CALCUTTA CLUB CASE: PRINCIPLE OF MUTUALITY AND ITS RELEVANCE UNDER GST REGIME

INTRODUCTION

‘No man, in my
opinion, can trade with himself; he cannot, in my opinion, make, in what is its
true sense or meaning, taxable profit by dealing with himself ’.¹

The principle of
mutuality is a concept borrowed from the ‘English decisions’ and has been adopted
and refined over a long period of time by the courts in India. The principle of
mutuality has been mainly held to be applicable in the context of levy of
income tax as well as the erstwhile sales tax regimes.

In a landmark
decision by the larger bench of the Supreme Court in the case of State of
West Bengal & Ors. vs. Calcutta Club Limited, Civil Appeal No. 4184 of 2009
[reported in 2019-TIOL-449-SC-ST-LB], it was held that the supply /
sale of goods or rendering of services by incorporated / unincorporated
associations or clubs to their members are not liable to sales tax / service
tax by application of the principle of mutuality even after the 46^th
Amendment to the Constitution. Further, the Supreme Court also held that the
judgement in C.T.O. vs. Young Men’s Indian Association (1970) 1 SCC 462
which applied the doctrine of mutuality continues to hold the field even after
the 46^th Amendment.

BACKGROUND: West Bengal & Ors. vs. Calcutta Club Limited (Supra)

The Assistant Commissioner of Commercial Taxes issued a notice to the
respondent club (assessee) proposing to demand sales tax on the sale of food
and drinks to the permanent members during the quarter ending 30^th June,
2002. The demand was contested on the ground of principles of mutuality. The matter
was carried to the Tribunal which held that there is no supply or sale of goods
by the club to its members as members and the club are the same persons and
there is no exchange of consideration. The issue was contested before the High
Court by the Revenue. The High Court held that no sales tax could be imposed on
the supplies by clubs to their members.

On appeal, the
Division Bench of the Supreme Court in the State of West Bengal vs.
Calcutta Club Ltd. (2017) 5 SCC 356, considering the decision in C.T.O. vs.
Young Men’s Indian Association (1970) 1 SCC 462 and Fateh Maidan Club vs. CTO
(2017) 5 SCC 638 and Article 366(29A) of the Constitution, referred the
matter to a larger bench with the following questions:

(i)   Whether the doctrine of mutuality is still
applicable to incorporated clubs or any club after the 46^th
amendment to Article 366(29A) of the Constitution of India?

(ii)   Whether the judgement of this Court in
Young Men’s Indian Association (Supra) still holds the field even after
the 46^th Amendment; and whether the decisions in Cosmopolitan
Club (Supra) and Fateh Maidan Club (Supra) which remitted
the matter applying the doctrine of mutuality after the Constitutional
amendment can be treated to be stating the correct principle of law?

(iii) Whether the 46^th Amendment by
deeming fiction provides that provision of food and beverages by incorporated
clubs to their permanent members constitutes sale, thereby holding the same to
be liable to sales tax?

Levy of
service tax on clubs or associations

In the meanwhile,
the High Court of Jharkhand in Ranchi Club Ltd. vs. Chief
Commissioner of Central Excise & ST, Ranchi Zone [2012 (26) STR 401
(Jhar.)] and the High Court of Gujarat in Sports Club of Gujarat
Ltd. vs. Union of India [2013 (31) STR 645 (Guj.)] held that no service
tax could be demanded on the services provided by clubs or associations to
their members by applying the doctrine of mutuality and by relying upon the
decision of the Supreme Court in Young Men’s Indian
Association (Supra).

Consequently,
departmental appeals were filed before the Supreme Court against the aforesaid
High Court decisions. In the light of reference to the larger bench of the
Supreme Court in State of West Bengal vs. Calcutta Club Ltd. (Supra),
the service tax matters were also placed before this bench.

SUBMISSIONS OF THE
PARTIES

The submissions
before the larger bench of the Supreme Court by the Revenue and the assessees
could be summarised as below:

Revenue:

(a) After the 46^th amendment to the
Constitution which inserted Article 366(29A), more specifically clause (e), the
earlier decision holding that there cannot be levy of sales tax on supply of
goods by clubs or associations to their members would no more be applicable;

(b) The supply of food or drink by the clubs or
associations to their members could either be taxed under clause (e) of Article
366(9A) or under clause (f) thereof;

(c) The decisions of the Constitution Bench in the
case of Young Men’s Indian Association (Supra) is prior to the
amendment of the Constitution referred above and the amendment is to do away
the effect of the said decision;

(d) The phrase ‘unincorporated association or body
of persons’ in sub-clause (e) must be read disjunctively, and so read would
include incorporated persons such as companies, co-operative societies, etc.;

(e) The doctrine of mutuality has no application
when a members’ club is in the corporate form. Reliance was placed on the
decision in the case of Bacha F. Guzdar vs. Commissioner of Income Tax,
Bombay (1955)
1 SCR 876, wherein it was held that a shareholder is not the owner of
the assets of a company and, therefore, the aforesaid principle cannot possibly
apply to members’ clubs in corporate form.

Assessees:

(1) The 46^th Amendment, which inserted
clause (29-A) into Article 366 of the Constitution, has not done away with the Young
Men’s Indian Association (Supra) as there cannot possibly be a supply
of goods by a person to himself; and that, therefore, the doctrine of agency /
trust / mutuality continues as before;

(2) Referring to the definition of consideration,
it was contended that the consideration should move from one person to another
and as there are no two persons involved in a transaction between a club and
its members, no consideration is involved and hence no sale is involved;

(3) Clauses (e) and (f) of Article 366(29A) are for
different purposes and the clause (f) cannot be used to tax the supply of food
or drink by the clubs or associations to their members;

(4) On the issue of levy of service tax on clubs or
associations it was submitted that:

(i)   The concept of mutuality as applicable to
supply of goods would equally be applicable to the provision of service by a
club to its members;

(ii)   The definition under ‘club and association
services’ specifically excludes incorporated entities;

(iii)  Similar to Article 366(29A)(e) of the
Constitution, there is no deeming fiction to treat services by clubs to their
members as service liable to tax; deemed fiction in respect of goods cannot be
applied to services, and reliance is placed on the decision in the case of Geo
Miller & Co. vs. State of M.P., (2004) 5 SCC 209;

(iv)  Where supply of food or drinks by clubs or
associations falls under clause (e) of Article 366(29A) in its entirety, there
cannot be any levy of service tax on such transactions as the Supreme Court in
the BSNL case (2006) 3 SCC 1 held that in Article
366(29A) only clause (b) relating to works contract and clause (f) relating to
catering contract can be vivisected into services
and goods;

(v)  Even if it is assumed that the decision of the
Supreme Court in Joint Commercial Tax Officer vs. The Young Men’s Indian
Association (Regd.), Madras, (1970) 1 SCC 462 has been overcome, that
would relate only to sale or purchase of goods and not to services. Therefore,
there is no deeming provision in the Constitution relating to entry 97 of List
I, where a deeming clause is present in respect of service.

ANALYSIS OF DECISION

Levy of sales
tax on the goods supplied by clubs or associations to members

The larger bench of
the Supreme Court on the issue of sale of goods by an incorporated or
unincorporated club or association to its members held as under:

The reasoning for
the above view is summarised below:

(A) The 61^st Law Commission Report,
which recommended the 46^th Constitutional Amendment, was of the view
that the Constitution ought not to be amended so as to bring within the tax net
members’ clubs for the following reasons:

(1) The number of
such clubs and associations would not be very large;

(2) Taxation of
such transactions might discourage the co-operative movement;

(3) No serious
question of evasion of tax arises as a member of such clubs really takes his
own goods.

(B) Article 366(29A) was introduced by way of the
46^th Amendment with a view to expand the scope of tax on sale in
respect of certain specified activities involving supply of goods or supply of
goods and services, which hitherto was held by the Supreme Court in various
decisions as not amounting to sale of goods. However, as regards clause (e) of Article
366(29A), relating to supply of goods by unincorporated associations to their
members, the Court ruled that the 46^th Amendment did not overcome
the decision in the Young Men’s Indian Association case and the
doctrine of mutuality remains applicable even after the amendment.

It is interesting
to note that the Supreme Court placed reliance mainly on the decision in the
case of C.T.O. vs. Young Men’s Indian Association (1970) 1 SCC 462,
wherein the Association which is a society registered under the Societies
Registration Act, 1860 and the issue was whether supply of refreshments by the
society to its members would attract levy of sales tax. It should be noted that
in the said decision, members’ clubs were also a party. The Constitution Bench
of the Supreme Court in this connection, referring to the decisions of English
judgements in the cases Graff vs. Evans (1882) 8 Q.B. 373 and Trebanog
Working Men’s Club and Institute Ltd. vs. MacDonald (1940) 1 K.B. 576,
held that there cannot be sale between a club or association and its members
when refreshments are supplied. The Court further observed that the club, even
though a distinct entity, is acting as an agent in supplying various
preparations and the concept of transfer is completely absent.

Further, the Court
followed the principle laid out in Young Men’s Indian Association, in
Fateh Maidan Club [Fateh Maidan Club vs. CTO, (2008) 12 VST 598 (SC)] and
Cosmopolitan Club [Cosmopolitan Club vs. State of T.N., (2009) 19 VST 456
(SC)].

(C) The Supreme Court observed that the Statement
of Objects and Reasons for the 46^th Amendment states that while sale
by a registered club or other association of persons (the club or association
of persons having corporate status) to its members is taxable, sales by an
unincorporated club or association of persons to its members is not taxable as
such club or association, in law, has no separate existence from that of the
members.

(D) The Supreme Court held that the Statement of
Objects and Reasons did not properly understand the decision of the Supreme
Court in the case of Young Men’s Indian Association and assumed
that sale of goods by members’ clubs in the corporate form were taxable. The
Court observed that in the Young Men’s Indian Association case,
it had held that sale of goods by an incorporated entity to its members is sale
to self and hence, does not amount to sale of goods for levy of sales tax. The
Court clearly stated that the Constitution Bench in Young Men’s Indian
Association placed reliance on two English decisions (Graff vs.
Evans & Trebanog Working Men’s Club and Institute Ltd. vs. MacDonald) which
pertained to incorporated clubs and hence the concept of mutuality would be
applicable to incorporated clubs or associations also.

(E) The Supreme Court further held that even in
case of sale / supply of goods by unincorporated associations or body of
persons to members, the requirement of consideration is not fulfilled since in
case of sale of goods to self, there exists no consideration as per the
provisions of the Contract Act, 1872.

(F) The Supreme Court also ruled out the contention
of the Revenue that the supply of food by clubs would fall under clause (f) of
Article 366(29A), if not under clause (e), and observed that clause (f) was
specifically brought in to tax supply of food by restaurants and that the
subject matter of sub-clause (f) is entirely different and distinct from that
of sub-clause (e) and it cannot be made applicable to members’ clubs.

(G) Unlike the specific provisions under the
Income-tax Act, 1961 such as section 2(24)(vii) or section 45, the absence of
such language in clause (e) to Article 366(29A) is also a pointer to the fact
that the doctrine of mutuality cannot be said to have been done away with by
the 46^th Amendment.

Levy of service
tax on clubs or associations

The Supreme Court
held that the judgements of the Jharkhand High Court in Ranchi Club Ltd.
(Supra) and the Gujarat High Court in Sports Club of Gujarat
(Supra) are correct in their view of the law in Young Men’s
Indian Association (Supra). It was also held that with effect from 2005
no service tax could be levied on the services by clubs or associations to
their members in the incorporated form. Accordingly, the Supreme Court held
that show-cause notices, demand notices and other action taken to levy and
collect service tax from incorporated members’ clubs are declared to be void
and of no effect in law.

The judgement of
the Supreme Court is analysed as under:

(i)   The Court held that for the period prior to 1^st
July, 2012, i.e.,  before the Negative
List regime, the definition of club or association as per section 65(2a)
of the Finance Act, 1994 specifically excluded incorporated entities. Thus, the
Court held that incorporated entities providing services to their members would
be outside the service tax net prior to 1^st July, 2012.

(ii)   The Supreme Court held that companies and
co-operative societies registered under the respective Acts can certainly be
said to be constituted under those Acts.

(iii) For the period post-1st July, 2012, the Court,
referring to the definition of ‘services’ as per section 65B(44) of the Finance
Act, 1994 observed that to qualify as service the definition requires the
existence of two persons and the doctrine of mutuality, the doctrine of agency,
trust, as applicable to sales tax cases, would equally be applicable to the
definition of services. Accordingly, the Supreme Court held that services by an
incorporated club / association to its members would amount to service to self
and hence would not qualify as service as defined above. [Note: However, the
Supreme Court has not dealt with exclusion of deemed sale under Article
366(29A) from the definition of ‘service’ in section 65B(44) of the Finance
Act, 1994.]

(iv)  As regards the Explanation 3 to section
65B(44) of the Finance Act, 1994, the Court held that the said explanation
deeming associations and their members as distinct persons would not be
applicable to incorporated associations or clubs. Relying on the decision in the
case of I.C.T., Bombay North, Kutch and Saurashtra, Ahmedabad vs. Indira
Balkrishna (1960) 3 SCR 513, the Court further observed that the
expression ‘unincorporated associations’ would include persons who join
together in some common purpose or common action.

SUMMARY AND COMMENTS

In summary, the
supply of goods or services by incorporated / unincorporated clubs or
associations to their members would not be exigible to sales tax or service tax
on the basis of principles of mutuality. The larger bench of the Supreme Court
affirmed the judgement of Young Men’s Indian Association (Supra)
as regards the applicability of the doctrine of mutuality and held that it
continues to apply even after the 46^th Amendment.

As regards the levy
of service tax on the services provided by the club to its members, the Supreme
Court held that the judgements of the Jharkhand High Court in Ranchi Club
Ltd. (Supra) and the High Court of Gujarat in Sports Club of
Gujarat (Supra) are correct.

Additional
points to be noted

In the context of
service tax levy on the services provided by clubs to their members, the larger
bench of the Supreme Court did not consider its categorical decision in Bharat
Sanchar Nigam Ltd. vs. UOI 2006 (2) STR 161 (SC) wherein it was held
that the 46^th Amendment chose three specific situations: a works
contract, a hire- purchase contract and a catering contract, to bring the
services within the fiction of a deemed sale. Of these three, the first and the
third involve a kind of service and sale at the same time, hence apart from
these two cases where splitting of the service and supply has been
constitutionally permitted in clauses (b) and (f) of clause 29A of Article 366,
there is no other service which has been permitted to be so split.

Accordingly, under Article
366(29A) only ‘works contract’ in clause (b) and ‘catering contract’ in clause
(f) are divisible and split between services and goods and, therefore, there is
no question of splitting the deemed sale entry relating to sale or services
provided by the club to its members under clause (e) of Article 366(29A). This
aspect would have categorically ruled out any service tax levy for the period
up to 30^th June, 2017. Even Explanation 3 found in the definition of
services u/s 65B(44) would have been restricted only to declared services u/s
66E(h) and (i) corresponding to clauses (b) and (f) of Article 366(29A) of the
Constitution as only those can be vivisected, and as clubs fall under Article
366(29A)(e), the said explanation would not apply as the transaction cannot be
vivisected.

Another aspect
which is to be noted from the above decision is that the concept of mutuality
would not be applicable to proprietary clubs. The Supreme Court in the case of Cosmopolitan
Club vs. State of T.N. (2009) 19 VST 456 (SC), referring to the English
decisions, brought in the distinction between members’ clubs and the
proprietary clubs as below:

7. 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 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. The supply to them
of food or liquor though at a fixed tariff is a sale.

Therefore, in case
of proprietary clubs, the doctrine of mutuality would not be applicable
inasmuch as some of the shareholders may not be members of the club and vice
versa and outsiders could well use the club. In other words, the clear
mandate would be that the persons participating and persons enjoying should be
the same. If not, mutuality does not exist.

One other aspect to
be remembered is that although in the end portion of the judgement relating to
service tax the judgement seems to be confined to incorporated members’ club,
in our opinion it would apply to unincorporated members’ club also for three
specific reasons:

(1) The portion of
the judgement which answers the sales tax questions raised clearly covers both
type of members’ clubs and the Supreme Court refers to it when it discusses
service tax;

(2) If incorporated
members’ clubs or associations, where identity can be distinct, can still come
within the mutuality clause, there is no reason why unincorporated clubs or
associations cannot;

(3) Our observations relating to the BSNL case as to why the
transactions of clubs cannot be vivisected would rule out service tax
applicability. Further, the definition of services post-1^st July,
2012 specifically excluded these transactions.

Whether above
decision is applicable in GST regime

With effect from 1^st
July, 2012, GST is levied on the supply of goods or services or both in
terms of section 9 of the CGST Act, 2017. The term ‘supply’ is defined
elaborately in section 7 of the Act to include all forms of supply of goods or
services or both, such as sale, transfer, barter, exchange, licence, rental,
lease or disposal made or agreed to be made for a consideration by a
person in the course or furtherance of business.

It shall be noted
that the term ‘business’ that has been defined in section 2(17) of the CGST
Act, 2017 inter alia includes ‘provision by a club, association,
society, or any such body (for a subscription or any other consideration) of
the facilities or benefits to its members’.

Further, entry 7 of
Schedule II to CGST Act, 2017 reads as below:

‘7. Supply of
Goods

The following
shall be treated as supply of goods, namely:

Supply of goods
by any unincorporated association or body of persons to a member thereof for
cash, deferred payment or other valuable consideration.’

As per serial No. 7 of Schedule II, the supply of goods by any
unincorporated association or body of persons to its members shall be deemed to
be supply of goods. However, there is no such deeming fiction for ‘supply of
services’.

In terms of the
above referred provisions under the GST law, we are of the view that the
decision of the larger bench of the Supreme Court in Calcutta Club
(Supra) is applicable even under the GST regime for members’ clubs on
the basis of the following points:

(a) The doctrine of mutuality continues to apply
under GST law. In terms of section 7, the term ‘supply’ includes sale or
transfer or barter, etc., which requires two persons; further, the said supply
must be for consideration which necessarily involves two or more persons. As
there are no two persons involved in the provision of supply of goods or
services by the club or association to its members, there cannot be any
‘supply’ of goods or services. This is specifically so for members’ clubs.

(b) Though the definition of the term ‘business’
includes the provision of facilities or benefits by the club or association to
its members, there is no deeming fiction under the provisions of section 7
which defines the term ‘supply’ to include such transactions. As the supply of
goods or services by the club or association does not get covered under the
definition of supply u/s 7, there is no question of levying GST by referring to
the clause (e) of definition of ‘business’.

(c) In terms of section 7(1A) of the CGST Act, 2017
entries in schedule II are only for the purposes of classification and cannot
be read independently. Therefore, no tax could be levied on supply of goods or
services by incorporated or unincorporated associations to their members as the
main section does not cover it.

(d) Alternatively, as per serial No. 7 of Schedule
II, the supply of goods by an unincorporated association or body of persons
could be termed as ‘supply of goods’, hence incorporated clubs or associations
cannot be brought under this entry. Further, serial No. 7 of Schedule II only
covers ‘supply of goods’, hence the provision of service by the club or
association to its members remains outside the purview of GST.

(e) The ratio of the decision laid out in Young
Men’s Association (Supra) continues to hold the field that in a
members’ club, the club acts as merely an agent for the principal and would be
covered by the principle of mutuality.

In view of the above, the authors are sure
that the dispute would continue under the GST regime but are of the view that
the decision of the larger bench would apply to the GST regime also so as to
exclude members’ clubs from the purview of taxation.