Introduction
In the case of the Indian Medical Association v. Union of India[i], the Kerala High Court upheld the validity of s. 7(1)(aa) of the Central Goods and Service Tax Act, 2017 (‘CGST Act’). The Court ruled that the amendment was not unreasonable or arbitrary. However, the Court held that the amendment is prospective in nature and would not be applicable for the period prior to the amendment.
Facts
The Indian Medical Association (‘Petitioner’) is an association under the provisions of the Travancore-Cochin Literary Scientific & Charitable Societies Registration Act, 1955, in which qualified modern medical practitioners are the only persons eligible to become members of the Petitioner, on payment of the one-time admission fees.
The Petitioner is formed to promote medical science, protect the interests of the medical profession, guide government bodies in evolving and implementing a health policy for the state, and formulate and run schemes and projects for the welfare of members, their families, and the general public, help in proper disposal of biomedical waste, etc. There is no distribution of profit or dividends to the members, and the membership is also not transferrable.
In the event of dissolution of the Petitioner, the property of the Petitioner is given to any other non-profit organisation. It is not allowed to be distributed among its members.
The Petitioner has been discharging Goods and Service Tax (‘GST’) on the services provided to third parties. However, no GST was collected by the Petitioner on the amounts collected from the members relying upon the principle of mutuality, i.e., the Petitioner was of the view that no services were being provided to its members in lieu of the amounts received from them.
S. 7(1)(aa) was inserted in the CGST Act [with retrospective effect from 01.07.2017], which amended the definition of supply to include the transactions and activities by a person with its members for consideration as a supply. The section further clarified that the persons shall be deemed to be two separate persons.
The Petitioner challenged the constitutional validity of s. 7(1)(aa) of the CGST Act on the ground that it violates the concept of mutuality and that there is no provision of service by the Petitioner to its members. The challenge to constitutional validity was on the grounds that it was violative of as. 14, 19(1)(g), 265 and 300A of the Constitution of India (‘Constitution’), and the amendment was unreasonable and arbitrary.
Contentions of the Petitioner
The Petitioner submitted that they are the only group of individuals mutually serving themselves as per the doctrine of mutuality. This principle of mutuality can be overcome only through a constitutional amendment (and not by amending the statute) to empower the parliament and state legislature to levy GST on transactions between a club and its members.
The Petitioner relied on several cases in which the principle of mutuality was upheld and in which it was held that such transactions or activities are not leviable to service tax/GST.
The Petitioner also argued that the amendment, if constitutional, cannot have a retrospective effect and that the levy would only apply post the insertion of s. 7(1)(aa) of the CGST Act.
Contentions of the Respondent
The Union of India contended that the GST is a tax on the supply of goods or services and a. 246A or 366(12A) of the Constitution does not contain any reference to the expression ‘person’ and therefore, the Parliament and State legislatures can define ‘person’ for the purpose of taxability.
The Respondent argued that levying tax on transactions between a club and its members is within the competence of the parliament and is not in any way violative of the Constitution.
It was argued that the amendment through s. 7(1)(aa) of the CGST Act is only clarificatory in nature and will therefore have a retrospective effect. It was argued that retrospective law could not be a ground to consider a provision to be arbitrary or confiscatory in nature. Further, it was also argued that the amendment had been made only to remove any doubts which may have arisen due to the decision in the case of Calcutta Club[ii].
Held
The High Court held that under a 246A of the Constitution, read with a. 366(12A), the Parliament and State Legislatures have the power to levy tax on goods and services irrespective of the person involved. The High Court observed that the constitution does not restrict or limit the persons from whom tax on such goods or services may be collected.
Importantly, the High Court held that the concept of mutuality could not prevent the Parliament or State Legislatures from enacting a law regarding tax on the supply of goods or services. Relying on Karnataka Bank Ltd v. State of Andhra Pradesh[iii], the High Court held that the Parliament and State Legislatures have wide powers to define a person from whom the tax on the supply of goods or services can be collected.
The High Court referred to the Calcutta Club (supra) case, in which the law of mutuality was well reiterated. It held that even if it is determined that the principle of mutuality applies to the supply of goods or services by a club or association to its members, legislative amendments can be made to alter or remove the basis of this judgment.
The High Court also observed that before the abovementioned amendment, the principle of mutuality was applicable in the case of a supply of goods and services by an association/ club to its members. Accordingly, GST was not payable on such services/activities. However, after the insertion of s. 7(1)(aa) of the CGST Act, the Petitioner had become liable for GST on the supply of goods and services to their members.
However, the High Court held that the levy of GST on such services is prospective in nature, considering that both the Petitioner and the Respondents were following the Calcutta Club (supra) decision, and no show-cause notices were issued for the period prior to the amendment.
While commenting on the activities that come under the ambit of the supply of goods and services by association to its members, the High Court held that it is at the discretion of the assessing authority. The assessing authority should examine each activity independently and decide whether tax is leviable on such activities after giving the petitioner an opportunity to be heard.
Thus, the High Court upheld the constitutional validity of s. 7(1)(aa) of the CGST Act and held that the amendment is prospective in nature.
Our Analysis
The decision upholding the constitutional validity of s. 7(1)(aa) of the CGST Act is well reasoned. It considers the constitutional scheme and powers of the Parliament and State Legislatures to levy tax on the supply of goods or services by clubs/associations to its members.
It is noteworthy that the definition of ‘business’ under s. 2(17) of the CGST Act from 01.07.2017 already included the provision of service by a club/association/society to its members for consideration. In other words, the GST law recognised this as a business activity, and, therefore, it is possible that even without amendment, the GST law permitted the levy of tax on the supply of goods or services by clubs/associations to its members.
The language of the amendment itself makes it abundantly clear that it has been made to overcome the Supreme Court's decision in the Calcutta Club case. The fact that the High Court has held the levy to be prospective would bring relief to clubs/associations that have not collected GST from their members.
However, it remains to be seen which activities performed by clubs/associations for their members would be subject to tax, as the High Court did not address this specific aspect and left it open for the authorities to decide upon the nature of the transactions and activities. This may, again, lead to uncertainty and litigation between the tax department and the clubs/associations.
End Notes
[i] Indian Medical Association v. Union of India 2024 TAXSCAN (HC) 1648.
[ii] State of West Bengal v. Calcutta Club, 2019 (29) GSTL 545 (SC).
[iii] Karnataka Bank Ltd v. State of Andra Pradesh, 2008 (2) SCC 254.
Authored by Eesha Rastogi of Metalegal Advocates. The views expressed are personal and do not constitute legal opinions