The Kerala High Court in as significant ruling, dismissed the writ petition filed by the Indian Medical Association ( IMA ) challenging the levy of Goods And Service Tax ( GST ) on the supply of goods and services to its members. The court held that the provisions of Section 7(aa) will have prospective operation with effect from 01.01.2022.
The petitioner, IMA is an association under the provisions of the Travancore-Cochin Literary Scientific & Charitable Societies Registration Act, 1955. Only qualified modern medical practitioners with a valid registration in the State of Kerala under the Travancore Cochin Medical Practitioners Act, 1953, are eligible to become members of the petitioner association.
The petitioner association runs schemes as a self-help group which aims to helping one another or their family members to tide over difficulties such as disabilities, death, legal action, etc. The members pool in their money by way of admission and an annual subscription, which is distributed to individual members or their families upon the happening of the events (death, disability, etc.). The petitioner association has guest houses, and it lets out rooms to its traveling members and their guests. Many charitable activities, such as HIV awareness, End-TB campaigns, etc., have been carried out by the association.
The activities of the Petitioner Society are like mutual self-help, and the petitioner association is a kind of charitable organization. It was argued that he association is only a group of individuals serving themselves, and as per the doctrine of mutuality, there is no service by one person to another. It cannot be said that there is a supply of goods and services in carrying out the activities by the petitioner association, and therefore, no GST is payable in respect of the activities of the petitioner association.
After the judgment in State of West Bengal v. Calcutta Club, the parliament introduced Section 7(1)(aa) by the Finance Act, 2021, retrospectively that is with effect from the date of commencement of the GST regime ie., 01.07.2017, inserting a legal fiction and artificially deeming a club/association and its members to be two separate persons. The taxable event was also artificially enlarged to include “activities or transactions” between a club/association and its members.
The assessee contended that Section 246 to 246A empowers the Central and State to levy only the “tax on supply of goods and services” which postulates two entities ie., supplier and the person who receives the supply on consideration. In the case of a club and association, such as the petitioner, which is a self- serving institution, the principle of mutuality would apply as there could be no supply of goods and services between the club and its members as held in the Calcutta Club.
It was argued that the petitioner was not collecting any GST in view of the settled position of law from its members on transactions done. By way of amendment in the GST Act by inserting Section 7(1)(aa) expression thereto, a heavy, unforeseen burden is thus cast on the petitioner, and the petitioner is not in a position to collect tax from its members. The submission is that the retrospective levy, thus violates Article 19 (1) (g) of the Constitution of India.
The department argued that the Constitution does not put any limitations/restrictions on making laws to tax on the supply of goods and services; no such limitations can be read into such power and prevent parliament and legislatures from defining person(s) for the purposes of levying the tax on the supply of goods and services. There is neither a lack of legislative competence nor the impugned provisions of the GST Act offends any of the fundamental rights guaranteed under Part III of the Constitution, nor can the provisions be said manifestly arbitrary and capricious. Section 7(1)(aa) of the GST Act cannot be said to be offending any of the aforesaid tests to be declared as unconstitutional.
A single bench of Justice Dinesh Kumar Singh has observed that the amendment brought in Section 7(a) of the Finance Act, 1994 by inserting Section 7(aa) is well within the legislative competence and not ultra-virus. Section 7(1)(aa) explains that the person and its members or constituents shall be deemed to be two separate persons, and the supply of activities or transactions inter se shall be deemed to take place from one such person to another.The court held that once the amendment has been brought into statute by inserting Section 7(aa) by the Finance Act 2021, the petitioners have become liable to pay the GST on the supply of goods and services to their members. Section 7(aa) therefore, should not be given retrospective operation w.e.f 01.07.2017 but it should be given effect from the date when it was notified i.e., 01.01.2022. The court dismissed the writ petition and held that the provisions of Section 7(aa) will have prospective operation with effect from 01.01.2022
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