(PER : HONOURABLE
MR.JUSTICE RAVI R.TRIPATHI)
1. Three
different clubs of City of Ahmedabad, named, Sports Club of Gujarat
Limited, Rajpath Club Limited and Karnavati Club Limited are before
this Court making almost identical prayers. Prayer made in SCA
No.13654 of 2005 by petitioner - Sports Club of Gujarat Limited in
Para.16(A) is as under :
16(A) Your
Lordships be pleased to issue a writ of or in the nature of mandamus
declaring Section 65(25a), Section 65(105) (zzze) and Section 66 of
the Finance (No.2) Act,1994 as incorporated / amended by the Finance
Act,2005 to the extent that the said provisions purport to levy
service tax in respect of services purportedly provided by the
petitioner club to its members, as being ultra vires,
beyond the legislative competence of the Parliament,
unconstitutional, illegal and void.
2. It
is also prayed in Clause (B) that,
16(B).
Your Lordships be pleased to issue a writ of or in the nature of
mandamus commanding the respondents to forebear from imposing or
enforcing the provisions of the Finance (No.2) Act,1994 as amended by
the Finance Act,2005 or Rules, Notifications or Orders thereunder so
as to levy service tax in respect of services purportedly provided by
the petitioner club to its members.
3. Heard
learned Senior Advocate Mr.S.N.Soparkar with learned advocate
Mr.V.N.Nair for petitioner in SCA No.13654 of 2005, learned Senior
Advocate Mr. Mihir Joshi with learned advocate Mr.V.N.Nair for
petitioner in SCA No.13655 of 2005 and learned Senior Advocate
Mr.S.I.Nanavati with learned advocate Mr.V.N.Nair for the petitioner
in SCA No.13656 of 2005.
4. Learned
Senior Advocates for the petitioners made a common argument that the
matters are covered by the judgments which are more than one in
number but, last in the line is the judgment of the Division Bench of
Jharkahnd High Court at Ranchi in the matter of Ranchi Club Ltd.
v. Chief Commr. of C.Ex & S.T., Ranchi Zone, reported in 2012
(26) S.T.R. 401 (Jhar.).
Learned Senior Advocates submitted that the principle which fell for
consideration of the Division Bench of Jharkhand High Court was the
principle of mutuality and
in this regard, learned Senior Advocates invited attention of
the Court to the facts set out in the said judgment in Para.3 which
reads as under :
As
we have noticed that petitioner's contention is that petitioner is a
club and also registered company under the Companies Act, 1956. The
petitioner is giving service to its members but the club is formed on
the principle of mutuality and, therefore, any transaction by the
club with its member is not a transaction between two parties.
However, being a company, it may enter into a transaction with
anybody, a 3rd person, not a member, then in that
situation, this club becomes a legal entity and can certainly enter
into any transaction and such transaction are not on the principle of
mutuality and, therefore, may be liable to any tax as a transaction
between two parties. However, when the club is dealing with its
members, it is not a separate and distinct individual. It is
submitted that in identical facts and circumstances, however, in the
matter of imposition of sales tax, when the club was expressly
included in the statutory definition of 'dealer' under Madras General
Sales Tax Act, 1959, so as to bring the club within the purview of
taxing statute of the Madras Sales Tax, the Hon'ble Supreme Court, in
the case of the Joint Commercial Tax Officer Vs. The Young Mens'
Indian Association, considered the definition of the 'dealer' by
which the club was declared dealer and after considering the
definition of sale as given in the Act of 1959 and
explanation-I appended to Section 2(n), specifically declaring the
sale or supply or distribution of goods by a club to its
members whether or not in the course of business was declared deemed
to be a sale for the purpose of the said Act. In that
situation, Hon'ble Supreme Court considered the issue that the
club is rendering service or selling any commodity to its members for
a consideration then whether that amounts to sale or not.
Hon'ble Supreme Court held that it is a mutuality which
constitutes the club and, therefore, sale by a club to its member and
its services rendered to the members, is not a sale by club to the
members. In sum and substance, the ratio is that for a
transaction of sale, there must be two persons in view of this
judgement as well as in view of the Full Bench Judgement of this
Court delivered in the petitioner's own case i.e., Commissioner of
Income Tax Vs. Ranchi Club Limited reported in 1992(1)PLJR 252 (Pat)
(Fb). The Full Bench of this Court while considering the identical
issue in the matter of imposition of income tax, observed that no one
can earn profit out of himself on the basis of principle of mutuality
and held that income tax cannot be imposed on the transaction of the
club with its members. (emphasis supplied.)
5. Learned
Senior Advocates for the petitioners invited attention of the Court
to Para.15, 16 and 17 which are reproduced for ready perusal.
15. The
question which was considered by the Hon'ble Supreme Court in the
case of Joint
Commercial Tax Officer, Harbour Division, II-Madras Vs. The Young
Men's Indian Association reported
in 1970(1)
SCC 462 was
that whether the supply of various preparations by each club to its
members involve a transaction of sale within the meaning of Sales of
Goods Act, 1930. Hon'ble Supreme Court held that -
Thus
in spite of the definition contained in Section 2(n) read with
Explanation I of the Act if there is no transfer of property from one
to another there is no sale which would be exigible to tax. 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. This position has been rightly accepted even in
the previous decision of this Court .
The
Hon'ble Supreme Court held so after considering the English Law also
and observed that the law in England has always been that members'
clubs to which category the clubs in the present case belong cannot
be made subject to the provisions of the Licensing Acts concerning
sale because the members are joint owners of all the club property
including the excisable liquor. The supply of liquor to a member at
a fixed price by the club cannot be regarded to be a sale. If,
however, liquor is supplied to and paid for by a person who is not a
bona fide member of the club or his duly authorised agent, there
would be a sale. With regard to incorporated clubs a distinction has
been drawn. Where such a club has all the characteristics of a
members' club consistent with its incorporation, that is to say,
where every member is a shareholder and every shareholder is a
member, no licence need to be taken out if liquor is supplied only
to the members. If some of the shareholders are not members or some
of the members are not shareholders, that would be the case of a
proprietary club and would involve sale. Proprietary clubs stand on
a different footing. The members are not owners of or interested in
the property of the club and then the Hon'ble Supreme Court observed
that above view was accepted by the various High Courts in India.
The Hon'ble Supreme Court, relying upon other judgements held that
members' club is only structurally a company and it did not carry on
trade or business so as to attract the corporation profit tax.
Therefore, in spite of specific inclusion of the club in the
definition of the dealer in the Madras General Sales Tax Act, 1959
by providing an explanation to include the clubs which are selling
or distributing the goods to its members for cash have been included
in the definition of dealer and by explanation I to Section 2(n)
defining the sale the statutory provision was made to include any
transfer of property by club to its members to be a sale for the
purpose of the said Act, Hon'ble Supreme Court categorically held
that in absence of two, there cannot be transaction of transfer of
property.
The
Full Bench of Patna High Court in the case of writ petitioner itself
i.e., in the case of Commissioner of Income Tax Vs. Ranchi Club
Limited (Supra), after finding that Ranchi Club is a limited company
incorporated under the Indian Companies Act, considered the various
clauses of the main objects of the club and relying upon various
judgements, in paragraph 12 observed as under :-
12. Therefore,
by applying the principle of mutuality Members Clubs always claim
exemption in respect of surplus accruing to them out of the
contributions received by the clubs from their members. But this
principle cannot have any application in respect of the surplus
received from non-members. It is not difficult to conceive of cased
where one and the same concern may indulge in activities which are
partly mutual and partly non-mutual. True, keeping in view the
principle of mutuality, the surplus accruing to a Members' Club from
the subscription charges received from its members cannot be said to
be income within the meaning of the Act. But, if such receipts are
from sources other than the members, then still can it be s aid that
such receipts are not taxable in the hands of the club? The answer
is obvious. No exemption can be claimed in respect of such receipts
on the plea of mutuality. To illustrate, a Members' Club may have
income by way of interest, security, house property, capital gains
and income from other sources. But such income cannot be said to be
arising out of the surplus of the receipts from the members of the
club.
and
answered the question in affirmative and questions referred were as
under :-
Whether,
on the facts and in the circumstances of the case, the Tribunal has
rightly held that the assessee-club is a 'mutual concern'?
Whether,
on the facts and circumstances of the case, the Tribunal has rightly
held that the income derived by the assessee-club from its house
property let to its members and their guests is not chargeable to
tax?
Whether,
on the facts and in the circumstances of the case, the Tribunal has
rightly held that the income derived by the assessee-club from sale
of liquor, etc., to its members and their guests is not taxable in
its hands?
6. Learned
Senior Advocates submitted that after the careful consideration of
the facts of the case, the Division Bench of the Jharkhand High Court
held as under :
18. However,
learned counsel for the petitioner submits that sale and service are
different. It is true that sale and service are two different and
distinct transaction. The sale entails transfer of property whereas
in service, there is no transfer of property. However, the basic
feature common in both transaction requires existence of the two
parties; in the matter of sale, the seller and buyer, and in the
matter of service, service provider and service receiver. Since the
issue whether there are two persons or two legal entity in the
activities of the members' club has been already considered and
decided by the Hon'ble Supreme Court as well as by the Full Bench of
this Court in the cases referred above, therefore, this issue is no
more res integra and issue is to be answered in favour of the writ
petitioner and it can be held that in view of the mutuality and in
view of the activities of the club, if club provides any service to
its members may be in any form including as mandap keeper, then it is
not a service by one to another in the light of the decisions
referred above as foundational facts of existence of two legal
entities in such transaction is missing. However, so far as services
by the club to other than members, learned counsel for the petitioner
submitted that they are paying the tax.
7. Learned
advocate Mr.Ravani appearing for the Authorities
i.e. Union of India, Commissioner of Central Excise, and Deputy
Commissioner / Assistant Commissioner, Service Tax Cell, vehemently
opposed the petitions and submitted that the Department has not
accepted the aforesaid judgment. Learned advocate submitted that the
Department has filed SLP before the Hon ble Apex Court and the
judgment is under challenge. Merely because the judgment is not
accepted by the Department, its persuasive value is not lost and it
can always be considered by this Court for its persuasive value,
more particularly when the said judgment has relied upon a decision
of the Full Bench of Patna High Court in the matter of Commissioner
of Income-tax v. Ranchi Club Ltd., 1992 (1) PLJR 252 (Pat) (FB),
which is referred to by the Division Bench.
7.1 Learned
advocate for the Department also submitted that there is no question
of mutuality because the club is a legal entity as it is incorporated
under the Companies Act. This Court is unable to accept the
submissions made by learned advocate for the Department because they
were the very facts before the Division Bench for consideration and
learned advocate for the Department could not set out any convincing
grounds on which this Court should not follow the decision of the
Division Bench of Jharkhand High Court.
8. In
the result, these petitions are allowed and it is hereby declared
that Section 65(25a), Section 65(105) (zzze) and Section 66 of the
Finance (No.2) Act,1994 as incorporated / amended by the Finance
Act,2005 to the extent that the said provisions purport to levy
service tax in respect of services purportedly provided by the
petitioner club to
its members,
to be ultra
vires. Rule is
made absolute with no order as to costs.
8.1 At
this juncture, learned advocate for the Department prays that this
judgment be stayed for a period of six weeks so as to enable the
Department to carry the matter further.
Request
is granted.
(RAVI R.TRIPATHI, J.)
(R.D.KOTHARI, J.)
vipul
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