Background
The Constitution of India provides for distribution of legislative subjects between the Union and the States.[1] These subjects include taxing subjects as well. Before the Constitution (One Hundred and First Amendment) Act, 2016 (hereinafter, the ‘101st Amendment’), the levy of ‘taxes on the sale or purchase of goods’[2] was within the remit of the States.[3] Soon after the enforcement of the Constitution, however, the Supreme Court in its famous decision in Gannon Dunkerley severely limited the scope of this taxation power of the States.[4] In this case, it was held that the expression ‘sale’ had a limited meaning and it encompassed only the traditional class of sale as understood in law (i.e., the Sale of Goods Act, 1930).
Following the reasoning in Gannon Dunkerley, the Supreme Court on a number of occasions invalidated the levy of tax by the States by highlighting the limitations on the taxing powers. Subsequently, the Constitution was amended in order to address the reasons in Gannon Dunkerley and subsequent decisions, and to expand the scope of taxing power of the States. Notwithstanding the amendment, one issue which has persisted is the power of the States to tax transactions between an association and its members. This aspect is addressed in this article which seeks to unravel the controversy, the stipulations of the constitutional amendment, the judicial construction which virtually sets to naught this amendment and the recent attempt made by the Parliament to assert its taxing entitlement.
YMIA Decision: Sowing the Seeds of Discord
One of the leading cases reflecting the tussle between the tax authorities and clubs is the case where the Young Men Indian Association (“YMIA”), Madras challenged the levy of sales tax on the supply of food, snacks, beverages and other articles to their members or their guests. The High Court agreed to hold that neither the Association could be considered a ‘dealer’ nor “was any ‘sale’ involved in the aforesaid activity”. Rejecting the appeal against the determination by the High Court, the Supreme Court in its decision in YMIA[5] noted that the law was well settled in England and the Indian High Courts were also consistent in the view that there appeared to be no sale by a club to its members.
Authoring the majority decision for the Supreme Court in YMIA, Grover J. stressed upon two aspects: (a) the fact of non-incorporation of the clubs to affirm this position, distinguishing the situations of clubs incorporated as co-operative societies, companies, etc., and (b) that the club was “only acting as an agent for its members in matter of supply of various preparations to them [and therefore] no sale would be involved as the element of transfer would be completely absent”.
In a separate concurring opinion in YMIA, Shah J. elaborated on the first aspect, inter alia, in the following terms:
“Whether refreshments, beverages and other articles supplied by a Members’ Club for consideration to its members are in law sold depends upon the circumstances in which the transaction takes place. In each case the liability to tax of the transaction will depend upon its strictly legal form. If an incorporated members’ club supplies its property to its members at a fixed tariff, the transaction would readily be deemed to be one for sale, even if the transaction is on a non-profit basis: such a transaction would be liable to Sales Tax. Where, however, the club is merely acting on behalf of the members to make available to them refreshments, beverages and other articles, the transaction will not be regarded as a sale, for the club is the agency through which the members have arranged that the refreshments, beverages and other articles should be made available. The test in each case is whether the club transfers property belonging to it for a price or the club acts as an agent for making available property belonging to its members.”
Highlighting the undisputed factual findings of the High Court “that the clubs or associations sought to be rendered liable in these appeals were not transferring property belonging to them but were merely acting as agents for and on behalf of the members”, Shah J. concluded that “[t]hey were not selling goods but were rendering a service to their members”.
Thus, the Supreme Court concluded that the transactions between clubs and their members could not be subjected to sales tax.
Law Commission’s 61st Report: No Remedial Proposal!
Perceiving the decision in Gannon Dunkerley and others as strenuous limitations on their taxing entitlements, the States were unison that a solution was necessary in order to ensure their fiscal stability. This translated into the 61st Report of the Law Commission of India [6] which dedicated a separate chapter to the issues relating to ‘Sale by Associations to Members’.[7]
The Law Commission acknowledged that “[t]he broad general principle which constitutes a common feature of these transactions, is the absence of a transfer of property. It would appear that these transactions are not ‘sale’, because there is no transfer of property.” However, uncharacteristically, the Law Commission did “not recommend any change”. It attributed its conclusion to the following reasons:
a. In ordinary course the clubs could not be taxed under the existing sales tax laws and “the taxability of such transactions … [could be achieved only] by expanding the concept of ‘sale’ for the purpose of the legislative power of the States, – a result which can be achieved only be amending the Constitution”;
b. Having said so, however, “it would not be appropriate to amend the Constitution for this purpose … [because the] number of such clubs and associations would not be very large … [and] taxation of such transactions might discourage the co-operative movement”;
c. In particular, the option of a constitutional amendment to address the issue was not pragmatic in view of the fact that “[u]nincorporated associations exist in a ‘myriad of structural arrangements …”; and
d. In any case, “there can be no serious question of evasion in such cases” and therefore a constitutional amendment for this purpose was unnecessary.
In brief, despite accepting the existence of rigours on the taxing power of the States with regards to the transactions between the clubs and their members, the Law Commission did not make any recommendation so as to turn the tide against the clubs and their members.
46th Constitutional Amendment: Plugging the Gap?
Notwithstanding its reasons and merit, the lawmakers did not converge with the policy recommendations of the Law Commission on the aspect of withholding tax on transactions between clubs and their members. Instead, going diametrically opposite and adopting the same course which the Law Commission desisted from, the lawmakers chose to amend the Constitution of India with an objective of specifically empowering the States to levy tax on such transactions.[8]
As a part of a new definition clause, Article 366(29A) was inserted in the Constitution by the 46th Amendment in the year 1982 wherein clause (e) exclusively addressed the issues relating to levy of sales tax on transactions between clubs and their members. It provided that “a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration” shall be considered as included in a tax on sale or purchase of goods which the States are competent to levy.
Post-Amendment Jurisprudence: Non-Taxation Situation Continues?
If the purpose of the amendment to the Constitution was to ensure that the States could reassert their taxing entitlement upon the transactions between the clubs and their members, the purpose was not realised in the wake of judicial refusal to completely abandon its enunciation of the pre-amendment legal position.
To exemplify, as early as in the year 1994, by way of a short order, the Supreme Court in Automobile Association observed that “for the period commencing from 1-10-1983 in view of the constitutional amendment, the levy can be sustained” on the club.[9] However, this position was not consistently applied by the Supreme Court. For illustration, in the year 1998 in Fateh Maidan, the Supreme Court continued to apply the YMIA principle being of the view that “[a] club is identified with its members at a given point of time, so that it cannot be said that a club has an existence apart from its members”.[10] It is noteworthy the constitutional amendment and Article 366(29A)(e) were not referred by the Supreme Court in Fateh Maidan. In Cosmopolitan Club (2008), however, despite noting the constitutional amendment, the Supreme Court continued to give credence to the YMIA principle.[11]
These decisions and other vagaries in the application of Article 366(29A)(e) were acknowledged by the Supreme Court in 2017 to opine that a categorical enunciation of the correct legal position was warranted because it was “desirable that the position should be clear”. Accordingly, the liswas referred for consideration before a larger bench seeking determination of the following questions:[12]
“(i) Whether the doctrine of mutuality is still applicable to incorporated clubs or any club after the 46th Amendment to Article 366(29-A) of the Constitution of India?
(ii) Whether the judgment of this Court in the Young Men India Association still holds the field even after the 46th Amendment of the Constitution of India; and whether the decisions in Cosmopolitan Club and Fateh Maidan 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 46th Amendment to the Constitution, by deeming fiction provides that provision of food and beverages by the incorporated clubs to its permanent members constitute sale thereby holding the same to be liable to sales tax?”
It is noteworthy that while making this reference, the Supreme Court recorded the contention of the tax authorities that the ‘principle of mutuality’ and the ‘principle of agency’ – which constituted the underlying rationale for debarring the levy of sales tax on transactions between clubs and their members – had lost force in view of the constitutional amendment. While making the reference, the Supreme Court also sought to elaborate the context in which the principle of mutuality was relied upon by the clubs to claim their non-taxable position and the rationale for a clearer enunciation of the law. It was in this background that a larger bench, comprising of three judges of the Supreme Court, was constituted which rendered the 2019 decision in Calcutta Club.[13]
Calcutta Club Decision: Making Constitutional Amendment Redundant?
Speaking through Nariman J., a unanimous Supreme Court in Calcutta Club, turned the cart before the constitutional amendment and answered the reference in the following terms:
“1. The doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ club after the 46th Amendment adding Article 366(29A) to the Constitution of India.
2. Young Men India Association and other judgments which applied this doctrine continue to hold the field after the 46th Amendment.
3. Sub-section (f) of Article 366(29A) has no application to members’ clubs.”
In other words, according to the Supreme Court in Calcutta Club, the constitutional amendment was not relevant to address the lis and the transactions between clubs and their members continued to remain outside the scope of tax. The Supreme Court in Calcutta Club, in fact, extended this declaration even to service tax which was imposed as a new tax by the Parliament after the 46th Amendment to the Constitution.
The key findings of the Supreme Court in Calcutta Club are summarised below:
a. The decision in YMIA “made no distinction between a club in the corporate form and a club by way of a registered society or incorporated by a deed of trust. What is the essence of the judgment is that the holding of property must be a holding for and on behalf of the members of the club, there being no transfer of property from one person to another. Proprietary clubs were distinguished, as there the owner of the club would not be the members themselves, but somebody else.” [paragraph 26]
b. In view of the decisions in Bangalore Club[14] and Richard Evans[15], “it is clear that if persons carry on a certain activity in such a way that there is a commonality between contributors of funds and participators in the activity, a complete identity between the two is then established. This identity is not snapped because the surplus that arises from the common fund is not distributed among the members – it is enough that there is a right for disposal over the surplus, and in exercise of that right they may agree that on winding up, the surplus will be transferred to a club or association with similar activities. Most importantly, the surplus that is made does not come back to the members of the club as shareholders of a company in the form of dividends upon their shares. Since the members perform the activities of the club for themselves, the fact that they incorporate a legal entity to do it for them makes no difference. … What is of essence, therefore, in applying this doctrine is that there is no sale transaction between two persons, as one person cannot sell goods to itself.” [paragraph 32]
c. The lawmakers did not read the decision in YMIA “in its correct perspective. As had been noticed hereinabove, YMIA had three separate appeals before it, in one of which a company was involved. To state, therefore, that under the law as it stood on the date of the 46th Amendment, a sale of goods by a club having a corporate status is taxable, is wholly incorrect. Proceeding on this incorrect basis, what the 46th Amendment sought to do was to then bring to tax sales by clubs which have no separate existence from that of their members. In doing so, the 46th Amendment used the expression ‘any unincorporated association or body of persons’. This expression, when read with the Statement of Objects and Reasons, makes it clear that it was only clubs which are not in corporate form that were sought to be brought within the tax net, as it was wrongly assumed that sale of goods by members’ clubs in the corporate form were taxable. ‘Any’ is the equivalent of ‘all’. This word, therefore, also lends itself to the aforesaid interpretation, as the emphasis of the legislature is on all unincorporated associations or bodies being brought within sub-clause (e).” [paragraph 35]
d. For the aforesaid reason, the constitutional amendment is relevant “only to clubs which were not in the corporate form”. [paragraph 36]
e. Even the unincorporated associations cannot be subjected to tax for the reason that Article 366(29A)(e) requires “cash, deferred payment of valuable consideration” which, in view of Section 2(d) of the Indian Contract Act, 1872, “necessarily posits consideration passing from one person to another”. [paragraph 39]
f. In view of the YMIA decision and the doctrine of mutuality, “there is no sale transaction between a club and its members”, and in any case “there cannot be a sale of goods to oneself.” Significantly, “it is clear that the ratio of YMIA has not been done away by the limited fiction introduced by Article 366(29A)(e).” [paragraph 41]
g. The fact that ‘doctrine of mutuality’ has not been done away with by the constitutional amendment is evident from comparison of other provisions[16] which specifically institute a deeming fiction to tax a person by deeming his actions to be taxable transactions. [paragraph 48-51]
h. The aforesaid conclusion is not affected even if clause (f) of Article 366(29A)[17] is taken into consideration. [paragraph 42-45]
From the aforesaid, it is evident that the Supreme Court in Calcutta Club, albeit by the process of interpretation, reached a conclusion that the 46th Amendment of the Constitution was of no avail in so far as it inserted clause (e) in Article 366(29A) because despite this clause, the transactions between clubs and its members could not be taxed. The Supreme Court, furthermore, adverted to the guidance sought in the 2017 reference, by declaring that its conclusion was not based upon the incorporation status of the club and instead the declaration of non-taxability was extended to both classes of clubs, i.e., incorporated and unincorporated clubs.
One may argue, besides multiple other contentions that can be formulated, that the decision in Calcutta Club does not appear to lay down the correct legal position, on grounds of technicality and on merits. On technicality, because the constitutional stipulation regarding the bench-strength of the Supreme Court seems to be have been bypassed.[18] On the ground of substantive inquiry, in view of the settled principle of interpretation that the courts do not render statutory provisions as inert, superfluous or redundant by process of interpretation[19] – and therefore when statutory provisions cannot be rendered meaningless by process of interpretation, can a constitutional provision be rendered moot by indicating that its underlying rationale is not reasoned? This is because the Supreme Court in Calcutta Club has not quashed Article 366(29A)(e) – and therefore it remains as a valid constitutional provision – unlike the past instances[20] wherein the constitutional provisions have been struck as invalid for any reason. Nonetheless, in view of the constitutional mandate,[21] the decision of the Supreme Court is final and binding on all, unless reviewed by the Supreme Court itself.
2021 GST Amendment: Background for Another Showoff?
Undeterred by the invalidation of the Supreme Court in Calcutta Club, the lawmakers have continued to attempt taxing transactions between clubs and their members. Let us take the illustration of Goods and Services Tax (‘GST’) which was introduced in India on July 1, 2017 in view of the empowerment vested in the Parliament and the States under the 101st Amendment of the Constitution.
The definition of ‘business’[22] under GST specifically covers “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”. For this reason, certain orders have been passed under the GST laws which confirm that the contributions received by associations from their members towards providing common facilities are liable to tax under GST.[23] However, perceiving the clouds of uncertainty owing to the declaration in Calcutta Club, a specific amendment has recently been introduced in the GST law.
Expanding the scope[24] of ‘supply’ on which GST is levied, “the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration” has specifically been inserted in law. The expression “by a person, other than an individual” may have been inspired by the reasoning in Calcutta Club and is likely to be highlighted as the deeming fiction which was found missing in Article 366(29A)(e). Furthermore, in order to obviate any doubts arising on the levy of tax in the past, the validation provision has also been inserted, apparently designed to dilute the impact of Calcutta Club declaration in the context of GST laws:
“Explanation.––For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another”.
It is therefore clear that the lawmakers, continue to assert their legislative right to tax transactions between clubs and their members notwithstanding the judicial scuttling of their past attempts, such as in YMIA and Calcutta Club.
Conclusion
On a larger perspective, taxpayers’ challenge to legislative actions are not unknown. Instead, the judicial reports are replete with instances wherein the tax liability has been dislodged on account of deficiency in the concerned legislation. The trend traversed in this article is similar though the challenge by the taxpayers has been to the limitations of the constitutional empowerment of the legislature itself, the success to which is rare but nonetheless has been achieved twice in succession by the taxpayer. It is undeniable that challenge to the present attempt of the legislature, in the GST law, to tax transactions between clubs and their members is expected to be a matter of yet another challenge in courts. Which side the camel will sit on this time, however, is as elusive a question as always.
[1] Article 246 read with Schedule 7, Constitution of India.
[2] Entry 54, List II, Seventh Schedule, Constitution of India.
[3] It is noteworthy that the 101st Amendment does not omit this remit and instead only reduces its scope to select species of goods. The amended Entry 54 provides for “Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”
[4] State of Madras v. Gannon Dunkerley & Co., AIR 1958 SC 560.
[5] Joint Commercial Tax Officer, Harbour Division, II-Madras v. The Young Men’s Indian Association (Regd.), Madras, (1970) 1 SCC 462.
[6] Law Commission of India, Sixty-First Report on Certain Problems Connected with Powers of the States to Levy a Tax on the Sale of Goods and with the Central Sales Tax Act, 1956, (May 1974), available at https://lawcommissionofindia.nic.in/51-100/Report61.pdf.
[7] Ibid, Chapter 1-D.
[8] Refer, Statement of Objects and Reasons, Constitution (Forty-sixth Amendment) Bill, 1981. It was inter alia stated in this Statement that “(2) By a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon Dunkerley’s case, held various other transactions which resemble, in substance, transactions by way of sales, to be not liable to sales tax. … (3) This position has resulted in scope for avoidance of tax in various ways. … Similarly, 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. … (9) It is, therefore, proposed to suitably amend the Constitution to include in article 366 a definition of ‘tax on the sale or purchase of goods’ by inserting a new clause (29A). …” It is noteworthy that both, i.e. (a) this Statement of Objects and Reasons, and (b) clause (e) of Article 366(29) deal only with unincorporated clubs and do not make any reference to clubs in incorporated form.
[9] Automobile Association of Eastern India v. State of West Bengal, (2017) 11 SCC 811.
[10] Fateh Maidan Club v. Commercial Tax Officer, (2017) 5 SCC 638.
[11] Cosmopolitan Club v. State of Tamil Nadu, (2017) 5 SCC 635.
[12] State of West Bengal v. Calcutta Club Ltd., (2017) 5 SCC 356.
[13] State of West Bengal v. Calcutta Club Ltd., (2019) 19 SCC 107.
[14] Bangalore Club v. Commissioner of Income Tax, (2013) 5 SCC 509.
[15] Thomas (Inspector of Taxes) v. Richard Evans and Co. Ltd., (1927) 1 KB 33 (CA).
[16] The Supreme Court made reference to the following provisions of Income Tax Act, 1961 for the purpose of this comparison, (a) Section 2(24)(vii), (b) Section 44, (c) Section 45(2).
[17] Article 366(29A)(f) brings “a tax on the supply, by way of or as part of any service in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration” as within the fold of taxes on sale or purchase of goods.
[18] Article 145(3) of the Constitution states “[t]he minimum number of Judges who are to sit for the purpose of deciding any case involving a substantial question of law as to the interpretation of this Constitution or for the purpose of hearing any reference under article 143 shall be five.”
[19] See generally, Justice G.P. Singh, Principles of Statutory Interpretation, pp. 90-91, 14th edition, 2016.
[20] For illustration, see Kesavananda Bharati v. State of Kerala, AIR 1973 SC 1461 and Minerva Mills v. Union of India, AIR 1980 SC 1789 wherein parts of Article 31C was declared invalid and Supreme Court Advocates-on-Record Association and Another v. Union of India, AIR 2016 SC 117 which struck down amendments to Part V, Chapter IV of the Constitution by the Constitution (Ninety-ninth Amendment) Act, 2014.
[21] Article 141 of the Constitution states “[t]he law declared by the Supreme Court shall be binding on all courts within the territory of India”.
[22] Section 2(17)(e), Central Goods and Services Tax Act, 2017.
[23] For illustration, see Vaishnavi Splendour Homeowners Welfare Association (2020) 34 GSTL 360 (AAAR).
[24] Section 7(1)(aa), Central Goods and Service Tax Act, 2017, inserted vide Section 108 of Finance Act, 2021.
This article has been authored by Mr. Tarun Jain, Partner, BMR Legal and Advocate, Supreme Court of India. The author acknowledges the assistance of Ms. Namrata Rawat, a student at RGNUL, Punjab, in finalisation of this article. This blog is a part of RSRR’s Excerpts from Experts Blog Series, initiated to bring forth discussion by experts on contemporary legal issues. A PDF form of this article is available here: Taxing Transactions between Clubs and their Members.