No Sales Tax or Service Tax on supplies made by clubs to their members

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Synopsis: In the matter of State of West Bengal And Others v. Calcutta Club Limited, the Larger Bench of Hon’ble SC held that Sales Tax or Service Tax is not applicable on supplies made to club members as clubs cannot be treated as separate in law from their members, therefore supply of items to its members by the club cannot be said to be a transaction of sale.

Facts:

The Calcutta Club Limited (“the Respondent” or “Club”) charges and pays sales tax when it sells products to the non-members or guests who accompany the permanent members. But when the invoices are raised in respect of supply made in favour of the permanent members, no sales tax is collected.

The Assistant Commissioner of Commercial Taxes issued a notice to the Respondent apprising it that it had failed to make payment of sales tax on sale of food and drinks to the permanent members during the quarter ending June 30, 2002.

Tribunal–   Accepted the contention of the Respondent that supplies of food, drinks and refreshments by the clubs to their permanent members cannot be treated as “deemed sales” within the meaning of Section 2(30) of the Sales Tax Act, 1994 (“Sales Tax Act”). Revenue filed Writ Petition before High Court.

High Court- Automobile Assn. of Eastern India v. State of W.B. [(2017) 11 SCC 811] is not applicable. Supply is effected either on immediate payment of cash or deferred payment or valuable consideration which may be of various nature only then the tax can be levied and since no consideration was collected sales tax cannot be levied. Further, mere fact of presentation of bills and non-payment thereof consequently, striking off membership of the Club, did not bring the Club within the net of sales tax and that in the present facts, the element of mutuality was not obliterated. Revenue appealed.

Issues involved:

  • 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?
  • Whether the judgment of 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 v. State of T.N. [(2009) 19 VST 456 (SC)] and Fateh Maidan Club v. CTO [(2017) 5 SCC 638] which remitted the matter applying the doctrine of mutuality after the constitutional amendment can be treated to be stating the correct principle of law?
  • 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?

Respondent’s arguments:

  • As per Section 2(5) of the West Bengal Sales Tax Act, 1994 (“WB Sales Tax Act”) the very first pre-requisite for falling within the provisions of that Act is that there should be a profit motive, as defined, and since there is none in members’ clubs, the charging section will not be attracted.
  • Statement of Objects and Reasons, made it clear that only unincorporated clubs or associations of persons were referred to in Article 366(29-A)(e) of the Constitution.
  • Under no circumstances can a company be fitted within “body of persons”, as a result of which Article 366(29-A)(e) will not apply to sales of food or refreshments by a club to its members.
  • With insertion of Clause (29-A) into Article 366 of the Constitution, it has not done away with the Young Men’s Indian Association (supra), as there cannot possibly be a supply of goods by one person to itself; and that, therefore, the doctrine of agency/trust/mutuality continues as before.

Held:

The Larger Bench of Hon’ble SC in Civil Appeal No.4184 of 2009 decided on October 3, 2019 has held as under:

Whether the doctrine of mutuality has been done away with by Article 366(29-A)(e)

  • The essence of the doctrine of mutuality is that there is no sale transaction between two persons, as one person cannot sell goods to itself.
  • Relied on the case of Bangalore Club v. Commissioner of Income Tax and Anr. [(2013) 5 SCC 509] to hold that if any person carries on a certain activity in such a way that there is a commonality between contributors of funds and participators in the activity, a complete identity between the two is then established.
  • The 61st Law Commission Report had observed that there cannot be said to be any evasion of tax as a member of members’ clubs “really takes his own goods” and therefore, did not seek to tax such goods. The framers of the 46th Amendment thought otherwise, and made it plain that they sought to bring to tax sales made by unincorporated clubs or an association of persons to their members, as it was thought that such transactions were not taxable, as such club or associations in law has no separate existence from that of the members.
  • When profits and gains of a mutual insurance company are sought to be brought to tax, they are so done by express reference to the fact that the business of insurance is carried on by a mutual insurance company. The absence of any such language in subclause (e) of Article 366(29-A) is also an important pointer to the fact that the doctrine of mutuality cannot be said to have been done away with by the said 46th Amendment.

 

Position of Young Men’s Indian Association

  • Young Men’s Indian Association (supra) had three separate appeals before it, in one of which a company was involved. To state, therefore, that under the law as it stood on the date of the 46th Amendment, a sale of goods by a club having a corporate status to members is taxable, is wholly incorrect. Proceeding on this incorrect basis, what the 46th Amendment sought to do was to then bring to tax sales by clubs which have no separate existence from that of their members. In so doing, 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. “Any” is the equivalent of “all”. This word, therefore, also lends itself to the aforesaid interpretation, as the emphasis of the legislature is on all unincorporated associations or bodies being brought within subclause (e).
  • 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”.

Position of Sub-clause (f) of Article 366(29-A)

  • A members’ club may supply goods which are not food or drink – for example, soap, cosmetics and other household items. These items would be “goods”, but would not be within sub-clause (f) – not being food or drink, and cannot, therefore, be taxed under sub-clause (f), leading to the absurd situation of the supply of food and drink being taxable in members’ clubs, and the supply of other goods in such clubs being outside the tax net. For this reason also, it is clear that the subject matter of sub-clause (f) is entirely different and distinct from that of sub-clause (e), and cannot possibly apply to members’ clubs. In this view of the matter, the expression “in any manner whatsoever”, being part and parcel of sub-clause (f) cannot be held to extend to a supply of all goods so as to bring such goods to tax when applied to members’ clubs.

Conclusion:

  • The doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs after the 46th Amendment adding Article 366(29-A) to the Constitution of India.
  • Young Men’s Indian Association (supra) and other judgments which applied this doctrine continue to hold the field even after the 46th Amendment.
  • Sub-clause (f) of Article 366(29-A) has no application to members’ clubs.