Clubs or associations not liable to service tax on the principle of mutuality

Clubs or associations incorporated prior to 1.7.2012 not liable to service tax on the principle of mutuality

ABCAUS Case Law Citation:
ABCAUS 3308 (2020) (05) HC

Important case law relied upon by the parties:
DALCO Engineering Private Limited v. Satish Prabhakar Padhye
Dwarkadas Khetan and Co. v. CIT [(1956) 29 ITR 903, 907
CIT, Kanpur v. Canara Bank (2018) 9 SCC 322
State of West Bengal vs. Calcutta Club Limited
R.C. Mitter & Sons Calcutta v. CIT
M/s. Enchanted Woods Club Ltd., Vs. CCE

In this case, appeals had been preferred by the revenue being aggrieved by the order passed by the Central Excise and Service Tax Appellate Tribunal (CESTAT) in holding that the services provided were not taxable on the principle of mutuality of overriding the  statutory provisions contained in Section 65(105)(zzze) and  65(25)(aa) of the Finance Act, 1994.

The Revenue had also raised the question as to whether the principle of mutuality is applicable to services provided by the club to its members and would not be considered as taxable service for the purpose of levy of service tax?

The respondent was a limited company incorporated under Companies Act and was engaged in the business of construction of complex  and  roads  under  the  category “construction  of  complex  services  and  works  contract service”  under  the  Finance  Act,  1994.   

The Service Tax Department was of the view that the respondent was rendering taxable service under the category of “Club or Association  Service” u/s 65(105)(zzze) of the Finance Act, 1994 and was liable for payment of service tax.

During the course of audit the Revenue noted that as per agreements entered into by the respondent with their customers for  the purpose of residential apartments, certain amounts were collected as non-refundable deposits towards “Club House and  Swimming Pool”.

Show cause notices (SCN) were issued to the respondent demanding service tax. The demand was confirmed by the Adjudicating   Authority after considering reply filed to the SCN by the respondent.

However, CESTAT allowed the appel of the respondent on the ground that the issue as to whether services provided by a club to its members are liable to service tax under the category “Club or Association Service” was no more res integra, in the light of the  decisions rendered by various High Courts.

Before the Hon’ble High Court, the Revenue contended that clubs  incorporated under the Companies Act or registered under the Societies Registration Act constitute separate legal entity from its members and therefore, doctrine of mutuality between the members and  clubs bears no significance in the context of taxable service provided by clubs and association and vis-a-vis to its members.

The Hon’ble High Court stated that the issue in the appeal was no more res integra in the light of finding recorded by the Hon’ble Supreme Court. The Hon’ble High Court had observed that anybody “established or constituted” by or under any law for the time being in force, is not included in the definition of club or association u/s 65(25aa).

The Hon’ble Supreme Court in the context of the Income Tax Act, 1922 had occasion to construe what is meant by “constituted” under an instrument of partnership. It was opined that the word “constituted” does not necessarily mean “created” or “set up”, though it may mean that also. It also includes the idea of clothing the agreement in a legal form. Thus the word in its wider significance, would include both, the idea of creating or establishing, and the idea of giving a legal form to, a partnership.

Their Lordships held that clearly companies and cooperative   societies which are registered under the respective Acts, can certainly be said to be  constituted  under those  Acts.

In the light of the above decision of the Hon’ble Apex Court holding that the companies and co-operative societies which are registered  under  the respective Acts can be said to be constituted under those Acts and the clubs or associations incorporated prior to 1.7.2012  were  not  included  in  the  service  tax  net, the Hon’ble High Court answered the substantial questions of law against the revenue and  accordingly dismissed the appeal.

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