Changes in GST norms for Clubs after Supreme Court’s ‘landmark’ Calcutta Club ruling

Recently, a larger bench of the Supreme Court in the case of Calcutta Club Ltd. [Civil Appeal No. 4184/2009] and Ranchi Club Ltd. [Civil Appeal No. 7497/2012] decided that one of the most litigious issues relating to taxability of sale of goods or provision of services by a member's club to their members. The issue arose because of the insertion of clause (e) in Article 366(29A) of the Constitutional Amendment Act, 1982, through the 46^th amendment. This clause stated that tax on purchase or sale of goods includes a tax on the supply of goods by any unincorporated association or body of persons to a member for cash, deferred payment or other valuable consideration.

In this case, the taxpayers (i.e. clubs) charged sales tax on food and beverages supplied to non-members or guests who accompany members, but not on supply of food and beverages to its members. The Revenue Authorities sought to tax the latter category also. The clubs argued that the supply of food and beverages to its members is a supply of goods and services to itself, and it was acting as an agent of its members.

The Revenue Authorities alleged that the doctrine of mutuality was not applicable after the amendment to Article 366(29-A), wherein a deeming fiction was created, holding that the supply of goods by clubs to its members will be treated as a sale for the purpose of levy of sales tax. It further argued that the doctrine of mutuality, as applicable to sales tax, was not applicable to service tax, after the introduction of negative list (in 2012) came into force.

The Supreme Court held that the doctrine of mutuality continues to be applicable to incorporated and unincorporated member’s clubs even after the insertion of Article 366(29A) to the Constitution. While providing this decision, the Court also followed its earlier decision, on the doctrine of mutuality, in the case of Young Men’s Indian Association [(1970) 1 SCC 462]. The said ruling was again based on the following two international judicial precedents:

• Graff vs. Evans [(1882) 8 QB 373]
• Trebanog Working Men’s Club and Institute Ltd. vs. Macdonald [(1940) 1 KB 576]

This decision raises questions over whether it will be applicable under the Goods and Service Tax (‘GST’) regime, since it has replaced the erstwhile sales tax / service tax.

Section 7(1) of the CGST Act defines the term supply to inter-alia includes all forms of supply of goods and/or services or both made by a person for a ‘consideration’ in the course of business or furtherance of business. As per the CGST Act r.w. Indian Contract Act, 1872, consideration needs to flow from one person to another.

Entry 7 to Schedule II of the CGST provides that goods supplied by unincorporated associations or body of persons to a member thereof for cash or other valuable consideration shall be treated as a supply of goods under the GST law.

No such deeming fiction has been created under Schedule II with respect to supply of services.

GST is applicable for supply of goods or services in the course of business and as per the definition of business (as per CGST Act) it includes any provision of benefits provided by a club, association, society, or any such body to its members. However, based on the Supreme Court decision and applying the ‘doctrine of mutuality’, the transactions between the associations and its members should not qualify as supply under the GST regime.

This decision also raises a concern about whether it can be extended to co-operative societies, unincorporated, joint ventures, etc. which have similar structures to member’s club. Further, whether it will be applicable to proprietary clubs.

Considering the above, it would be better if the Central Board of Indirect Taxes and Customs comes out with a certain clarification regarding its taxation under the GST law.