Retrospective amendment to the scope of ‘Supply’ in Finance Act, 2021: Unsettling the settled?
“The health of our economy will not improve until we inject the ‘S’ factor into our fiscal laws, and make them Sane, Simple and Stable.”
- Nani Palkhivala
The amendment to Section 7 of the CGST Act, 20171 with retrospective effect from 1 July 2017, seeks to levy tax on activities or transactions involving supply of goods and/ or services by any person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.
Further, with the aid of an Explanation, it has been clarified that the person and its members or constituents shall be deemed as separate persons notwithstanding anything contained in any other law for the time being in force, any judgment, decree or order of the Court, Tribunal, or authority. Simultaneously, entry 7 of Schedule II to the CGST Act which classified “Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration” as ‘supply of goods’ for the purpose of GST, stands omitted with retrospective effect.
Before delving into the implications of the above provision, let us look at the legislative background and judicial history of taxation of such transactions.
Over the years, the ‘doctrine of mutuality’ has been invoked in a myriad of cases, both under the Income-tax as well as erstwhile indirect tax laws, viz. Service tax and VAT laws.
The doctrine stems from the common law principle that a person cannot make a profit from himself. In the context of Indian law, some Hon’ble High Courts had upheld the doctrine of mutuality vis-à-vis levy of sales tax by following the English cases of Graff vs. Evans2 and Trebanog Working Men’s Club and Institute Ltd. vs. Macdonald3. However, a 3-Judge Bench of Hon’ble Apex Court overruled this view in Enfield India Ltd4 on the ground that said doctrine had no application vis-à-vis taxing statute. This issue once again came up before the Hon’ble Supreme Court’s Constitution Bench in CTO vs. Young Men’s India Association5 wherein this time, and it was held that the club (although a distinct entity) was only an agent of its members and there was no ‘sale’ involved in the supply of various preparations to them since the element of ‘transfer’ was absent.
The judgment in Enfield India Ltd (supra) was distinguished on the grounds that the English cases had applied the doctrine of mutuality even in tax matters.
Subsequently, the 46th amendment to the Constitution in 1982 inserted clause (29-A) in Article 366 to inter alia tax – “supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.”
As a result, the larger bench of Apex Court, in the matter of Calcutta Club Limited/Ranchi Club Limited6, was called upon to decide whether the ‘doctrine of mutuality’ was done away with by Article 366(29-A)(e) and whether the ratio of Young Men’s Indian Association (supra) would continue to operate. While deciding the levy of sales tax, the Hon’ble Court referred to the Statement of Objects and Reasons for the 46th amendment and held that as the club or association has no separate existence from its members, Article 366(29- A) did not overcome the decision in the Young Men’s Indian Association and the doctrine of mutuality remains applicable even after the amendment.
As per the Hon’ble Court, for the supply of goods by incorporated and unincorporated associations or body of persons to its members, the requirement of consideration was not fulfilled in terms of the Contract Act, 1872. Further, there was no transfer in the supply of food and hence, there is no “seller” or “buyer” relationship in the passing of consideration.
Insofar as the levy of Service tax is concerned, it was observed that the Service tax law requires the provision of services by one person to another, and the doctrine of mutuality, which is applicable to clubs qua sales tax for supplies to members, was equally applicable “on all fours to services.” Consequently, services by a members’ club to its members amount to ‘services to self’ and would not qualify as taxable service. This position was validated for both the pre and post-negative list periods of the Service Tax regime.
Interestingly, the advance rulings under the GST regime have been a mixed bag so far. On the one hand, the Maharashtra Appellate Authority for Advance Ruling (AAR) has, in the case of Rotary Club of Mumbai Queens Necklace7, held that subscription/membership/admission fee collected by the appellant is not liable to GST in the absence of provision of any specific facility or benefits to its members; but on the other hand, the West Bengal AAR8 has ruled on the tax rate applicable to various services provided to club members such as the supply of food at its restaurant or social events organized in the club premises, and other facilities like swimming.
In the context of a co-operative housing society, the Maharashtra AAR9 has held that the activities of obtaining conveyance from the promoter (Builder), managing, maintaining and administering the society’s property, raising fund for achieving the society’s objectives, undertaking and providing any social, cultural or recreation activities, etc. for its members qualify as “supply” under the GST law. It rejected applicant’s reliance on the principle of mutuality, holding that “it is not tenable in so far as taxability in the GST regime is concerned.”
Karnataka AAAR, too, has ruled on similar lines in the case of Vaishnavi Splendor Homeowners Welfare Association10, holding that service supplied by an association to its members is a taxable service under GST law, and therefore, contribution received from members is liable to GST.
From the above background, it is amply clear that although taxability of supplies by a club/association/ society, etc., to its members was fairly settled under the erstwhile era, the levy of GST on such supplies and applicability of the doctrine of mutuality is still a bone of contention.
One must note that the amendment to Section 7 is not the first instance where the legislature has sought to nullify the effects of judgments pronounced by the Apex Court. The 2012 Vodafone decision under the Income-tax law and consequent amendment is a classic case of retrospective taxation. The Apex Court has been consistently holding that enacting amendments, which nullify the law declared by it, would amount to encroaching upon the domain of the judiciary. However, it has also recognized that the legislature can fundamentally amend or alter the statute’s provisions to remove the basis/condition of the judgment.
Given the above, questions can be raised on whether the amendment fundamentally alters the very condition on which the Apex Court decision in Calcutta Club Limited (supra) is based and whether the clarification that the members and constituents are separate from the person per se, would render the principle of mutuality redundant in the context of GST.
One could still argue that a fee/amount collected by the person is utilized for meeting various administrative expenditures, and therefore, there is no ‘consideration’ visà- vis facilities or benefits to members which can constitute a business. Insofar as co-operative society is concerned, one could contend that it is an incorporated body where the contributors are the members themselves and that they contribute by way of society maintenance as reimbursement of common expenses.
Further, it may be worthy to note that under the GST law, the term “person” has been defined in an inclusive manner, covering not only a company and a firm but also a HUF, LLP, body corporate incorporated by or under the laws of a foreign country, trust and even association of persons whether incorporated or not outside India. Hence, the amendment unequivocally expands the ambit for taxing transactions/ activities which hitherto were not qualifying as ‘supply.’ To illustrate, profit share given to a Partner of the LLP could come within the GST net consequent to said provision, which clearly does not seem to be the intention of the legislature.
Moreover, while it has now become a trend to introduce changes in the GST legislation through the Finance Bill subject to the recommendations of the GST Council, one could also challenge the amendment on the contours of Article 279A of the Constitution.
Given the wide implications and unsettling nature of the proposed amendment, there is a high likelihood that the doors of the judiciary will be knocked yet again.
1. To be notified by way of separate Notification
2. [(1882) 8 Q.B. 373]
3. [(1940) 1 K.B. 576]
4. [(1968) 2 SCR 421]
5. [(1970) 1 SCC 462]
6. [2019 (10) TMI 160 – SC]
8. The Bengal Rowing Club [TS(DB)-GST-AAR(WB)-2019-402]
9. Apsara Co-operative Housing Society Limited [TS(DB)-GST-AAR(MAH)-2020-319]
10. Order No. KAR/AAAR-10/2019-20 and dated 21 October 2020