Supply of service by a club or association to its members is not a taxable service for the purposes of GST.
In a recent judgment, Hon’ble Kerala High Court has held that supply of service by a club or association to its members is not a taxable service for the purposes of GST.
ABCAUS Case Law Citation:
4532 (2025) (04) abcaus.in HC
In the instant case a Writ Petition was preferred by the State Branch of the Indian Medical Association apprehending coercive action from the Directorate General of GST Intelligence for recovery of tax on various services rendered by it to its members.
It was the petitioner’s contention that it was not liable to pay tax on the supply of services to its members, it apprehended coercive action for recovery of tax when it was 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 five financial years.
The petitioner was running various mutual Schemes for the benefit of its member-doctors, e.g. Social Security Schemes, Professional Disability Support Scheme (PDSS), Professional Protection Scheme, Kerala Health Scheme, etc. All the Schemes were to support fellow doctors, while one or two Schemes support their immediate family members. The member-doctors were contributing 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 was paid out to the widow of deceased doctors, disabled doctors, doctors afflicted with specified diseases, etc. Each Scheme was run by a separately elected committee, in which the Secretary and President of the petitioner were ex officio members.
The Petitioner contended that it was not liable to pay GST on services rendered by it to its members under the aforesaid Schemes since it was well settled through a line of precedents that the principle of mutuality would insulate services rendered by a Club/Association to its members from the levy of GST on supply of services.
However, there was an amendment to introducing deeming provisions making the supply of services by a Club/Association to its members a taxable supply for the purposes of the levy of tax. The amendment that was introduced through the Finance Act, 2021 was also made retroactive with effect from 01.07.2017.
In view of the above amendment, in the first round of litigation before the Single Judge of the Hon’ble High Court, it was held that there was no merit in the contentions of the petitioner as regards manifest arbitrariness of the statutory provisions, the declaration sought for in the writ petition could not be granted. However, the single judge found that the retroactive operation given to the amendment could not be legally sustained on the principles of fairness and set aside the retroactivity envisaged for the amendment.
The Petitioner not satisfied with the impugned order dismissing of its Writ Petition and the Union and the State impugning the latter portion of the judgment that set aside the retroactive operation of the amendment, challenged it before a Division Bench of the Hon’ble High Court.
Before the Bench, the Union and State argued that it was well within the powers of the Parliament and the State legislatures to overcome the basis of earlier judgments of the Supreme Court on the aspect of mutuality, by introducing a new definition of supply through a legislative exercise and clarifying that a supply would also include a supply from a club to its members.
However, the Bench observed that in the instant case, the issue was slightly different viz. whether it would be competent for a legislature to levy tax on a transaction when the taxable event in relation to the subject of taxation has not been recognised as such by the Constitution? In other words, when the Constitution has understood a taxable transaction as necessarily involving two persons, can a legislature deem a transaction that does not involve two persons as a taxable transaction?
The Bench found strength in the argument that on account of the principle of mutuality that informs the actions of the Club/Association towards its members, the mere fact that statutory amendments have been made to the concept of “supply” under the GST Acts will not suffice to make their activities liable to the levy of GST; that their activities cannot be treated as ‘service’ since the concept of service under the GST law itself contemplates the existence of two entities viz. a service provider and a service recipient, and excludes the concept of self service for the purposes of the levy.
The Hon’ble High Court observed that under the scheme of levy of GST under the Constitution, GST is envisaged as a levy of tax on the “supply” of “goods or services or both”. While “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. Therefore, it can be safely assumed that the Scheme of GST under the Constitution also contemplates the existence of at least two persons – a provider and a recipient before one can infer either a “supply” or a “service” for the purposes of the levy. In other words, the concepts of self-supply or self service are not envisioned under the Constitution for the purposes of the levy.
The Hon’ble High Court opined that what had been done through the said 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”. Significantly, 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.
The Hon’ble High Court further observed that when a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, a legislative body, that derives its legislative competence to enact a Statute from the Constitution, cannot give to the word/concept a meaning that goes against the meaning assigned to the same word/concept by the Supreme Court in the context of its setting under the Constitution.
The Hon’ble High Court observed that the decision of the Supreme Court in Calcutta Club is authority for the proposition that 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.
Accordingly the Hon’ble High Court declared 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 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.
As a result, the Petition was allowed.
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