Sales tax cannot be charged by clubs for supply of food and drinks to its members: SC

In a significant judgment, the Supreme Court has ruled that Service Tax cannot be levied on Clubs, whether incorporated or unincorporated for the supply of food and drinks to permanent members. The doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs after the 46th Amendment adding Article 366(29-A).

A Bench of Justices Rohinton F. Nariman, Surya Kant and V. Ramasubramanian reasoned that such supply of goods between a members’ club and its permanent members lack the one essential aspect of a ‘sale’ — a seller and a buyer. The reason is that in members’ clubs there is no sale by one person to another for consideration, as one cannot sell something to oneself. Moreover, from 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members’ clubs in the incorporated form.

The Bench was answering a reference on the question whether the doctrine of mutuality highlighted in the Young Men’s Indian Association judgment of the Constitution Bench would survive the 46th Constitutional Amendment, which introduced Article 366 (29-A) into the Constitution. The West Bengal government had appealed against the Calcutta Club. The Bench held that the doctrine of mutuality between the club and its members would dominate the relationship between an incorporated members’ club and its permanent members. Under Article 366(29-A), the supply of goods shall be deemed to be sale of those goods by the person making the supply, and the purchase of those goods by the person to whom such supply is made. As the Young Men’s Indian Association case and the doctrine of mutuality state, there is no sale transaction between a club and its members.

The Court further ruled that where there is no transfer of property, there is no sale which would be eligible to tax. On the same lines, if the club even though a distinct legal entity is only acting as an agent for its members in matter of supply of various preparations to them, no sale would be involved as the element of transfer would be completely absent.

Doctrine of Mutuality

The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable. The Court observed that 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.

The Court noted that the 46th Amendment used the expression “any unincorporated association or body of persons”. This expression 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.

The Court ruled that 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). Such an interpretation would lead to an 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.

The Bench held that “the same reasoning exempting the supply of edible goods between an incorporated members’ club and its permanent members would apply for service tax also. 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.”

The Apex Court concluded that–

· 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.

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