Kerala High Court
Indian Medical Association, Kerala … vs Union Of India on 11 April, 2025
Author: A.K.Jayasankaran Nambiar
Bench: A.K.Jayasankaran Nambiar
2025:KER:30517
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE DR. JUSTICE A.K.JAYASANKARAN NAMBIAR
&
THE HONOURABLE MR. JUSTICE EASWARAN S.
FRIDAY, THE 11TH DAY OF APRIL 2025/21ST CHAITHRA, 1947
W.A.NO.1659 OF 2024
AGAINST THE JUDGMENT DATED 23.07.2024 IN W.P(C).NO.21297 OF 2023
OF HIGH COURT OF KERALA
APPELLANT(S)/PETITIONER IN THE WRIT PETITION:
INDIAN MEDICAL ASSOCIATION, KERALA STATE BRANCH,
REPRESENTED BY ITS SECRETARY DR. JOSEPH BENAVEN,
IMA STATE HEAD QUARTERS, BYPASS ROAD, ANAYARA P.O.,
THIRUVANANTHAPURAM -695029. NEW ADDRESS REPRESENTED
BY ITS PRESIDENT DR JOSEPH BENAVEN, IMA STATE HEAD
QUARTERS, BYPASS ROAD, ANAYARA P.O.,
THIRUVANANTHAPURAM, PIN - 695029
BY ADV.SRI.ARVIND P. DATAR (SR.)
BY ADV.SRI.P.R.RENGANATH
BY ADV.SRI.GEORGE VARGHESE(PERUMPALLIKUTTIYIL)
BY ADV.SRI.MANU SRINATH
BY ADV.SRI.NIMESH THOMAS
BY ADV.SRI.LIJO JOHN THAMPY
RESPONDENT(S)/RESPONDENTS IN THE WRIT PETITION:
1 UNION OF INDIA,
REPRESENTED BY THE SECRETARY, DEPARTMENT OF REVENUE,
MINISTRY OF FINANCE, GOVERNMENT OF INDIA, NORTH BLOCK,
NEW DELHI-110001., PIN - 110001
2 STATE OF KERALA
REPRESENTED BY THE SECRETARY, DEPARTMENT OF FINANCE,
GOVERNMENT SECRETARIAT, GOVERNMENT OF KERALA,
THIRUVANANTHAPURAM-695001., PIN - 695001
3 GST COUNCIL,
GST COUNCIL SECRETARIAT, 5TH FLOOR, TOWER-II,
JEEVAN BHARTI BUILDING, JANPATH ROAD, CONNAUGHT PLACE,
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NEW DELHI-110001, PIN - 110001
4 ADDITIONAL DIRECTOR GENERAL,
DIRECTORATE GENERAL OF GST INTELLIGENCE, KOCHI ZONAL
UNIT, 1ST FLOOR, CENTRAL EXCISE BHAVAN, KATHRIKKADAVU,
KOCHI-682017., PIN - 682017
5 DEPUTY DIRECTOR,
DIRECTORATE GENERAL OF GST INTELLIGENCE, KOZHIKODE
REGIONAL UNIT, MAHE HOUSE, PANICKER ROAD, NADDAKAVU
P.O., KOZHIKODE-673011, PIN - 673011
BY SRI.AR.L. SUNDARESAN, ADDITIONAL SOLICITOR GENERAL
BY SRI.MOHAMMED RAFIQ, SPECIAL GOVERNMENT PLEADER
(TAXES)
THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON
20.03.2025, ALONG WITH W.A.NO.1487/2024 & W.A.NO.468/2025,
THE COURT ON 11.04.2025 DELIVERED THE FOLLOWING:
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2025:KER:30517
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE DR. JUSTICE A.K.JAYASANKARAN NAMBIAR
&
THE HONOURABLE MR. JUSTICE EASWARAN S.
FRIDAY, THE 11TH DAY OF APRIL 2025/21ST CHAITHRA, 1947
W.A.NO.1487 OF 2024
AGAINST THE JUDGMENT DATED 23.07.2024 IN W.P(C).NO.21297 OF 2023
OF HIGH COURT OF KERALA
APPELLANT(S)/RESPONDENTS 4, 1, 3 AND 5:
1 ADDITIONAL DIRECTOR GENERAL, DIRECTORATE OF GST
INTELLIGENCE, REPRESENTED BY THE SECRETARY,
DEPARTMENT OF REVENUE, MINISTRY OF FINANCE,
GOVERNMENT OF INDIA, NORTH BLOCK, NEW DELHI - 110 001.
2 UNION OF INDIA,
REPRESENTED BY THE SECRETARY, DEPARTMENT OF REVENUE,
MINISTRY OF FINANCE, GOVERNMENT OF INDIA, NORTH BLOCK,
NEW DELHI, PIN - 110001
3 GST COUNCIL,
GST COUNCIL SECRETARIAT, 5TH FLOOR, TOWER-II,
JEEVAN BHARTI BUILDING, JANPATH ROAD, CONNAUGHT PLACE,
NEW DELHI, PIN - 110001
4 DEPUTY DIRECTOR,
DIRECTORATE GENERAL OF GST INTELLIGENCE, KOZHIKODE
REGIONAL UNIT, MAHE HOUSE, PANICKER ROAD, NADDAKAVU
P.O., KOZHIKODE, PIN - 673011
BY SRI.AR.L. SUNDARESAN, ADDITIONAL SOLICITOR GENERAL
BY ADV.SRI.P.R.RENGANATH
BY ADV.SRI.SREELAL N.WARRIER, SC, GST INTELLIGENCE
BY ADV.SRI.SHAIJU K.S., CGC
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RESPONDENTS/PETITIONER & RESPONDENT 2:
1 INDIAN MEDICAL ASSOCIATION
KERALA STATE BRANCH, REPRESENTED BY ITS SECRETARY
DR. JOSEPH BENAVEN, IMA STATE HEAD QUARTERS, BYPASS
ROAD, ANAYARA P.O., THIRUVANANTHAPURAM, PIN-695029.
2 STATE OF KERALA,
REPRESENTED BY THE SECRETARY, DEPARTMENT OF FINANCE,
GOVERNMENT SECRETARIAT, GOVERNMENT OF KERALA,
THIRUVANANTHAPURAM, PIN - 695001
BY ADV.SRI.ARVIND P. DATAR (SR.)
BY ADV.SRI.P.R.RENGANATH
BY ADV.SRI.GEORGE VARGHESE(PERUMPALLIKUTTIYIL)
BY ADV.SRI.MANU SRINATH(D/1420/2014)
BY ADV.SRI.NIMESH THOMAS(K/1324/2018)
BY ADV.SRI.LIJO JOHN THAMPY(K/1313/2018)
BY SRI.MOHAMMED RAFIQ, SPECIAL GOVT. PLEADER (TAXES)
THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON
20.03.2025 ALONG WITH W.A.NO.1659 OF 2024 AND W.A.NO.468 OF
2025, THE COURT ON 11.04.2025 DELIVERED THE FOLLOWING:
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IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE DR. JUSTICE A.K.JAYASANKARAN NAMBIAR
&
THE HONOURABLE MR. JUSTICE EASWARAN S.
FRIDAY, THE 11TH DAY OF APRIL 2025/21ST CHAITHRA, 1947
W.A.NO.468 OF 2025
AGAINST THE JUDGMENT DATED 23.07.2024 IN W.P(C).NO.21297 OF 2023
OF HIGH COURT OF KERALA
APPELLANT(S)/2ND RESPONDENT IN WPC:
STATE OF KERALA,
REPRESENTED BY THE SECRETARY, DEPARTMENT OF FINANCE,
GOVERNMENT SECRETARIAT, GOVERNMENT OF KERALA,
THIRUVANANTHAPURAM-695001, PIN - 695001
BY SRI.MOHAMMED RAFIQ, SPECIAL GOVT. PLEADER (TAXES)
RESPONDENT(S)/PETITIONER AND RESPONDENTS 1, 3, 4 ADN 5 IN WPC:
1 INDIAN MEDICAL ASSOCIATION, KERALA STATE BRANCH,
REPRESENTED BY ITS SECRETARY DR.JOSEPH BENAVEN,
IMA STATE HEAD QUARTERS, BYPASS ROAD, ANAYARA P.O.,
THIRUVANANTHAPURAM-695029, PIN - 695029.
2 UNION OF INDIA,
REPRESENTED BY THE SECRETARY, DEPARTMENT OF REVENUE,
MINISTRY OF FINANCE, GOVERNMENT OF INDIA, NORTH BLOCK,
NEW DELHI, PIN - 110001
3 GST COUNCIL,
GST COUNCIL SECRETARIAT, 5TH FLOOR, TOWER-II,
JEEVAN BHARTI BUILDING, JANPATH ROAD, CONNAUGHT PLACE,
NEW DELHI-110 001.
4 ADDITIONAL DIRECTOR GENERAL,
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DIRECTORATE GENERAL OF GST INTELLIGENCE, KOCHI ZONAL
UNIT, 1ST FLOOR, CENTRAL EXCISE BHAVAN, KATHRIKKADAVU,
KOCHI-682017, PIN-682017.
5 DEPUTY DIRECTOR,
DIRECTORATE GENERAL OF GST INTELLIGENCE, KOZHIKODE
REGIONAL UNIT, MAHE HOUSE, PANICKER ROAD, NADDAKAVU
P.O., KOZHIKODE-673 011., PIN - 673011
BY ADV.SRI.ARVIND P. DATAR (SR.)
BY ADV.SRI.P.R.RENGANATH
BY ADV.SRI.AR. L. SUNDARESAN, ADDITIONAL SOLICITOR
GENERAL
THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON
20.03.2025, ALONG WITH W.A.NO.1659 OF 2024 AND W.A.NO.1487 OF
2024, THE COURT ON 11.04.2025 DELIVERED THE FOLLOWING:
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"C.R."
JUDGMENT
Dr. A.K. Jayasankaran Nambiar, J.
These Writ Appeals, one preferred by the petitioner in W.P.
(C).No.21297 of 2023 and the other two preferred by the GST Officials
of the Union and the Kerala State, impugn the judgment dated
23.07.2024 of a learned Single Judge in W.P.(C).No.21297 of 2023.
The Facts in Brief:
2. The essential facts necessary for disposal of these Writ
Appeals are as follows:
W.P.(C).No.21297 of 2023 was preferred by the Kerala State
Branch of the Indian Medical Association apprehending coercive action
from the Directorate General of GST Intelligence for recovery of tax on
various services rendered by it to its members. While it was the
petitioner’s contention that it was not liable to pay tax on the supply of
services to its members, it apprehended coercive action for recovery of
tax when it was served with summons requiring it to produce details of
the registration taken by it under the GST Act and their audited books of
accounts and other financial documents for the financial years from
2017-18 to 2021-22.
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3. The petitioner runs various mutual Schemes for the benefit
of its member-doctors, e.g. Social Security Schemes or SSS (I, II, and
III), Professional Disability Support Scheme (PDSS), Professional
Protection Scheme, Kerala Health Scheme, etc. All the Schemes are to
support fellow doctors, while one or two Schemes support their
immediate family members. The member-doctors contribute an
admission/annual fee, and in cases of certain Schemes (e.g. SSS, PDSS)
also a fraternity contribution upon the death/disability of a fellow
member doctor; the pooled sum is paid out to the widow of deceased
doctors, disabled doctors, doctors afflicted with specified diseases, etc.
Each Scheme is run by a separately elected committee, in which the
Secretary and President of the petitioner are ex officio members. The
Schemes have separate bank accounts, and accounts of each Scheme
are drawn up and separately audited. A brief description of the
Schemes is as given below:
“Social Security Schemes
i) Objects: The objects of the schemes are to provide
financial assistance to the families of the medical practitioner in the
event of his or her death, or in the event of a member suffering
permanent disability that renders the member unfit to practice the
profession for life. The objects also encompass undertaking various
charitable/philanthropic activities such as providing medical aid to the
needy and poor, family welfare programmes independently/jointly with
the Government, organising blood donation camps, eye camps,
promoting medical education, etc.
ii) Payment: Any doctor who is a member of the petitioner
may become a member of these Social Security Schemes upon payment
of an admission fee which is graded depending upon the age of the
doctor. The member is then required to pay an annual subscription of
Rs.300 to Rs.1,000 for a period of 20 to 25 years.
iii) Death/Permanent disability: Upon the death/permanent
disability of a member, every other member of that scheme is to pay a
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specified “fraternity contribution” ranging from Rs.100 to Rs.500
depending upon the number of years for which the deceased member
had been a member of the scheme. The fraternity contribution
(calculated as a product of the individual fraternity contribution and the
net membership of scheme concerned, subject to a maximum specified
under the bye-laws) is handed over to the family of the
deceased/permanently disabled member and the remaining portion, if
any, is credited to the corpus of the scheme concerned to be paid out in
future.
Professional Disability Support Scheme
i) Object: The object of the scheme is to provide financial
assistance to a member of the scheme who has become so temporarily /
permanently disabled that it renders him unfit to practice her / his
profession.
ii) Payment: Any eligible member of the petitioner may
become a member of this scheme upon payment of an admission fee
that is graded based on age (Rs.5,000/- to Rs.15,000)/-. An annual fee
of Rs.1,000/- is also payable by each member of the scheme. A member
of the scheme is also required to make a disability contribution (graded)
upon any member of the scheme suffering disability.
iii) Benefit: As with the Social Security Schemes above
the aggregate disability contribution is a paid out to the disabled
member. Further, upon death, a fixed sum of Rs.50,000/- is also paid to
the family of the deceased member of the scheme. The total amount of
such death benefits paid each year is also collected equally from the
remaining members.
Professional Protection Scheme
i) Object: The two objects of this scheme are: (i) to protect
members in the case of harassment, litigation, etc, and provide legal
aid; (ii) to promote social service activities such as medical aid to the
poor, family welfare programmes, blood donation camps, medical
attention, medical aid, etc.
ii) Payment: Any member of the petitioner may become a
member of this scheme. ‘upon payment ‘of an annual subscription fee
(Rs.2,000/- for the first year, and decreasing by Rs.100/- every year, and
stabilising at Rs.1,500/-). This membership is for one unit of PPS
membership.
iii) Benefit: If any member of the scheme faces legal action
(for acts done/omitted in the course of his profession), the petitioner
engages and pays an advocate to provide legal services to the member
concerned. Further, if the litigation results in damages being ordered to
be paid by a member of the scheme, the petitioner pays such damages
up to a maximum of Rs.10 lakhs for a single case and Rs.20 lakhs for
multiple cases in one year.
iv) A member may also opt for enhanced protection under this
scheme, upon payment of membership fee of Rs.10,000/- p.a. The
maximum compensation then payable to such a member of the scheme
would be an additional Rs.1 crore.
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Hospital Protection Scheme
i) Object: The object of the scheme is to protect hospitals,
clinics, dispensaries (run by member-doctors/where member-doctors
work) from litigation and from harassment by the media for any act of
alleged negligence or carelessness or deficiency of service on the part
of the doctors/staff. Besides providing legal aid to the member
institutions of the scheme, the scheme also aims to undertake social
services activities as mentioned in the Professional Protection Scheme
above.
ii) Payment: Membership fee ranges from Rs.5,000/- to
Rs.75,000/- per year depending upon the bed strength of the member
institution.
iii) Benefit: The maximum compensation paid by the scheme is
Rs.10.00 lakhs for a single case and Rs.20.00 lakhs for multiple cases in
a year. As with the PPS Scheme above, the petitioner would also
engage advocates to act on behalf of member institutions and pay the
related legal fees to such advocates.
Kerala Health Scheme
i) Object: The object of the Scheme is to provide financial
assistance to members of the scheme and his/her spouse, parents and
children in the event of any person being diagnosed with specified
diseases.
ii) Payment: The admission fees range from Rs.800/- to
Rs.6,000/- depending upon the age of the doctor. All beneficiary
members are additionally required to pay an annual membership
subscription of Rs.100/- and Advance Finance Assistance Contribution
ranging from Rs.2400/- to Rs.7500/- p.a.
iii) Benefit: Upon diagnosis/hospitalisation for specified
diseases, compensation ranging from Rs.5,000/- to Rs.5 lakhs is paid.
Pension Scheme
i) Object: The object of this scheme is to provide pension to
life members of the petitioner.
ii) Payment: Admission fee is Rs.3,000/- to Rs.5,000/-. Every
member of the scheme shall also pay an annual membership fee of
Rs.500/-. Further, the minimum annual contribution to be made by
every member of the scheme is Rs.12,000/-.
iii) Benefit: The pension is paid when a member of the scheme
requests payment after she or he attains 60 years. 30% of the pension
corpus of a member may be paid to the member at the time of starting
the pension payment, if so requested by the member. The pension is
then paid for the rest of the life of the member from the remaining 70%
corpus amount of the member. Upon the death of a member, his
nominee may similarly take a lump-sum payment from 30% of the
corpus. Full maturity amount is paid to the nominee if pension for
spouse is not opted for. If death occurs before the age off 60, the
scheme provides for stated pay-outs.
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Mutual Benefit Scheme
i) Object: The object of the scheme is to provide financial
support, encourage the habit of thrift amongst the members, encourage
financial planning amongst the members, etc.
ii) There were Schemes A, B and C wherein the monthly
payment to be made by the member of such schemes was Rs.5,000/-,
Rs.10,000/- and Rs.25,000/- respectively. The monthly instalment is
payable by the 20th of every English calendar month, upon default of
which interest @) 2% per month is payable. Each of the above 3
schemes runs for 20 months.
iii) Beginning from ‘the second month “beneficiary amount”
was payable by the scheme and increases every month. The member to
whom the beneficiary amount for each month was payable was decided
by lots among the members who request to be such beneficiaries.
Defaulters were not included in the monthly lot. In the event of
consecutive default of monthly instalments, the member would be
removed from the scheme and the amount already paid would be vested
with the funds of the scheme. The Managing Committee decided what
amount was to be deducted as services charges and the balance amount
was disbursed to members at the end of the scheme.
Patient Care Scheme
i) Object: The object of the scheme is to institute a corpus
fund to provide assistance to deserving patients who seek care in
modern medicine, to establish information/assistance centre for
patients seeking medical services, to create a network of health care
facilities across Kerala to assist poor patients and patients in
emergency situation, etc.
ii) Payment: Any member of the petitioner may join as a
member of the scheme for a period of 3 years on payment of a
membership fee of Rs.1,000/-. Members of the scheme are entitled to
participate in the general body of this scheme and are eligible to cast
their votes.
iii) Benefit: The criteria and expenditure of the patient care
fund is decided by the managing committee of the scheme from time to
time. The payment to deserving patients are made from the corpus of
this fund/scheme.”
4. The writ petitioner bona fide believed that it was not liable
to pay GST on services rendered by it to its members under the
aforesaid Schemes since it was well settled through a line of precedents
that the principle of mutuality would insulate services rendered by a
Club/Association to its members from the levy of GST on supply of
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services. The underlying basis for the non-taxability of such services
was the concept that when a Club/Association provides services to its
members, there is no separate recipient of the services provided by the
Club/Association and that the services were effectively provided by the
members of the Club/Association to themselves. The said basis of non-
taxability was, however, removed by an amendment of the provisions of
Section 2(17)(e) and Section 7(1)(aa) read with the Explanation thereto
of the Central Goods and Services Tax Act, 2017 [CGST Act] and the
Kerala Goods and Services Tax Act, 2017 [KGST Act] that introduced
deeming provisions making the supply of services by a Club/Association
to its members a taxable supply for the purposes of the levy of tax. The
amendment that was introduced through the Finance Act, 2021 was also
made retroactive with effect from 01.07.2017, thereby adding to the
financial woes of the petitioner.
5. In the writ petition preferred by the petitioner, the
petitioner sought the following reliefs:
1. declare that the provisions of Section 2(17)(e) and Section 7(1)
(aa) and the Explanation thereto, of the Central Goods and Services Tax Act,
2017 and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the
Explanation thereto, of the Kerala Goods and Services Tax Act, 2017 are
unconstitutional and void being ultra vires the provisions of Article 246A
read with Article 366(12A), and violative of Articles 14, 19(1)(g), 265 and
300A, of the Constitution of India;
2. in the alternative; issue a declaration that the phrase “shall be
deemed to have been inserted with effect from the 1st day of July 2017”, in
S.108 of the Finance Act, 2021 is unconstitutional and void being violative of
Articles 14, 19(1)(g), 265 and 300A of the Constitution of India;
3. issue a writ in nature of a writ of prohibition restraining the
respondents, their men and agents from provisionally attaching the
properties of the petitioner under Section 83 or any other provision of the
CGST or KGST Acts, 2017;
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4. The petitioner also prays that this Honourable Court may be
pleased to dispense with the translation of the documents produced in the
vernacular language;
5. issue such other writ, direction or order as this Hon’ble Court
may deem fit and proper in the facts and circumstances of the case, and
thus render justice.
The findings of the Single Judge:
6. The learned Single Judge, who heard the matter, found that
insofar as the amendment to the CGST/SGST Act through Finance Act,
2021 had the effect of removing the basis of the immunity that was
hitherto granted to the petitioner on the principle of mutuality, and
there was no merit in the contentions of the petitioner as regards
manifest arbitrariness of the statutory provisions, the declaration sought
for in the writ petition could not be granted. The learned Judge,
however, found that the retroactive operation given to the amendment
could not be legally sustained on the principles of fairness and set aside
the retroactivity envisaged for the amendment. It is therefore that the
writ petitioner is before us impugning that portion of the judgment of
the learned Single Judge that dismissed its writ petition, while the Union
and the State are before us impugning the latter portion of the judgment
that set aside the retroactive operation of the amendment.
The submissions of the learned counsel:
7. We have heard Sri. Arvind P. Datar, the learned senior
counsel, duly assisted by Sri. P.R.Renganath, the learned counsel for the
appellant in W.A.No.1659 of 2024, Sri. AR. L. Sundaresan, the learned
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Additional Solicitor General in W.A.No.1487 of 2024 and Sri.Mohammed
Rafiq, the learned Special Government Pleader (Taxes) for the appellant
in W.A.No.468 of 2025.
8. The submissions of Sri. Arvind P. Datar, the learned senior
counsel, duly assisted by Sri. P.R.Renganath, the learned counsel for the
appellant in W.A.No.1659 of 2024, on the unconstitutionality of levy of
GST on activities/transactions between a Club and its members are as
follows:
A. On the aspect of mutuality, the learned senior counsel would
submit as follows:
● Identity between club and members: It is long established
common law that there is identity between a club/association and its
members, under the principle of mutuality. Consequently, there can be no
sale/service by a club to its members. This position in law was recognised
even in the 19th century in Graff v. Evans – [(1882) 8 QBD 373].
● Principle applies even to incorporated clubs: That
clubs/associations have long acted upon the faith of this position in law,
and that this principle applies even to incorporated clubs, was recognised
in Trebanong Working Men’s Club and Institute Ltd. v. Macdonald –
[(1940) 1 All ER 454].
● Principle applies even to tax law: Even in taxation laws, the
position of a members’ club, though incorporated, has been recognised to
be quite different i.e., that the members’ club was only structurally a
company and that it did not carry on trade or business so as to attract the
Corporation Profits Tax [Inland Revenue Commissioners v. Westleigh
Estates Co. Ltd – 1924 (1) KB 390].
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● Principle well recognised in India: This position has all along
been recognised, and applied, in India by various High Courts, as has been
acknowledged even by the Supreme Court. In the manner of stating a
well-settled position in law in respect of which no detailed analysis was
required, the Supreme Court recognised that in the case of a club the
services were to the members themselves, that it was a self-serving
institution (even where guests are admitted), that a club was identified
with its members, and that it could not be said that a club had an existence
apart from the members [Secretary, Madras Gymkhana Club
Employees Union v. The Management of the Gymkhana Club – [1967
SCC OnLine SC 51], paras 30-32 : AIR 1968 SC 554]].
● Incorporation irrelevant: It has been clarified by the Supreme
Court that services provided by a club for members have to be treated as
activities of a self-serving institution, even if the club is incorporated as a
limited company under the Companies Act, and that it was “clear that the
Club cannot be treated as a separate legal entity of the nature of a limited
company carrying on business” [Cricket Club of India Ltd v. Bombay
Labour Union – [AIR 1969 SC 276, para 14].
● No transfer between a club and its members: It is based on this
principle – that there could be no sale or transfer between a club and its
members – that the Supreme Court stuck down levy of sales tax on supply
of food/beverages made by a club to its members, in JCTO, Madras v.
The Young Men‘s Indian Association (Regd.) – [(1970) 1 SCC 462].
● 46th Amendment attempts to bring clubs to tax: In an attempt
to legitimise levy of sales tax on a club/association, the Constitution 46 th
Amendment (1981) had sought to define “tax on sale or purchase of
goods” as including a tax on the supply of goods by an unincorporated
association or body of persons to a member thereof for cash, deferred
payment or other valuable consideration.
● Mutuality survives 46th Amendment:
Even the 46th Amendment did not do away with the basis of the
principle that the club/association and its members are one and the same,
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further, even on its terms, the 46 th Amendment extended only to supply of
goods (and not to provision of services).
● The Supreme Court in State of West Bengal & Ors. v.
Calcutta Club Ltd. – [2019 (29) GSTL 545 (SC)] emphatically held that
the principle of mutuality continued even after the 46 th Amendment. The
said decision also recognises that the law has always been that the
principle of mutuality extends even to incorporated clubs and not just to
unincorporated clubs and that the 61 st Law Commission Report which
preceded the 46th amendment had not appreciated this.
● No service between club/association and its members: Calcutta
Club (para 76) also recognised that the position in law was that there could
be no service between a club and its members, confirming the decision in
Ranchi Club v. Chief Commr. of Central Excise & Service Tax –
[2012 SCC OnLine 306 : (2012) 51 VST 369]. Ranchi Club had laid
down that the basic feature common in sale and services was that both
required the existence of two parties, that since the issue whether there
were two persons or two legal entities in the activities of the members’
club had been already considered and decided by the Supreme Court [in
Young Men’s Indian Association], it had to be held that in view of mutuality
and in view of activities of the club, if the club provided any service to its
members, it was not a service by one to another as the foundational facts
of existence of two legal entities in such transaction was missing.
● Legal position at the time of the constitutional amendment:
Thus, the position of law prevailing at the time of the Constitution 101 st
Amendment – empowering the Parliament and the State legislatures to
levy a goods and services tax under Article 246A – was that there was
identity between a club/association and its members. The name of the
club/association was but a tool used to compendiously refer to the
members. Therefore, Article 246A and 366(12A) have been enacted only
on the understanding that this was the law.
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B. On the aspect of GST being on "supply", the learned senior
counsel would submit as follows:
● The Constitution 101st Amendment defined goods and services
tax as a “tax on supply of goods or services or both”, per Article 366(12A).
● The plain meaning of “supply of goods or services” is supply by
one person to another. In other words, it is evident that “supply”, by its
very nature, requires two persons. There can be no supply to oneself.
● Thus, the scope of the legislative power granted by the
Constitution to levy GST is that such a tax can be levied only where there
is supply of goods/service by one person to another.
● While so, by the Finance Act, 2021, Parliament introduced
Section 7(1)(aa) retrospectively w.e.f. the date of commencement of the
GST regime (01-Jul-17) thereby inserting a legal fiction and artificially
deeming a club/association and its members to be two separate persons.
Further, the taxable event was also artificially enlarged to include
“activities or transactions” between a club/association and its members.
● It is in this context that the ratio laid down in State of Madras
v. Gannon Dunkerley & Co. – [AIR 1958 SC 560], and a long line of
cases, becomes relevant. While the constitutional power was to levy only a
“tax on sale or purchase of goods”, the State legislatures sought to expand
this power by inserting an artificial definition in the sales tax legislations to
the effect that “sale” would include a “works contract”. This was struck
down in Gannon Dunkerly ibid on the ground that the accepted meaning of
a term in a constitutional phrase could not be statutorily expanded.
● What a constitutional provision is aimed at is to be construed
based on the state of the law then in force. To expand the scope of such a
provision by a statute would be to overreach the Constitution. In short, a
phrase in the Constitution granting legislative power should be construed
according to “known legal connotations” [see para 43 of BSNL, cited in
para 16 of Calcutta Club].
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● When similar situations arose - in fact six different situations -
where various States legislatures attempted to broaden the tax net by
statutorily expanding the definition of “sale”, the Supreme Court struck
down each such amendment as being beyond the meaning of the word
“sale” in the legislative entry in the Constitution (entry 54 of List II – “tax
on sale or purchase of goods”) were then added to the Constitution
through six sub-clauses [(a) to (f)] of a newly inserted Article 366(29A) of
the Constitution. [New India Sugar Mills Ltd v. CST – [(1963) 14 STC
316]; State of Madras v. Gannon Dunkerley & Co. – [AIR 1958 SC
560]; K.L. Johar and Co. v. CTO – [AIR 1965 SC 1082]; A.V.
Meiyappan v. CCT – [(1967) 20 STC 115 (Mad.)]; CTO v. Young
Men’s India Assn. (Regd) – [(1970) 1 SCC 462] & Northern India
Caterers (India) Ltd v. Lt. Governor of Delhi – [(1980) 2 SCC 167] ].
C. On the aspect of Enlarging scope of “supply” by amending
Section 7 of CGST Act without amending the Constitution –
impermissible and unconstitutional, the learned senior counsel would
submit as follows:
● The Supreme Court has recognised the well-established
concept of mutuality, and that a club/association is a self-serving
institution, and that there could be no “sale”/”service” between a club and
its members, and has further held [Calcutta Club] that even the 46th
Amendment did not do away with mutuality. Thus, this was the position in
law at the time of the 101st Amendment.
● In this legal landscape, a power given to tax “supply of goods
and services” can only be construed as applying to sale/service by one
person to another, and not to sale/service to oneself (which is the case with
respect to clubs/associations, since the club/association and its members
are one and the same). After all, the very fact that the CGST amendment
[Explanation to Section 7(1)(aa)] states that “notwithstanding any law in
force” reaffirms that law in force was mutuality. Further, in this regard,
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the “such as” in Section 7(1) is telling. It reveals the extent of the scope of
the phrase “supply” as originally understood. It is trite that any new item,
anything left unsaid (if at all) should be considered in line with the
character/principle underlying the enumerated cases. It would be seen
that all enumerated cases contemplate the involvement of two parties.
● Only the Constitution can expand what the Constitution has
given: If this legislative power granted by the Constitution is to be
expanded beyond the known legal connotations, it can be done only by a
constitutional amendment doing away with the long-established and
well-recognised concept of mutuality i.e., by a constitutional amendment
which invests the Parliament and State legislature with the power to levy
GST on self-sale/self-services between a club and its members. A statutory
amendment, howsoever creatively worded, and ingeniously couched as a
clarification, would not suffice.
● Why a validating statute will not suffice: If judgments [e.g.
YMIA, Ranchi Club, Calcutta Club] merely state a position of statutory law,
it could be undone by a validating statute. But where the judgments
recognise a long-standing principle of law, which has a bearing on the
extent of a power bestowed by the Constitution to legislatures, then, that
power can be enlarged only by a constitutional amendment and not by the
legislatures through a statutory amendment.
● What could be done only by constitutional amendment earlier
cannot be done by statutory amendment now:
a) Indeed, the very fact that a constitutional
th
amendment was required [46 Amendment] and that statutory definitions
did not suffice [struck down in Young Men’s Indian Association] its
testimony that Section 71(1)(aa) is insufficient for its intended purpose.
b) In fact, the 61st Law Commission expressly
recognised that expanding the concept of “sale” for the purpose of
legislative power of the States, could “be achieved only by amending the
Constitution”.
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c) In other words, it would not suffice for statutes to
state that club/associations would be deemed to be doing business, or
that they and their members were deemed to be two different persons.
● In any case, 46th Amendment does not cover services: Even
assuming, but not for a moment admitting, that the 46 th Amendment has
done away with mutuality and would stand in aid of the impugned
statutory provisions, it has done so only with respect to goods. Thus, as
regards services, the position would continue to be governed by the
known legal connotations of mutuality. Consequently, there could be no
levy of GST on “service” by a club/association to its members.
● “Supply of goods and services” cannot cover all
activities/transactions: Moreover, Article 246A speaks only of “supply of
goods and services”. Section 7(1)(aa) though expands it to mean
“activities or transactions”. If indeed, supply naturally meant activities or
transactions there would have been no need for such an artificial
definition. This artificiality in itself betrays its reach beyond the scope of
the constitutional phrase, and is self-defeating.
● In fine, the effect of judgments may be nullified by legislative
act removing the basis of the judgment. However, where a judgment
recognises a position of law – especially a well-entrenched position in
vogue for ages – which position in turn is determinative of the scope of
power conferred on a legislature by a constitutional provision, then any
amendment to that position of law can be made only by a constitutional
amendment and not by a statute by the legislature.
D. On the aspect of retrospectivity, the learned senior counsel
would submit as follows:
● Retrospective law cannot be unreasonable/confiscatory: It has
been recognised that legislatures have the power to pass retrospective
laws. However, such laws cannot be unreasonable or arbitrary. Where
the retrospective law is confiscatory, it would unreasonable and thereby
unconstitutional [Jayam & Co. v. Asst Commr – (2016) 15 SCC 125].
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● New levy by overturning long-established position: In the
instant case, given, inter alia, the ratio in Calcutta Club, there could have
been no levy of GST on clubs and associations prior to the insertion of
Section 7(1)(aa) and Explanation thereto. The said insertions thus
created a new levy. This is done by overturning a long-held position of
law i.e., the mutuality of clubs and association. Jayam & Co. cited above
[see para 19 of the SCC report], held that a new provision inserted for
determining input tax credit could not be retrospective.
● Substantial unforeseen prejudice: The new levy is made
effective from the year 2017. Consequently, SCN no.58/2024-25 (GST)dt. 02-Aug-24 has been issued by the DRI (the 1 st appellant herein)
seeking to demand a huge sum of money from the appellant association
for transactions done over the last 6 years. The appellant could have had
no notion about such a levy and consequently no amounts were collected
from the members towards the tax. The demands proposed in the said
SCN are for GST on the admission fee, annual subscription fee, renewal
fees, fraternity contribution, etc, and are as follows:
a) Rs.45.32 crores towards GST under Section 74(1),
alleging suppression;
b) interest from 01-Jul-17 onwards;
c) penalty under Section 122(1) read with Section 74(1)
of the CGST Act, 2017;
d) personal penalty on three past Secretaries (i.e.,
Secretaries during the period from 2017-2023) of the respondent under Section
122(3).
The above SCN is in addition to an earlier SCN no.17/2023-24 dt. 18-
Aug-23 seeking to demand Rs.2.71 crores, plus interest and penalty
thereon on the membership fees. A heavy, unforeseen burden is thus cast
on the appellant. The appellant would also not be in a position to collect
the same from its members. The appellant’s vested right to its funds thus
stands affected. Indeed, the appellant’s activities are liable to be gravely
affected. The retroactive levy thus also violates Article 19(1). In this
regard, it may be noted that it has been held that a statute whose
retrospective operation covers a comparatively short period may yet,
given the nature of the restriction imposed by it, be of such a character
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as to introduce a serious infirmity in the retrospective operation [Rai
Ramakrishna v. State of Bihar – 1963 SCC OnLine SC 31 : AIR
1963 SC 1667 (para 17)]. Indeed, in Jayam & Co. cited above, an
amendment stretching back to just three-and-a half years was struck
down.
● Undoing of settled law passed off as a clarification:
a) Though the amendment seeks to overturn a well-settled
position in law, it is unfortunately couched in the language of
clarification (i.e., “it is hereby clarified that”) in a vain attempt to pass
muster in the event of a constitutional challenge.
b) While so, the mere legislative assertion that an amendment is
a clarification is not conclusive, and whether a change is clarificatory or
whether it is a substantive change (and therefore not retrospective) is a
matter of statutory interpretation and therefore for the courts to
adjudicate [Union of India v. Martin Lottery Agencies Ltd (2009)
12 SCC 209, para 52].
c) Further, the very fact that Section 7(1)(aa) itself states
employs “deemed” twice amply demonstrates that the pre-amendment
position was different from the post-amendment position, and that the
use of “it is clarified” is but a vain smokescreen.
d) Even assuming the two phrases are equally balanced, the
interpretation in favour of the assessee is to be adopted.
● No interest: No GST was payable prior to the Finance Act,
2021 amendment, which was notified on 01-Jan-22. The impugned
amendments were inserted by Section 108 of Finance Act, 2021. Under
Section 1(2) of Finance Act, 2021, the Government was empowered to
specify the date of commencement of any provision thereof. In exercise
of the said power under Section (2), the Government issued notf.
no.39/2021 dt. 21-Dec-21 specifying 01-Jan-22 as the date on which the
aforesaid Section 108 comes into force. However, the said Section 108
itself states that the insertion of Section 7(1)(aa) in CGST ACT 2017
shall be deemed to have been made with effect from 01-Jul-17. Thus,
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prior to 01-Jan-22 (or in any case 21-Dec-21) it could not have been
known that GST ought to be paid by clubs/associations. Interest is
merely compensation for belated payment of what ought to have been
paid earlier. But, the question of payment earlier did not arise i.e., it was
impossible to know, or to pay, earlier. It is trite that the law does not
expect the impossible [lex non cognit ad impossibilia]. Thus, there can
be no levy of interest for any period prior to 01-Jan-22. [see Star India
(P) Ltd v. CCE – [(2005) 7 SCC 203], para 8]● No penalty: There can be no retrospective imposition of
penalty or confiscation of goods [JK Spinning & Wvg. Mills Ltd. v.
UOI – [1988 SCR (1) 700]].
● Retrospectivity falls foul of govt-constituted committee report
#1 – manifestly arbitrary/unreasonable: Pursuant to the Vodafone saga,
the Standing Committee on Finance presented its report on Current
Economic Situation and Policy Options to Parliament on August 30,
2012. The Committee inter alia found that the investment climate in the
country had suffered a serious setback and investors confidence had
been hit mainly because of the concerns over the impact of retrospective
tax laws and new General Anti Avoidance Rules (GAAR). The
Government then constituted an Expert Committee headed by Dr.
Parthasarathi Shome on GAAR on July 13, 2012. After examining the
matter in some detail, the relevant conclusion of the Committee was
summarised as below:
The Committee concluded that retrospective application of tax law should occur
in exceptional or rarest of rare cases, and with particular objectives: first, to
correct apparent mistakes/anomalies in the statute; second, to apply to matters
that are genuinely clarificatory in nature, i.e. to remove technical defects,
particularly in procedure, which have vitiated the substantive law; or, third, to
“protect” the tax base from highly abusive tax planning schemes that have the
main purpose of avoiding tax, without economic substance, but not to “expand”
the tax base. Moreover, retrospective application of a tax law should occur only
after exhaustive and transparent consultations with stakeholders who would
be affected. [Indeed, reflecting the challenges behind just and correct
application of retrospective application, there is a constitutional or statutory
protection against it in several countries. Countries such as Brazil, Greece,
Mexico, Mozambique, Paraguay, Peru, Venezuela, Romania, Russia, Slovenia and
Sweden have prohibited retrospective taxation.][Emphasis added]
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● Retrospectivity falls foul of govt-constituted committee report
#2 – manifestly arbitrary / unreasonable: In 2013, the World Bank
published a report downgrading India in the index of investment
friendliness-from its position of 131 in 2011, India was moved to 134.
India’s position remained below countries like Uganda, Ethiopia, Yemen
etc. while its smaller neighbours like Sri Lanka fared better. To address
this fall in confidence, the government appointed a committee headed by
another eminent Indian Mr. Damodaran. The remit of this committee
was generally to examine issues which contributed to this decline, the
committee squarely addressed the question of retrospective taxation and
had the following to say:
It has often been said that death and taxes are equally undesirable aspects of
human life. Yet, it can be said in favour of death that it is never retrospective.
Retrospective taxation has the undesirable effect of creating major uncertainties
in the business environment and constituting a significant disincentive for
persons wishing to do business in India. While the legal powers of a Government
extend to giving retrospective effect to taxation proposals, it might not pass the
test of certainty and continuity. This is a major area where improvements should
be attempted sooner rather than later ….
[Emphasis added]
● Not “small repairs” or “play in the joints” or “greater leeway”:
It cannot be contended that the impugned amendment makes only “small
repairs” or that the legislature is entitled to “play in the joints” or to
“greater leeway in tax legislation”, at least in the present case. Clearly,
it is not “small repairs”, “play in the joints”, etc. when the well-
established law of mutuality is sought to be abolished, or when a
Supreme Court judgment is sought to be reversed, or when a liability of
enormous proportions is sought to be imposed.
● Department’s arguments invalid: The above being so, the
Department’s arguments for back dating are dealt with below:
a) Existence of Section 7(1)(a) and Section 2(17)(e) of no matter: The
Department contends that Section 7(1)(a) and Section 2(17)(e) existed effective
01-Jul-17 and that by itself made supplies of goods/services by clubs/associations
to its members taxable effective 01-Jul-17 irrespective of the newly introduced
Section 7(1)(aa) notified on 01-Jan-22. The argument is manifestly incorrect since
a plain reading of the Section 7(1)(a) & Section 2(17)(e) on the one hand, and of
the new Section 7(1)(aa) and Explanation on the other, would make it clear that the
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latter are plainly wider in scope. It is the latter which seek to nullify the long-
established principle of mutuality. Verily this scenario was considered in
Calcutta Club where Article 366(29A)(f) akin to Section 7(1)(a) and Section
2(17)(e) was held insufficient to nullify mutuality. It is recognising this that
Parliament itself has sought to introduce an expansive 7(1)(aa) and
Explanation. [Incidentally, in this context, it may be mentioned that it is
submission of the respondent herein (IMA KSB) that such a specific provision as
Section 7(1)(aa) & Explanation ought to have been brought in through a
constitutional amendment. This has been argued in detail in W.A. 1659 of 2024.]
b) No demand raised earlier: The contention that the levy was always in
existence from 01-Jul-14, even when Section 7(1)(aa) was absent, is also
incorrect. Till 2022, no demand was raised as the Department was fully aware
that these transactions are not taxable. The amendment is attempted to apply
GST to medical associations for the first time through Section 7(1)(aa) and the
Explanation thereto. Further, the present appeal involves welfare schemes for
doctors where neither supply of goods nor supply of services is made.
c) Other assessee’s acts cannot/do not determine
constitutionality/statutory meaning: The Department contends that most
clubs/associations in the country had taken registration and started paying GST
even before the insertion of Section 7(1)(aa) without any doubt as to the liability
to pay GST even going by Section 7(1)(a). Such an argument needs to be stated
only to be rejected. The action of assessees cannot determine the interpretation of
taxation provisions. Indeed such a dare is dangerous even for the broader
interests of the Revenue, for, if this proposition were to be accepted, it would,
simply put, mean that henceforth all batch tax litigations ipso facto ought to be
ruled in favour of the assessees.
d) Income Tax PAN in the name of the respondent does not nullify
mutuality: The contention of the Department that the respondent and its members
have all along been different persons since the respondent association had
obtained an income-tax PAN is bewildering. The reference to income-tax is –
thankfully for IMA KSB – self-defeating for the Revenue. Indeed, income tax law
has always recognised mutuality and continues to do so till date. PAN is obtained
by clubs/associations only because there is non-mutual income such as interest on
deposits, consideration paid by non- members, etc.
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● In fine, looked at from the point of view of law or economics,
the retrospective amendment unsettling well-established law, is
unreasonable and arbitrary. It militates starkly against fairness in
taxation and the rule of law. This is all the more when, as in the present
case, the provision is retroactive. It is also disproportionate inasmuch as,
whatever be the merits of the amendment, the retroactivity is uncalled
for, without any determining principle, and capricious. What is more,passing off what earlier required a constitutional amendment (46 th
Amendment) in the language of a clarification through a statutory
amendment is a colourable exercise.
9. The submissions of Sri. AR. L. Sundaresan, the learned
Additional Solicitor General in W.A.No.1487 of 2024, briefly stated, are
as follows:
● The thrust of the argument of the appellant is that IMA is an
incorporated association and its members are considered to be one and
the same and hence there is no question of supply of goods or supply of
services by IMA to its members and law in this regard has been settled
by Hon’ble Supreme Court in State of West Bengal and Others v.
Calcutta Club Ltd. reported in (2019) 19 SCC 107 wherein the
Hon’ble Supreme Court has held that the doctrine of mutuality survives
even after amendment to the Constitution under 46th amendment by
which Article 366(29A) was introduced.
● The respondents respectfully submit that the said argument
deserves to be rejected for the following reasons:-
a) The judgment in Calcutta Club case cannot come
to the aid of the appellant as it was on the interpretation on the WB
Sales Tax Act and imposition of service tax which are traceable to entry
54 of List 2 and entry 97 of List 1 which in turn are traceable Article
246 of Constitution of India.
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b) The source of power for enacting the Central
Goods and Services Tax Act and Kerala Goods and Services Tax Act is
from Article 246A and Article 366(12A). As extracted above in
Articles 246 and 254, Parliament and Legislature of every State shall
have power to make laws with respect to Goods and Services Tax.
Article 366(12A) provides that Goods and Services Tax means tax on any
supply of goods or services or both, except taxes on supply of alcoholic
liquor for human consumption.
c) As such nothing in Articles 246 or 254 or any
judgment interpreting a law under the said Articles and referable to List
1 entry 97 and entry 54 of List 2 would be applicable, as Article 246A is
an enabling provision notwithstanding Articles 246 and 254 of the
Constitution.
d) Neither in Article 246A nor 366(12A) there are
any limitations imposed on the Parliament or State Legislature with
regard to imposition of such tax.
e) When there are no limitations or restrictions
imposed by the Constitution, no such limitations or restrictions can be
read into such power.
f) When no limitation or restriction with regard to
the term supply or person has been provided for in the Constitution, the
field is wide open for the Parliament and the Legislature to identify the
person to be taxed and to define what would be supply and to define
what would be referable to the term person. Accordingly Section 7 of
the Act as it was rad with Section 2(17) and amendment 7(1)(aa) which
defines supply and thereby providing that supply of goods and services
by an Association to its member will be deemed to be supplies for the
purposes of this Act is well within the power of the Parliament and the
Legislature.
g) The following judgments are relied for the
proposition that no restrictions can be placed on the power of the
Parliament or the State Legislature to impose a tax and make necessary
provisions to achieve the end of maximisation of collection of tax:
(i) (2008) 2 SCC page 254 Karnataka Bank v. State of
Andhra Pradesh Para 21, 22, 30, 33, 34, 35, 36, 37, 42, 43 and 50.
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(ii) (2012) 6 SCC 312 State of Madhya Pradesh v. Rakesh
Kohli para 9, 15, 17, 20, 30.
(iii) (2001) 3 SCC 654 Municipal Council Kota Rajasthan v.
Delhi Cloth and General Mills Company Limited para 16, 18, 22
(iv) (2008) 5 SCC 449 Ramanalbailal Patel v. Government
of Gujarat para 15, 22 to 26
(v) (2022) Vol. 15 SCC 364 Parmar Samantsinh Umedsinh
v. State of Gujarat para 54, 62 to 65.
● TEST OF VIRES OF TAXATION LAW:
(i) There is always a presumption in favour of
Constitutionality of a law made by the Parliament or the State Legislature.
(ii) No enactment can be struck down by saying that it is
arbitrary or unreasonable or irrational but some Constitutional infirmity has to
be found.
(iii) The Court is not concerned within the wisdom or
unwisdom, the justice or injustice of the law as Parliament and State Legislature
are supposed to be alive to the needs of the people whom they represent and
they are the best judge of the Community by whose suffrage they come into
existence.
(iv) Hardship is not relevant in pronouncing on the
Constitutional validity of a fiscal stature or economic law, and
(v) In the field of taxation, the legislature enjoys a greater
latitude for classification.
● SETTLED PRINCIPLES in Challenge to
Constitutionality of any Law:
(a) In a challenge to the vires of a Statute, there is
always presumption in favour of the Constitutionality.
(b) The Court while examining the constitutional
validity of a statute is not concerned with the wisdom or un-wisdom of
the Legislature and would not substitute its wisdom for that of the
Legislature. Law enacted by the Legislature can be struck down by the
courts only if:
(i) It lacks legislative competence.
(ii) It offends any of the fundamental rights guaranteed
under Part III of the Constitution and;
(iii) Later the third ground was also conceived by the
Hon’ble Supreme Court, namely, that the law is so manifestly
arbitrary and capricious. The present Section 7(1)(aa) does not
come within anyone of the above vice to be declared as
unconstitutional.
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● Without prejudice to the above submissions, if at all it is
considered that the judgment in Calcutta Club case would be applicable
even after Articles 246A and 366A introduced by the 101 st amendment,
it is always open to the Legislature to amend the law to remove the
basis of the judgment. The judgment in Calcutta Club case was on the
basis of the words used in Article 366(29A) and the relevant provisions
of the Finance Act and the West Bengal Sales Tax Act which did not
provide that an Association and its members can be considered as two
different persons. The phrase used in Article 366A(29A) was only
unincorporated association or body of persons. That basis is
sought to be undone by introducing the amendment by way of Section
7(1)(aa) and the explanation thereto. It is settled law that the
Legislature has the power to amend the law and thereby remove the
basis of an earlier judgment. On that ground also the attack to Section
7(1)(aa) and the explanation thereto and Section 2(27)(e) deserves to be
rejected. The respondents rely upon the judgment in (2020) 5 SCC
274 – Union of India and Others v. Exide Industries and another
para 7, 15, 16, 21, 25 to 27, 47.
● While amending Section 7(1) by introduction of 7(1)(aa)
amendment has been introduced to the word ‘supply’ but not to the
word ‘service’. However there is no flaw in the same since under
Section 9 the taxable event is supply of goods or services or both.
Since it is the supply of goods and services which is a taxable event, the
definition of supply and amending the said definition of supply to
include an association and its members as two different persons would
be sufficient and there is no necessity to define service in such way that
service by an association to its member would be a taxable service.
There is no flaw in the amendment and the amendment as it is would
serve the purpose and object to be achieved.
● Assuming for the purpose of argument without admitting
there is a flaw in not having amended the definition of service, the
respondent respectfully submits that while interpreting any law, the
courts will have to harmoniously read the provision keeping in mind the
objects that is sought to be achieved by the Legislation. If while
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interpreting the provision of law, the Court comes to the conclusion that
something is missing and ought to have been introduced for the purpose
of giving life to the Section, the Courts would supply the words to give
effect and life to the provision. Reliance is placed on the decisions in
(1988) 2 SCC 513 – Hamidia Hardwar Stores v. Mohanlal Sowcar
where words which were absent in Section 10 (3) (a) sub clause (iii) but
were available in Section 10 (3) (a) (I) were read into Section 10 (3) (a)
(iii) by the Court, for the purpose of giving life to the section and to
ensure that the objection of the Act namely protection against
unreasonable eviction of the tenant is achieved. Reliance is also placed
on (1991) 2 SCC 87 – Surjit Singh Kalra v. Union of India and
Anr. para 19.
● The respondent respectfully submits that the purport of the
definition of the word ‘supply’ so as to include supply made by an
association to its members should be read as referable both to goods as
well as services as it was never the intention of the Legislature and
could not have been the intention of the Legislature to treat supply of
goods by the association to its members as taxable and supply of service
by the association to its members as not taxable. If such an
interpretation is given it would be absurd and defeat the object of
taxation and hence such an interpretation ought not to be given and the
Court should liberally interpret the provision in a harmonious way to
give life to the Section.
● The appellant is a registered Society under the Travancore-
Cochin Literary Scientific and Charitable Societies Registration ct,
1955. It is an admitted position that in the event of termination of a
member and even dissolution of the society, property of the association
is not allowed to be distributed among the members, but is to be given
to any other non-profitable organisation having the same objects in view
of the provisions contained in the above said Act. It is legal entity
which can sue and can be sued in its own name. Even in case of any
dispute between the society and its members, the society is entitled to
initiate proceedings against its members in the court of law. As such
the concept of mutuality and that the association and the members are
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one and the same would not arise. As there is no concept of mutuality,
there is no locus for the IMA to challenge the impugned provisions on
the ground of mutuality.
● IMA Kerala is engaged in diverse business ventures
encompasing the provision of hotels, bar and guest houses, bio-medical
waste treatment plant, construction of residential complexes, as well as the
facilitation of health insurance for its members and their families. Some of
the schemes floated by IMA, Kerala are as follows:
● IMA Kerala floated an entity named IMAGE, acronym for IMA
Goes Ecofriendly, which has an annual turnover of around Rs.50 Crore per
annum. This business venture collects bio-medical wastes from hospitals for
treatment at their plant. The profits are periodically transferred to the
accounts of IMA, Kerala.
● IMA Kerala actively manages a Professional equipment and
employment protection scheme, wherein special rates for equipment
procurement are negotiated on behalf of its members; Also this scheme
supplies colour coded bags to various hospitals for the collection of waste by
IMAGE, an entity floated by IMA Kerala.
● Indian Medical Association also undertakes brand endorsements
of big Scorporates and accrues income out of it. Major brands like Pepsico,
Asian Paints, Kent water purifier etc. are their clients.
● IMA Kochi runs a bar attached hotel by name ‘IMA House’ which
provides rooms to public on payment. The property is advertised in e-
commerce platforms also.
● The membership fee for IMA is collected by the local branch of
IMA and the due shares are transferred to State and HQ as per the bylaw of
the national body. Though state units of IMA are functioning independently
with separate PAN and registration, an average member is investing for the
services of the association due to the vast assets and income earned by the
body through various business activities and thus the association cannot
claim the benefits of mutuality of a membership association.
● The accounts of IMA Kerala including various schemes was
audited by as many as seven different Chartered Accountants but they never
informed the department about their activities except that of IMAGE which
was functioning after obtaining another PAN. Only after the inspection
proceedings by the department, the association started paying GST on
various schemes floated by IMA.
● Retrospective effect
a) In so far as Section 7(1)(aa) is concerned, it comes to
effect from 01.07.2017.
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Such retrospectivity is valid and the contention agaisnt the same deserves to be
rejected for the following reasons:-
(i) The Legislature has power to make laws prospectively and retrospectively.
(ii) Clarificatory amendments are always retrospective in operation.
(iii) The present amendment introducing Section 7(1)(aa) and the explanation
are clarificatory. The liability was always there even under Section 7(1)(a).
(b) So far as the arguments of the appellant that the
amendments cannot given retrospective effect, the same is untenable and
deserves to be rejected. It is settled law that the Parliament has got the
authority to make laws prospectively and retrospectively. Only limitation can be
that a vested right cannot be taken away by the retrospective enactment in the
present case. The appellant relied upon the judgment in Jayam & Co. v. State
of Tamil Nadu – [(2016) 15 SCC 125] wherein the entitlement of input tax
was reduced to the extent tax collected at the time of sale of the goods if the
goods are sold at a discount. It was contended that such a reduction of the
entitlement of availing in the tax credit cannot be given retrospective effect.
That was on the basis of the principle of law that a vested right cannot be taken
away by retrospective amendment. That is when the assessee had the right to
adjust the entire tax credit in full, by an amendment it cannot be retrospectively
reduced and that a vested right was sough to be curtailed. The said ratio will
not apply since there is no vested right of the appellant association which is
being taken away. It is only the liability which was always on them is sought to
be enforced by way of the amendment.
(c) In the alternative, the respondents submit that after
the (2019) 19 SCC page 107 judgment of the Hon’ble Supreme Court in State
of West Bengal & Ors. v. Calcutta Club Ltd., a doubt arose with regard to
the correct position and hence the amendment was made by the Parliament to
remove any such doubt on the basis of the judgment in Calcutta Club was
corrected and hence it was made with retrospective effect and the respondents
are entitled to make it with retrospective effect.
(d) Retrospectivity cannot be a ground of attack if it is
within the power of Legislature and such retrospective law is not manifestly
arbitrary and confiscatory in nature.
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(e) In the present case, the entire community has
understood the fact and purpose of Section 7(1)(a) and almost all the
Associations/Clubs/Incorporated Bodies and un-Incorporated Bodies have been
collecting and paying service tax for the supply of goods and services to their
members. Hence, appellant cannot contend that they are taken by surprise or
that the imposition was unforeseen and could not have been anticipated by
them.
Respondents rely upon the following judgments to justify the
retrospective effect:-
1. 1965 SCC Online SC 39 – Para 18 and 25 (Jawaharlal v. State
of Rajasthan)
2. (1985) 2 SCC 197 – Para 28 nd 29 (Lohia Machines Ltd. v.
Union of India
3. (1989) 3 SCC 488 – Para 65, 66 (Ujar Prints and Others v.
Union of India)
4. (2005) 7 SCC 725 – (RC Tobacco Pvt. Ltd. v. Union of India)
5. (2020) 20 SCC 57 – Para 21. & 24 (Union of India v. Exide
Industries Ltd.)
6. (2020) 5 SCC 274 – Para 44 (Union of India v. Exide
Industires Ltd.)
7. (2020) 14 SCC 785 – Para 30 (Prashanti Medical Services and
Research Foundation v. Union of India and Others).
So far as retrospective effect is concerned, respondents
submit that the provisions as they stood even prior to the amendment
enabled levy of tax on supply of goods and services from an association
to its members. The amendment was only clarificatory in nature. Other
clubs and associations have subjected themselves to GST regime in
respect of supply of goods and services to its members. Hence IMA is
not taken by surprise and the demand of GST are not unconscionable
and they could have well been contemplated. Under such
circumstances the judgment of the Ld. Single Judge holding that the
provisions will only have prospective effect is incorrect and that part of
he judgment deserves to be set aside and W.A.No.1487/2024 deserves
to be allowed.
10. The submissions of Sri.Mohammed Rafiq, the learned
Special Government Pleader (Taxes) for the appellant in W.A.No.468 of
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2025, briefly stated, are as follows:
● The source of power to enact laws with respect to ‘Goods and
Services Tax’, both intra-state and inter-state, is Article 246A of the
Constitution of India.
● Clause (12A) of Article 366 of the Constitution defines ‘goods
and services tax’ exhaustively as any tax on supply of goods, or services
or both except taxes on supply of alcoholic liquor for human consumption.
● As per the inclusive definition provided in Clause (12) of
Article 366, ‘goods’ includes all materials, commodities and articles.
● Clause (26A) of Article 366 provides a broad definition of
‘services’ as anything other than goods.
● The expression ‘supply’ appearing in Article 366(12A) must not
be interpreted in a narrow or pedantic sense; instead, the construction
that is most beneficial to the broadest possible scope of the power to
enact laws ‘with respect to’ Goods and Services Tax should be adopted.
● A nine judge Constitution Bench in State of U.P. and Others
v. Lalta Prasad Vaish and sons – [2024 SCC OnLine SC 3029] held
that the primary principle of interpreting entries in the legislative lists is to
provide a wide meaning to them. A narrow interpretation must only be
adopted when either (a) the scope of the Entry is limited by the use of
language devices; or (b) a wide interpretation creates an overlap between
entries within the same list or different lists.
● In Lalta Prasad (supra) it was further held that, the legislative
entries must be given a wide meaning. All incidental and ancilliary matters
which can be fairly and reasonable comprehended must be brought within
them.
● In Lalta Prasad (supra) it was also held that “the legislative
meaning cannot be used to artificially narrow legislative entries. We also
deem it necessary to note that we must be cognizant that the standard of
‘legislative meaning’ is employed to identify the ‘intent’ of the framers of
the Constitution and belongs to the originalist school of thought, which has
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been consistently opposed by this Court over the years. For these reasons,
the principle of interpretation elucidated in State of Madras v. Gannon
Dunkerley & Co. – [AIR 1958 SC 560] must be used cautiously by
Courts.
● The definition provided in sub clause (e) of clause 29A of
Article 366 is not applicable in the context of a levy of tax under Article
246A.
● Article 366(29A) defines the specific expression “tax on sale or
purchase of goods,” which relates only to the legislative field under Entry
92A of List I of the Seventh Schedule and the assignment of taxes levied
thereunder to the States as provided in Article 269(1).
● The power conferred to the Parliament and the State
legislatures under Article 246A is to make laws with respect to “goods and
services tax,” and the expression “tax on sale or purchase of goods”
defined under Article 366(29A)(e) is absent in Article 246A.
● The definitions provided in Article 366(29A) would apply to the
specific expressions defined thereunder wherever such expressions are
used in the Constitution, that too if the context demands [See Geo Miller
& Co. (P) Ltd. v. State of M.P. – [(2004) 5 SCC 209].
● By virtue of the non-obstante clause, Article 246A prevails over
the provisions of Articles 246 and 254 of the Constitution and thus prevails
over the Seventh Schedule and the expressions defined in Article 366(29A).
● Tax on Goods and Services under the Central/State Goods and
Services Tax Act, 2017 and scope for its levy on the provision of facilities
or benefits by clubs, associations, societies, etc., to their members.
● The common law doctrine of mutuality cannot pose a limitation
on the plenary power of the Union and the States to enact laws with
respect to Goods and Services Tax, as conferred under Article 246A of the
Constitution, including imposing the levy on clubs, associations, societies,
or similar bodies incorporated or not providing facilities or benefits to
their members.
● The power to make laws with respect to goods and services tax
conferred on the Union or States under Article 246A is unconditional.
● A five-judge Constitution Bench in Union of India v. Gwalior
Rayon Silk Mfg. (Wvg.) Co. Ltd – [(1964) 53 ITR 466] held that the
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legislative competence of the Union legislature or even of the State
Legislature could only be circumscribed by express prohibition contained
in the Constitution itself and unless and until there was any provision in
the Constitution expressly prohibiting legislation on the subject either
absolutely or conditionally, there would be no fetter or limitation on the
plenary powers which the legislature enjoyed to legislate on the topics
assigned to them.
● A nine-judge Constitution Bench in Jindal Stainless Ltd. v.
State of Haryana – [(2017) 12 SCC 1], held that taxation is an incident
of sovereignty, which cannot be curtailed by any implied limitations.
● A nine-judge Constitution Bench in Mineral Area
Development Authority v. SAIL – [(2024) 10 SCC 1] held that any
limitation on the plenary legislative powers of either the Union or the
States with respect to a subject must be express and specified by the
Constitution.
● No express restrictions are specified in the Constitution on the
power conferred on the Union and the States to make law with respect to
Goods and Services Tax.
● Application of the common law doctrine of mutuality in the
context of Central/State Goods and Service Tax, 2017.
● The doctrine of mutuality relates to the notion that a person
cannot make a profit from himself, and it has its origin in common law.
[Bangalore Club v. CIT – [(2013) 5 SCC 509].
● Quoting with approval the decisions in Rana Girders Ltd. v.
Union of India – [(2013) 10 SCC 746] and Union of India v. SICOM
Ltd – [(2009) 2 SCC 121] a five-judge Constitution Bench in Indore
Development Authority v. Manoharla – [(2020) 8 SCC 129] observed
that, there is no doubt that common law principles have to be weighed
upon the statutory provision and latter has to prevail.
● By Section 9(1) read with clauses (a) and (aa) of Section 7(1),
2(84)(f) and 2(17)(e) of the Central/State Goods and Service Tax Acts,
clubs, associations, societies, any such bodies etc. are subjected to goods
and service tax in respect of facilities or benefits provided to its members,
and thus the common law doctrine of mutuality has no application in so far
as the levy in question.
● Application of English Common Law beyond the limits of
erstwhile Presidency Towns is a question of fact.
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● A nine-judge Constitution Bench in Superintendent and
Remembrancer of Legal Affairs v. Corpn. Of Calcutta – [(1967) 2 SCR
170] held that:
“some of the doctrines of common law of England were administered as
the law in the Presidency towns of Calcutta, Bombay and Madras. The
Common Law of England was not adopted in the rest of India. Doubtless,
Some of its principles were embodied in the statute law of our country.
That apart, in the mofussil, some principles of Common Law were invoked
by courts on the grounds of justice, equity and good conscience. It is,
therefore, a question of fact in each case whether any particular branch of
the Common Law became a part of the law of India or in any particular
part thereof”
Therefore, the applicability of the English common law doctrine of mutuality
in the state of Kerala, an erstwhile Part-B State, is a question of fact. All
along, no evidence has been produced by the IMA to prove the said fact.
● IMA is an incorporated society registered under the Travancore-
Cochin Literary, Scientific and Charitable Societies Registration Act of 1955,
which recognises the society as a distinct entity separate from its members.
● The common law, if at all can be termed as a law in force at the
commencement of the Constitution, must yield to the legislation by a
competent legislature in view of Article 372(1).
● Scope of amendments made to Section 7 in the year 2021.
● By Section 108 of the Finance Act, 2021, a new clause as (aa) followed by
an Explanation was added to Section 7 of the Central Goods and Services Tax
Act, 2017, with effect from 01.07.2017. Corresponding amendments were
also made to the Kerala State Goods and Services Tax Act, 2017.
● In addition to individuals, the definition of ‘person’ in 2(84) includes
Hindu undivided families, companies, firms, Limited Liability Partnerships,
associations of persons, or a body of individuals, whether incorporated or not.
The provision of facilities or benefits by these persons to their members is
defined as a business under Section 2(17)(e), and thus such provision of
facilities or benefits falls within the scope of supply by a person in the course
or furtherance of business as defined in clause (a) of Section 7. The newly
incorporated clause (aa) clarifies that supply includes activities or
transactions by such persons, to their members, or constituents, or vice
versa, for cash, deferred payment, or other valuable consideration.
● The Explanation newly added along with clause (aa) to Section 7 further
clarifies that the person and its members or constituents shall be deemed to
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be two separate persons, and the supply inter se shall be deemed to take
place from one such person to another.
● Furthermore, by the non-obstante clause and the legal fiction couched in
the Explanation, the doctrine of mutuality either as a law in force or a
principle recognised by any judgment to govern the provision of facilities or
benefits by the incorporated or un-incorporated bodies to their members has
been expressly prevailed over.
● Retrospective operation of the amendments made to Section 7 vide
the Finance Act, 2021.
● The question of whether provisions operate retrospectively or not does
not arise at all since retrospective operation with effect from 01.07.2017 in
express terms has been given to the provisions by the Amendment Act.
● From the point of view of the economist and as an economic theory, a
sales tax may be an indirect tax on the consumers, but legally, it need not be
so. The permission given to the seller to collect the sales tax as a tax from the
purchaser does not do away with the primary liability of the seller to pay the
sale tax. That being the true view of sales tax, a state legislature acting within
its legislative field has the power of a sovereign legislature and could make
its law prospectively as well as retrospectively. The principles so laid down by
a five-judge Constitution Bench in The Tata Iron & Steel Co. Lid. v. The State
of Bihar – [(1958) 9 STC 267] in the context of sales tax would squarely apply
in the context of levy under the goods and services tax regime also.
● In R.C. Tobacco (P) Ltd. and another v. Union of India – [(2005) 7
SCC 725] it was held that a law cannot be held to be unreasonable merely
because it operates retrospectively. The unreasonability must lie in some
other additional factors. It was also held that the retrospective operation of a
fiscal statute would have to be found to be unduly oppressive and
confiscatory before it can be held to be so unreasonable as violative of
constitutional norms. In the instant case, there is no finding that the
retrospective operation given to subclause (aa) of Section 7(1) is unduly
oppressive, confiscatory or unreasonable.
● Applicability of dictum laid down in State of W.B. & Ors. v.
Calcutta Club Ltd. – [(2019) 19 SCC 107], in the context of the present
case.
● The issues involved in the instant case have boiled down to the
aspect of tax on the supply of services by the association to its members.
Therefore, the application of the dictum laid down in Calcutta Club (supra)
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with reference to the erstwhile service tax levied under the Finance Act, 1994
alone is relevant for the present.
● The findings in Calcutta Club (supra) on the issue of levy of
service tax on services rendered by incorporated clubs to its members are
based not on any constitutional provision but on the interpretation of the
various provisions of the Finance Act, 1994 before and after the major
amendments carried out in the year, 2012.
● The only factor that weighed with the Bench to hold against the
revenue on this point is that the Explanation-3, clause (a) to the definition of
Service provided in Section 65B(44) of the Finance Act, 1994 expressly
recognises only members of an ‘unincorporated association or a body of
persons’ as distinct persons. The Court ruled that the expression body of
persons cannot take in incorporated bodies, and hence, the principle of
mutuality is not ousted so far as incorporated bodies and their members are
concerned.
● Whereas by Section 9(1) read with Section 7(1)(a), 2(84)(f) and
2(17)(e), clubs, associations, societies, any such bodies, etc., are subjected to
goods and service tax in respect of facilities or benefits to its members,
notwithstanding the status of such bodies as incorporated or unincorporated.
Further, the sub-clause (aa) and the Explanation loaded with a non-obstante
clause and legal fiction incorporated in Section 7(1) with express
retrospective effect from 01.017.2017 in clear terms clarifies that dictum to
the contrary laid down in any judgment has no application. Therefore, the
dictum laid down in Calcutta Club (supra) cannot be pressed into service to
hold that the common law doctrine of Mutuality survives in the GST regime
as well.
Discussion and Findings:
(i) On the constitutionality of the impugned amendments.
11. We have considered the rival submissions and have gone
through the pleadings as well as the precedents cited across the bar. At
the very outset we might observe that considerable time was spent by
the learned counsel for the Union and the State to argue that it was well
within the powers of the Parliament and the State legislatures to
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overcome the basis of earlier judgments of the Supreme Court on the
aspect of mutuality, by introducing a new definition of supply through a
legislative exercise and clarifying that a supply would also include a
supply from a club to its members. Under ordinary circumstances, we
would have had no reservations to the said settled position in law.
Indeed the legislature has the power to enact validating laws that
remove the basis of invalidity pointed out by the courts in relation to the
earlier unamended law. However, we are in these proceedings
concerned with a slightly different issue viz. whether it would be
competent for a legislature to levy tax on a transaction when the taxable
event in relation to the subject of taxation has not been recognised as
such by the Constitution ? In other words, when the Constitution has
understood a taxable transaction as necessarily involving two persons,
can a legislature deem a transaction that does not involve two persons
as a taxable transaction ? This is the limited point on which we find
ourselves at variance with the views of the learned Single Judge in the
impugned judgment, who found no merit in the argument of the writ
petitioner that the amendments had to be invalidated for the reason that
it was ultra vires the Constitutional provisions.
12. The thrust of the arguments of Sri. Datar, the learned
senior counsel appearing for the appellant in W.A.No.1659 of 2024 is
that notwithstanding the amendments effected to Sections 2(17) and
Section 7(1) of the CGST Act, it’s activities in relation to those Schemes
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that it runs as a self help group, where the members help each other and
their families to tide over difficulties such as disabilities, death, legal
action etc, will not be liable to tax under the GST Act. The contention, in
other words, is that on account of the principle of mutuality that informs
the actions of the Club/Association towards its members, the mere fact
that statutory amendments have been made to the concept of “supply”
under the GST Acts will not suffice to make their activities liable to the
levy of GST; that their activities cannot be treated as ‘service’ since the
concept of service under the GST law itself contemplates the existence
of two entities viz. a service provider and a service recipient, and
excludes the concept of self service for the purposes of the levy.
13. When we analyse the Scheme of levy of GST under the
Constitution, we find that GST is envisaged as a levy of tax on the
“supply” of “goods or services or both”. The words “goods”, “supply”
and “services” are understood in a particular sense under the
Constitution. When the words used in the Constitutional text have
acquired a meaning through judicial interpretation over the years, one
must assume that that is the same sense in which the word is used when
inserted into the Constitution through a later amendment. While
“goods” is a standalone concept, meaning thereby that it is not
something that requires a plurality of persons to infer its existence, the
concepts of “supply” and “service” do require a plurality of persons to
infer their existence. This aspect was recognised in Ranchi Club v.
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Chief Commissioner of Central Excise & Service Tax – [2012 SCC
Online SC 306], where it was laid down that the basic feature common
in sale and services was that both required the existence of two parties.
The decision in Ranchi Club [supra] was quoted with approval by the
Supreme Court in Calcutta Club also. Therefore, it can be safely
assumed that the Scheme of GST under the Constitution also
contemplates the existence of at least two persons – a provider and a
recipient before one can infer either a “supply” or a “service” for the
purposes of the levy. In other words, the concepts of self-supply or self-
service are not envisioned under the Constitution for the purposes of the
levy.
14. Article 246A of the Constitution, that confers
simultaneous legislative powers on the Union and the States to make
laws with respect to goods and service tax, uses the word “supply”
without giving it an artificial meaning that would take in even a “deemed
supply”. In fact, even by the Constitution [46 th Amendment] Act, 1982
when a deeming provision was introduced to bring transactions, that did
not fit into the traditional concept of sale of goods, to sales tax, the
exercise that was done was to amend the Constitution to deem those
transactions as “Sales” or “Purchases”. Thus, under Article 366(29A), a
tax on the “supply of goods” by an incorporated association or body of
persons to a member thereof for cash, deferred payment or other
valuable consideration, was deemed to be a “tax on the sale or purchase
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of goods”. In contrast to the above, what has been done through the
present amendment to the CGST/SGST Act is merely to amend the
definition of “supply” to include “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”.
Significantly, such supply has not been deemed to be a “service”, and
the concept of “service” itself has not undergone a change, to include
within its fold such activities or transactions.
15. We cannot therefore find it in ourselves to accept the
contention of the learned Additional Solicitor General Sri. AR. L.
Sundaresan, appearing on behalf of the Union of India, and relying on
the decisions in Karnataka Bank v. State of Andhra Pradesh –
[(2008) 2 SCC 254] and Ramanlal Bhailal Patel v. State of Gujarat
– [(2008) 5 SCC 449] that it is always open to the legislature to
provide an artificial meaning to a word for the purposes of the Statute,
and that the mere fact that the said meaning of the word in the Statute
differs from its popular meaning can be of no avail. While we do not
doubt the correctness of the proposition laid down in the aforecited
precedents, the factual situation that obtains in the instant case, as
already noticed, is slightly different. We are not presently considering
the legality of a legislative exercise that gives an artificial definition to a
word/concept that differs from it’s accepted or popular meaning. What
we are confronted with in these proceedings is a situation where the
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statutory exercise undertaken by the legislative body has given a
meaning to a word/concept therein that differs from the accepted
meaning of the same word/concept under the Constitution. We are of the
view that when a word/concept in the Constitution has been interpreted
by the Supreme Court in a particular manner, a legislative body, that
derives its legislative competence to enact a Statute from the
Constitution, cannot give to the word/concept a meaning that goes
against the meaning assigned to the same word/concept by the Supreme
Court in the context of its setting under the Constitution. This is
especially so because, when used in the Constitution in a particular
sense, it is that sense of the word/concept that determines the very
competence of the legislature to enact a law in relation to the subject
represented by that word/concept.
16. The levy of GST is on the “supply” of taxable “goods” or
“services” or both for a consideration. The concept of “supply” and
“service” as understood under the Constitution and the CGST/SGST Acts
(before their amendment) both excluded transactions informed by the
principle of mutuality ie. a supply/service from one entity to itself (self
supply/self service). Thus, even if there is now a deemed “supply”, based
on the amendments effected to the CGST/SGST Acts, there is no deemed
“service” in circumstances where the service is rendered by a club or
association to its members, since the definition of service has not been
amended.
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17. It is also significant, as pointed out by the learned senior
counsel Sri. Datar, that the Constitution has not been amended to deem
a supply of service by a club or association to its members as a taxable
service for the purposes of GST. The decision of the Supreme Court in
State of West Bengal and Others v. Calcutta Club Ltd. – [(2019)
19 SCC 107] is authority for the proposition that the principle of
mutuality has survived under the Constitution even after the 46 th
Amendment. If that be so, then the amendment exercise carried out by
the Parliament would itself have to be seen as unconstitutional since it
incorporates a definition of supply that militates against the
constitutional understanding of the term. For reasons that we have
already stated while considering the arguments of Sri. Sundaresan on
behalf of the Union of India, we find ourselves in agreement with the
argument of Sri. Datar that a phrase as understood under the
Constitution cannot be statutorily expanded by any legislature since the
power to legislate is itself one that is conferred by the Constitution.
18. It is worth recalling that when similar situations arose in
the past where various State legislatures attempted to broaden the tax
net by statutorily expanding the definition of “sale”, the Supreme Court
struck down such amendments as being beyond the meaning of the word
‘sale’ in Entry 54 of List II of the Seventh Schedule to the Constitution.
To get over the said decisions of the Supreme Court, the Constitution
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had to be amended to add six sub-clauses [(a) to (f)] to the newly
inserted Article 366 (29A) of the Constitution. Accordingly:
i. Article 366(29A)(a) was inserted to get over the decision in
New India Sugar Mills Ltd v. CST – [1963 (14) STC 316] that
held that a compulsory sale through Control Orders was not a sale;
ii. Article 366(29A)(b) was inserted to get over the decision in
State of Madras v. Gannon Dunkerley & Co. – [AIR 1958 SC
560] that held that a works contract is not a sale;
iii. Article 366(29A)(c) was inserted to get over the decision in
K.L.Johar and Co. v. CTO – [AIR 1965 SC 1082] that held that a
hire-purchase was not a sale;
iv. Article 366(29A)(d) was inserted to get over the decision in
A.V.Meiyappan v. CCT – [1967 (20) STC 115 (Mad)] that held
that a transfer of the right to use goods was not a sale;
v. Article 366(29A)(e) was inserted to get over the decision in
CTO v. Young Men’s India Association (Regd) – [(1970) 1 SCC
462] that held that there could be no sale between a
club/association and its members; andvi. Article 366(29A)(f) was inserted to get over the decision in
Northern India Caterers (I) Ltd v. Lt. Governor of Delhi –
[(1980) 2 SCC 167] that held that supply of food and beverages in
restaurants was not a sale.
19. We might also refer to the decisions in [(1965) 56 ITR
198 (SC)] – Navnit Lal C. Javeri v. K.K. Sen, Appellate Assistant
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Commissioner of Income-Tax, Bombay and [(2021) 15 SCC 667] –
Skill Lotto Solutions Pvt. Ltd. v. Union of India and Others – relied
upon by Sri.Mohammed Rafiq, the learned Special Government Pleader
for the State, to contend that it is open to a legislature to define a word
in a taxing Statute in a sense different from its popular meaning or a
meaning that is given to it through judicial interpretation of the same
word as used in the constitutional text. In Navnit Lal C. Javeri [supra],
a Constitution Bench of the Supreme Court considered a challenge to
the validity of Section 12(1B) read with Section 2(6A)(e) of the Indian
Income-Tax Act, 1922. The appellant before the Court was a
shareholder in a Private Limited Company and he impugned the
statutory provisions that treated a loan advanced to him by the Company
as a dividend for the purposes of taxation. His contention that Entry 82
in List I of the VIIth Schedule to the Constitution that dealt with “taxes
on income other than agricultural income” did not justify the impugned
provision because a loan advanced to a shareholder by a company
cannot be treated as an ‘income’ in any legitimate sense, was rejected
by the Supreme Court. The Court held that entries in the List had to be
construed widely and when so construed the word ‘income’ could be
interpreted to include within its ambit even a loan advanced to a
shareholder. The Court went on to find as follows @ p. 208 as follows:
“The question which now arises is, if the impugned section
treats the loan received by a shareholder as a dividend paid to him by the
company, has the legislature in enacting the section exceeded the limits of
the legislative field prescribed by the present entry 82 in List I ? As we have
already noticed, the word “income” in the context must receive a wide
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interpretation; how wide it should be it is unnecessary to consider, because
such an enquiry would be hypothetical. The question must be decided on the
facts of each case. There must no doubt be some rational connection
between the item taxed and the concept of income liberally construed. If the
legislature realises that the private controlled companies generally adopt the
device of making advances or giving loans to their shareholders with the
object of evading the payment of tax, it can step in to meet this mischief, and
in that connection, it has created a fiction by which the amount ostensibly
and nominally advanced to a shareholder as a loan is treated in reality for tax
purposes as the payment of dividend to him. We have already explained how
a small number of shareholders controlling a private company adopt this
device. Having regard to the fact that the legislature was aware of such
devices, would it not be competent to the legislature to device a fiction for
treating the ostensible loan as the receipt of dividend ? In our opinion, it
would be difficult to hold that in making the fiction, the legislature has
travelled beyond the legislative field assigned to it by entry 82 in List I.”
20. What is significant is that the interpretation of the word
‘income’ as contained in earlier precedents was in the context of the
Income Tax Act and not in the context of the Constitution itself. The
Court held that the use of the word ‘income’ in the Entry in List I was
sufficiently wide to take in loans advanced to a shareholder by a
Company. The Court did not have to deal with a situation where the
words in the Entry itself had acquired a definite meaning through
judicial interpretation. Interestingly, the Court did observe that there
had to be some rational connection between the items taxed and the
concept liberally construed.
21. Similarly in Skill Lotto Solutions Private Limited
[supra], the Court considered the validity of Section 2(52) of the CGST
Act that defined “goods” to include actionable claims. The contention
that an artificial definition of goods to include actionable claims could
not withstand the test of constitutionality when the word “goods” was
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defined differently under the Constitution, was rejected by holding that
“The Constitution-framers were well aware of the definition of goods as
occurring in the Sale of Goods Act, 1930 when the Constitution was
enforced. By providing an inclusive definition of goods in Article
366(12), the Constitution-framers never intended to give any restrictive
meaning of goods.” Thus, the Court did not find any contradiction
between the meaning of the word as used in the Constitution and the
meaning given to it under the Statute concerned.
22. The issues considered in the aforesaid judgments are
clearly distinguishable from the issue that confronts us in these
proceedings. The concepts of “supply” and “service” having been
judicially interpreted as requiring at least two persons – a provider and
a recipient, for inferring their existence, and the Supreme Court having
held in Calcutta Club [supra] that the principle of mutuality has
survived the 46th amendment to the Constitution, so long as the said
judgment holds sway as a binding precedent and/or the Constitution is
not amended suitably to remove the concept of mutuality from the
concepts of supply and service thereunder, the impugned amendment to
the CGST/SGST Acts must necessarily fail the test of constitutionality.
23. We are also conscious of the decisions in State of
Madhya Pradesh v. Rakesh Kohli – [(2012) 6 SCC 312] and
Parmar Samanthsingh Umedsingh v. State of Gujarat & Others –
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[(2022) 15 SCC 364] that postulate that a legislature has to be
accorded a greater degree of latitude in laws relating to economic
activities, and that no statute should be struck down unless it is vitiated
by a constitutional infirmity. We do however find that the statutory
provisions impugned in these proceedings suffer from a definitive lack of
legislative competence. Accordingly the provisions of Section 2(17)(e)
and Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017
and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the
Explanation thereto of the KGST Act are declared as unconstitutional
and void being ultra vires the provisions of Article 246A read with
Article 366 (12A) and Article 265 of the Constitution of India.
(ii) On the validity of retrospective/retroactive operation of
the impugned amendments:
24. In the light of our above finding with regard to the
unconstitutionality of the impugned statutory provisions, it is
unnecessary for us to go into the validity of the retrospective/retroactive
operation given to the said provisions. However, we might record our
agreement with the findings of the learned Single Judge that held the
said retrospective operation to be illegal. The principle of fairness is one
that must inform all actions of a State, including legislation, since it is
an essential aspect of the Rule of Law that is recognised as a basic
feature of the Constitution. The insertion of a statutory provision that
alters the basis of indirect taxation with retrospective effect, so as to tax
persons for a prior period when they had not anticipated such a levy
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and, consequently, had not obtained an opportunity to collect the tax
from the recipient of their services, militates against the concept of Rule
of Law. On its part, the State too would be found wanting in offering a
valid justification for it’s legislative action. Over the last seven decades
since the adoption of our Constitution the guarantees therein have been
ensured to our citizenry through progression from a culture of authority
to a culture of justification. Accordingly, in modern times the State is
obliged to offer justification for all its actions that touch upon the
constitutional rights, fundamental and otherwise, of its citizens. We do
not find any such justification for the retrospective operation of the
impugned statutory provisions.
The upshot of the above discussion is that W.A.No.1659 of
2024 is allowed with consequential reliefs to the appellant therein, and
W.A.No.1487 of 2024 and W.A.No.468 of 2025 are dismissed. No Costs.
Sd/-
DR. A.K.JAYASANKARAN NAMBIAR
JUDGESd/-
EASWARAN S.
JUDGE
prp/