Category: Article

In this article, the author has discussed the place of supply provisions applicable to tour operator’s services of providing “packaged tours”. The legislative history of the amendment to the definition of ‘tour operator’ and changes in the provisions relating to the situs of the service are relevant in interpreting the GST Law, and hence the same are also discussed. Packaged Tours are those tours where the entire tour arrangement, viz planning, organising, scheduling, booking of accommodation, sightseeing, traveling, etc., is done by the tour operator. There can be a “domestic tour” (i.e., Tour in India) or “a foreign tour” (Tour outside India). This article also highlights key observations on extraterritorial jurisdiction in taxing tours conducted outside India.

PLACE OF SUPPLY — INTRODUCTION

The “place of supply” plays a crucial role in deciding the taxability of the supply for the purposes of goods and services tax. As per section 2(86) of the CGST Act, “place of supply” means the place of supply referred to in Chapter V of the IGST Act. The Levy of GST is on the intra-state supply and inter-state supply of goods or services or both. The provisions as to what constitutes intra-state supply or inter-state supply are contained in Chapter IV of the IGST Act, and the ‘place of supply’ is a key element in such a determination. Simply put, in the case of domestic supplies, the ‘place of supply’ decides the appropriate State, and in the case of cross-border transactions, it decides the appropriate country that is entitled to the amount of tax in respect of the subject transaction.

Coming to the service transactions, both the definitions viz. “import of services” [Section 2 (11)] and “export of services” [Section 2(6)] under the provisions of the IGST Act have a reference to ‘place of supply’, and hence taxability of service transaction cannot be completed without examining the place of supply provisions.

Chapter V of the IGST Act, sections 10 and 11 deal with the supply of goods, and sections 12 and 13 deal with the supply of services. Section 12 is applicable when the location of the supplier and recipient is in India (i.e., domestic supply), and Section 13 is applicable when the location of the supplier or location of the recipient is outside India. (i.e., cross-border supply). In this background, let’s discuss the place of supply provisions in the case of Tour Operator Services.

LEGISLATIVE HISTORYTOUR OPERATOR

The tour operator service was brought into service tax net on 1^st September, 1997, where the scope of service was limited to providing the service of ‘touring’ (i.e., undertaking a journey from one place to another irrespective of the distance) that is conducted in a tourist vehicle covered by a tourist permit granted under the Motor Vehicle Act. In the year 2004, the scope of service was enhanced to cover two types of services: (i) business of planning, scheduling, organizing or arranging tours (which may include arrangements for accommodation, sightseeing, or other similar services) by any mode of transport and (ii) person engaged in the business of operating tours in a tourist vehicle covered by a tourist permit. Later on, in 2008, the scope of the second part was expanded to include a tour by any contract carriage.

In the year 2012, with the introduction of negative list-based taxation, the ‘reference to type of vehicle’ in the second part of the definition was altogether deleted, and hence, the second part simply read as a person engaged in the business of operating tours. A broad comparison of Tour operator services under Positive List based taxation, Negative List based taxation, and GST regime is given below:

In COX & KINGS INDIA LTD. vs COMMISSIONER OF SERVICE TAX, NEW DELHI 2014 (35) STR 817 (Tri. — Del. [10^th December, 2013], Hon’ble Tribunal took the view that the definition of Tour Operator in 2004 onwards has two facets:

(i) the generic facet of engagement in the business of planning, scheduling, organizing or arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport; and

(ii) the specific component, brought into the definition by the inclusionary clause where a person engaged in the business of operating tours in tourist vehicles, covered by a permit granted under the Motor Vehicles Act, 1988 or the rules made thereunder, would also be a “tour operator”.

It further held that the generic facet of the definition does not, however, include the business of operating tours by any mode (i.e., all modes) of transport. Contours of the expression (in the generic facet) are clearly limited to the business of planning, scheduling, organizing or arranging, etc., but exclude the operation of tours. The Hon’ble Court inferred this to be the only permissible meaning of the amended definition since if the generic facet of the definition includes operating tours as well; there was no necessity for the second and specific facet spelled out in the definition, namely operating tours in a tourist vehicle covered by a permit granted under the Motor Vehicles Act, 1988, or the rules made thereunder.

As regards what constitutes the operating of tours, the Hon’ble Tribunal observed that when the facilities provided by tour operators include providing a tour leader to accompany the touring party throughout the tour, besides scheduling the tour package, operating the packaged tour, fixing the probable dates and venues, the itinerary; booking accommodation in hotels at foreign locations; planning and arranging travel through various modes in foreign locations; sightseeing, boarding and lodging abroad; providing foreign guides, air ticketing and arranging visa and travel insurance, etc. — such activities clearly comprise operating the tour, in addition to planning, scheduling, organizing or arranging the tour.

In light of the above legislative history, the author is of the view that the definition of Tour Operator under the GST regime also contains the aforesaid two facets viz (i) arranging or facilitating the tour and (ii) operating the tour. In Heena Enterprises vs. CCE & S.T.-SURAT-I [ 2024-VIL-1177-CESTAT-AHM-ST], the Hon’ble Tribunal, while examining the provisions under positive list-based taxation regime, has considered the activities of Planning, Scheduling, Organising And Arranging a tour are in the nature of ‘intermediary services’ and hence the destination of ‘tour’ is not relevant. The argument of the appellant that since the tour is conducted in J&K, the activities are performed in J&K was not accepted by the Tribunal, stating that the tax is not on tour but on the activities and the activities of arranging and organizing are performed outside J&K. The Tribunal concluded that the appellant is not performing the second part of undertaking the tour in a tourist vehicle.

The author is of the view that the activities contemplated in the former part are more in the nature of intermediary services, whereas the activities contemplated in the latter part are broader in scope and are activities conducted on a principal-to-principal basis. Thus, when the activities mentioned in the first part are combined with the obligation of operating the tour, the status of such composite activities carried out by the tour operator changes from intermediary activities to activities carried on one’s own account.

SITUS OF SERVICES

POSITIVE LIST-BASED TAXATION REGIME

In the positive list-based taxation regime (i.e., prior to 1^st July, 2012), ‘tour operator services’ fell under Rule 3(1)(ii), i.e., performance-based services. As per Export of Service Rules, where the taxable service is partly performed outside India, it shall be treated as performed outside India. Similarly, Taxation of Services (Provided from Outside India) Rules 2006 provided that where such services are partly performed in India, they shall be treated as performed in India, and the value of such taxable service shall be determined u/s 67 and rules made thereunder. In this regard, Rule 7(2) of the Service Tax (Determination of Value) Rules, 2006, provided that total consideration paid by the recipient for such services, including the value of services partly performed outside India, will be treated as the value of taxable services. Thus, prior to 1^st July, 2012, the situs of ‘tour operator services’ was based on the “performance of services”, i.e., “from where the services are provided” and “where the services are used/ received”.

In COX & KINGS INDIA LTD.’s case (supra), the issue involved before the Tribunal was with respect to the taxability of outbound tours (i.e., tours arranged for Indian tourists outside India and performed entirely outside India). The case of the assessee was that Service Tax is a destination-based consumption tax, and consumption of service in respect of outbound tours being outside India, no Service Tax is leviable. Hon’ble Delhi Tribunal, without going into the provisions of Export of Service Rules, took the view that services provided and consumed outside taxable territory would not amount to a taxable service under the provisions of the Act. It was further stated that when the tour is conducted partly in India and partly outside India, there is an obligation to apportion the consideration to that part of the service which is provided and consumed outside the territorial limits.

NEGATIVE LIST-BASED TAXATION REGIME

In the negative-list-based taxation regime (i.e., from 1^st July, 2012), Section 66C was enacted to decide the ‘place of provision of services’. Accordingly, the Place of Provision of Service Rules, 2012 (PoPS Rules) were enacted. Rule 4 dealt with the Place of provision of performance-based services. Rule 4(b) read as under:

The place of provision of the following services shall be the location where the services are actually performed, namely:
(b) services provided to an individual, represented either as the recipient of service or a person acting on behalf of the recipient, which requires the physical presence of the receiver or the person acting on behalf of the receiver, with the provider for the provision of the service.

However, Rule 7 provided that where any service referred to in Rules 4, 5, or 6 is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided. Further, Rule 8 provided that where the location of the provider of service, as well as that of the recipient of service, is in the taxable territory, the place of provision shall be the location of the recipient of service. Rule 14 further provided that where the provision of a service is, prima facie, determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration.

Rule 9 provided that the place of supply of intermediary services shall be the location of the service provider. The term “intermediary” is defined in Rule 2(f) of the POPS Rules as under:

“intermediary” means a broker, an agent, or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account;]

According to the author, Rule 9 would become applicable only where the tour operator is not engaged in the business of operating tours and is only engaged in arrangements and facilitation services. However, in the case of composite tours, where operation is an integral part, Rule 9 would not become applicable, and Rule 4, i.e., performance-based services, will cover the activities.

In the Service Tax Education Guide Issued by CBE & C. dated 19^th June, 2012, while giving illustrations of intermediary services, reference was made to “Tour Operator services”. The author is of the view that the education guide did not eliminate the possibility of Tour operators falling into performance-based services but merely expressed the other possibility of qualifying them as intermediary services based on the facts of the case. The characterization of Tour Operator Services as ‘performance-based services’ finds its authority in the decision of the Hon’ble Apex Court in the case of ALL INDIA FEDN. OF TAX PRACTITIONERS vs. Union of India 2007 (7) STR 625 (SC) [Para 8]. The Education Guidance Note, while explaining the scope of Rule 4(b) of the POPS rules, emphasized the two crucial aspects viz:

(i) The nature of services covered here is such as are rendered in person and the receiver’s physical presence, i.e., service in this category is capable of being rendered only in the presence of an individual

(ii) the individual can be either the service receiver himself or a person other than the receiver who is acting on behalf of the receiver.

The business of operating tours satisfies the above conditions. The place of performance and place of consumption, in this case, is the same.

As per Rule 6A of the Export of Service Rules (inserted from 1^st July, 2012), for a service to qualify as ‘export of service’, it was necessary that the place of supply of the said service falls outside India. Besides, the concept of ‘location of service provider’ and ‘location of service receiver’ was introduced. Hence, in the case of falling under Rule 7 (where part performance was in India ) or Rule 8 (where both service provider and service receivers were in India) and under Rule 9, where the Tour Operator was located in India, the outbound tours (i.e., tours conducted outside India) became taxable. This was contrary to principles of export contained in a positive-based taxation regime, where performance outside India and part-performance outside India were both treated as exports of services. The matter, therefore, came up before the Hon’ble Delhi High Court in the case of INDIAN ASSOCIATION OF TOUR OPERATORS vs UOI 2017(5) GSTL 4 (Del) [31^st August, 2017] seeking a declaration that Rule 6A of the Service Tax Rules, 1994 concerning ‘Export of services’ is ultra vires the Finance Act 1994 (‘FA’). The validity of Section 94(2)(f) of the FA was also challenged on the ground that it gives unguided and uncontrolled power to the Central Government to frame rules regarding ‘provisions for determining export of taxable services’. The Hon’ble Court held as under:

“46. As already noticed, Rule 6A(1)(d) treats even services provided outside the taxable territory, i.e., where the place of provision of service is outside India, as an export of ‘taxable’ service. Since such service by virtue of Section 66B read with Section 65(51) and (52) read with Section 64(1) and (3) of the FA is not amenable to Service Tax in the first place and is therefore not ‘taxable’ service, Rule 6A is ultra vires the FA. Even Section 94(2)(hh) of the FA permits the central government to determine when there would be an export of ‘taxable service’ and not ‘non-taxable service.’ Something which is impermissible under the FA cannot, by means of the rules made thereunder, be brought within the net of service tax.”

Having regard to the composite nature of services provided by Tour Operators, the Hon’ble Court in Para 51 and 52 of the judgment emphasized the need for having machinery in the statute itself, in case of taxability of composite services, by which it can be determined with some certainty as to how much of the composite service can be said to be rendered in the taxable territory and of what value for the purposes of levy and collection of tax. It further held that If there is no such machinery provided, that would be an additional ground for invalidation of the levy itself.

Later on, by virtue of Notification No.6/2014-ST dated 11^th July, 2024, the amendment was made to the Mega Exemption Notification No.25/2012-ST dated  20^th June, 2012, and the following entry was inserted.

“42. Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India.”

Consequently, the outbound tours provided to foreign tourists were exempted.

As regards service provided by any person located in non-taxable territory to a person located in the taxable territory (i.e., inbound tours), Rule 2(1)(G) read with Para (I)(B) of Notification No.30/2012-ST dated 20^th June, 2012 provided that if services provided are ‘taxable services’, then the liability to pay 100 per cent service tax shall be on the service receiver. Thus, in the case of inbound tours, where the performance of the tour was in India, but the service provider was located outside India, the intermediary services were outside the purview of service tax. As regards performance-based services for tours conducted in India and service providers located outside India, the exemption was provided under Entry 34 of the Mega Exemption Notification if such services are provided to the following persons:

(a) Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry, or any other business or profession;

(b) an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; or

(c) a person located in a non-taxable territory:

In other cases, liability under RCM was triggered.

GST PROVISIONS

(a) Section 12 — When the service provider and Service Receiver both are in India.

The provisions of POPS Rules are parimateria with the place of supply provisions contained in Section 12 and Section 13 of the IGST Act. Rule 7 is parimateria with Section 12, which provides that when both the service provider and service receiver are in India, there is no escape from taxation. Section 12 has further developed it to determine the right of a particular State to claim the tax. However, in section 12, only the following services are treated as performance-based services

– restaurant and catering services

– personal grooming, fitness, beauty treatment, and health service including cosmetic and plastic surgery

Further, no specific provision is made to cover ‘intermediary services’. Thus, when it comes to ‘tour operator services’ falling under section 12 of the IGST Act (i.e., where both service provider and service receiver are in India), in the absence of applicability of sub-section (3) to (14) of section 12 of the IGST Act, the general provision under section 12(2) becomes applicable.

(b) Section 13 When a service provider or service receiver is outside India.

In respect of tour operator services covered under Section 13 of the IGST Act, performance-based services are covered under Section 13(3)(b) and Intermediary Services are covered under Section 13(8) (b) of the IGST Act. The provisions of Section 13(3)(b) are parimateria with provisions of Rule 4(b) of the POPS Rules, and provisions of Section 13(8)(b) are parimateria with Rule 9 of the POPS Rules. However, it’s necessary to discuss what constitutes performance, especially in the case of a composite supply of services, for it may be the case where activities like planning, scheduling, arranging, booking, etc., may be performed by the Indian tour operator from India, the actual tour may be conducted abroad.

The recent Notification No.4/2022 — ITR dated 13^th July, 2022 gives us some guidance in this matter. It provides that Tour operator service, which is performed partly in India and partly outside India, supplied by a tour operator to a foreign tourist, is exempt to the extent of the value of the tour operator service which is performed outside India. It further provides that the value of the tour operator service performed outside India shall be such proportion of the total consideration charged for the entire tour which is equal to the proportion which the number of days for which the tour is performed outside India has to the total number of days comprising the tour, subject to 50 per cent of the total consideration charged for the entire tour. Hence, the author is of the view that in the case of composite services, the performance of the tour is to be seen from the number of days the tour is conducted abroad or in India. In Para 54 and 54A, the expression ‘tour conducted wholly outside India’ and the ‘number of days for which the tour is performed outside India’ are used in the same sense.

Thus, depending upon the nature of services — ‘intermediary services’ or ‘performance-based service’, and the location of the service provider and receiver, the situs is determined as under:

Note 1: When a Tour operator in India is providing services to Foreign tourists in respect of Tours conducted in India, the place of supply u/s 13(3)(b) as well as u/s 13(8)(b) will be India. Such services will be liable to tax in India as there is no exemption in respect of such tours. Similarly, if a Tour operator in India is providing services to a Foreign Tour Operator ( FTO) in respect of tours conducted in India, his services would attract GST in India. In the opinion of the author, applying section 13(2) of the IGST Act may not be correct in such a case, as there is no legislative intention to exclude tours conducted in India outside the purview of GST merely because service recipients are located abroad. The exemption Entry no. 54 and 54A fortifies this view as the exemption granted under these entries is only limited to tours conducted/ performed abroad.

Note 2: It’s rare to expect a Foreign Tour Operator (FTO) to provide service to Indian Tourists in connection with Tours conducted in India that would fall under section 13(3)(b) of the IGST Act. It may, however, happen that FTO may take bookings from foreign Tourists in connection with Tours conducted by an Indian Tour Operator in India and are paid a commission by an Indian Tour Operator (as service receiver). In such cases, the services provided by FTO will be in the nature of intermediary services, and hence the place of supply would be outside India u/s 13(8)(b).

Note 3: In case the Indian Tour Operator has foreign tourists as a customer for tours conducted abroad, services provided to them would be regarded as “export of services” as a place of supply of services would be abroad both u/s 13(3)(b). However, u/s 13(8)(b), the place of supply would be India. In such a case, the services will be exempted from GST by virtue of Entry No.54 and 54A of Notification No.9/2022-ITR, being tour operator services provided to foreign tourists in respect of tours conducted abroad.

Note 4: In the case of outbound tours, Indian Tour Operators often enter into contracts with FTOs for the purpose of making tour-related arrangements for conducting foreign tours abroad. The contract can be of two types, viz (i) where the FTO merely acts as an intermediary by arranging the bookings of accommodation, local travel, arranging local guide, sightseeing etc, leaving the responsibility of operating the tour with Indian Tour Operator by deputing his own people or by hiring third party services (ii) where entire foreign tour operations are outsourced to FTO and FTO operates the foreign tour by providing composite services to Indian Tour Operator (by attending to latter’s customers when they come on tour abroad). The former case falls u/s 13(8)(b), and the latter falls u/s 13(3)(b) of the I.G.S.T. Act. However, in both cases, the place of supply will be outside India for both the performance as well as the location of the service provider will be outside India. Therefore, in the opinion of the author, such services, therefore, would not be regarded as “import of services” u/s 2(11) of the IGST Act to attract GST under reverse charge in the hands of Indian Tour Operator. It’s understood that in such cases, the GST department in some cases has issued show cause notices to Indian Tour Operators by treating the place of supply as India in terms of section 13(2) — i.e., location of the service recipient. The author is of the view that applying provisions of section 13(2) to tour operator service would give absurd results as the cases covered under Note 1 would be regarded as ‘export of service’, although the whole tour is conducted in India, which is contrary to the legislative intent if the entire history of tour operator service is taken into account.

CONCLUDING THOUGHTS

Lastly, when one argues that the tour operator services are performance-based services or intermediary services, the reference is drawn to the decision of the Hon’ble Supreme Court in the case of ALL INDIA HAJ UMRAH TOUR ORGANIZER ASSOCIATION MUMBAI vs. UOI 2022 (63) GSTL 129 (SC) [26^th July, 2022] wherein the Hon’ble Court expressed a view that services provided by HGOs in India to Huj Pilgrims in India would not be covered into performance-based services so as to apply rule 4(b) of the POPS Rules. In the opinion of the Author, this cannot be treated as an authority or ratio decidendi for the determination of place of supply in the case of tour operator service, especially since the issue before the Court in the said case was the applicability of Exemption Entry 5A of Mega Exemption Notification No.25/2012-ST (or as the case may be Entry 63 of the IGST Exemption Notification) relating to Services by a specified organization in respect of a religious pilgrimage and its vires in the light of Article 14 of the Constitution of India. The issue before the Court was not regarding the determination of the place of supply. Further, from the scope of services examined in Para 38 of the said judgment, the Hon’ble Court observed that the services were more in the nature of making arrangements, and it’s in that context the Court expressed a view that such services cannot be treated as performance-based services. It’s also apposite to note that the Hon’ble court was considering a case where Indian HGOs were service providers in India and Haj pilgrims were recipients in India; hence, the location of the service provider as well as the location of the service recipient was in India. The Hon’ble Court, therefore, referred to rule 8 of the POPS Rules and held that the place of provision of service is the location of the recipient of service. It may be relevant to note that the Court specifically recorded that it is not going into the issue of extra-territorial operations of the laws relating to service tax, and the said issue is left open. The Court also did not go into the question of the validity of POPS rules. In this background and having regard to the decisions of COX & KINGS INDIA LTD and INDIAN ASSOCIATION OF TOUR OPERATORS, it would be interesting to see whether imposing tax in respect of services provided to Indian customers for tours conducted outside India in terms of section 12(2) of the IGST Act, can be said to be having extra-territorial jurisdiction.

BCAJ Admin

The implementation of the Goods and Services Tax (GST) in many countries is aimed to streamline the tax regime and eliminate the cascading effect of taxes.

One of the fundamental concepts of GST is Input Tax Credit (ITC), which allows businesses to claim credit for the taxes paid on inputs or input services or capital goods. However, the interpretation and application of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), pertaining to the payment of tax by the supplier as a prerequisite for claiming such ITC, has sparked a debate regarding the denial of ITC to bona fide claimants, especially when such denial is not attributable to any lapse on the part of the claimant.

This article explores the conflicting perspectives and proposes a balanced approach to ensure fairness for all stakeholders.

THE LEGAL PROVISION

Section 16(2)(c) stipulates that a recipient of goods or services can avail ITC only if the tax charged on the supply of goods or services has been actually paid to the Government by the supplier. The strict interpretation of this provision places an onerous burden on the claimant to verify whether the supplier has remitted the tax, potentially leading to the denial of ITC even to bona fide claimants who have already paid the tax to the suppliers. This raises concerns about the practicality and fairness of such a requirement.

Before the amendment to Section 41 of the CGST Act, recipients were allowed to claim ITC on a provisional basis. This meant that they could avail of ITC based on self-assessment, but it would only become final after the process of matching ITC through the filing of GSTR-2 and GSTR-3. Further, the disallowances proposed by the Department merely on the basis of the mismatch with GSTR-2A were easy to challenge. Sections 42, 43 and 43A, which were associated with the matching, reversal and reclaim of ITC, were omitted due to challenges in effectively implementing the matching process.
With the amendment introduced by the Finance Act, 2022, effective from 1st October, 2022, the concept of provisional ITC and matching was eliminated. The recipients are now required to self-assess and claim ITC in GSTR-3B based on credits in GSTR-2B. If a recipient claims ITC for GST that the corresponding supplier has not paid, they are required to reverse ITC along with applicable interest. The recipient can re-avail the reversed ITC once the supplier pays the GST.

This change results in the disallowance of ITC to the recipient solely due to the non-payment of tax by the supplier, along with interest. However, there remains an open question regarding whether the authorities can impose a time limit on the re-availing of this credit by the recipient after the supplier has made the payment. Furthermore, there is a lack of clarity regarding the refund of interest paid by the recipient in such cases, adding an element of uncertainty to this aspect of the amended Section 41 of the CGST Act.

PRE-GST JUDICIAL PRONOUNCEMENTS

In the pre-GST era, the Courts¹ have recognised the difficulties faced by claimants in verifying the tax payment by suppliers. These judicial precedents have emphasised the bona fide nature of transactions and allowed recipients to claim credit, even if the supplier had defaulted in paying the taxes. These rulings highlighted the unfairness and impracticality of imposing such a burden on claimants, ensuring that the interests of businesses were protected.

1 Commissioner of Central Excise, Jalandhar vs. Kay Kay Industries [2013 (295) ELT 177 (S.C.)]
Arise India Ltd and others vs. Commissioner of Trade & Taxes, Delhi and others [TS-314-HC-2017(Del)-VAT]
Larsen & Toubro vs. CCE (2001 (127) ELT (807)

INCONSISTENCIES IN GST JUDICIAL DECISIONS

Under the GST regime, there have been divergent opinions on the issue of ITC eligibility due to non-payment of tax by the suppliers, as discussed on the next page.

• D.Y. Beathel Enterprises vs. State Tax Officer (Data Cell) – {[2021] 127 taxmann.com 80 (Madras)}

The issue centred on the eligibility and conditions for claiming ITC under the CGST Act and the Tamil Nadu Goods and Services Tax Act, 2017.

The petitioners, who were engaged in trading Raw Rubber Sheets, had procured goods from registered dealers. A substantial portion of the sale consideration was transacted through banking channels. Relying on the suppliers’ tax returns, the petitioners claimed ITC.

However, during a revenue inspection, it was uncovered that the suppliers hadn’t remitted any tax to the Government. Consequently, the revenue initiated proceedings to recover the ITC from the petitioners. The petitioners contended that the suppliers should have been examined during the inquiry, a step that wasn’t undertaken.

The Court ruled in favour of the petitioners, asserting that the revenue couldn’t reverse the ITC availed by the petitioners due to the supplier’s failure to pay taxes on the supplies without first conducting an examination of the suppliers and initiating recovery proceedings against them. The Court emphasised that when it became evident that the tax hadn’t been deposited to the Government, the liability should have been apportioned either to the supplier or the buyer.

In summary, this judgment highlights that if an assessee purchases goods through registered dealers, especially when a significant part of the sale transaction is conducted through banking channels, the revenue authority cannot reverse the ITC without properly examining the supplier and initiating recovery proceedings against them.

• Pinstar Automotive India (P.) Ltd vs. Additional Commissioner – {[2023] 149 taxmann.com 13 (Madras)}

The Court upheld the denial of ITC to the petitioner-assessee in a situation where the supplier had charged tax but failed to remit it to the tax department. The Court emphasised that the provisions of Section 16(2)(c) of the Act must be strictly followed, and the interest of revenue must be protected by ensuring that tax liability is met either by the supplier or the purchaser. The Court noted that when the supplier did not deposit the tax charged from the petitioner, the revenue was justified in denying ITC to the assessee. However, it also acknowledged that a mechanism should be established to address situations where tax liability was met by both the purchaser and the supplier, as it could result in double taxation.

• Jai Balaji Paper Cones vs. Assistant Commissioner Sales Tax {[2023] 152 taxmann.com 690 (Madras)}

In this judgment, the Court addressed a case related to ITC where the petitioner had paid taxes on three invoices to the supplier for goods purchased. However, it was found that the supplier’s GST registration had been cancelled before these invoices were issued, and the tax had not been remitted to the Government. Consequently, the Court ruled that a mandamus (a judicial order) could not be issued to the tax department, as it would go against the provisions of Section 16(2)(c) of the CGST Act, along with Rule 36(4) of the Central Goods and Service Tax Rules, 2017.

The Court observed that Section 16(2)(c) specifies that a registered person is only eligible for ITC if the tax has been actually paid to the Government. Further, it stated that since the supplier had lost their GST registration before the invoices were raised, they couldn’t have paid the tax to the government.

The Court, therefore, dismissed the petitioner’s writ petition, favouring the revenue authorities and denied the claim of ITC. However, it acknowledged the petitioner’s right to seek recovery of the amount from the suppliers through legal means.

• Suncraft Energy (P.) Ltd vs. Assistant Commissioner, State Tax {[2023] 153 taxmann.com 81 (Calcutta)}

In this case, the appellant’s ITC was reversed by the revenue authority under the West Bengal Goods and Services Tax Act, 2017 (WBGST Act). This reversal was based on the allegation that certain supplier invoices were not reflected in the appellant’s GSTR-2A for the Financial Year 2017–18. The appellant contended that they had complied with Section 16(2) by possessing valid tax invoices, making payments to the supplier and fulfilling other conditions for availing ITC.

The Court ruled that the reversal of ITC based on discrepancies in GSTR-2A was not justified. It clarified that GSTR-2A is a tool for taxpayer facilitation and does not impact the eligibility of taxpayers to avail of ITC based on self-assessment under Section 16 of the Act. The Court emphasised that the reversal of credit from the buyer is optional, except in exceptional circumstances such as collusion, missing supplier or lack of assets. The revenue authority failed to conduct an inquiry into the supplier’s actions despite clarifications provided by the appellant.

Furthermore, the show cause notice faulted the supplier’s GSTR-1 but did not address the possession of valid tax invoices or receipt of goods and services by the appellant. Therefore, the Court held that action against the supplier should have been taken before seeking a reversal of ITC from the appellant. The revenue’s action was deemed arbitrary, and the impugned order was set aside. The Court directed the authorities to follow Central Board of Indirect Tax and Customs (CBIC) guidelines.

In summary, the Court ruled in favour of the appellant, stating that the reversal of ITC was unjustified, and action against the supplier should precede any such reversal based on GSTR-2A discrepancies.

• Aastha Enterprises vs. State of Bihar {[2023] 153 taxmann.com 491 (Patna)}

In this ruling, the Court addressed the issue of whether a purchaser, a registered dealer, can claim ITC when they have paid the tax to the selling dealer through a tax invoice, but the selling dealer has not remitted the tax to the Government. The Court found that for ITC to be claimed, certain conditions and restrictions must be met, including the actual payment of tax to the Government by the selling dealer. These conditions must be satisfied together, and ITC can only be claimed when the tax has been paid to the Government by the supplier.

The Court emphasised that ITC is a benefit or concession created by the statute and can only be availed of if the statutory conditions are strictly followed. It rejected the argument of double taxation, stating that the claim is denied only when the selling dealer fails to pay the tax to the Government. The Court also clarified that the existence of a recovery mechanism in the statute does not absolve the purchasing dealer of their liability to ensure the tax is paid to the Government.

Ultimately, the Court ruled in favour of the revenue and dismissed the writ petition, stating that the claim for ITC cannot be sustained when the selling dealer has not paid the tax to the Government despite collecting it from the purchasing dealer. Additionally, the Court noted that the writ petition was filed after the period for appeal had expired, but it was still admitted because the issue involved the interpretation of provisions related to ITC under the relevant tax act.

In the complex landscape of conflicting court rulings on the allowance of ITC under the GST framework, one cannot help but ponder the very essence of this tax reform. On the one hand, there are judgments that champion the cause of recipients, advocating for a fair and pragmatic interpretation that safeguards their rights. On the other hand, there are those who argue for stringent adherence to the law, viewing ITC as a privilege that must be earned through supplier compliance. This legal tug of war not only underscores the interpretational nuances of the GST law but also underscores the pressing need for a cohesive and definitive resolution that strikes a balance between taxpayer interests and the broader objectives of the tax regime.

In my view, the denial of ITC based solely on technical non-compliance burdens genuine taxpayers and undermines the intent of the GST regime. It is important to consider the complexity of GST laws and adopt a balanced and uniform approach to ensure fairness in the treatment of claimants. Some of the recommendations that the Government should focus on to ensure a balanced and uniform approach are as follows:

• Clarity in regulations: Provide clear and unambiguous guidelines regarding ITC eligibility and compliance requirements. This clarity will help businesses understand their obligations better.
• Consistency in interpretation: Ensure that GST laws are interpreted consistently across different jurisdictions and by different authorities to avoid confusion and conflicting precedents.
• Standardisation of procedures: Implement standardised procedures for the denial and rectification of ITC across all states and union territories. This will help businesses operate seamlessly across India.
• Regular training for tax authorities: Ensure that tax authorities across the country receive regular training to stay updated on GST laws and their proper application.
• Industry consultation: Engage with industry stakeholders and trade associations to gather feedback on the GST framework and promptly make necessary adjustments to ensure fairness and simplicity.

UNFAIR DEMANDS AND SHOW CAUSE NOTICES

In an alarming trend, tax authorities are insisting claimants to reverse ITC or confront show cause notices. This places an unjustifiable burden on claimants, forcing them into a precarious dilemma. They are left with two unfavourable options: either reverse ITC, effectively subjecting themselves to double GST taxation on the same transaction, or brace for the possibility of protracted legal repercussions. The situation is aggravated by the difficulties claimants face in accessing concrete evidence or documentation that could demonstrate the payment of GST by their suppliers, leaving them in a state of perplexity.

This trend raises significant concerns about the fairness and transparency of tax enforcement. It not only places an unjust economic burden on businesses but also jeopardises their trust in the tax system. Addressing this issue is crucial to ensure that tax compliance is balanced with the protection of taxpayers’ rights and that the system remains equitable and just for all parties involved.

REVERSING ITC TO AVOID LITIGATION

In specific scenarios where claimants have the potential to reclaim GST along with accrued interest from defaulting suppliers, they may consider the strategic move of reversing ITC to sidestep protracted legal battles and seek some relief. However, this is a relatively rare occurrence. In the overwhelming majority of cases, claimants find themselves compelled to shoulder the financial burden by reversing ITC along with the associated interest, even when they are unable to recover GST, plus interest, from their suppliers. This predicament is intensified by the inherent difficulty of obtaining compensation from non-compliant suppliers.

When claimants contemplate resisting the official directive to reverse ITC alongside the requisite interest, they find themselves facing the daunting prospect of engaging in protracted legal disputes with both Government authorities and their suppliers. This ordeal invariably comes with substantial litigation costs, placing an unjust burden on the claimants, who, in essence, are the aggrieved parties in this convoluted equation.

One pivotal factor further worsening this situation is the profound challenge of reclaiming the GST and interest owed from suppliers who have defaulted on their obligations. The claimants, despite having legitimate claims, often find themselves entangled in a web of supplier evasiveness or insolvency, rendering the recovery process an arduous and frustrating endeavour.

In summary, the strategic reversal of ITC to avert lengthy legal battles is an option available to some claimants. Nonetheless, it remains a rare recourse, as most claimants are left with no choice but to comply with the requirement to reverse ITC, even when they cannot recuperate the GST and interest owed to them by their defaulting suppliers. This unfortunate situation not only places claimants at a financial disadvantage but also underscores the pressing need for reforms and remedies to ensure that the burden of compliance and recovery falls on those who are truly responsible for the defaults.

REVERSAL AND RE-AVAILING OF ITC

Rule 37A of the Central Goods and Services Tax Rules has been introduced w.e.f. 26th December, 2022, with respect to the reversal and re-availment of ITC in cases where the supplier fails to pay the tax. As per the Rule, if the recipient has availed of ITC based on the supplier’s details reported in their GSTR-1 return, but the supplier fails to pay the applicable taxes in GSTR-3B by the specified deadline, the recipient must reverse the ITC amount while filing their GSTR-3B return before 30th November following the end of the financial year. In such a case, the claimant need not pay the interest on such reversal. Subsequently, such credit can be re-availed by the claimant if the supplier pays the tax in the GSTR-3B return. In respect of the period prior to 26th December, 2022, there is no provision which allows the recipient to re-avail the ITC reversed, even if the supplier were to pay the tax later.

CONCLUSION

The post-amendment changes to Section 41 necessitate the reversal of ITC by recipients, and therefore, it is advisable that recipients should exercise caution and closely monitor the tax payments of their suppliers. To mitigate potential financial implications, recipients may consider releasing GST payments to suppliers only after the supplier has deposited the requisite taxes. Moreover, in cases where tax recoveries are initiated against recipients without corresponding recoveries from suppliers, recipients should explore the possibility of reversing ITC under protest as a prudent course of action and litigate the matter.

The current practice of tax authorities directly demanding ITC reversal from recipients solely based on the cancellation of supplier GSTIN or non-filing of GSTR-3B without the Department even attempting to recover the tax from the suppliers (who are the real culprits here) is a matter of concern. The issue of ITC eligibility under GST has been a subject of long-standing debate, with no resolution in sight in the near future.

Firstly, to provide relief to genuine claimants who have availed ITC based on valid documents but where the supplier has not paid taxes, the present law should be amended to compel the Revenue Authorities to first proceed against the suppliers who have defaulted / delayed in their payment obligations to the Government. The action against the recipient should be initiated by the Government only after it has exhausted its remedies against the suppliers and has not been able to recover its dues from such suppliers; after all, it is the suppliers who have defaulted in their payment obligations and the recipients cannot be penalised when they have duly paid the taxes to the suppliers in accordance with the law. Secondly, and at the bare minimum, the Government should consider waiving the interest and penal implications in the hands of the recipients. Thirdly, a provision should be introduced that allows claimants to reclaim the credit if the supplier eventually pays the taxes, thus balancing the need for compliance with the protection of bona fide claimants. This approach would provide a fair and reasonable resolution to the conundrum of ITC claims under the GST regime, fostering trust and confidence among businesses and enabling a smoother transition to a unified tax system.

One hopes that the Government will pay heed to the genuine concerns of the recipient by amending the law, thereby providing much-needed relief to businesses that are needlessly saddled with stiff monetary consequences and harsh Departmental action for no fault of their own.

BCAJ Admin

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.

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Invoice-to-invoice Matching

“An
important item in our agenda for 1986-87 is to initiate reform in the system of
indirect taxes. … In excise taxation a vexatious question which has been often
encountered is the taxation of inputs and the cascading effect of this
on the value of the final product. … . This scheme, which has been referred as
Modified Value Added Tax (MODVAT) scheme … allows the manufacturer to
obtain instant and complete reimbursement of the excise duty paid on
the components and raw materials. … Introduction of MODVAT will decrease the
cost of the final product considerably through the availability of instant
credit of the duties paid on the inputs and consequential reduction of interest
costs. The MODVAT scheme will be in force from 1st March, 1986.”

–  Shri V. P. Singh, union minister of finance,
on introducing the union Budget for 1986-87

Instant
credit was the cardinal principle when MODVAT scheme was first introduced in
1986.   Under the Central excise law, the
credit has been available instantly on receipt of goods in the premises of the
manufacturer.  Under the State-vat laws
also, credit is available to the dealer on the purchase of goods. under the
service tax law, this cardinal principle is followed currently, subject to
specified condition viz. payment of invoice is made within specified period.
However, under the proposed GST  regime,
input tax credit would not be instant; it would be subject to
‘invoice-to-invoice matching’. The 
invoice-to-invoice matching requires the details of the inward supply of
the recipient to be matched with that of corresponding details of the outward
supply of the supplier; so as to claim input tax credit in respect of invoices
relating to inward supply.

Global
leader for indirect taxes of a large accounting firm was recently quoted
saying, “Invoice-to-invoice matching under the proposed goods and services tax
in India will make it harder for the cash economy and other parts of the world
will soon like to emulate this feature. India is the only country that is doing
it (invoice-to-invoice matching). This is unique ….people will to comply or
they will fall out of the GST chain. 
Only those who play in the cash economy will feel the pressure as they
will lose credit. Is it the right time to do as it’s a new tax.”

Missing
trader fraud (also known as missing trader intra- Community fraud) within the
european union (eu), abusing the vat rules on cross-border transactions within
the eu or the ‘missing trader’ fraud as seen in the case of Mahalaxmi Cotton
Ginning Pressing and Oil Industries vs. The State of Maharashtra & Others
51 VST 1 (Bom.) could also be the added reasons for this proposed change.

The
recommendations in the report of the technology advisory Group for unique
Projects, january 2011, included that the Common GST Portal would also act as a
tax booster, matching the input tax credits in the returns to detect tax
evasion. Hence, this change is being considered and designed since 2011. The businesses in India, however, are still
not in a position to assimilate the proposed change and the change is perceived
as inconceivable; possibly in view of the current practice and mind frame to
take credit instantly.

The
Common GST  Portal created and managed by
GSTn is suppose to do this matching on the basis of invoice level data filed as
part of return by all taxpayers, including for inter-state supplies.

Detailed
provisions are there in the model CGST / SGST law  to deal with situations –

 -Where
the input tax credit claimed by the recipient in respect of an inward supply is
in excess of the tax declared by the supplier for the same supply (Section 29);

–
Where the input tax credit claimed by the recipient in  respect 
of  an  inward 
supply  is  not 
declared  by the  supplier 
as  outward  supply 
in  his  valid 
returns (Section 29);

–
For duplication of claims of input tax credit (Section 29);

–
Reduction of input tax credit by the recipient where the output tax is reduced
by output supplier by issuing a credit note (Section 29A).

Manner of Taking input Tax credit

(Section 16 of the model CGST / SGST law)

“Input
tax credit” is defined in Model CGST / SGST Law to mean credit of ‘input tax’.

“input
tax” in relation to a taxable person, means the {iGST and CGST}/{iGST and
SGST}   charged on any supply of goods and/or services to him which are used, or
are intended to be used, in the course or furtherance of his business and
includes the tax payable under reverse charge mechanism.

It
is key to note that though the law has defined the terms‘ input’, ‘input
service’ and ‘capital goods’, these terms have not been used in the definition
of ‘input tax’ / ‘input tax credit’. “input tax” is the tax charged on any
supply of goods and/ or services and it is not a tax charged on ‘input’ /
‘input services’ / ‘capital goods’. 
Hence, wherever the provision, in model GST law,  deals with input tax credit, it would have to
be read currently in the context of supply of goods and/ or services.  Wherever the model GST  law 
has referred to input / input service / capital goods with reference to ‘input
tax credit’, either that should get rectified in the final law in favour of
goods and/or services or the definition of ‘input’, ‘input service’ and
‘capital goods’ should be revisited considering one of the objects of GST  to remove cascading effect of taxes.

Every
registered taxable person is entitled to take credit of input tax admissible to
him, subject to the followings:

-He
is in possession of a tax invoice, debit note, supplementary invoiceor such
other taxpaying document as may be prescribed, issued by a supplier registered
under the GST law;

–
He has received the goods and/or services (where the goods are received in lots
or instalments, upon receipt of the last lot or instalment) – for this purpose,
it shall be deemed that the taxable person has received the goods where the
goods are delivered by the supplier to a recipient or any other person on the
direction of such taxable person, whether acting as an agent or otherwise,
before or during movement of goods, either by way of transfer of documents of
title to goods or otherwise;

–
The tax charged in respect of such supply has been actually paid to the credit
of the appropriate Government, either in cash or through utilisation of input
tax credit admissible in respect of the said supply; and

–
He has furnished valid returns, as required

In
case the goods and/or services are used partly for business purposes / taxable
supplies and zero-rated supplies and partly for other purposes / non-taxable
supplies and exempted supplies, input tax shall be restricted to so much as it
is attributable to business purposes / taxable supplies and zero-rated
supplies. The manner of attribution for such purposes would be prescribed.

The
input tax credit in respect of any invoice needs to be taken before

-Filing
of the return u/s. 27 for the month of September following the end of financial
year to which such invoice pertains or

-Filing
of the relevant annual return whichever is earlier.

Negative list for input Tax credit

Input
tax credit will not be available in respect of the following (Section 16(9) of
the model CGS / SGST law):

-Motor
vehicles, except when they are supplied in the usual course of business or are
used for providing the following taxable services

 (i) Transportation of passengers, or

 (ii) Transportation of goods, or

 (iii) Imparting training on motor driving
skills;

-Goods
and / or services provided in relation to food and beverages, outdoor catering,
beauty treatment, health services, cosmetic and plastic surgery, membership of
a club, health and fitness centre, life insurance, health insurance and travel
benefits extended to employees on vacation such as leave or home travel
concession, when such goods and/or services are used primarily for personal use
or consumption of any employee;

–  Goods and/or services acquired by the
principal in the execution of works contract when such contract results in
construction of immovable property, other than plant and machinery;

–
Goods acquired by a principal, the property in which is not transferred
(whether as goods or in some other form) to any other person, which are used in
the construction of immovable property, other than plant and machinery;

–
Goods and/or services on which composition tax has been paid; and

–
Goods and/or services used for private or personal consumption, to the extent
they are so consumed

–
Capital goods, where depreciation is claimed under the income tax act, 1961 on
the tax component of the cost of such capital goods[the restriction specified
herein is not on all goods but only on ‘capital goods’; capital assets and
capital goods, both are defined separately and have different meaning]

Supply (Removal) of capital Goods on Which input Tax credit
Was Taken

On
supply of capital goods on which input tax credit has been taken, higher of the
following is required to be paid:

–  An amount equal to the input tax credit taken
on the said capital goods reduced by the percentage points as may be specified
in this behalf; or

–  Tax on the transaction value of such capital
goods

Transfer of input Tax credit

in
case there is change in the constitution of a registered taxable person on
account of sale, merger, demerger, amalgamation, lease or transfer of the
business with the specific provision for transfer of liabilities, the input tax
credit that remains unutilised in its books of accountsof the registered
taxable person (transferor) would be allowed to be transferred such sold,
merged, demerged, amalgamated, leased or transferred business.

Utilisation of input Tax credit

Every
taxable person would be entitled to take input tax credit; however, till he
discharges his self-assessed tax liability vide valid tax returns he will not
be allowed to utilize such input tax credit (Section 28 of model CGST/SGST law).   Such restriction on utilisation of input tax
credit is not prevalent in the current indirect tax regime.

The
input tax credit is to be utilised as follows (Section 35(5)

Input
tax credit on account of CGST cannot be utilised for payment of SGST and
vice-versa.

Unutilised
input tax credit at the end of the tax period can be claimed as refund (Section
38(2) of model CGST  / SGST law)  in cases of:

–  Exports (other than the goods exported which
are subject to export duty)

–  Credit accumulation is on account of rate of
tax on inputs being higher than the rate of tax on outputs. [‘input’ has been
defined to mean goods other than capital goods. ‘Output’ has not been defined.]

Input Tax credit on stock, When registration is applied for

The
following persons are entitled to take credit of input tax within one year from
the date of issue of the tax invoice in respect of inputs held in stock and
inputs contained in semi- finished or finished goods held in stock, to be
calculated as per Generally accepted accounting Principles:

The
provisions currently are silent in respect of capital goods held on the date of
registration / date he becomes liable to pay tax under regular scheme and in
respect of credit of input tax on services received before the date of
registration / date he becomes liable to pay tax.

Switching To composition levy / Goods or services become
exempt

On
switching over from the regular mechanism to composition levy, or the goods and
/or services become exempt, the registered taxable person is required to pay an
amount equal to the input tax credit in respect of inputs held in stock and
inputs contained in semi-finished or finished goods held in stock on the day
immediately preceding the date of such switch over or, as the case may be, the
date of such exemption, to be calculated as per Generally accepted accounting
Principles.  Balance of input tax credit,
if any, would lapse.

Input Tax credit of Goods sent for Job Work (section 16a of
The Model CGS / SGST law)

The
principal is entitled to take input tax credit on inputs / capital goods sent
to job worker, including sent directly without being first brought to the
premises of the principal, if the said inputs / capital goods are received back
by the principal within the specified period.

Input service Distributor (section 17 of The Model CGS /
SGST law)

“Input
Service Distributor”(ISD) means an office of the supplier of goods and / or
services which receives tax invoices issued u/s. 23 towards receipt of input
services and issues tax invoice or such other document as prescribed for the
purposes of distributing the credit of CGST 
(SGST in State acts) and / or IGST paid on the said services to a
supplier of taxable goods and / or services having same PAN as that of the
office referred to above.

Explanation. – for the purposes of distributing the
credit of CGST  (SGST  in State acts) and / or IGST, input Service
distributor shall be deemed to be a supplier of services.

An
ISD is allowed to distribute the credits as follows

 The
manner for computing the credit to be distributed is not yet prescribed.

Account and records for input Tax credit

Every
registered person is required to keep and maintain a true and correct account
of input tax credit availed (Section 42 of model CGST / SGST law).

An
input tax credit ledger in electronic form would be maintained at the common
portal for each registered taxable person, to be called as “electronic credit
ledger”. The amount of input tax credit will be credited to electronic credit
ledger of the registered taxable person.

Transition provisions

A
registered taxable person is entitled to take credit of the amount of Cenvat
credit / vat credit carried forward in the return furnished under the earlier
law.  A registered taxable person is also
entitled to take credit of the unavailed Cenvat credit / vat credit in respect
of capital goods, not carried forward in the return furnished under the earlier
law. Such credits can be taken only if the amount was admissible as Cenvat
credit / vat credit under the earlier law and is also admissible as input tax
credit under the GST law.

Transition
provisions have been provided for situations:

–         –Where the goods manufactured / traded were exempted under
earlier law and are liable to tax under GST law

 –      
–Where the person is going to be
taxable person under the regular mechanism under GST law, however, was under
the composition scheme under the earlier law

Transition
provisions have not been provided for situations:

–       –Cenvat
credit was taken on input services, however the invoice was not paid within
three months, hence Cenvat credit taken was reversed; the invoice would be paid
after the appointed date or the invoice would be paid after the filing of
return u/s. 27 for the month of September following the end of first financial
year under GST Law andafter filing of the relevant annual return

 –     
–Unavailed Cenvat credit in respect
of natural resources (where Cenvat credit is currently availed over the period
of three years)

Disputes under earlier law for claim / recovery of Cenvat
credit / VAT credit

The
proceedings relating to claim / recovery of Cenvat credit / vat credit under
the earlier law shall be disposed of in accordance with the provisions of earlier
law. Any amount of credit found to be admissible to the claimant shall be
refunded to him in cash and any amount of credit becomes recoverable shall be
recovered as an arrear of tax under GST law. The said amount admissible /
recovered would not be admissible as input tax credit under the GST law.

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