The ‘landmark’ Calcutta Club verdict changes GST norms for clubs

Under tax laws, every now and then, a decision is delivered which gets the “landmark” prefix. Names such as BC Srinivasa Shetty, Bacha F Guzdar and the Azadi Bachao Andolan became familiar because of landmark judgments. The features of landmark decisions are that they resolve an issue in a critical area of the law which has been litigated for ages, are decisive judgments and are invariably given by the Supreme Court.

Recently, the Supreme Court pronounced a landmark judgment under service tax laws in the Calcutta Club case. The decision was that clubs are not entitled to charge, collect and pay service tax on any services made to members. The rationale for the decision was that if there are no members, there is no club and vice-versa. A few years earlier, the Jharkhand High Court gave a similar ruling in a case involving the Ranchi Club.

The Supreme Court followed its earlier decision on the same topic in the case of CTO versus Young Men’s Indian Association, (1970) 1 SCC 462. The necessity for the Supreme Court to rule on this matter arose because of the insertion of Clause (e) in Article 366 (29-A) in the Constitution of India through the 46th 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 another valuable consideration.

The Supreme Court needed to decide whether the doctrine of mutuality has been done away with by Article 366 (29-A) (e), and whether the ratio of Young Men’s Indian Association would continue to operate even after the 46th Amendment.

Graff versus Evans

The Young Men’s Indian Association case was, in turn, based on two judgements that were not from India. In Graff versus Evans (1882) 8 QB 373, the High Court of Justice, Queen’s Bench Division ruled that the true construction of the rule is that the members were the joint owners of the general property in all the goods of the club, and that the trustees were their agents with respect to the general property in the goods.

Any member was entitled to obtain the goods on payment. A sale involves the element of a bargain. There was no bargain here, nor any contract with Graff with respect to the goods. In Trebanog Working Men’s Club and Institute Ltd versus Macdonald [1940] 1 KB 576, the court held that as the members owned the liquor between themselves, there was no actual ‘sale’, and the club was simply a trustee of the liquor for its members.

The GST element

It is interesting that the Supreme Court is using the logic and rationale of cases decided in foreign countries under service tax laws. These laws are not exactly similar, and the interpretations given by Indian tax authorities are extremely different from those ruled by courts abroad. The timing of this decision raises a question on its utility, as the GST has replaced service tax. Those who have charged service tax on services provided to their members would want to know whether they need to do something, or just let bygones be bygones.

More importantly, clubs would be keen to know whether services provided to their members would attract the definition of supply under Section 7 of the CGST Act. Using the logic of the Calcutta Club decision, the answer should probably be no, as the taxman should not separate the club from its members.

The CBIC would do well to use this decision as the trigger to issue a notification stating that the GST need not be charged on services provided by a club to its members.

The writer is a chartered accountant