The Madras High Court has decided to hear a petition seeking exemption for members' club in an incorporated form, from levy/ payment of GST under the Central Goods and Services Act, 2017.
A Bench led by Chief Justice Sanjib Banerjee issued notices to the Central Government and CBDT in a petition filed by Ootacamund Club, situated in Ooty, Tamil Nadu.
The Petitioner-club, registered as a body corporate under the Companies Act, 2013, seeks exemption from levy of GST on the ground that the services rendered by members' clubs in incorporated form, do not constitute 'supply' within the meaning of section 7 of the CGST Act.
Advocate Suhrith Parthasarathy appearing for the Club, sought application of the Supreme Court's findings against levy of service charge by members' clubs, whether incorporated and unincorporated, from its members.
Principle of Mutuality
In an affidavit sworn by the Petitioner's Secretary Abraham, it is submitted that all the members of the club are each a shareholder in the company, and they form an integral part of the club. In other words, the Club and its members together constitute a single entity.
In this context, emphasis is laid on the "principle of mutuality" to state that "supply" of goods or services, as contemplated under Article 366(12A) of the Constitution, does not take place between members' club in an incorporated form and its members, due to lack of existence of two parties.
"Analogous to the transaction of sale and service, even supply requires the existence of two parties. Since, by virtue of the principle of mutuality, a members' club in an incorporated form and its members are not treated as distinct persons in the eyes of law, it is submitted that "supply" of goods or services as contemplated under Article 366(12A) does not take place between members' club in an incorporated form and its members," the plea states.
It is contended that both the Parliament and the State Legislatures do not have the power under Article 246A to levy GST on members' club as the same is excluded from the scope of Article 366(12A) of the Constitution, due to absence of "supply" transaction.
Application of Supreme Court's Calcutta Club decision over levy of GST
The Petitioners also referred to the decisions of the Gujarat High Court in Sports Club of Gujarat Ltd. v. Union of India, 2013  STR 645, and the Jharkhand High Court in Ranchi Club Limited v. Chief CCE & ST, 2012 (26) STR 401, upheld by the Supreme Court in State of West Bengal v. Calcutta Club Ltd,
where it was held that clubs are not under any obligation to charge and remit service tax with respect to any service that might have been availed by the customers of the club.
The reason given for this by the Courts was that levy of service charge shall violate principle of mutuality inasmuch as they seek to impose tax on transactions of club with their members.
It may be noted that these decisions were passed in reference to demand of service tax under the Finance Act, 1994.
The Petitioner-club in this case has averred, "given that the principles of mutuality are applicable to the Petitioner and given that the Hon'ble Supreme Court in Calcutta Club Limited (cited supra) has held that the members' clubs in incorporated form such as the Petitioner's is not amenable to sales and service tax, the same principle must, by logical extension also apply to the CGST Act as well. This is especially so given that the CGST Act has replaced the erstwhile sales and service tax regime in a unified manner."
"the principle of mutuality as an exemption to taxation has been recognised and upheld by the Hon'ble Supreme Court in a catena of cases including in Commissioner of Income Tax v. Bankipur Club (1997) 5 Supreme Court 394, Bangalore Club v. Commissioner of Income Tax, (2013) 5 SCC 509, Yum! Restaurants (Marketing) Private Limited v. Commissioner of Income Tax, (Civil Appeal No. 2847 of 2010). Therefore, to not recognise this well settled principle as an exemption to goods and service tax, is arbitrary and unreasonable."
- CGST Act in purporting to levy GST on members' clubs in an incorporated form violates the right to form associations and unions guaranteed by Article 19(1)(c) of the Constitution.
- The income tax department has consistently accepted the Petitioner's submission that the principles of mutuality are— absolutely applicable to the Petitioner's dealing with its members. Therefore, the same principle will squarely apply in the case of the Petitioner under the CGST Act as well.
- CGST Act does not contain a provision similar to that of Explanation 3 to Section 66B(44) of the Finance Act, 1994, which provides that "an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons." Therefore, the legislature did not intend to treat the members' club in incorporated form and its members as distinct persons and accordingly, the question of consideration being made by one person to another in terms of section 7(1) of the CGST Act, does not arise.
The petition is filed through Advocates Arun Karthik Mohan and Suhrith Parthasarthy.