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Dalhousie Institute v. Assistant Commissioner, Service Tax Cell

Calcutta High Court
Jun 30, 2004
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Structured Summary of the Provided Legal Opinion

Factual and Procedural Background

The petitioner (Petitioner No. 1) is a club formed by members under the West Bengal Societies Registration Act, 1961. The club is described as a non-profit body that provides facilities and amenities exclusively to its members and their guests; the bye-laws do not provide for participation by outsiders except as guests of members. In 1997, an amendment to the Finance Act, 1994 brought services rendered by a "mandap keeper" within the ambit of service tax. The petitioner obtained registration under the Finance Act and filed returns, an act the petitioner later described as done by mistake. Thereafter the petitioner sought a declaration that the Finance Act (as amended in 1997) did not apply to it, and prayed for quashing and rescinding of communications dated 21 October 1997, 12 October 1998 and 26 November 1998 and the Registration Certificate dated 19 November 1997. The writ petition challenges the applicability of service tax to the club's activities, and seeks to quash the impugned notices and registration certificate.

Legal Issues Presented

  1. Whether, having regard to the definitions of "mandap", "mandap keeper" and "taxable service" in the Finance Act (as amended), the petitioner/club can be made liable to pay service taxes (i.e., whether the club falls within the definition of a mandap keeper rendering taxable service).
  2. Whether the petitioner is estopped from challenging the respondents' action because it had earlier obtained a registration certificate and submitted returns under the Finance Act.

Arguments of the Parties

Petitioner's Arguments (as advanced by Senior Counsel Mr. J.P. Khaitan)

  • By reference to Section 65[4(i)] of the Finance Act the petitioner's club does not fall within the definition of "taxable service" as a mandap keeper.
  • The charging of service tax under that provision requires satisfaction of four pre-conditions: (i) letting out of immovable property (including furniture, fixtures, etc.); (ii) letting out for consideration; (iii) such letting and related services must be to a "client"; and (iv) letting out must be for organizing official, social or business functions.
  • The doctrine of mutuality applies: where an organisation exists to serve its members mutually and surplus/receipts are used for members' benefit (and not distributed), such transactions are not trading/commercial and should not be brought within the service tax charge. The petitioner relied on income-tax and sales-tax authorities for this proposition.
  • Registration and filing of returns under the Finance Act were made by mistake and do not estop the petitioner from asserting the statute is inapplicable.

Respondent's Arguments (as set out in the affidavit-in-opposition)

  • The petitioner is estopped from challenging the respondents' action because it had obtained a Registration Certificate and submitted returns under the Finance Act for one year.
  • The club is offering its immovable property, assets and facilities for use and enjoyment of outsiders in the name of guests for consideration; therefore the use amounts to letting out for consideration.
  • Members who bring invitees should not be treated as guests within the bye-laws; where members hold large social gatherings no individual guest charges are paid and a register recording invitees is maintained, indicating that outsiders use the facilities beyond the strict meaning of "guest".

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner of Income-Tax v. Bankipur Club Ltd. (226 ITR 97) Applied the doctrine of mutuality to hold that receipts for facilities extended by clubs to members as part of membership privileges are not "trading activity" and surplus is not taxable as income under the Income-tax Act. The court relied on the Bankipur Club principle to support the proposition that the club's activities are mutual and not commercial trading, thus indicating such activities should not attract service tax as a commercial "letting out".
Chelmsford Club v. Commissioner of Income Tax, Delhi (243 ITR 89) Following Bankipur Club, held that surplus from club activities and annual value of clubhouse (as contemplated in Section 22) are outside the levy of income-tax. The court used this authority to reinforce that club receipts arising from mutual arrangements are not treated as income from trading and to analogise that service tax exigibility should not capture such mutual transactions.
Commissioner of Income-Tax v. Darjeeling Club Ltd. (152 ITR 676) Applied principle that members' entitlement to facilities as of right under club rules means payments by members cannot be treated as rent or trading income for income-tax purposes. The court cited this decision to show that where members use facilities by virtue of membership (not by commercial letting), the transaction is not one of commercial letting and thus not chargeable to service tax under the mandap keeper definition.
Joint Commercial Tax Officer, Harbour Division v. Young Men's Indian Association, Madras (XXVI STC 241) Held that supply of preparations by a club to its members did not involve a "sale" where there is no transfer of property and where the club acts as agent/mandatary for members; consequently no sales tax levy where no transfer of property occurs. The court relied on this sales-tax authority to demonstrate that where clubs act for members (not as independent commercial sellers) and there is no transfer of property, tax cannot be levied; the decision was used analogically to support exclusion of the club from service tax as a mandap keeper.

Court's Reasoning and Analysis

The court proceeded in two principal stages: a preliminary assessment of the estoppel plea and a substantive analysis of statutory definitions.

On the preliminary estoppel point the court held that the doctrine of estoppel cannot be applied against the clear provisions of a statute. The court reasoned that if a statute is not applicable to a person, any action taken by that person under a mistake of law (such as obtaining registration and filing returns) cannot operate as an estoppel to prevent them from asserting that the statute does not apply. Accordingly, the estoppel argument was rejected.

On the substantive issue the court examined the definitions of "mandap", "mandap keeper" and "taxable service" contained in the Finance Act. The court extracted the following legal import from those definitions:

  • The phrase "let out for consideration" in the definition of "mandap" implies a commercial letting transaction — a parting with possession to a third party for consideration and thus a transaction of commercial/trading character.
  • "Mandap keeper" contemplates a person who allows temporary occupation of a mandap for consideration, again indicating a commercial transaction involving third parties.
  • "Taxable service" as a service "provided to a client" presupposes that services are rendered to persons who obtain use of the mandap for consideration — i.e., a commercial relationship with clients rather than mutual service among members.

The court then contrasted these statutory indicia of commercial letting with the petitioner's constitution and activities: the club is a body formed by individuals under the Societies Registration Act and, under the club's bye-laws, the facilities are exclusively for members (and their guests) and there is no provision for extending the facilities to third parties for consideration. The court found that the members jointly own the immovable properties and that the club exists to serve its members mutually. On this basis the court concluded that the members (collectively, via the club) are not letting the premises out in a commercial sense to third-party clients; rather, the arrangements fall within the doctrine of mutuality.

The court also rejected the respondents' reliance on dictionary meanings of "client" as insufficient; instead the court emphasized that statutory definitions must be read in their full context. The court concluded that the statutory concept of a mandap keeper assumes a separate legal/physical entity letting out property commercially to clients, which is not the situation in the petitioner club's case.

Finally, the court analogised decisions from income-tax and sales-tax jurisprudence (where the doctrine of mutuality had been applied) and found those authorities persuasive for the present statutory context: where the club's activities are mutual, not commercial, the service tax provision aimed at commercial mandap keepers does not apply.

Holding and Implications

HOLDING: The writ petition is allowed. The court set aside and quashed the impugned notices and the Registration Certificate (the communications dated 21 October 1997, 12 October 1998 and 26 November 1998 and the Registration Certificate dated 19 November 1997 were quashed).

Implications: The direct consequence of the decision is that the petitioner-club is not held liable under the Finance Act (as amended in 1997) as a mandap keeper for service tax purposes on the facts and law as presented; the notices and registration certificate impugned in this petition were quashed. The opinion applies the doctrine of mutuality to conclude that the club's provision of facilities to its members (and their guests in the manner described in the bye-laws) does not amount to commercial letting to clients within the meaning of the mandap provisions. The court made no order as to costs.

This summary is limited to, and faithful to, the matters expressly stated in the provided opinion.

Show all summary ...

1. In this case the applicant initially having accepted the applicability of the Finance Act, 1994 as amended by Finance Act, 1997 (hereinafter referred to as the aforesaid Act) to it, the club/petitioner has asked for a declaration that the said Act does not apply. So, they prayed for quashing and rescinding of the communications letters dated 21st October, 1997, 12th October, 1998 and November 26, 1998 and also the Registration Certificate dated 19th November, 1997. The short fact of the case is that the petitioner No. 1 is a body, formed under the West Bengal Societies Registration Act, 1961 by its members and with an object to achieve various purposes as mentioned in the object Clause of its bye-laws. It is stated that the petitioner No. 1 is non-profit making body and extends amenities and facilities to its members only and/or their guests. In the bye-laws there is no provision for allowing the outsider to participate in the club function and affairs except in case of guest(s) of a member, who is solely responsible for making payment on behalf of the guests. In other words, the income of the club derived from the members and/or members of their family and the surplus of the receipts is being invested and/or reserved for the benefit of the members exclusively, no amount of excess is distributed among its members. In legal parlance the element of mutuality in the affairs and dealing of the club exists. The Club provides for various facilities and amenities including space as a venue for holding social, commercial and business functions, meetings and gatherings.

2. In 1994 by the aforesaid Act various services rendered by the traders and/or organizations were subjected to tax at a particular rate. In 1997 by way of amendment of the aforesaid Act the services rendered by ‘mandap keeper’ providing mandap to the clients were brought under exigibility to the Service Taxes. Pursuant to the aforesaid Act the petitioner got itself registered and filed returns. It is claimed that obtaining of registration followed by filing of returns under the aforesaid Act were by mistake. On discovery of legal position the present application has been taken out for the relief as quoted hereinabove. The learned Senior Counsel Mr. J.P Khaitan appearing for the petitioner contends going by the definition of Section 65 [Clause 4(i)] of the said Act that the petitioners' Club cannot be brought within the purview of the same. The said definition of taxable service is quoted below:

“65.4(i) “taxable service” means any service provided…………(p) to a client by a mandap keeper in relation to the use of a mandap in any manner including the facilities provided to the client in relation to such use and also the services, if any, rendered as a caterer”.

3. Mr. Khaitan says that it is clear from the aforesaid definition in order to charge tax under the aforesaid Act following four pre-conditions must be satisfied.

(i) “There must be letting out of immovable property which may include any furniture, fixtures, light fittings, floor coverings therein;

(ii) Such letting out must be for consideration;

(iii) Such letting out and provision of related facilities and catering services must be to a client;

(iv) Such letting out must be for organizing any official, social or business function.”

4. According to him if there is mutuality in the affairs and business of any establishment, whether it is a body corporate or collective individuals or otherwise, the same cannot be brought within the purview of chargeability of service taxes. He has developed his argument by drawing analogy with decided cases of income-tax and sales tax. In connection with the income-tax he has relied on decisions of Supreme Court and this Court rendered in case of Commissioner Of Income-Tax v. Bankipur Club Ltd., (226 ITR 97), Chelmsford Club v. Commissioner Of Income Tax, Delhi, (243 ITR 89), Commissioner Of Income-Tax v. Darjeeling Club Ltd., (152 ITR 676). He has also relied on decision of the Supreme Court in connection with Sales Tax rendered in case of Joint Commercial Tax Officer, Harbour Division-II Madras, (XXVI STC 241).

5. None appears on behalf of the respondents. However, I find affida-vit-in-opposition has been filed. In the affidavit-in-opposition the point has been taken firstly the petitioner is estopped from challenging the action of the respondent after having obtained Registration Certificate and submitted returns. It is further stated in the affidavit that the petitioner/club is offering its immovable property other assets and facilities for use and enjoyment of the outsider in the name of the guests for consideration. The members who are bringing the invitees could not be termed as guests within the meaning as defined in the bye-laws and rules of the petitioner. It is further stated in the affidavit that when a member of the petitioner holds any social gathering in the club premises and invite large number of people to attend such gathering, no individual guest charges is paid and further register is maintained, recording each and every invitee in name of guests.

6. Therefore, going by the definition of ‘client’ as mentioned in the said Act and having regard to the meaning of the word ‘client’ as mentioned in Webster's Encyclopaedic Unabridged dictionary of English language the Members and their guests who are using the club premises as an invitee for social function and gatherings can be treated to be client.

7. Having considered contention of the petitioner as well as the respondent the point in this case is whether going by the definition of ‘Mandap’ and ‘Mandap keeper’ of the said Act the petitioner/club can be made liable to pay service taxes or not. Before I decide this issue the preliminary point taken by the respondent is to be addressed. It is contended the petitioner is estopped from making this application after having obtained registration certificate under the said Act and submitted returns for one year. It has now become elementary principle of law that question of estoppel cannot arise nor the principle thereof can be applied as against the provision of law. If it is found that the particular statute is not applicable to any person or persons, the action taken by mistake cannot operate as an estoppel or acquiescence. So, this preliminary issue is decided against the respondent.

8. Mr. Khaitan persists in the doctrine of mutuality, which has already been accepted by the Supreme Court and this Court without any exception and consistently in several cases of income-tax as well as Sales Tax. He submits that there is no basic difference in the object and purpose of exigibility of the service taxes. Whether the principle of mutuality can be applied in this case or not, has to be gathered from the definitions of mandap keeper and the taxable service. Therefore the aforesaid three definitions are set out hereunder.

“Mandap” means any immovable property as defined in Section 3 of the Transfer of Property Act, 1882 (4 of 1882) and includes any furniture, fixtures, light fittings, and floor coverings therein let out for consideration for organizing any official social or business function;

“mandap keeper” means a person who allows temporary “occupation of a mandap for consideration for organizing any official, social or business function.”

“taxable service” means any service provided to a client, by a mandap keeper in relation to the use of a mandap in any manner including the facilities provided to the client in relation to such use and also the services, if any, rendered as a caterer.

9. The words ‘let out for consideration’ employed in the definition of ‘mandap’ clearly intend the element of use of any person including the third party given by the landlord, of the immovable property as well as the furniture, fixture and light fittings on consideration. Therefore, the meaning and definition of letting out inheres transaction of commercial character, rather trading. Similarly, from the definition of ‘mandap keeper’ it is clear that a person allows temporary occupation of a mandap for consideration, meaning thereby temporary parting with possession to third party for consideration. Therefore, it is obvious that legislature intended this transaction must be for commercial purposes. Again words ‘provided to a client’ used in the definition of taxable service in the said Act necessarily presupposes that the mandap keeper must be letting out to any person on consideration. Now it has to be examined in the context of the aforesaid reading and meaning of the three definitions, whether the petitioner/club does come within the purview of the same or not.

10. Undeniably and undisputedly the petitioner club has been formed by a number of individuals and for the purpose of attaching apparently independent legal entity this body individuals have got this club registered under the West Bengal Societies Registration Act, 1961. Under the said Act this club cannot have any juristic entity rather the office-bearer of the same as provided under Section 19 of the said Act. Therefore all the members jointly own all the immovable properties as per definition of the mandap. In the bye-laws, rules and regulations of the Club I do not find there is any provision that the properties and the facilities those are being made available by the members for themselves, are extended to the third parties for any consideration whatsoever. The members of the club are allowed exclusively to participate in the services rendered by the club and the club fund, no third party is allowed to participate in the same. Even the facilities and amenities of the club are not extended to any third party who, of course, may come as a guest and/or invitee of the members. Therefore, it is clear from the activities of the club as stipulated in the bye-laws, rules and regulation, the ‘mandap keeper’ in this case is the members collectively in the name of petitioner No. 1 and the mandap belonged to them in the name of the petitioner No. 1 again. The allegations in the affidavit-in-opposition for which the action is sought to be taken do not make any difference of the aforesaid user. I am of the view that the understanding of respondent about petitioners' dealing is fallacious, for they mean the word ‘client’, relying on the dictionary expression instead of reading and understanding correct meaning and purport of the aforesaid three definitions. In my view service taxes is recoverable from the ‘mandap keeper’ who is having different and separate legal and physical entity and, let out mandap with commercial and trading object. Here the members have formed the petitioner No. 1 to serve themselves mutually and for this purpose members are paying for such user and any amount of receipt and expenditure of the club is enjoyed and/or participated and/or incurred by the members alone, not by third party.

11. The suggestion of Mr. Khaitan for application of the principle of mutuality which has been accepted in income-tax and Sales Tax cases in this case as well, appears to have much relevance because of the definition as mentioned above. In the income-tax cases our Court (152 ITR 676) while applying the principle of mutuality has held that:

“The club was not the landlord and the members, during their stay, were not the tenants of the club. The members by virtue of their membership were entitled to avail of the facilities of the club as of right according to the rules of the club. They were entitled to accommodation also as of right. What is paid by the members for their accommodation cannot be treated as rent and that income cannot be regarded as income from house property under the I.T Act.”

12. In the decision of Supreme Court (226 ITR 97) it has been observed considering the large number of Indian and English decisions at page 110 that—

“……the receipts for the various facilities extended by the clubs to their members, as stated hereinabove, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, cannot be said to be “a trading activity”. The surplus-excess or receipts over the expenditure-as a result of mutual arrangement, cannot be said to be “income” for the purpose of the Act.”

13. In the case of Chelmsford Club v. Commissioner Of Income Tax, Delhi, (243 ITR 89) the Supreme Court while following the Bankipur Club case that it is not only the surplus from the activities of the business of the club that is excluded from the levy of income-tax even the annual value of the clubhouse as contemplated in Section 22 of the Act will be out side the purview of levy of income-tax”.

14. The Supreme Court in the case of the Joint Commercial Tax Officer, Harbour Division v. Young Men's Indian Association Madras while dealing with the problem of levy of sales tax in connection with a club after considering the various decisions of the Courts of this country as well as the English decision was pleased to observe as follows:

“The essential question, in the present case, is whether the supply of the various preparations by each club to its members involved a transaction of sale within the meaning of the Sale of Goods Act, 1930. The State Legislature being competent to legislate only under entry 54, List II of the Seventh Schedule of the Constitution the expression ‘sale of goods’ bears the same meaning, which it has in the aforesaid Act. 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 the 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 final conclusion of the High Court in the judgment under appeal was that the case of each club was analogous to that of an agent or mandatory investing his own moneys for preparing things for consumption of the principal and later recouping himself for the expenses incurred. Once this conclusion on the facts relating to each club was reached it was unnecessary for the High Court to have expressed any view with regard to the vires of the Explanations to section 2(g) and 2(n) of the Act. As no transaction of sale was involved there could be no levy of tax under the provisions of the Act on the supply of refreshments and preparations by each one of the clubs to its members.”

15. The principle of mutuality in this case is also squarely applicable, as going by the definitions of mandap, mandap keeper and the taxable service, in this case the facility of use of the premises to the members by its club cannot be termed to be a letting out nor the members of the club using the facility of any portion of the premises for any function can be termed to be a client. The services rendered by any person to his client presupposes the element of commerciality and obviously this transaction must be involved with the third parties, as opposed to the members of the club. Thus, I allow the writ petition consequently I set aside and quash the notices and the registration certificate.

16. However, there will be no order as to costs.