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Post 01/07/2012, the relationship between club and members should be
considered as provision of service by one person to another. Further
refundable security deposit and notional interest thereon cannot be
exigible to service tax.
Facts
The Applicant is a
resident public limited company engaged in establishing and running an
indoor sports complex and club and proposes membership from prospective
members. A refundable interest free security deposit was proposed to be
collected from the members in a range depending upon the category of
membership. Further the Applicant has shareholders and dividends are
distributed to them.
The issue raised before the Authority is in
relation to whether the relationship between the Applicant and members
of the club could be considered as service by one to another for the
purpose of section 65B(44) of the Finance Act, 1994, accordingly whether
the membership fee, annual fee received from the members be liable for
service tax or will be excluded on the principles of mutuality and
whether refundable security deposit would be exigible to service tax.
The Applicant relied upon various High Court decisions in relation to
clubs and associations holding that principle of mutuality is applicable
and no service tax is leviable. The Revenue submitted that by virtue of
Explanation 3 to the definition of service, an unincorporated
association and the member shall be treated as distinct persons. It was
also argued that the applicant has a profit motive considering their
objects and the fact that dividends are distributed to the members and
thus is purely a business activity and not in the nature of a
conventional members’ club. Therefore, the principles of mutuality have
no relevance.
Held
It was argued by the Applicant
that there is no ‘activity’ undertaken by the Applicant for the members
and there is complete absence of identity between the contributors and
the beneficiaries being one and the same. The Authority observed that
the Applicant carries out the club as business and has shareholders, who
may not be members of the club. Thus the prime objective being profit
motive, the principles of mutuality would not apply. However, in
relation to the second issue, the Authority observed that the security
deposit is towards various facilities and amenities in the club and not
for any services rendered. Moreover it is not in the nature of
consideration as the same would be refunded to members. Further notional
interest on refundable security deposit will also not be liable for
service tax as section 67(1) of the Finance Act, 1994 provides that
service tax is chargeable with reference to value which is the gross
amount charged for the services provided or to be provided. Thus since
the notional interest is not a charge by the Applicant there is no
service. Moreover, it was also stated that the Revenue has not been able
to establish that the notional interest has led to depression or
reduction in value of taxable service.
