Historical background on levy of service tax on mutual organisations

The genesis of service tax on club or association dates back to 1998 when the Government attempted to levy service tax on members club under “Mandap Keeper’s Service”. The question of mutuality arose that whether there existed two entities for having a transaction between them as against a consideration. The Hon’ble Calcutta High Court1 exercising the powers in Writ jurisdiction held that the members’ club and the members being same entity, transaction in between themselves cannot be regarded as income or sale or service. The Hon’ble Court held that the ratio of the decision in case of
Tamil Nadu Kalyana Mandapam Owners’ Associations vs. UOI2 was not applicable in this case.

Having failed to impose the liability of service tax on mutual organisations, the Government introduced a new taxable service called “Club or Association Service” from 16-6-2005 under Finance Act, 1994 by insertion of S. 65(105)(zzze) alongwith definition of Club or Association in clause 25a3 to S. 65. Simultaneously, Explanation was added to S. 65(105) to impose service tax on services by “unincorporated associations” or “body of persons” to its members.

The definition of taxable service as contained under Section 65(105)(zzze) sought to expand meaning to the term, “service” by adding the words, “facilities” and “advantage” to it. The term “facility” or “advantage” are not defined in the Act. This was done to give a wide coverage to the term “service” and as answer to the contention that a club or association may not be regarded as providing service to its members but there can be some “facility” or “advantage” attuned to the members of the club or association. Further, the term, “consideration” was also replaced by the terms “subscription” and “any other amount” to avoid any confusion or ambiguity as to whether in fact there is a flow of any consideration from the member to such unincorporated association.

In this article, attempt is made to examine applicability of service tax on the clubs and
co-operative housing societies. Clubs can further be divided into members’ club and proprietary club.

Service tax on proprietary clubs

Proprietary clubs are not covered in the definition as such clubs do not serve to its members but to the customers on professional basis. Leviability of service tax on proprietary clubs should be otherwise decided on the basis of nature of taxable service they provide. Prior to 1-7-2012, services were taxable under different clauses of S. 65(105) and if the service fits into category of any of the clause, it would become taxable. The distinction between various clauses of S. 65(105) was blurred from 1-7-2012 after introduction of Negative List based taxation in service tax and all the services became taxable subject to the Negative List and exemptions provided under the law. Thus, the proprietary club became taxable even prior to or from
1-7-2012 based on the nature of service provided by them

Service tax on Member's club & co-op. housing societies upto 30.6.2012:

The members’ club is one which is formed by a some members coming together. It is an organisation composed of people who voluntarily meet on a regular basis for a mutual purpose. A club is any kind of group that has members who meet for a social, literary, or political purpose, such as health clubs, country clubs, book clubs, women's associations etc.

Thus, a members’ club is a mutual organisation wherein a group of persons contribute some amount and serve themselves. Hon’ble Jharkhand High Court4 in a case dealing with implications of service tax on providing club halls to its members for organising functions held that, “if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of existence of two legal entities in such transaction is missing. However, so far as services by the club to other than members, learned counsel for the petitioner submitted that they are paying the tax”.

The Hon’ble Gujarat High Court in Sports Club of Gujarat5 took one step ahead in declaring Section 65(25a), Section 65(105)(zzze) and Section 66 of the Finance (No. 2) Act, 1994 as incorporated/amended by the Finance Act, 2005 Ultra Vires to the extent that the said provisions purport to levy service tax in respect of services purportedly provided by the petitioner club to its members.

On the similar facts, the Hon’ble Gujarat High Court in Karnavati Club Ltd.6 allowed refund of service tax to the petitioners and the Special Leave Petition of the department was dismissed by the Hon’ble Supreme Court7.

The Hon’ble Mumbai Tribunal in a combined ruling in case of Matunga Gymkhana, Tahnee Heights Co-operative Housing Society & Mittal Tower Premises Co-operative society8 held that,
“on application of principle of mutuality, services provided by appellants to their respective members would not fall within ambit of taxable club or association service nor the consideration whether by way of subscription/fee or otherwise received therefore be exigible to Service Tax”. This decision was confirmed by the Hon’ble Bombay High Court. The departmental appeal against this decision is pending in Hon’ble Supreme Court.

Quote

“These judgments were also considered by the Principal Bench in the case of FICCI (supra). It was held that “On the analyses above and on the basis of the precedential guidance adverted to, we conclude that in view of the decision in Ranchi Club Limited (supra), on application of the principle of mutuality, services provided by the appellants to their respective members would not fall within the ambit of the taxable “club or association” service nor the consideration whether by way of subscription/fee or otherwise received therefore be exigible to Service Tax. In view of the decision of the Gujarat High Court in Sports Club of Gujarat Limited, as the relevant provisions (namely Section 65(25a), Section 65(105)(zzze) and Section 66 of the Act), to the extent these provisions purport to levy Service Tax in respect of services provided by a “club or association” to its members is declared Ultra Vires, we hold that there are no operative legislative provisions of the Act legitimizing the levy and collection of Service Tax from the appellants, for providing “club or association” service, in so far as these relate to any services provided to members of these appellants.” It was further held by the Bench that “services provided to non-members fall outside the ambit of “club or association” service prior to 1-5-2011 and subsequent to this date there is no specific allegation that the services provided to non-members fall within the expanded scope of this taxable service qua provisions of the Finance Act, 2011………….”

The above decision of Mumbai Tribunal assumes great importance as it consists three different types of mutual organizations, a members’ club, a co-operative housing society and a commercial premises society wherein all of them are treated at par so far as levy of service tax is concerned prior to 1-7-2012. Apart from both being mutual organisations, there may be a subtle difference in working of a members’ club and a co-operative society so far as dealing with its members are concerned, the later has a more stronger case being only a collective mechanism sans provision of any service.

Reimbursement of expense – service tax liability

In the context of members’ club or co-operative housing society, it is possible to contend that the amounts collected are nothing but reimbursement of expenditure. In this context, it is important to take note of judgment of Hon’ble Delhi High Court in case of Intercontinental Consultants & Technocrats Pvt. Ltd9. In this case, the High Court on the basis of valuation provisions contained in the Finance Act, 1994 held that the Government lacked power to tax the reimbursement of expenditure. The term “for a consideration” contained under S. 67 has to be viewed in the context of a “service”. There is no element of service in case of “reimbursement of expense” and Rule 5 of Service Tax (Determination of Value) Rules 2006 fails the test of the charging section. The departmental appeal against this decision is pending in the Apex Court and the decision is awaited.

Service tax on Members’ club and co-operative housing societies from 1-7-2012:

Applicability of above decisions needs to be tested in the changed scenario of negative list based taxation wherein it is generally accepted that mutuality concept is given go-bye, we shall discuss the provisions and attempt to arrive at some common understanding until they are tested in the court of law.

The term, “service” is first time given a statutory meaning that encompass almost all activities into its ambit. By virtue of the paradigm shift in the levy of service tax, the definitions of taxable services provided u/s. 65(105) have been given go-bye and the “Club or Association Service” under sub-clause (zzze) no more exists on the statute book.

As per the new dispensation, the definition of “service” u/s. 65B (44) read as,
“service means, any activity carried out by a person for another for a consideration” and includes “declared services”. Certain exclusions are provided in the definition clause itself has discussed above alongwith a Negative List and certain exemptions including the mega exemption notification.

As per the definition, for the levy of service tax, it is necessary to have some activity to be carried out by one person for another. Here the distinction between a members’ club and a co-operative housing society may be more pronounced. In the former case, there may be existence of some activity but in case of a co-operative society it is difficult to say that the society carry on any activity. In the final analysis, any entity having involved in provision of service is a question of fact and the levy of service tax may be decided on the basis of the facts of each case.

The term “activity” is not defined in the Act and therefore has to be understood in generic sense. The dictionary meaning of the term “activity” is as follows:

• “the condition in which things are happening or being done”(The Oxford Dictionary).

• “Activity” means the state of being active or energetic action or movement, liveliness
(The Free online dictionary.com).

From the above definition it is clear that there should be an activity by a person for another for consideration. As explained above, the society is merely a collecting and pass through mechanism like in case of property tax, water charges, common area repairs and maintenance etc. It can be contended that no activity is carried out by a society for its members. There may be various service providers providing service to the society which is the legal owner of the building including that of common areas, for e.g. repairs service providers, maintenance service providers, security agencies etc. Thus, the society is receiver of service and not provider of service. If a member’s flat or office premises require repairs, the same is obtained directly by the member and the society is not involved in provision of that service. Further no consideration is flowing from the members to the society except allocation and collection of expense. Any such payments without quid-pro-quo of a service cannot be liable to tax. Thus, it can be argued that even under the new dispensation, service tax is not applicable in case of a co-operative society. The important ingredients of the definition of service is absent in case of a co-operative society:

a) ‘Any activity’;

b) Relationship of service provider and service receiver;

c) Any consideration.

It is worthwhile to know that, the Explanation 3 in the definition clause stating that, that in case of an unincorporated association or body of persons, such association and member thereof shall be treated as distinct persons may not be relevant as it only covers unincorporated association or body of persons. In case of member's club it is possible to have such entity. However, the co-operative societies are incorporated bodies and hence the Explanation does not apply.

Exemption in case of a non-profit entity:

The discussion would be incomplete without taking into account the exemption in Entry 28 of the mega exemption notification10.

“Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution –

(a) As a trade union;

(b) For the provision of carrying out any activity which is exempt from the levy of service tax; or

(c) Upto an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex”.

(emphasis supplied under all above paraphrases)

Being the exemption notification, it can be said that both the exemptions under sub clauses (b) and (c) are applicable to a co-operative society, the former being of general nature applicable to all non-profit entities and the second being specific to the housing societies. So far as the monetary limit of ₹ 5,000 is concerned, the notification is worded in ambiguous manner, i.e.
“exemption by way of reimbursement of charges or share of contribution upto an amount of ₹
5,000 p.m. per member……………..”. Here in the opinion of the writer, the word, “upto” would mean that exemption is allowed upto collection of ₹ 5,000 per member per month and not that if the amount collected in excess of ₹ 5,000 p.m. per member, the entire amount would become taxable. In other words, if
₹ 5,100 is collected p.m. per member, only ₹ 100 would be liable to be taxed. It is further to be noted that the exemption is allowed for sourcing of any goods or services from outsiders for common use of members. In this regards, it is pertinent to take note of Circular issued by CBEC11 clarifying the exemptions to unincorporated/non-profit entity arranging exempt service for its members. As per this circular, if per month per member contribution of any or some members of a Residential Welfare Association12 (RWA) for sourcing of goods and services from third person exceeds
₹ 5000/-, the entire contribution of such member whose per month contribution exceeds ₹ 5000/- would not be eligible for exemption and service tax would be levied on aggregate amount of monthly contribution of such member. However, this circular if juxtaposed against the earlier exemption notification No. 8/2007 ““ ST, it would be clear that in the earlier notification, exemption was subject to the condition
that the total consideration received from an individual member for providing such service does not exceed ₹ 3000/- per month, whereas the present exemption is
up to ₹ 5000/- per member per month. In the opinion of the writer, it can therefore be said that the exemption under the current notification No. 25/2012 ““ ST has to be read in the manner stated above and the circular does not reflect correct position in law.

Exemption under clause (b) of NN 25/2012-ST (Entry 28)

In addition to the exemption of ₹ 5000/-, carrying out any activity by an unincorporated entity for its members which is exempt from levy of service tax, would also not be liable to tax. Here, though not clear, the term “activity exempt from levy of service tax” would mean such activities on which service tax is not leviable under the charging section13 and would also include, the exclusions from the definition of service and items listed in Negative List and not be limited only to the exemption notification. Hence, there would be a blanket exemption in relation to services covered under clause (b) independent of the limited monetary exemption under clause (c). The examples of such exempt activities could be collection of municipal tax or any other Government levy, water charges etc. It is pertinent to note that the exemption under clause (b) is applicable to all unincorporated or incorporated organizations and hence even the commercial or industrial co-operative societies would be eligible for this exemption though the monetary limit specified in sub-clause (c) may not be applicable to them.

It is therefore necessary that each type of collection by a member's club or co-operative housing society should be examined for leviability of service tax. It is to be borne in mind that every collection does not ipso facto liable for service tax. The definition of service and the charging section pre-supposes provision of service as
quid-pro-quo to a consideration. This means an agreement is necessary whether in writing or oral, to establish nexus between the consideration and service provided or to be provided. In absence of such nexus in view of the writer, no liability of service tax can be envisaged on mere collection or receipt. Examples of such collection are sinking fund, repair fund, etc. Thus, if at all there is a levy of service tax on co-operative society it can only on maintenance charges and facilities like club house, swimming pool etc.

Exemption cannot determine taxability

It is a settled principle that the exemption cannot be determined liability of tax. If the levy is non-existent, the exemption under the law cannot make the levy valid in the eyes of the law. Therefore, the above discussion on exemption may be for the benefit of readers who do not want to contest the levy and play safe.

Conclusion

From above discussion it appears that service tax is not leviable on member's club and co-operative societies prior to 1-7-2012. However, the same cannot be said in case of the proprietary club up to 30-6-2012 wherein the leviability of service tax may be decided with reference to nature of service being provided. From 1-7-2012 it appears to be more or less certain that they will be liable to service tax. In case of members’ club, it is a good case to argue that even after 1-7-2012 service tax may not be applicable depending on the nature of service. For a co-operative housing society including a commercial or industrial premises society there appears to be a better case to argue about non-applicability of service tax even after 1-7-2012. However, one needs to verify each receipt before coming to the conclusion. Only a judicial verdict can bring finality to the contentious issue and the views expressed in this article are personal views of the writer.

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