The objective of this article is to
understand the scope and relevance of the term ‘business’ under GST laws and
apply it in context of non-commercial institutions such as charitable trusts,
NGOs, educational institutions, employee welfare trusts, etc. and mutual
associations such as residential welfare associations, trade associations,
clubs, societies, etc. GST is generally understood as an amalgam of VAT and
Service Tax laws. While most of the VAT laws applied to dealers, which
somewhere built in the requirement of business, the service tax laws applied
comprehensively to all persons. In this context, it may be gainful to bear in
mind that the philosophy of the VAT laws is inherited in the GST law to some
extent.
At the outset, it can be argued that the
term supply by itself is a commercial term and is generally not used for
activities undertaken by non-commercial organisations. Though the term ‘supply’
is defined in a very broad manner, presence of a tinge commercial character in
the transaction seems to be essential element (unless specifically made
redundant). When examined in the presence of the terms ‘sale’, ‘transfer’,
‘service’, the term supply is narrow if seen from this perspective. It is
pertinent to note that the law makers have not used the term ‘activity’ (as was
used in the service tax law) but rather chose to use the term ‘supply’ which
indicates the intent of the Legislature to narrow down the scope of
chargeability on this count. Also, the statutory definition of term supply u/s.
7(1) is further qualified by the phrase ‘in the course of furtherance of
business’.
In fact, the term business plays a
significant role in the entire definition of ‘supply’ under section 7 which can
be analysed as follows:
(i) The first clause of supply requires that all forms of supply of
goods or services should be ‘in the course or furtherance of business’ .
(ii) The second clause dispenses with the requirement that the
import transaction should be in the course or furtherance of business; in
other words, non-business transactions which are import of services would
also be termed as supply.
(iii) The third clause r/w Schedule I enlist transactions entered
into without consideration. This clause dispenses with the requirement of
consideration flowing between the taxable persons in such transactions. Even
though certain entries do not use the term business, there is an implicit
requirement of a business activity being present in view of the specific terms
such as ‘business asset’, ‘principal’, ‘agent’, etc.
This interpretation leads one to an
inference that except in case of import of service (as well as import of goods
in IGST transactions), transactions can be termed as a supply only if they
acquire the feature of being a business/ commercial transaction. Further
analogy can also be drawn from various other definitions / provisions under the
GST Law (such as outward supply, capital goods, inputs, composite supply, input
tax credit, place of business, etc). None of these terms attempt to
administer a non-business transaction. Given the scheme of the law, it would be
reasonable to interpret that only transactions in the nature of ‘business’
(except import of service and goods) would have GST implications.
This leads us to question as to whether any
boundaries can be drawn over the term ‘business’ under the GST law.
Definition of ‘Business’
The term business has been defined in an
inclusive manner u/s. 2(17) of the CGST Act to include the following
activities:
a) Any trade, commerce,
manufacture, profession, vocation, adventure, wager or any other similar
activity, whether or not it is for a pecuniary benefit
b) Any activity or transaction
in connection with or incidental or ancilliary to sub-clause (a)
c) Any activity or transaction
in the nature of sub-clause (a), whether or not there is volume, frequency,
continuity or regularity of such transaction
d) Supply or acquisition of
goods including capital goods and services in connection with commencement or
closure of business;
e) 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;
f) admission, for a
consideration, of persons to any premises;
g) services supplied by a
person as the holder of an office which has been accepted by him in the course
or furtherance of his trade, profession or vocation;
h) services provided by a race
club by way of totalisator or a licence to book maker in such club ; and
i) any activity or
transaction undertaken by the Central Government, a State Government or any
local authority in which they are engaged as public authorities;
The primary part of the said definition can
be analysed as follows:
(a) Main activity being in the
nature of ‘trade, commerce, manufacture, profession, vocation, adventure, wager
or any similar activity whether or not it is for a pecuniary benefit’;
(b) Incidental/ ancillary
activity to the above business activity;
(c) Main activity constituting
business regardless of whether there is volume, frequency, continuity or
regularity; and
(d) Any activity in connection
with commencement or closure of business.
A brief history of a similarly worded
definition under the VAT laws may assist us in understanding the scope of the
term. Historically, the term business was not included in the list of
definitions under the Central Sales Tax Act and other General Sales tax
legislation. It was in 1959 where the Madras General Sales Tax Act defined this
term to include trade, commerce, etc. within its ambit. The definition has
evolved over time and attempted to overcome certain infirmities identified by
judicial decisions. It would be very interesting to note that the Courts not
given an unlimited space to this term even-though the said term was defined in
an inclusive manner.
Legal principles on the term ‘business’
The Central Sales Tax Act, 1956 had defined
the said term as follows:
“‘business’ includes,
(i) And trade, commerce,
manufacture or an adventure or concern in the nature of trade, commerce or
manufacture, whether or not such trade, commerce, manufacture, adventure or
concern is carried on with a motive to make gain or profit and whether or not
any gain or profit accrues from such trade, commerce, manufacture, adventure or
concern; and
(ii) Any transaction in
connection with, or incidental or ancillary to, such trade, commerce,
manufacture, adventure or concern”
The said definition is similar, in terms of
coverage, to clause (a) and (b) of section 2(17) of the GST Law. The respective
state enactments also had similar definitions with modifications in terms of
additional clauses widening the coverage of the term. The debate over the scope
of the term business dates back to the decision of the Hon’ble Supreme Court in
State of Andhra Pradesh vs. Abdul Bakhi And Bros [1964] 15 STC 644 (SC),
wherein the Court held that the expression “business” though extensively used
as a word of indefinite import, in taxing statutes it is used in the sense of
an occupation, or profession which occupies the time, attention and labour of a
person, normally with the object of making profit. To regard an activity as
business there must be a course of dealings, either actually continued or
contemplated to be continued with a profit motive, and not for sport or
pleasure.
In another decision (prior to the insertion
of expansive clauses of incidental/ ancillary activity), the Hon’ble Supreme
Court in Raipur Manufacturing Co. Ltd’s case ([1967] 19 STC 1 (SC)) was
examining whether discarded machinery, sale of waste, scrap or unserviceable
material and by-products fall within the scope of the term ‘business’. The
assessee contended that it was not engaged in buying and/or selling of such
material and the said material was not sold with an objective of profit. The Court observed that the term ‘business’ does
not hinge solely on the motive of earning profit though it predicates a motive
which pervades a whole series of transactions effected by the person. The
Court observed that though the volume and frequency of the transaction was
high, the taxable person cannot be said to have the intention of carrying on
business of such items. Though the residuary price may impact the profit and
loss account by reducing the costs, that does not by itself establish an
intention to carry on business in that product.
They are either
fixed assets of the Company or are goods which are incidental to the
acquisition or use of stores or commodities consumed in the factory. Those goods are sold by the Company for a price which goes into
the profit and loss account of the business and may indirectly be said to
reduce the cost of production of the principal item, but on that account,
disposal of those goods cannot be said to become part of or an incident of the
main business of selling textiles. In order
that receipts from sale of a commodity may be included in the taxable turnover,
it must be established that the assessee was carrying on business in that
particular commodity, and to prove that fact it must be established that the
assessee had an intention to carry on business in that commodity. A person who
sells goods which are unserviceable or unsuitable for his business does not on
that account become a dealer in those goods, unless he has an intention to carry
on the business of selling those goods.
In the same judgement, the Court also held
that sale of by-products (caustic liquor) was an incident of the manufacturing
activity of the Company and was includible in the definition of business under
the Bombay Sales Tax Act under the primary clause itself.
‘For reasons
which we have already set out in dealing with “kolsi”, we are of the
view that waste caustic liquor may be regarded as a by-product or a subsidiary
product in the course of manufacture and the sale thereof is incidental to the
business of the Company and the turnover in respect of both “kolsi”
and “waste caustic liquor” would be liable to sales tax.’
Subsequently, in the post amendment period,
the Hon’ble Supreme Court in Burmah Shell Oil Storage and Distributing Co.
of India ltd. [1973] 31 STC 426 (SC) settled some conflicting High Court
decisions and held that the amendment in 1964 has made the intention of
profit as an unnecessary criteria not only to the primary clause,
but also to the secondary clause of the definition of business. In view of this
amendment, canteen sales, sales of advertisement materials and scrap sales were
held to be taxable under the post amendment period even if they were not
conducted with the object of making profit. Though the decision of Raipur
Manufacturing (supra) was held to be not applicable as regard the intention
of profit, in the view of the author, the intention of carrying on trade,
commerce which was cited in the said decision is still relevant.
In a landmark decision of State of Tamil
Nadu and Another Versus Board of Trustees of the Port of Madras, the Court
was examining the taxability of sale of uncleared or abandoned items by a Port
established under a statute performing statutory functions without any objective
of making profit. It was held that, if the main activity was not business then
any connected or incidental activity of sales would not amount to business
unless an independent intention to conduct business is these connected
activities is established. In this backdrop, the Court held that Port Trust was
not engaged in business and hence the activity of sale of uncleared or
abandoned items cannot be termed as a business activity. This ruling is very
important in the context of educational, social and charitable associations and
discussed in later paragraphs.
In another decision in Board of Revenue
vs. A. M. Ansari [1976] 38 STC 577 (SC), auction of forest produce was held
not to be regarded as a business activity in the absence of a frequency of such
activity. The Supreme Court held that volume, frequency, continuity and
regularity of transactions in a class of transactions should ordinarily be
undertaken to be termed as a business activity.
Application of legal principles of the
definition of business under GST Law
The first clause of the definition is the
bedrock on which most of the clauses of definition rest upon. Except for the
inclusion of profession, vocation, adventure, wager, etc., the said
clause is more or less similar to the definition of the business in the central
sales tax and state sales tax statutes. The clause should be understood in a
commercial sense (as understood by the Supreme Court in Abdul Bakshi’s case
supra) except for the requirement of a profit motive. The clause renders the
intention of making pecuniary benefits as an irrelevant factor in deciding
whether an activity is business. Each of the words in this clause could be
attributed a meaning as follows:
– ‘trade’
primarily refers to exchanging of goods for goods or goods for money with a
secondary meaning of being a repeated activity carried on with a profit motive
which is distinguished from agriculture, etc; but in the context of this Act
should also refer to provision of services and not merely goods
– ‘commerce’
refers to a larger volume of trade though there is not specific scale when a
trade is termed as commerce.
– ‘manufacture’
has been used to cover manufacturing activities which do not fall within the
contours of the term ‘trade’.
– ‘profession’
would refer to an occupation requiring intellectual skill or any other manual
skill controlled by intellect.
– ‘vocation’
refers to calling or the way in which an individual passes his/her life; but in
the context of the previous terms should be understood to refer to activities
such as sports, art not undertaken as a professional but for recreation or
pleasure.
– ‘adventure’
would refer pecuniary risks, a venture, a speculation in which there is
considerable risk of loss as well as a chance of gain; and in the context of
the previous terms should be understood as having a feature of trade, commerce,
manufacture, etc. say conducting research activities connected or not with the
primary business.
– ‘wager’
would refer to betting activities where the possibility of success is highly
uncertain.
The second clause includes activities which
are incidental to the primary business activity. The said clause emphatically
requires that the primary activity should be in the nature of business for the
incidental activity also to be included in the definition. This is in line with
the principles laid down by the Madras Port Trust’s case where the primary
activity of the Trust was of non-business character. As rightly pointed out in
the decision, this conclusion should be reached only after ensuring that the
incidental activity should not be an independent activity to fall within the
first clause itself.
The third clause makes the frequency,
continuity or regularity of the primary activity as irrelevant in deciding
whether the activity is in the nature of business, in other words occasional
transactions. This clause overcomes the Supreme Court’s view in H.A.
Ansari’s case which required that there should be some regularity in
dealings for the transaction to be a business and also overcomes a contention
of the assessee that they are not ‘carrying on’ (a degree of continuity) a
business activity.
The fourth clause specifically includes any
transaction in connection with commencement or closure of business. The purpose
of this clause is to remove any ambiguity over such transactions to be ‘in the
course’ of business. Such transactions though strictly not in the course of
business would also be included in the definition of business. Similarly,
transactions which relate to closure of business would be included though they
are strictly not ‘in the course or furtherance of business’.
It can be inferred that the legislature has
intended to cover transactions even having a remote connection with a business
activity and also made the stage of business irrelevant for the definition of
business. As a consequence, the legislature has widened the scope of items
which would be governed under the law. Further, a definition of wide import
would ensure all transactions are eligible for the benefit of input tax credit
since the eligibility of input tax credit (like taxability) revolves around the
transactions being in the ‘course or furtherance of business’. Having said
this, a question arises whether the definition has implicitly excluded
non-commercial activities which are undertaken by social, charitable or public
organisations from its scope. While the definition is qua the activity, in the
view of the author, the status of the organisation performing the activity
should also be kept in mind to understand the intention behind the activity. A
discussion based on the above thought process has been attempted below.
Charitable Trusts and Charitable Activities
The GST Law has conferred certain exemptions
on specified services by charitable organisations; one exemption is with
reference to services of an entity registered u/s. 12AA of the Income-tax Act,
1961 (IT Act) by way of charitable activities; the other is for services by way
of conducting religious ceremonies, renting of religious place meant for general
public and owned or management by an entity registered u/s.12AA or section
10(23C) of the IT Act, provided the rental charges for the room/ hall, etc.
are within the specified limits. The exemption entries are fairly narrow in its
scope and may result in taxation of other non-commercial activities.
The former exemption entry grants benefit on
two counts i.e. (a) the service should be provided by a 12AA registered entity
and (b) such activities are in the nature of charitable activities. One aspect
(i.e. the subject) has been borrowed from the IT Act while the other aspect
(i.e. the subject matter of taxation) has been provided under said notification
itself by way of an explanation.
The coverage of the first aspect of the
exemption entry is purely dependent upon the status of the registration u/s.
12AA of the IT Act. The Income-tax Act provides that exemption would be
available on specified incomes of charitable or religious trusts under the
provisions of section 11 and 12 provided such eligible trusts are registered
u/s. 12AA of the IT Act. The trust may or may not be enjoying complete
exemption from income tax (say in view insufficient recoupment of income for
charitable purposes, etc.). As long as the trust is holding a valid 12AA
registration certificate, it meets the requirement of the first part of the
exemption entry and the said entity would continue to be covered under the said
clause. Therefore, religious trusts, though not strictly carrying charitable
activities exclusively, would still be covered under this clause, since 12AA
registration is applicable even for religious trust.
The other aspect is with reference to the
scope of services which are eligible for such exemption. The trust which is
registered u/s. 12AA is eligible for exemption only for services ‘by way of’
charitable activities. Charitable need not always mean free or without
consideration; charitable would also refer to subsidised or at minimal costs
with an intent to grant a benefit to the recipient over and above what is charged
for that activity. This entry grants exemption from GST on recoveries from such
activities as long as the activities are for charitable purpose i.e. public
health and awareness in respect of specific diseases; advancement of religion,
spirituality or yoga, educational or skill development programmes for specified
persons and preservation of environment.
The said exemption entries are narrow in the
sense that not all social activities would fall within the term ‘charitable
activities’. The larger question that arises is whether an entity not
registered u/s. 12AA or engaged in activities which are not within fold of
‘charitable activities’ under the exemption notification be liable to GST at
all. Framing a legal proposition, would a non commercial entity engaging in
public service, irrespective of whether registered u/s. 12AA of the IT Act or
not, be liable to be taxed under GST. Two simple examples can be taken:
Example 1 – Old Age Homes under a
Charitable Trust (whether registered u/s. 12AA or not)
ABC trust is owning and operating old-age or
orphanage homes. The said Trust owns the land, buildings and the proceeds from
such trust are necessarily required to be applied for the primary object of the
Trust. The Trust has the following sources of receipts – (a) maintenance
charges for the persons admitted at the old age home; (b) renting of precincts
to third parties for their commercial activities; (c) sale of handmade goods by
old age persons; etc. Admittedly, the trust is not a commercial concern
though it is engaging in certain income generating activities. Clause (a) of
the definition requires that there should be an activity in nature of ‘trade,
commerce, etc’ with or without a pecuniary benefit. Though the intention of
profit has been made irrelevant, the intent to engage in business has not been
dispensed with (refer analysis above) in Burmah Shell case. Moreover in the Madras
Port Trust case (supra) the Court held that mere sale of articles cannot by
itself be termed as business unless there is an intention to engage in such
activity. The Hon’ble Supreme Court in Commissioner of Sales Tax v. Sai
Publication Fund [2002] 126 STC 288 (SC) applying the Madras Port Trust
case has held a similar view. Hence, it can be argued that the Old age Trust
should not be subject to any GST on such transaction even though they are
income generating activities i.e. any sale or service cannot be equated to a
business activity, especially in the absence of an intention to engage in such
activity as an occupation.
Example 2 –
NGO engaged in Charitable activities organising a Marathon (whether registered
u/s. 12AA or not)
An NGO which is registered as a 12AA trust
and engaged in charitable activities relating to public health. The NGO
conducts a marathon for collection of funds and uses the same for charitable
activities1. The NGO collects participation fee for the marathon and
also receives other income from sponsors and advertisers. The said income is
then deployed for charitable activities. The activity may or may not be an
isolated/ non-recurring activity for the NGO. Applying the definition of supply
and business, the question that needs to be answered is whether the aforesaid
income can be said to be part of a trade/ commercial activity and subjected to
GST. Going by the rationale in the previous case study, a stand can be taken
that the NGO is not engaged in trade, commerce, etc. Though clause (c) taxes
transactions which are non-recurring, such transactions should first qualify as
a business transaction as per clause (a). The marathon activity by the NGO
cannot be termed as a trade, commerce activity and hence the NGO cannot be
termed to be in business. However, this is different from an organisation which
organises a marathon and as a practice chooses to donate a portion of proceeds
for a particular social cause. The differentiating factor is the intent behind
the activity which continues to be highly relevant in the scheme of the
definition of business, though the proceeds may meet the same end-use.
____________________________________________________________________________________________
1 There
is a thin line of difference between services ‘for’ charity and service ‘by
way’ of charity. The exemption entry
only covers the latter but not the former.
Example 3 – Employee Welfare Trust
Companies establish welfare trusts wherein
the employees compulsorily contribute a nominal sum towards membership fees.
The trust is established with an objective of medical aid, scholarships to
employees or their dependants. The trust cannot be said to be engaged in a
trade, commerce or such activity and may not fall within the scope of the term
supply. Moreover, the membership fee is strictly not a consideration since the
amount is not paid for a direct inducement of a supply of service of goods
rather it merely establishes an eligibility at the employees to claim a benefit
provided by the trust. It can therefore
be argued that the Trust is not liable for payment of GST.
In summary, the status of the entity, its
objective (incl. that enshrined in charter documents), pattern of dealings and
the importance of the transaction in the scheme of objects would all play a
role in deciding the intent behind the transaction. As repeatedly held by
Courts, the onus of proving taxability qua business transaction is on
the revenue contending the taxability. Similarly, there is a very good case to
argue that the welfare trusts, social trusts and institutions claiming income
tax exemptions u/s. 10(23C), whether charitable or not, can still be said to be
outside the ambit of GST unless they undertake activities which are
predominantly in the nature of trade, commerce, etc.
Mutual Associations (Trade/Non-Trade), etc.
The fundamental requirement for a
transaction to be termed as ‘supply’ in section 7 of the GST law is the
existence of two or more transacting parties (with or without consideration).
The definition of business includes a provision of a facility/ benefit by a
club, association, society or such mutual benefit body as ‘business’. The
question arises is whether in view of this inclusion any activity by a mutual
concern (such as clubs, resident welfare associations, etc.) to its
members results in a levy of GST on the services of such concerns. In order to
answer this question, it may be essential to relook at the principles under income tax and erstwhile service tax regime.
Mutuality Principles under Income Tax
Law
Mutual societies are formed by pooling
resources for the common benefit of all its members. The mutual societies could
be incorporated or otherwise and it would not alter the concept of mutuality.
Under income tax, an association of members forming a mutual group is not
taxable on the surplus resulted in the hands of the association on the doctrine
of mutuality. This is based on the concept that no one can profit from himself
or trade with himself. The profit or surplus merely indicates that the members
have over-charged themselves and they continue to have a right of disposal over
the surplus or even wind up such surplus.
The Hon’ble Supreme Court in Commissioner
of Income-Tax vs. Bankipur Club [1998] 109 STC 427 (SC) laid down certain
requirements to claim the benefit of mutuality:
– Complete identity of the
contributors and the participators i.e. contributors to the common fund and the
participators in surplus should be an identical body
– Legal form of the
association is immaterial
– Mere fact that some of the
members take advantage of the activities
while the others having the right to do so do not avail of this, does not
affect mutuality
– If money is realised from
members and non-members for the same consideration by giving alike facilities
to all, it evidences profit earning motive and commerciality and mutuality
cannot be said to exist (Commissioner of Income-Tax, Bombay City vs. Royal
Western India Turf Club Ltd. AIR 1954 SC 85).
The relevant extract of the judgement is :
“………if the
object of the assessee-company claiming to be a “mutual concern” or “club”, is
to carry on a particular business and money is realised both from the members
and from non-members, for the same consideration by giving the same or similar
facilities to all alike in respect of the one and the same business carried on
by it, the dealings as a whole disclose the same profit-earning motive and are
alike tainted with commerciality. In other words, the activity carried on by
the assessee in such cases, claiming to be a “mutual concern” or “members’
club” is a trade or an adventure in the nature of trade and the transactions
entered into with the members or non-members alike is a trade/business/transaction
and the resultant surplus is certainly profit income liable to tax……”
In a more recent case of Bangalore Club
vs. CIT [2013] 350 ITR 509 (SC), the Court denied the benefit of mutuality
on the basis that surplus funds which were loaned to a member bank against
interest were at the disposal of such member who used it for commercial
operations. In other words, diversion of funds to third parties or even members
for exclusive use would adversely affect the concept of mutuality and taint the
society with a commercial nature, though to the extent the mutual operations
continue, such benefit would be available.
Mutuality Principles under Service
Tax Law
The service tax law vide Finance Act, 2006
and subsequently in the negative list scheme had by insertion of an explanation
treated a club or association and its members as distinct persons. The
explanation was attempted to dissect the principle of mutuality and impose
service tax on the services of a club or association to its members. A dispute
arose with regard to the impact of the explanation on the club or association
services provided by such mutual associations. The High Court in Ranchi Club
Ltd vs. CCE, Ranchi (2012) 26 STR 401 (Jhar) differentiated between a
‘members club’ and a ‘propreitory club’ for incorporated associations. In a
members club, every member is a shareholder and every shareholder is a member
with no third party transaction and there is no separate legal person in such
case. However, in a propreitory club, where certain shareholders are members or
certain members are shareholders; or members are not owner of the property of
the club, then the club and its members are distinct persons. The Court
followed the decision of the Supreme Court in Joint Commercial Tax Officer
vs. The Young Men’s Indian Association – 1970 (1) SCC 462, which held that
in a member’s club, the club is merely acting as an agent for its members in
the matter of supply of various preparations and there could not be a ‘sale’ in
such arrangements.
In order to tax a mutual concern, it is
imperative that the legislature breaks through the concept of mutuality by
fictionally delinking the mutual society from its members. In the current GST
law, the provisions do not fictionally define the club or its members as
distinct persons or alter the status of mutuality, The inclusion in the
definition of business merely treats the activity as a business activity.
Neither does the current definition of ‘supply’ nor the charging section of GST
law treat the club and its members as distinct persons. In fact, the case of
seeking GST from clubs or mutual society is on a weaker footing in comparison
to the service tax law as there is no parallel to Explanation 3 of section
65B(44) of the Finance Act, 1994, in the current GST law. In fact, in few
specific instances, the deeming fiction to treat branches in two States or in
two countries as distinct persons or supplies between principal and agent as
deemed supplies has been introduced. In the absence of such deeming fiction, it
can be argued that the limited role which the said clause performs is include
the activity as a business activity for the club, association or mutual
society. The said analysis could be applied in the following case studies:
Example 1 – Resident Welfare associations
(RWAs)
RWAs are established for the mutual welfare
of the residents of a particular locality. RWAs collect maintenance fees, rent
out space for commercial establishments, hoardings, etc. The said
associations are formed by the residents with periodical contributions which
are utilised for the maintenance of common areas of the resident establishment.
In the process, it derives income from third parties from the common area but
for the sole purpose of reducing the maintenance costs to residents of the
establishment. Section 7 defining supply requires that there has to be a supply
to another for consideration for it to be termed a supply. The maintenance fee
collected by the RWAs from its members cannot be termed as a transaction
between two parties (in view of the concept of mutuality) and consequently be
outside the scope of taxability. The exemption entries for RWAs (Rs. 5,000/-
per month) may really not have any application to associations which are
conforming to the concept of mutuality.
Renting service by the RWAs to third parties
would not fall within the concept of mutuality. Yet, in such transactions, a
contention can be made that the renting services by RWAs are for the purpose of
reduction of costs of the RWAs and therefore not a business activity in the
sense of being a trade, commerce, etc. It may also be noted that section
2(17)(e) covers only services and facilities to members within the scope of
business and not services and facilities to non members.
Another example would be with respect to the
club facilities which are housed in the RWAs. If the in-house club is
maintained and operated by the third party and the association merely rents out
the place which houses the club, the principle of mutuality would not apply and
GST would be applicable on the services rendered by the third party club. But
where the club is being operated by the association itself, the ground of
mutuality can certainly be taken and GST may not apply in such circumstances.
Example 2 – Clubs or association services
(RWAs)
Clubs provide several facilities to its
members including recreation, restaurants, renting of space, etc.
Member’s clubs operate on the principle of mutuality, own properties on behalf
of the members and hold the funds/ contribution for the members. The club would
have to conforn to the conditions to establish mutuality based on the
principles in Bankipur’s case. While article 366(29A) contains a specific
clause to tax on ‘supply’ of goods by an unincorporated association or body of
persons to a member for consideration as a sale of goods by such association to
its members, the said clause cannot on its own trigger taxation in GST regime
on account of the following reasons:
– The
Calcutta Court in State of West Bengal and Ors vs. Calcutta Club Limited
[2008] 14 VST 499 (Cal) held that though article 366(29A) has been amended,
the vital requirement of consideration continues to be present in the sales tax
law. In a members’ club, the charges paid for the services are merely
reimbursement of the costs incurred by the club and cannot be termed as
consideration between the club and the members2.
2 It may be noted that this matter has been
referred to a larger bench of the Supreme Court vide decision [2016] 96 VST 20
(SC) State Of West Bengal And Others vs. Calcutta Club Limited, but in the view
of the author, the decision of the Calcutta High Court states the correct
position of law.
– The
effect of the deeming fiction of Article 366(29A) has not been percolated in
the GST law in the definition of supply or taxable persons (and only in a
limited way in Schedule II of the Act). The requirement of two persons and a consideration
in mutual societies is still wanting in the current GST law.
– Article
366(29A) applies to ‘supply of goods’ and does not apply ‘supply of services’ –
also refer Entry 7 of Schedule II of the GST law. Therefore, a restaurant
services by a mutual society is deemed to be a supply of service & would
not be covered by the said entry.
– Section
25(4) and (5) of the GST law does not seem to cover the aspect of distinct
persons for a club and its members.
The author does see a certain challenge in
taking the stand over non-taxability in view of entry 3 of Schedule I which
deems a supply of goods by an agent to its principal as a GST transaction. This
is in view of the Court observations that clubs operate as an agent of the
members in performing its function. But it may also be noted that the
definition of ‘agent’ does not strictly cover the classes of persons like a
club, society, etc. and hence, may stand excluded.
The exercise of examining the business
aspect of a transaction is a double-edged sword since any attempt to exclude an
act from the term business would have potential consequences over the input tax
credit claim u/s. 17(1), on the ground of it being used either wholly/ partly
for a non-business activity.
This is on the basis that an input or input
service or capital goods on which credit is proposed to be claimed should
necessarily be used ‘in the course or furtherance of business’ for it to be
eligible for credit. But there would certa inly be fresh litigation on the
definition of business and last word is far from being stated.
