Month: July

Sections 88 to 92 of the Finance Act, 1994 (the Act) provided for prosecution for certain offences, such as failure to furnish prescribed returns, false statement in verification, abetment of false return, etc. These provisions were omitted by the Finance (No. 2) Act, 1998 w.e.f. 16-10-1998. However, through the Finance Act, 2011, amendments have been made to introduce prosecution provisions by enacting a new section 89 under FA. Further, sections 9A, 9AA, 9B, 9E and 34A of the Central Excise Act, 1944 (‘CEA’) have been made applicable to Service tax. These provisions together constitute the provisions relating to prosecution under Service tax, which are discussed hereafter.

Prosecution provisions Offences punishable

(a) Provision of taxable services or receipt of any taxable services where the recipient is liable to pay Service tax, without an invoice issued in accordance with the provisions of the Act or the Rules made hereunder;

(b) availment and utilisation of credit without actual receipt of taxable service or excisable goods either fully or partially in violation of the Act or Credit Rules;

(c) maintenance of false books of account;

(d) failure to supply information or supply of false information;

(e) failure to pay to the Government any amount collected as Service tax beyond a period of six months from the date on which such payment became due.

2.2 Quantum of punishment

(a) conviction of the accused for the first time for an offence under the Act;

(b) payment of penalty or any other action taken for the same act which constitutes the offence

(c) the fact that the accused was not the principal offender and was acting merely as a secondary party in the commission of the offence.

(d) The age of the accused.

Sanction

Central Excise Sections provisions made applicable to Service tax

The provisions of sections 9A 9AA, 9B, 9E and 34A of CEA which have been made applicable to Service tax are briefly explained as under:

(a) The offences would be ‘non-cognisable’ i.e., an offence in which a police officer has no authority to arrest without a warrant. Further the CCCE is also empowered to compound the offences on payment of the compounding amount as may be prescribed (section 9A of CEA).

(b) If an offence is committed by a company (which includes a firm), the persons liable to be proceeded against and punished are:

(i) the company;
(ii) every person, who at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business, except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and
(iii) any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed. (section 9AA of CEA)

(c) The Court is empowered to publish the name, place of business, etc. of person convicted under the Act (section 9B of CEA)

(d) In case of a person who is less than 18 years of age, the Court, under certain circumstances, is empowered to release the accused on probation of good conduct u.s 360 of the Code of Criminal Procedure, 1973 or to release the offenders on probation under the Probation of Offenders Act, 1958. (section 9B of CEA)

(e) The imposition of penalty would not prevent infliction of other punishment on the offender. (section 34A of CEA)

Dept. clarifications vide Circular No. 140/9/2011-TRU, dated 12-5-2011

Relevant extracts from the Dept. Circular are given hereafter for reference:

Para 2
Prosecution provision was introduced this year, in Chapter V of the Finance Act, 1994, as part of a compliance philosophy involving rationalisation of penal provisions. Encouraging voluntary compliance and introduction of penalties based on the gravity of offences are some important principles which guide the changes made this year in the penal provisions governing Service tax. While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations. Accordingly, it is imperative for the field formations, in particular the sanctioning authority, to implement the prosecution provision keeping in view the overall compliance philosophy. Since the objective of the prosecution provision is mainly to develop a holistic compliance culture among the taxpayers, it is expected that the instructions will be followed in letter and spirit.

Para 4
Clause (a) of section 89(1) of the Finance Act, 1994 is meant to apply, inter alia, where services have been provided without issuance of invoice in accordance with the prescribed provisions. In terms of Rule 4A of the Service Tax Rules, 1994, invoice is required to be issued inter alia within 14 days from the date of completion of the taxable service. Here, it should be noted that the emphasis in the prosecution provision is on the non-issuance of invoice within the prescribed period, rather than non-mention of the technical details in the invoice that have no bearing on the determination of tax liability.

Para 5
In the case of services where the recipient is liable to pay tax on reverse-charge basis, similar obligation has been cast on the service recipient, though the invoices are issued by the service provider. It is clarified that the date of provision of service shall be determined in terms of the Point of Taxation Rules, 2011. In the case of persons liable to pay tax on reverse-charge basis, the date of provision of service shall be the date of payment, except in the case of associated enterprises receiving services from abroad where the date shall be earlier of the date of credit in the books of accounts or the date of payment. It is at this stage that the transaction must be accounted for. Thus the service receiver, liable to pay tax on reverse-charge basis is required to ensure that the invoice is available at the time the payment is made or at least received within 14 days thereafter and in the case of associated enterprises, invoice should be available with the service receiver at the time of credit in the books of accounts or the date of payment towards the service received.

Para 7
Clause (b) of section 89(1) of the Finance Act, 1994 refers to the availment and utilisation of the credit of taxes paid without actual receipt of taxable service or excisable goods. It may be noted that in order to constitute an offence under this clause the taxpayer must both avail as well as utilise the credit without having actually received the goods or the service. The clause is not meant to apply to situations where an invoice has been issued for a service yet to be provided on which due tax has been paid. It is only meant for such invoices that are typically known as ‘fake’ where the tax has not been paid at the so-called service provider’s end or where the provider stated in the invoice is non-existent. It will also cover situations where the value of the service stated in the invoice and/or tax thereon have been altered with a view to avail Cenvat credit in excess of the amount originally stated. While calculating the monetary limit for the purpose of launching prosecution, the value shall be the amount availed as credit in excess of the amount originally stated in the invoice.

Para 8

Clause (c) of section 89(1) of the Finance Act, 1994 is based on similar provision in the Central Excise law. It should be noted that the offence in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should in material particulars have a bearing on the tax liability. Mere expression of opinions shall not be covered by the said clause. Supplying false information, in response to summons, will also be covered under this provision.

Para 9

Clause (d) of section 89(1) of the Finance Act, 1994 will apply only when the amount has been collected as Service tax. It is not meant to apply to mere non-payment of Service tax when due. This provision would be attracted when the amount was reflected in the invoices as Service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government. Where the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government.

Para 11

Section 9C of the Central Excise Act, 1944, which is made applicable to the Finance Act, 1994, provides that in any prosecution for an offence, existence of culpable mental state shall be presumed by the Court. Therefore each offence described in section 89(1) of the Finance Act, 1994, has an inherent mens rea. Delinquency by the defaulter of Service tax itself establishes his ‘guilt’. If the accused claims that he did not have guilty mind, it is for him to prove the same beyond reasonable doubt. Thus “burden of proof regarding non-existence of ‘mens rea’ is on the accused.

Para 13

Sanction for prosecution has to be accorded by the Chief Commissioner of Central Excise in terms of the section 89(4) of the Finance Act, 1994. In accordance with Notification 3/2004 -ST dated 11th March 2004, the Director General of Central Excise Intelligence (DGCEI) can exercise the power of the Chief Commissioner of Central Excise, throughout India.

Para 14

The Board has decided that monetary limit for prosecution will be Rupees Ten Lakh in the case of offences specified in section 89(1) of the Finance Act, 1994 to ensure better utilisation of manpower, time and resources of the field formations. Therefore, where an offence specified in section 89(1) involves an amount of less than Rupees Ten Lakh, such case need not be considered for launching prosecution. However the monetary limit will not apply in the case of repeat offence.

Para 15

Provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.

Para 16

Prosecution proceedings in a Court of law are to be generally initiated after departmental adjudication of an offence has been completed, although there is no legal bar against launch of prosecution before adjudication. Generally, the adjudicator should indicate whether a case is fit for prosecution, though this is not a necessary pre-condition. To launch prosecution against top management of the company, sufficient and clear evidence to show their direct involvement in the offence is required. Once prosecution is sanctioned, complaint should be filed in the appropriate court immediately. If the complaint could not be filed for any reason, the matter should be immediately reported to the authority that sanctioned the prosecution.

Para 17

Instructions and guidelines issued by the Central Board of Excise and Customs (CBEC) from time to time, regarding prosecution under Central Excise law, will also be applicable to Service tax, to the extent they are harmonious with the provisions of the Finance Act, 1994 and instructions contained in this Circular for carrying out prosecution under Service tax law.

4.    Guidelines for launching prosecution issued by CBEC under Central Excise (Circular No. 33/80 CX 6. Dated 26-7-1980 read with CBEC Circular No. 15/90 – CX 6, dated 9-8-1990.)

(i)    Prosecution should be launched with the final approval of the Principal Collector after the case has been carefully examined by the Collector in the light of the guidelines.

(ii)    Prosecution should not be launched in cases of technical nature, or where in the additional claim of duty is based totally on a difference of interpretation of law. Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual had guilty knowledge of the offence, or had fraudulent intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt. It follows, therefore, that in the case of public limited companies, prosecution should not be launched indiscriminately against all the Directors of the company but it should be restricted to only against such of the Directors like the Managing Director, Director in charge of Marketing and Sales, Director (Finance) and other executives who are in charge of day-to-day operation of the factory. The intention should be to restrict the prosecution only to those who have taken active part in commit-ting the duty evasion or connived at it. For this purpose, the Collectors should go through the case file and satisfy themselves that only those Chairman/Managing Directors/Directors/Partners/ Executives/Officials against whom reasonable evidence exists of their involvement in duty evasion, should be proceeded against while launching the prosecution. For example, Nominee Directors of financial institutions, who are not concerned with day-to-day matters, should not be prosecuted unless there is very definite evidence to the contrary. Prosecution should be launched only against those Directors/Officials, etc., who are found to have guilty knowledge, fraudulent intention, or mens rea necessary to bind them to criminal liability.

(iii)    In order to avoid prosecution in minor cases, a monetary limit of Rs. 10,000 was prescribed in the instructions contained in Board’s letter F. No. 208/6/M-77-CX 6, dated 26-7-1980. Based on experience, and in order not to fritter away the limited man-power and time of the Department on too many petty cases, it has now been decided to enhance this limit to Rs.1 lakh. (See Note Below) But in the case of habitual offenders, the total amount of duty involved in various offences may be taken into account while deciding whether prosecution is called for. Moreover, if there is evidence to show that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.

(iv)    One of the important considerations for deciding whether prosecution should launched is the availability of adequate evidence. Prosecution should be launched against top management when there is adequate evidence/ material to show their involvement in the offence.

(v)    Persons liable to prosecution should not normally be arrested unless their immediate arest is necessary. Arrest should be made with the approval of the Assistant Collector or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Collector, who will consider whether the case is a fit one for prosecution.

(vi)    Decision on prosecution should be taken immediately on completion of the adjudication proceedings.

(vii)    Prosecution should normally be launched immediately after adjudication has been completed. However, if the party deliberately de-lays completion of adjudication proceedings, prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.

(viii)    Prosecution should not be kept in abeyance on the ground that the party has gone in appeal/revision. However, in order to ensure that the proceedings in appeal/revision are not unduly delayed because the case records are required for purposes of prosecution, a parallel file containing copies of the essential documents relating to adjudication should be maintained. It is necessary to reiterate that in order to avoid delays, the Collector should indicate at the time of passing the adjudication order itself whether he considers the case is fit for prosecution so that it should be further processed for being sent to the Principal Collector for sanction.

Applicability of prosecution provisions
Section 89 of the Act has become operative upon enactment of the Finance Act, 2011 on 8-4-2011. Hence, it would appear that prosecution provisions would apply to offences committed on or after 8-4-2011.

In this regard, useful reference can be made to precedents under income tax. In the context of section 276C which was inserted w.e.f. 1-10-1975, it has been held in a number of cases that the said section would not apply to an offence committed prior to that date.

Time limit for launching prosecution
The Economic Offences (Inapplicability of Limitation) Act provides that there is no time limit for launching prosecution in case of offences under some specified Acts. Further, limitation bar contained in Criminal Procedure Code, is not applicable to offences under Central Excise, Service Tax and Customs Law.

It would appear that there is no time limit for launching prosecution under Service tax.

Note: The monetary limit has been enhanced to Rs.25 lakh vide CBEC Circular dated 12-12-1997.

Few judicial considerations are as under:

?    In Devchand Kalyan Tandel v. State of Gujarat, 89 ELT 433 (SC) it was held that in case of economic offences, the Courts should not take lenient view, as stringent measures are necessary in case of economic offences. (In this case, there was lapse of 13 years between the occurrence and the date of judgment.)

?    In V. K. Agarwal v. Vasantraj, (1988) 3 SCC 467 and A. A. Mulla v. State of Maharashtra, 1997 AIR SCW 63, the Supreme Court declined to stop further proceedings on the matter though the matters had become very old. (In this case, the case was already filed long ago i.e., in 1969).

Procedures relating to prosecution

The CBE&C has clarified that prosecution can be approved only by the CCCE in terms of section 89(4) of CEA throughout India.

Some judicial and other considerations are as under:

?    Appeal against sanction of prosecution cannot be filed with CEGAT — [Jagatjit Industrial Ltd. v. CCE, (1993) 67 ELT 878 (CEGAT)]

?    Decision to grant sanction for prosecution is merely an administrative act. No hearing is necessary. Prima facie, authority sanctioning prosecution should be satisfied that an offence is committed. Even exoneration by disciplinary authority (in excise and customs matters, it means departmental adjudication) is also not relevant [Supdt. of Police (CBI) v. Deepak Chowdhary, (1995) 6 SCC 225, the same view in State of Maharashtra v. Ishmal Piraji Kalpatri, AIR 1996 SC 722.]

?    Opportunity of personal hearing is not required to be given before grant of sanction of the Commissioner to file criminal prosecution — [Assistant Commissioner v. Velliappa Textiles, (2003) 157 ELT 369 (SC 3-member Bench).]

?    Decision to prosecute does not involve ex-ercise of any quasi-judicial power, [Praveen Kumar R. Jain v. Chief Judicial Magistrate, Dindigul, 1995 (79) ELT 353 (Mad. HC).]

?    Specific approval for launching prosecution is required. Mere signing on file by the Chief Commissioner would not mean that he has applied his mind and granted approval. If prior approval of the Chief Commissioner is not obtained, prosecution cannot continue and accused has to be acquitted. – [UOI v. Greaves Ltd., (2002) 139 ELT 34 (CEGAT)].

?    In CIT v. Camco Colour Co., (2002) 254 ITR 565 (Bom. HC), it was held that monetary limit prescribed is a policy decision with a view to reduce litigation and the same is binding on the Revenue.

?    The CBE&C has clarified that when action is launched under the Central Excise Act, action under Indian Penal Code, 1860 should also be launched, wherever found feasible — [CBE&C Circular No. 178/12/1996, dated 28-2-1996.]

Compounding of offences
Section 9A(2) of CEA, provides that any offence under CEA can be compounded by the CCCE. Such compounding can be done either before or after the institution of prosecution. Procedure for compounding has been prescribed in the Central Excise (Compounding of Offences) Rules, 2005 and Guidelines for Compounding have been issued vide MF (DR) Circular No. 54/2005-Cus, dated 30-12-2005. Since, section 9A of CEA has been made applicable to Service tax, the Rules/Guidelines and precedents under Central Excise would be relevant for Service tax.

Some judicial considerations are as under:

?    In Vinod Kumar Agarwal v. UOI, (2008) 223 ELT 19 (Bom HC DB), it was held that compound-ing under the Customs Act cannot result in discharge of offences under other Acts like IPC.

?    In Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Company, (2004) 52 SCL 224 (Bom HC DB), it was held that if the offence is compounded, it is as if no offence had even been committed in the first place.

?    In P. P. Varkey v. STO, (1999) 114 STC 251 (Ker. HC), it was held that once the offence is compounded, penalty or prosecution proceedings cannot be taken for the same offence.

?    In S. Viswanathan v. State of Kerala, (1999) 113 STC 182 (Ker HC DB), it was held that once the matter is compounded, neither the Department nor the assessee can challenge the compounding order.

?    A person having agreed to the composition of offence is not entitled to challenge the said proceedings by filing appeal. [S. V. Bagi v. State of Karnataka, (1992) 87 STC 138 (Karn HC FB) — followed in Sakharia Bandhu v. ADCCT (1999) 112 STC 449 (Karn HC DB).]

9.    Conclusion
Service tax law has evolved as a law based on voluntary compliance. In this backdrop, re-introduction of prosecution provisions is a retrograde step. One does understand that there may have been many cases of tax evasion detected by the Tax Dept. However, the same is no justification for re-introduction of prosecution provisions, inasmuch as there are wide powers for the tax administration under the existing tax structure and other laws to deal with such cases and impose stiff penalties.

Overall, the provisions are too harsh, and are likely to be misused by the authorities causing severe harassment to taxpayers. In particular, non-issue of tax invoice by a service provider being specified as an offence, is totally unjustified. Further, non-issue of tax invoice as per the Service Tax Rules by a service provider based outside and its non-issue to be treated as an offence at the end of service recipient in India, is unprecedented and needs to be done away with.

It is suggested that a monetary limit of tax evaded amount of Rs. 1 crore need to be prescribed for a judicious implementation of prosecution provisions and minimise hardships to small and medium taxpayers.

Though
the concept of ‘mutuality’ has been a subject-matter of extensive
judicial considerations under the Income tax Act and Sales tax laws, it
has been tested judicially to a very limited extent under Service tax.

However,
it assumed significance in the context of Club or Association Service,
the category introduced w.e.f. June 16, 2005, more particularly in the
context of co-operative societies, trade associations and clubs.

The
following Explanation was inserted at the end of section 65(105) of the
Finance Act, 1994 (Act) w.e.f. May 01, 2006: “For the purpose of this
section, taxable service includes any taxable service provided or to be
provided by any unincorporated association or body of persons to a
member thereof, for cash, deferred payment or any other valuable
consideration.” Attention is particularly invited to the following
Explanation inserted to newly introduced section 65B(44) of the Act
which now defines ‘service’ effective from July 01, 2012: “
…………………….

Explanation 2 — For the purpose of
this Chapter, — (a) An unincorporated association or a body of persons,
as the case may be, and a member thereof shall be treated as distinct
persons. ……………”

General concept

It is
widely known that no person can make a profit out of himself. The old
adage that a penny saved is a penny earned may be a lesson in household
economics, but not for tax purposes, since money saved cannot be treated
as taxable income. It is this principle, which is extended to a group
of persons in respect of dealings among themselves. This was set out by
the House of Lords in Styles v. New York Life Insurance Co., (1889) 2 TC
460 (HL). It was clarified by the Privy Council in English and Scottish
Joint Co-operative Wholesale Society Ltd. v. Commissioner of
Agricultural Income-tax, (1948) 16 ITR 270 (PC), that mutuality
principle will have application only if there is identity of interest as
between contributors and beneficiaries. It was the lack of such a
substantial identity between the participants, with depositor
shareholders forming a class distinct from the borrowing beneficiaries,
that the principle of mutuality was not accepted for tax purposes for a
Nidhi Company (a mutual benefit society recognised u/s.620A of the
Companies Act, 1956) in CIT v. Kumbakonam Mutual Benefit Fund Ltd.,
(1964) 53 ITR 241 (SC).

Distinction between Members’ Club/Association and Proprietary Club/Association

(i)
The concept of mutuality and distinction between ‘Members’ Clubs’ and
‘Proprietary Clubs’ has been discussed in detail in a 6-Member Supreme
Court Ruling viz. Joint CTO v. Young Men’s Indian Association, (1970) 26
STC 241 (SC). (‘YMIA’) The relevant extract of discussion is set out
hereafter for reference.

If a members’ club, even though a
distinct legal entity, acts only as an agent for its members in the
matter of supply of various preparations and articles to them, no sale
would be involved as the element of transfer would be completely absent.
Members are joint owners of all the club properties. Proprietary clubs
stand on a different footing. The members are not owners of or
interested in the property of the club. To show the difference of
characteristics between Members’ Club and Proprietary Club, the Supreme
Court held that where every member is a shareholder and every
shareholder is a member, then the same would be called a Members’ Club.

In
a Members’ Club what is essential is that the holding of the property
by the agent or trustee must be holding for and on behalf of and not a
holding antagonistic to the members of the club. (ii) In CIT v. Bankipur
Club Ltd., (1997) 226 ITR 97 (SC), it was held by the Supreme Court
that there must be complete identity between contributors and
participators. If this requirement is fulfilled, it is immaterial, what
particular form the association takes. Trading between persons
associating together in this way does not give rise to profits which are
chargeable to tax. Facilities were offered only as a matter of
convenience for the use of the members. (iii) It was further held in
Chelmsford Club v. CIT, (2000) 243 ITR 89 (SC) that the surplus from the
activities of a club is excluded from the levy of the income-tax.

Applicability to a co-operative society

Where
a co-operative society deals solely with its members, right to
recognition for exemption on grounds of mutuality has been recognised
under income-tax in the following High Court rulings:

• CIT v. Apsara Co-operative Housing Society Ltd., (1993) 204 ITR 662 (Cal.);
•  CIT v. Adarsh Co-operative Housing Society Ltd., (1995) 213 ITR 677 (Guj.) and;
• Director of Income-Tax v. All India Oriental Bank of Commerce and Welfare Society, (2003) 130 Taxman 575 (Del.).

 Judicial considerations under Service tax

The
Service tax authorities had issued show-cause notices to various clubs
demanding Service tax under the service category ‘Mandap Keeper’ on the
ground that the clubs have allowed the members to hold parties for
social functions. Two of such clubs disputed the levy before the
Calcutta High Court viz.:

• Dalhousie Institute v. AC, (2005) 180 ELT 18 (Cal.).
•  Saturday
  Club Ltd. v. AC, (2005) 180 ELT 437 (Cal.). In Saturday Club’s case, a
  members’ club permitted occupation of club space by any member or his
  family members or his guest for a function by constructing a mandap.

On the principle of mutuality, there cannot be

(a) any sale to oneself,
(b) any service to oneself or
(c) any profit out of oneself.

Therefore,
the Calcutta High Court held that the same principle of mutuality would
apply to income-tax, Sales tax and Service tax in the following words:
“Income tax is applicable if there is an income. Sales tax is applicable
if there is a sale. Service tax is applicable if there is a service.
All three will be applicable in a case of transaction between two
parties.

Therefore, principally there should be existence of two
sides/entities for having transaction as against consideration. In a
members’ club there is no question of two sides. ‘members’ and ‘club’
both are the same entity. One may be called as principal while the other
may be called as agent, therefore, such transaction in between
themselves cannot be recorded as income, sale or service as per
applicability of the revenue tax of the country. Hence, I do not find it
is prudent to say that members’ club is liable to pay service tax in
allowing its members to use its space as ‘mandap’.”

While
quashing the proceedings, the High Court referred to the decisions in
the case of Chelmsford Club v. CIT, (2000) 243 ITR 89 (SC) & CIT v.
Bankipur Club Ltd., (1997) 226 ITR 97 (SC)

Principles laid down by the Calcutta High Court under Service tax

(a)
The principles laid down by the Calcutta High Court in Saturday Club
& Dalhousie Institute discussed above have been followed in a large
number of subsequently decided cases. Some of these are:

• Sports Club of Gujarat Ltd. v. UOI, (2010) 20 STR 17 (Guj.)
• Karnavati Club Ltd. v. UOI, (2010) 20 STR 169 (Guj.)
•  CST v. Delhi Gymkhana Club Ltd., (2009) 18 STT 227 (CESTAT-New Delhi)
•  Ahmedabad Management Association v. CST, (2009) 14 STR 171 (Tri.-Ahd.) and
•  India International Centre v. CST, (2007) 7 STR 235 (Tri.-Delhi)

“using of facilities of club, cannot be said to be acting as its clients and hence, in respect of services provided to its members, a club would not be liable to pay Service tax in the category of club or association service.”

The Revenue’s appeal against the above ruling was dismissed by the Delhi High Court on technical grounds. It needs to be noted that, Explanation inserted at the end of section 65(105) of the Act w.e.f. May 01, 2006, has not been discussed in the aforesaid ruling.

Recent judgment in Ranchi Club Ltd. v. CCE & ST, (2012) 26 STR 401 (JHAR)

Background

A writ petition was preferred by Ranchi Club Limited for declaration that the Club was not covered under the Act and, therefore, was not liable to pay Service tax under ‘Mandap Keeper Service’ or under the ‘Club or Association Service’ categories and prayed for order of prohibition against Central Excise Division, Ranchi from enforcing any of the provisions of the Act.

Contention of the petitioner

Petitioner is a club which is a registered company under the Companies Act, 1956 and is giving service to its members but the club is formed on the principle of mutuality and, therefore, any transaction by the club with its member is not a transaction between two parties. When the club is dealing with its member, it is not a separate and distinct individual. It was submitted that in identical facts and circumstances, however, in the matter of imposition of sales tax, when the club was expressly included in the statutory definition of ‘dealer’ under the Madras General Sales Tax Act, 1959, so as to bring the club within the purview of taxing statute of the Madras Sales Tax, the Supreme Court, in YMIA case, considered the definition of the ‘dealer’ by which the club was declared as a ‘dealer’. The Court considered the definition of ‘sale’ as given in the Act of 1959 and Explanation-I appended to section 2(n), specifically declaring ‘sale’ or ‘supply or distribution of goods by a club’ to its members whether or not in the course of business to be a ‘deemed sale’ for the purpose of the said Act. In that situation, the Supreme Court considered the issue that when the club is rendering service or selling any commodity to its members for a consideration, whether that amounts to sale or not. The Supreme Court held that it is a mutuality which constitutes the club and, therefore, sale by a club to its members and its services rendered to the members, is not a sale by the club to its members. In sum and substance, the ratio is that for a transaction of sale, there must be two persons in view of this judgment as well as in view of the Full Bench judgment of this Court delivered in the petitioner’s own case i.e., Tax v. Ranchi Club Limited, (1992) 1 PLJR 252 (PAT) (FB) (‘Ranchi Club’). The Full Bench considering the identical issue in the matter of imposition of income-tax observed that no one can earn profit out of himself on the basis of principle of mutuality and held that income-tax cannot be imposed on the transaction of the club with its members.

With the help of these two judgments, it was submitted that the petitioner was a club and was rendering services to its members and the same principle of mutuality applied to the facts of the case in view of the reason that the language in the provisions of the Madras General Sales Tax Act, 1959 and the provisions under the Income-tax Act are pari materia with the provisions which are sought to be applied against the writ petitioner for levy of Service tax.

Contentions of the Department

The Department submitted that the sale has its own meaning and the service is entirely different transaction which cannot be equated with the sale in any manner. They relied upon the book ‘Principles of Statutory Interpretation’ by G. P. Singh, the then Chief Justice, M.P. High Court (3rd edition), wherein there is reference to a case wherein Bhagwati J observed that, for construction of fiscal statute and determination of liability of the subject to tax, one must refer to the strict letters of law. It was submitted that the statutory provisions are very clear which are sections 65(25a), 65(105)(zzze) as well as Explanation appended to section 65. It was also submitted that when the language of section is absolutely clear, then the meaning of the statute in fiscal matter should be given according to the language and words used in the section and cannot be interpreted on the basis of some ideology or some impressions or with the help of some other enactments. Each of the taxing statute may have its own definition and meaning and they are required to be given effect to, irrespective of the fact that meaning of the same word in different statute has been given differently. It was further submitted that the Supreme Court in the situation of imposition of Sales tax may have held that there cannot be sale by oneself to oneself and himself to himself, but the club can certainly render the service to its members and tax is on the service and the members are paying for the service to the club and, therefore, it is a service for consideration rendered by the club and is liable for tax.

Observations of the High Court

The question which was considered by the Supreme Court in YMIA case was that whether the supply of various preparations by each club to its members involves a transaction of sale within the meaning of the Sale of Goods Act, 1930. In para 15 of the judgement, the High Court quoted the Supreme Court as under:

“Thus in spite of the definition contained in section 2(n) read with Explanation 1 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 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 Supreme Court held so after considering the English Law also and observed that 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. 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 to be taken 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 Supreme Court observed that the above view was accepted by various High Courts in India. The Supreme Court, relying upon other judgments held that members’ club is only structurally a company and it did not carry on trade or business so as to attract the corporation profit tax. Therefore, in spite of specific inclusion of the club in the definition of the dealer in the Madras General Sales Tax Act, 1959, the Supreme Court categorically held that , there cannot be transaction of transfer of property.

The Full Bench of the Patna High Court in the case of the petitioner itself (Ranchi Club case) after finding that the club was a limited company incorporated under the Indian Companies Act, considered various clauses of the main objects of the club and relying upon various judgments, observed as under:

    Therefore, by applying the principle of mutuality, members’ clubs always claim exemption in respect of surplus accruing to them out of the contributions received by the clubs from their members. But this principle cannot have any application in respect of surplus received from non-members. It is not difficult to conceive in case where one and the same concern may indulge in activities which are partly mutual and non-mutual. True, keeping in view the principle of mutuality, the surplus accruing to a members’ Club from the subscription charges received from its members cannot be said to be income within the meaning of the Act. But, if such receipts are from sources other than the members, then can it still be said that such receipts are not taxable in the hands of the club? The answer is obvious. No exemption can be claimed in respect of such receipts on the plea of mutuality. To illustrate, a members’ club may have income by way of interest, security, house property, capital gains and income from other sources. But such income cannot be said to be arising out of the surplus of the receipts from the members of the club. “

Conclusion by the High Court

Taxability of mutual concerns (up to 30-6-2012)

    a) According to one school of thought, the scheme of Service tax envisages a contractual relationship between the service provider and service receiver. Under a service contract, money flows from the service receiver and service is rendered by the service provider. The Courts have held that relationship between a mutual association and its members is governed by the principle of mutuality and is not one between two different entities. When a facility or amenity is provided to the members, it is so done by the members to themselves through the medium of their agent, the association. There cannot be an independent commercial transaction between a principal and his agent. Therefore, the very scheme of service tax is not applicable to the relationship between the members’ association and its members. Hence, the club or association service category (introduced w.e.f. June 16, 2005) would not apply to mutual concerns.

The ruling of the Jharkhand High Court in Ranchi Club discussed above strongly supports this view and more importantly it has considered the Explanation inserted at the end of section 65(105) of the Act w.e.f. May 01, 2006 to nullify the Calcutta High Court rulings of Saturday Club (supra) and Dalhousie Institute (supra).

    b) According to another school of thought, the Calcutta High Court ruling in Saturday Club & Dalhousie Institute case discussed earlier was in the context of Mandap Keeper Services wherein the relevant taxable service definition u/s. 65(105) of the Act, the service recipient was specified as ‘Client’. However, under the club or association service category, the relevant taxable service definition u/s.65(105)(zzze) of the Act, the service recipient is specified as ‘members’.

The distinction made by the Government is reinforced, if one closely examines, the taxable services definitions of all the newly introduced taxable services through the Finance Act, 2005 which clearly demonstrates that in the context of club or association services ‘members’ have been specified as service recipients liable to tax. Hence the ratio of Saturday Club’s case would not apply in the context of mutual concerns like club, associations, etc. The aforesaid view is reinforced by the insertion of Explanation at the end of section 65 of the Act w.e.f. May 01, 2006.

    c) Though principle of mutuality is relevant, it would appear that taxability of mutual concerns under Service tax remains a highly contentious and litigative issue.

Taxability of mutual concerns under the ‘negative list’ based taxation of services (w.e.f. July 01, 2012)

The terminology employed in Explanation 2 inserted in section 65B(44) of the Act which defines ‘Service’ is identical to that employed in Explanation to section 65(105) of the Act (up to June 30, 2012). Hence, it would appear that, principles of mutuality upheld by the Calcutta High Court in Saturday Club and Dalhousie Institute and the Jharkhand High Court in Ranchi Club, would continue to be relevant.

Further, under Sales tax a constitutional amendment was carried out, to enable States to levy sales tax on sale of goods by a club or association to its members. The same has not been carried out for Service tax.

However, it needs to be expressly noted that the is-sue is likely to be subject of extensive litigations.