Tax on Service to Self

As per Section 66B, read with clause (44) of Section 65B, services rendered by one person to other is liable to tax. Thus, for levy of Service Tax, there should be two persons. One the Service Provider and other the Service Recipient. There is no Service Tax on service to self. However, explanation (3) to clause (44) of Section 65B provides two exceptions to this principle. One of them is that the unincorporated association or body of persons and a member thereof shall be treated as distinct person. Even prior to introduction of present day Negative List regine, an identical explanation was provided in Section 65.

            The Hon’ble High Court of Calcutta in Saturday Clubvs. Assistant Commissioner, Service Tax, 2005 (180) ELT 437 (Cal.) found that members and club are same entity and hence transactions between them cannot be taxed. The aforesaid judgment was consistently followed by other High Courts and CESTAT. To end this controversy the legislature appended aforesaid explanation to Section 65. But, the Hon’ble High Court of Jharkhand in Ranchi Club Ltd. Vs. Chief Commissioner, Central Excise, 2012 (26) STR. 401, held that even after introduction of the aforesaid explanation, the services rendered by the club to its members are not liable to Service Tax.

            In Ranchi Club (Supra) the Hon’ble High Court has placed reliance on the judgment of Hon’ble Supreme Court in Joint Commercial Tax Officer, Madras Vs The Young Men’s Indian Association, AIR 1970 (SC) 1212. In that case, the Hon’ble Supreme Court had held that  supply of food to its members by the club does not involve a transaction of sale and hence not liable to Sales Tax. In Ranchi Club (Supra), the Hon’ble High Court,  drawing analogy from Young Men’s (Supra) case came to the conclusion that services rendered by the club to its members are not liable to Service Tax. With due regards to the Hon’ble High Court, it is humbly submitted that the Hon’ble High Court has committed a grave error in reaching the said conclusion. In Young Men’s (Supra) case the Hon’ble Supreme Court held that a State Legislature is competent to levy tax only if the transaction falls under Entry 54, List II of the 7th Schedule. However, there is no such limitation on the legislature powers of the Union Parliament. The only limitation on the Parliament’s legislature power [as held in UOI Vs. H.S. Dhillon, 1972 SCR (2) 33] is that the subject matter of legislature is not covered in List II of 7th Legislature. It is nobody’s case that the State Legislature is competent to levy Service Tax on the services rendered by Club to its members. Hence, the Parliament is fully competent to levy tax on such transactions. Moreover, as held by Hon’ble Supreme Court in Kapil Mohan Vs. Commissioner of Income Tax, 1999 (1) SCC 430, Tax and Equity are strangers and later cannot be relied upon to question the validity of former.

            The aforesaid conclusion is also supported by the judgments of Hon’ble Supreme Court. In Young Men’s (Supra) case the Hon’ble Supreme Court referred its earlier decision in State of Madras vs. Gannon Dunkerlay & Co., 1959 (1) SCR, 379 and held that a transaction which is not of the nature of sale within the meaning of the Sales of Goods Act, cannot be subjected to tax under a law enacted in exercise of power under Entry 54 List II.

            In Gannon Dunkerlay (Supra) case the issue before the Hon’ble Court was as to whether State Legislature is competent enough to levy tax on the material consumed in a composite in a contract for construction of a building. The Hon’ble Supreme Court answered this question in following words.

   “To sum up, the expression “sale of goods” in Entry 48 is a nomenjuris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. In a building contract which is, as in the present case, one, entire and indivisible and that is its norm, there is no sale of goods, and it is not within the competence of the provincial legislature under Entry 48 to impose a tax on the supply of the materials used in such a contract treating it as a sale.”

            The taxability of material supplied in execution of a composite works contract again came up before the Hon’ble Supreme Court of India in Mithan Lal Vs. The State of Delhi, AIR 1958 (SC) 682. The only difference was that the case was pertaining to State of Delhi, which was a Part C State, the legislature powers of which were vested in Union parliament. The Hon’ble Supreme Court found that Gannon Dunkerlay (Supra) case has no application here and levy was constitutionally valid. The Hon’ble Apex Court held that the Parliament’s power to legislate for Part C states are plenary and absolute.  Thus, there was an interesting situation.  At that time,  the Bengal Sales Tax Act was applied in the State of Delhi.  The  provisions of the said act,  levying tax on material  supplied in execution of works contract were held to be unconstitutional  and therefore, such transactions were not liable to Sales Tax in the State of West Bengal.  But, the  very provisions of the said Act, were held to be validly enacted in their application in the State of Delhi and the identical  transactions were liable to Sales Tax in Delhi.   Therefore, it was not the nature of transaction alone,  but the legislative powers determined the constitutional validity of the said provisions.

            The above discussions shows that Parliaments power to levy a tax on any transaction is subject to only one restriction i.e. the subject matter of taxation is not vested with State legislature. Therefore, treating the association of persons and its members, as distinct entity, for the purpose of Service Tax is well within the legislative competence of parliament.