Doctrine of Mutuality: CESTAT Quashes Service Tax Demand on Association Subscription Fees [Read Order]

The Chennai bench of the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) quashed a service tax demand on association fees and donations, holding them non-taxable under the doctrine of mutuality.

The assessee, Southern Region Bulk LPG Transport Owners Association, collected membership fees and donations during 2013-14. The revenue department demanded ₹8,15,236 as service tax, contending these receipts constituted taxable services under Section 65(105)(zzze) of the Finance Act, 1994.

The revenue department’s findings were supported by a statement from P. Mathiyalagan, an employee of the association, who revealed the association’s fund collection practices.

Aggrieved by the order the association moved before the Commissioner of Appeals and then to the tribunal.

M.N. Bharathi, counsel for the assessee, argued that membership fees and donations should not be taxed, citing the principle of mutuality between the association and its members.

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He explained that, under the doctrine of mutuality, an association and its members are regarded as the same entity for tax purposes. As a result, contributions or payments made by members for their collective benefit do not constitute taxable transactions since there is no exchange between two separate parties.

Relying on the Supreme Court’s decision in State of West Bengal v. Calcutta Club Ltd (2019), the counsel contended that such transactions are not liable to tax.

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On the donation part, the counsel contended that they were voluntary contributions given without expecting a direct exchange (quid pro quo) and, therefore, couldn't be considered payment for services rendered.

The counsel added that the employee's testimony from 2007 to 2012 was hearsay and unreliable, as he only joined the appellant later in that period.

The counsel representing the revenue, N. Satyanarayanan, maintained that the association provided facilities to members in exchange for fees, creating a taxable service relationship. He relied on Mathiyalagan's statement as evidence that donations functioned as operational funds rather than philanthropy.

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Based on the submission made by both parties, the bench comprising Ajayan T.V. (Judicial Member) and  Vasa Seshagiri Rao (Technical Member) inspected the legal backings and factual metrics of the case.

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The bench rejected Mathiyalagan's deposition as unreliable for periods before his employment (2007-2009) and uncorroborated for 2010-2012.

Relying on State of West Bengal v. Calcutta Club Ltd (2019), the bench upheld the doctrine of mutuality, holding that membership fees lacked taxable reciprocity. Donations were distinguished as voluntary contributions without service consideration. The demand under "Club or Association Services" was quashed.

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The bench also quashed the demand raised by the department for donations. The bench observed that since the department failed to prove any quid pro quo services, the assessee cannot be held liable.

To Read the full text of the Order CLICK HERE

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