusion clauses are required. If an association is not a mutual association, but fall under any exclusion clause, it will exempt service tax on club or association service and not on other services.
Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on [email protected] , Web: www.rajeshkumar.co.in