Sports Club of Gujarat Ltd. vs Union of India (UOI)

K.S. Jhaveri, J.—Whether the petitioners, who are basically engaged in promoting different sports, are liable to pay service tax on the services rendered by it to its members is the issue that has come up for our consideration in these petitions.

The petitioners are companies registered under the provisions of the Companies Act, 1956, having its registered office at Ahmedabad, Gujarat. The main object of the petitioners is to promote different games and sports in the State of Gujarat and to afford to its members all the usual privileges, conveniences and accommodation of a residential club. The petitioners also provide various facilities and amenities, including space as a venue for holding social, commercial and business functions, meeting and gatherings. In legal parlance, the element of mutuality in the affairs and dealing of the club exists.

The petitioners were served with Notices dated 1st July, 1997, issued by the office of the Commissioner of Central Excise & Customs, Service Tax Cell, Respondent No. 2 herein, calling upon them to fill in the Application Form ST-I and to get themselves registered under the Service Tax Act, 1997 [hereinafter referred to as "the Act" for short]. It was further communicated by the said Notices that the petitioners would be liable to pay Service Tax @ 5% for the services rendered by the club as "mandap keepers" within the meaning of the provisions of Section 65(20) of the said Act.

Pursuant to the issuance of the said Notices, the petitioner in S.C.A. No. 2016/1999 got itself registered as "Mandap keeper" and also paid service tax for the years 1997 - 1998. However, it has resisted the payment of service tax for the years subsequent thereto, i.e. 1998 -1999.

So far as the petitioner in S.C.A. No. 1691/1999 is concerned, a reply was submitted to the said Notice inter alia stating that it is not covered under the definition of "Mandap keeper" and therefore, it is not required to get itself assessed under the said Act or to get itself registered u/s 69 of the Finance Act, 1964. A further reply dated 28th July, 1997 was also submitted high lighting in detail the grounds as to why it could not be considered as a "Mandap keeper" under the provisions of the Act and therefore, is not required to be registered under the Act. Being dissatisfied by the reply given by the petitioner of S.C.A. No. 1691/1999, the competent authority of the office of the Commissioner of Central Excise & Customs, Service Tax Cell issued a communication dated 5th August, 1997 holding that it was liable to pay Service Tax. Thereafter, it was served with another Notice dated 24th August, 1998 issued u/s 71 of the Act. To the said Notice, the petitioner submitted its reply vide reply dated 9th September, 1998 stating that the provisions of Section 66 of the Act shall not apply to it. However, vide communication dated 23-12-1998, issued by the office of Respondent No. 2, the petitioner in S.C.A. No. 1691/1999 was informed that the provisions of Section 66 of the Act shall apply to it.

Pursuant to the above, show-cause Notices were issued to the petitioners, u/s 70 & 77 of the Finance Act, 1994. Being aggrieved by the aforesaid action of the respondent-authority, the petitioners have approached this Court by way of the present petitions.

Mr. S.N. Shelat, learned Sr. counsel appearing with Mr. Vijay N. Dar for the petitioners, has submitted that according to the respondents, the petitioners are "mandap keepers" in view of the provisions of Clauses (19) & (20) of Section 65 of the Finance Act, 1994 on the ground that it allows temporary occupation of its facilities like banquet halls, lawns, etc. owned by it for organizing social, official or business functions.

7.1 Learned Sr. counsel has contented that the services offered by the petitioners were only as a matter of convenience for the use by its members and the invitees, which is one of the object of the clubs. Therefore, the facilities extended by the petitioners to its members cannot be classified as a trading activity.

7.2 Learned Sr. counsel has further submitted that there is no element of transfer of property from one to the other when the Clubs arrange for the supply of services to member/s since the property continues to be of its members. When the club provides its facilities to its members for official, social or business functions, there is no letting-out of its Immovable property for any consideration. Hence, no ingredients of Clauses (19) or (20) of Section 65 of the Finance Act, 1994 get attracted. Moreover, no element of transfer is involved between the member and the club when the club provides its members the facility to use its property for any function. Therefore, under no circumstances, the petitioners can be classified as "Mandap keepers".

7.3 Learned Sr. counsel has relied upon a decision of the Calcutta High Court in the case of Dalhousie Institute Vs. Assistant Commissioner, Service Tax Cell, wherein, it has been held that the members of a club are allowed exclusively to participate in the services rendered by the club and its fund and that providing such facility to the members by its club cannot be termed to be a letting-out nor the members using the facility of any portion of the premises for any function can be termed to be a client. Similar principle is also laid down in another decision of the Calcutta High Court in the case of Saturday Club Ltd. Vs. Asstt. Commr., Service Tax Cell,

7.4 Learned Sr. counsel has further submitted that keeping in mind the principle laid down in the aforesaid decisions, the Union Government has also amended the Finance Act, by introducing the Finance (Amendment) Act, 2005, which came into force w.e.f. 16-6-2005. Therefore, the submissions canvassed by the petitioners have been indirectly endorsed by the Union Government as well. Hence, the impugned action of the respondents is illegal and bad in the eyes of law and deserves to be quashed and set aside.

Mr. Y.N. Ravani, learned standing counsel appearing on behalf of the respondent-Central Government, has submitted that the Memorandum of Association of the petitioners include the leasing or hiring of any moveable or Immovable property as one of its object. The kind and scope of services, which attract service tax levy, have been well-defined in the service tax legislation. The petitioners provide services in relation to the use of its banquet halls, lawns, etc. to its members and therefore, it is covered by the scope of "taxable service" provided by a "Mandap keeper" within the meaning of Section 65(20) of the Act.

8.1 Learned Counsel has further submitted that the terms "Mandap" and "Mandap keeper", as defined in the Finance Act, 1994 describe the scope and nature of levy, the taxable event and the person who is liable to pay tax. The levy covers not only establishments having regular business but also, the conference rooms, halls, etc. which are let-out for conducting official, social or business functions.

8.2 Learned Counsel has submitted that the services rendered by the clubs in the form of temporary occupation of its premises, viz. the banquet halls, lawns, etc., to its members, their families and guests, are charged for a consideration and that the same are being paid by the members. Hence, the services rendered by the clubs of allowing its members temporary occupation of its premises will attract the levy of service tax. The tax on the services rendered by the clubs is in pith and substance a tax on the services. The clubs are already exempted from the levy of Income Tax and therefore, it would not be proper to grant them exemption even under the Service Tax Act. Hence, no interference is called for from this Court in these petitions.

8.3 Learned Counsel for the respondents has relied upon a decision of the Apex Court in the case of Tamil Nadu Kalyana Mandapmam am Assn. Vs. Union of India (UOI) and Others, , wherein, it has been held that Service tax on catering services does not amount to tax on sale and purchase of goods and that for a tax to amount to a tax on sale of goods, it must amount to a sale according to the established concept of a sale. It has been further held therein that the operative words of Article 366(29A)(f) of the Constitution of India is supply of goods and only supply of food and drinks and other articles for human consumption, is deemed to be sale or purchase of goods.

Having considered the rival submissions raised by the respective parties, the point is whether going by the definition of "mandap" and "mandap keeper", as defined in the Finance Act, 1994, the petitioners/clubs can be made liable to pay service tax or not. Service tax was introduced in India vide the Finance Act, 1994. It is legislated by the Parliament under the residuary entry, i.e. Entry 97 of List I of the Seventh Schedule of the Constitution of India. It is an indirect tax and is to be paid on all the services notified by the Union Government for the said purpose. The said tax is on the service and not on the service provider.

However, u/s 68 of the Finance Act, 1994, as amended by the Finance Act, 1997 the service provider is expected to collect tax from the client utilizing its services. Amongst other services, the Finance Act, 1997 made the services rendered by "Mandap keepers" exigible to Service tax.

Looking to the facts of the case, a reference to some of the amended provisions of Section 65 of the Finance Act, 1994 are apposite. It reads as under:

(19) "Mandap" means any Immovable property as defined in Section 3 of the Transfer of Property Act, 1882 and includes any furniture, fixtures, light fittings and floor coverings therein let out for consideration for organizing any official, social or business function;

(20) "Mandap Keeper" means a person who allows temporary occupation of a mandap for consideration for organizing any official, social or business function.

(41)(p) "Taxable Service" means any service provided to a client, by a mandap keeper in relation to the use of a mandap in any manner including the facilities provided to the client in relation to such use and also the services, if any, rendered as a caterer.

A conjoint reading of the above provisions of law goes to show that the services provided to a client, including the facilities provided in relation to its use and also the services, if any, rendered as a caterer, by a person who allows the temporary occupation of any Immovable property, as defined in Section 3 of the Transfer of Property Act, 1882 and which also includes any furniture, fixtures, light fittings and floor coverings therein, let out for consideration, for organizing any official, social or business function, in any manner, falls under the category of taxable service.

In other words, for a service/s to fall under the category of "taxable service", within the provisions of the Finance Act, 1994 the requirement is that it must be provided by a person, who allows temporary occupation of any Immovable property, as defined under the provisions of the Transfer of Property Act, 1882 and includes such facilities attached thereto, let out for consideration for the purpose of organizing any official, social or business function to a client. The words "let out for consideration" employed in the definition of "Mandap" clearly intend the element of use by any person, including the third party, of an Immovable property as well as the furniture, fixtures and light fittings given by the landlord on consideration. Therefore, the meaning and definition of letting-out inheres transaction of commercial character, rather trading. Similarly, from the definition of "Mandap keeper" it is clear that a person allows temporary occupation of a mandap for consideration, meaning thereby temporary parting with the possession to a third party for consideration. Thus, it is obvious that legislature intended this transaction must be for commercial purposes. Again, the words, "provided to a client" used in the definition of taxable service necessary presupposes the "mandap keeper" must be letting out an immovable property to any person on consideration.

Now, it has to be examined in the context of the aforesaid reading and meaning of the three definitions as to whether the petitioners/clubs does come within the purview of the same or not. One of the criteria is that such service must be provided to a client. If such service is not provided to a client, then it would not attract levy under the provisions of the Act. Hence, the question that is now required to be considered by this Court is as to whether the members of the clubs fall under the definition of "client" or not so as to attract levy of tax under the provisions of the Act.

To decide the same, we shall refer to the meaning of the term "client" as defined in some of the leading dictionaries. In Concise Oxford Dictionary, the word "client" is defined as "a person using the services of a lawyer, architect, social worker or other professional person". Wharton''s Law Lexicon, 1976 Edn. defines client as "a person who seeks advice of a lawyer or commits his cause to the management of one, either in prosecuting a claim, or defending a suit in a Court of justice". In the English Solicitors Act, 1870, (Section 3) client is defined as "Client includes any person who, as a principal or on behalf of another person, retains or employs, or is about to retain or employ, a solicitor; and any person who is or may be liable to pay the solicitors Bill of costs, for any services, fees, costs, charges, or disbursements". In Stroud''s Judicial Dictionary, it is defined as "any person who, as a principal or on behalf of another person, retains or employs or is about to retain or employ, a solicitor". In Corpus Juris Secondum, it has been defined "a client is one who seeks advice of an attorney or retains him to prosecute or defend a suit. A client is one who applies to a lawyer or counselor for advice and direction in a question of law or commits his cause to his management in prosecuting a claim or defending him against a suit in a court of justice; one who retains the attorney who is responsible to him for his fees and to whom the attorney is responsible for the management of the suit; one who communicates facts to an attorney expecting professional advice".

The definition of the term "client" clearly shows that an element of agency is implicit between a person and the agency providing service to him. A "client" is one who applies for service or advice or who retains a solicitor in the management of his suit. A "member" of a club is not a client of the club.

It is a well-settled law that in between the principal and agent when there is no transfer of property available, the question of imposition of service tax cannot be made available. The petitioners herein are a members "club" and not a "proprietary club". It is not even the case of the respondents that the petitioners are a "proprietary club". Therefore, if the club space is allowed to be occupied by any member or his family members or by his guest, for a function, by constructing a "mandap", the club cannot be called as "mandap keeper" because the club is allowing its own member to do so, who is, by virtue of his position, a principal of the club. If any outside/agency is called upon to do the needful, it may raise a bill along with the service tax upon the club and the club as an agent of the members, is supposed to pay the same.

The authority cannot impose service tax twice; once upon the people carrying out the business of "mandap keeper" and then upon the members club for the purpose of using the space for constructing or using it as a "mandap". Therefore, apart from any other question, the possibility of double taxation cannot be ruled out.

If, in a given case, a person, being an owner of a house, allows another to occupy the house for the purpose of carrying out any function in that house, then it will not be construed as transfer of property. But, if such person calls upon a third party, a "mandap keeper", to construct a mandap in such house, then in that case, such "mandap keeper" can be able to raise bill upon the user of the premises along with the service tax. Therefore, it cannot be held well that the members club is covered by the Finance Act, 1994 for imposition of service tax to use its space as "mandap".

For the applicability of service tax, there should be existence of two sides/entities, viz. transaction as against consideration. In a members-club there is no question of two sides. "Members" and "Club" both are the same entity. One may be called as "principal" when the other may be called as "agent". Therefore, such transaction, in between themselves, cannot be recorded as income, sale or service.

By relying upon the bye-laws of the clubs, a ground is sought to be raised that since the clubs also take on lease or hire moveable or Immovable property for its different purposes, they are liable to pay service tax. We have gone through the bye-laws and also the relevant rules and regulations of the Clubs and do not find any provision that the properties and/or the facilities, those are being made available by the members to themselves could be extended to third parties for any consideration whatsoever.

The members of the clubs are allowed exclusively to participate in the services rendered by the clubs and no third party is allowed to participate in the same. Even, the facilities and amenities of the clubs are not extended to any third party who, of course, may come as a guest and/or invitee of the members. The above exclusiveness is given for a limited period and for a specific purpose and therefore, in any case, it cannot be termed as "lease" or "hire". Thus, it is clear from the activities of the clubs, as stipulated in its bye-laws and the relevant rules and regulations that the "mandap keeper", in this case, are the members collectively. Hence, we are of the opinion that the understanding of the respondents about the petitioners - dealing is fallacious, for they mean the word "client", relying on the dictionary expression, instead of reading and understanding the correct meaning.

Service tax is recoverable from the "mandap keeper", who is having a different and distinct separate legal and physical entity and who lets-out the "mandap" with a commercial and trading object. Here, the members have formed the club to serve themselves mutually and for this purpose, the members are paying for such user and any amount of receipt and expenditure of the clubs is enjoyed and/or incurred by the members alone and not by third party.

The principle of mutuality is squarely applicable in this case as going by the definitions of "mandap", "mandap keeper" and "taxable service", as reproduced herein above, the facility of use of the premises and /or the facilities attached thereto, by the members of the clubs cannot be termed to be "letting-out" nor the members of the club using the facility/s or any portion of the premises for any function can be termed to be client/s. The services rendered by any person to his client pre-suppose the element of commerciality and obviously this transaction must be involved with a third party, as opposed to the members of the Club.

Merely because the clubs are exempted from the levy of Income Tax, the respondents could not impose service tax, unless and until the same is permissible under the law. It has now become an elementary principle of law that the question of estoppel cannot arise nor the principle thereof can be applied as against the provisions of law. If it is found that a particular statute is not applicable to any person/s, the action taken by mistake cannot operate as an estoppel or acquiescence. Therefore, the entire proceedings against the clubs about the applicability of service tax are required to be quashed and set aside.

In taxation matters, where a High Court is concerned with the interpretation of an all India statute, it should be a practice and policy that if one High Court has interpreted a provision or section of a taxing statute which is an all India statute and there is no other view in the field, another High Court must ordinarily accept that view in the interest of uniformity and consistency in matter of application of taxing statute so as to avoid the challenge of discrimination in application and administration of tax matters. Such principle has been laid down in Maneklal Chunilal and Sons Ltd. Vs. Commissioner of Income Tax (Central), Bombay, ; Commissioner of Income Tax, Bombay City I Vs. Chimanlal J. Dalal and Co., Commissioner of Income Tax Vs. Tata Sons Private Ltd., and J.D. Patel and Another Vs. Union of India (UOI) and Others, . We are, therefore, in respectful agreement with the view taken by the Calcutta High Court in the decision referred to in Dalhousie Institute and Saturday club cases (supra).

The subsequent amendment in the Act in 2005 clearly establishes that even the Legislature thought it fit to amend the Act. The decision of the Calcutta High Court has also been followed by several Tribunals in the country and the said decisions have not been stayed.

For the foregoing reasons, the petitions are allowed. The entire proceedings initiated against the petitioners by the respondents about the applicability of service tax are quashed and set aside. Recovery, if any, effected from the petitioners/clubs shall be refunded to them at the earliest. Rule is made absolute with no order as to costs.