Judicial analysis: Taxability of Associations

In a recent decision FICCI vs. CST, Delhi-2014-TIOL- 701-CESTAT -DEL wherein two separate appeals were filed by Federation of Indian Chambers of Commerce and Industry (FICCI) and by Electronic and Computer Software export Promotion Council (ECSEPC), while considering on the applications for Stay, since substantial issues were heard in both the cases, the appeals were disposed off. In the said appeals the substantial common issues which fell for the Hon. Tribunal’s consideration were:

• Whether FICCI and ECSEPC are engaged in activities having objectives which would amount to public service and of a charitable nature and consequently fall outside the ambit of Club or Association.

• Whether their services to the respective members and the consideration received therefor was liable to tax, in view of the principle of mutuality declared in several judgments including in Ranchi Club Limited vs. Chief Commissioner of Central Excise & Service Tax 2012 (26) STR 401 (Jhar) and whether service tax was leviable under Club or Association-service, in the light of the judgment of the Gujarat High Court in Sports Club of Gujarat Ltd. vs. Union of India 2013-TIOL-528-HCAHM- ST.

• Whether services provided by FICCI and ECSEPC to non-members was liable to be classified as Club or Association-service and whether demand of service tax on FICCI for the period subsequent to 01-05-2011 was sustainable.

• Whether ECSEPC is a body constituted by or under any law and therefore falls outside the purview of the definition of Club or Association, in view of clause (i) of section 65(25a) of the Act; and

Thus, the important question that the Tribunal considered was whether both, FICCI and ECSEPC carried out activities having objectives amounting to public service and therefore would be falling in the excluded part of the definition of club or association service in section 65(25aa) of the Finance Act, 1994. Clause (iii) of the said definition excludes from its scope any person or body of persons engaged in activities having objective in the nature of public service and are of charitable, religious or political nature. Referring to Law Lexicon, Income Tax 1961, Charitable Endowment Act and Foreign Trade (Regulations) Rules, 1993, the Tribunal observed that the term “charitable purpose” would include a trust having an object and scope of public utility and advancement of any other object of general public utility and that public service would imply a service performed for the benefit of public and specially by a non-profit organisation. The Hon. Bench also observed that in order to hold an activity as charitable, the other objects of an institution or a body need not necessarily be charitable. If such objects are incidental or ancillary to the dominant purpose of charity, it would not take away the character of the activity being a valid charity as observed by the Supreme Court in CIT Madras vs. Andhra Chamber of Commerce (1965) 55 ITR 733 (SC) and that the said principle was reiterated in Surat Art Silk Cloth Manufactures Association, Surat AIR 1980 SC 387. FICCI itself was held as charitable by the Supreme Court in CIT, New Delhi vs. FICCI AIR 1981 SC 1408. In the Andhra Chamber of Commerce (supra), it was explained that promotion of trade, commerce or industry involves an object of general public utility and such activity may lead to economic benefit for the entire society although prosperity would be shared by those in trade, commerce or industry. On this count, it cannot be held otherwise. The Tribunal observed that contours of what attributes to charitable purpose or what object qualify as of general public utility and what constitutes public purpose are considered and explained in several decisions including those by the High Courts. The list, interalia, included South India Hire Purchase Association (1979) 116 ITR 793 (Mad) and Western India Chambers of Commerce and Industry Ltd. (1982) 136 ITR 67 (Bom). The Hon. Bench thus concluded that FICCI and ECSEPC are institutions having public service objectives and of a charitable nature. The Tribunal also noted that the authority holding the FICCI’s activities as covered within the ambit of club or association service omitted to provide reasons for distinguish Supreme Court’s judgment in FICCI’s own case wherein it was treated as a charitable organisation under the provisions of the Income Tax Act which are pari materia the exclusionary provision in section 65(25aa) whereas the authority relied on the Board’s circular dated 28-04-2008 instead. The adjudication order thus suffered from the vice of gross judicial indiscipline. For similar reasons, ECSEPC was also held as engaged in the activities which had objective in the nature of public service and of charitable nature.

Whether principle of mutuality applicable:
The next issue that the Tribunal dealt with was the issue as to whether the services provided by the appellant organisations to their respective members amounted to rendition of taxable service of a club or association in view of the principle of mutuality despite invalidation of the relevant provisions vide the judgments in Ranchi Club Ltd. 2012-TIOL-1031-HC-Jharkhand-ST and Sports’ Club of Gujarat 2013-119L-528-HC-AHM-ST. It was examined by the Hon. Tribunal that based on the Full Bench decision of the Patna High Court in CIT vs. Ranchi Club Ltd. 1992 (1) PLJR 252 (Pat), in Ranchi Club Ltd. (supra) it was ruled that while sale and service may be two different and distinct transactions, the basic feature common to both the transactions is that they require existence of two parties – for sale, a seller and a buyer and for a service, service provider and service recipient. Similarly, in Sports Club of Gujarat Ltd. (supra), the High Court declared the provision to the extent these purport to levy service tax in respect of services provided by a club to its members, as ultra vires. The Tribunal also noted that based on the said decision in Ranchi Club Ltd. (supra), the Tribunal granted full waiver of pre-deposit to appeal preferred by the Federation of Hotel & Restaurant Association of India in Appeal No.57179 of 2013 and in another preferred by Delhi Gymkhana Club Ltd. In Appeal No.55225 of 2013 wherein reference was also made to the decision of the Gujarat High Court in Sports Club of Gujarat Ltd. (supra). For the appellants, it was also pleaded that when the relevant provisions were declared ultra vires by the Gujarat High Court and in absence of any contrary decision by any other High Court, it would imply that there is no operative statutory provision in the law to justify levy of service tax on the service of club to its members. Citing interalia Full Bench’s decision in Madura Coats vs. CCE, Bangalore 1996 (82) ELT 512 (Tri.), the Tribunal observed that where adjudication of vires of a provision of a statute or a Notification is outside the province of the Tribunal, the decision of a particular High Court, in absence of a contrary decision by another High Court would have to be followed by the Tribunal as the Tribunal does not enjoy the liberty to disregard the view of the High Court.

Based on the above analysis and on following precedential guidance, the Bench held that on application of principle of mutuality, the services of FICCI/ESCEPC to their members do not qualify to be considered club or association service in absence of operative legislative provisions whereby the levy of service tax could be justified.

Services to non-members & levy after 1st May, 2011:

Primarily, it is to be noted here that the scope of Club or association service was expanded to cover facilities or advantages provided by a Club or association to persons other than its members also, provided such facilities or advantages are primarily intended for members. in the scenario, the tribunal observed that the Show Cause notices in both the appeals covered the period prior to the amendment vide the finance act, 2011.  The notices for the period post amendment were issued as periodic notices reiterating allegation in the earlier notices. however, in both the cases since the Show Cause notices failed to indicate the effect of amendment, the tribunal held that services to non-members fell outside the ambit of Club or association service prior to 01-05-2011 and for the subsequent period, it will not attract service tax in absence of specific allegation that services to non-members fell within the expanded scope of the taxable service in terms of amended provisions.

ECSEPC: Whether a body constituted by or under any law:
The Tribunal noted that ECSEPC was constituted qua provisions of Export-Import Policy and its Articles of Association are subject to Foreign Trade Policy (FTP) and while examining this aspect in detail, the tribunal observed that Export Promotion Councils (EPCs) are non-profit organisations which are autonomous and competent to regulate their own affairs but subject to provisions of uniform byelaws to be framed by the Central Government periodically for constitution or business by EPCs and they are required to adopt byelaws that are approved by the Central Government and that ECSEPC is listed and recognised as an EPC in the Appendix to the FTP. To understand and analyse the scope of “body established or constituted by or under a law for the time being in force”, reliance was placed on the observations in the following judgments:

•    Dr. Indramani Pyarelal Gupta vs. W. R. NATHUY AND Ors. AIR 1963 SC 274….Para 22.
•    Finite Infratech Limited vs. IFCI and Ors. [2011] 161 Comp Case 257 (Delhi) … Para 22.
•    R. C. Mitter & Sons vs. CIT air 1959 SC 868 …
Para 22.
•    S. Azeez Basha vs. Union of India air 1968 SC 662 …
Para 22.
•    National Stock Exchange of India Limited vs. Central Information Commission (2010 100 SCl 464 (del) … Para 22.

After a detailed analysis, it was observed that ECSEPC though registered under Societies registration act, 1860 is notified to be an EPC and was chartered to function as EPC authorised to issue Registration cum Membership Certificate (RCMC) and it was concluded that ECSEPC was a body established or constituted under a law for the time being in force viz., foreign trade (development and Regulation) Act, 1992 read with FTP and as such is excluded from the scope of definition of Club or Association qua Clause (1) of section 65 (25a) of the act.

Conclusion:
thus, in conclusion, taxability of service tax on both the counts is decided in negative – the associations are held as charitable organisations and at the same time the concept of mutuality also is held applicable to them. this would apply to all cases for the period till 30-06-2012. Legal testing for the negative list based service tax law yet remains to be done. This decision pronounced by the Principal Bench of the CeStat, assumes particular importance for the fact that CeStat, mumbai in case of Vidarbha Cricket Association vs. CCE, Nagpur 2013-TIOL-1915-CESTAT- mum pronounced a majority decision (the matter was referred to a third member on account of difference in view, reported at 2013-TIOL-1404-CESTAT-MUM) holding that object of the association cannot be considered of charitable nature and that the activity of providing cricket cannot be considered an activity, charitable in nature. in this case, per majority it was also observed, contrary to the observation in fiCCi’s case (supra) above that the provisions of the income tax act, 1961 are not pari materia with Chapter V of the income tax act, 1994 or the said association is a charitable organisation because it is held to be a charitable organisation under the income tax, 1961. While the matter was referred to the third member, the plea was presented by the appellant’s counsel that the decision of Sports Club of Gujarat Ltd. vs. UOI (supra) had held the levy of service tax under Club and association service as ultra vires. however, the Bench held the view that the said issue was not raised before the referral Bench. (The decision was reported in July 2013 whereas the matter was heard by the division Bench on 14th June, 2013). The principle of mutuality however was not discussed in the said case of Vidarbha Cricket association (supra). having discussed this and considering that the decision in case of FICCI and ECSEPC above has been pronounced by the Principal Bench containing President CeStat, the pending litigation in similar matters achieves finality in the like manner.

[Note: Readers may note that the concept of mutuality and the decision  of  Jharkhand  high  Court  ranchi  Club  (supra)  were discussed at length earlier under this feature in July, 2012 and december, 2012 of BCaJ).