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Assessees in general have been confronting various issues under Service Tax ever since the introduction of the negative list based taxation with effect from 01st of July 2012. One of the issues being talked about now is that of service tax impact on services provided by Residents’ Welfare Association to its members. The issue is mainly pertaining to the nature of exemption that existed prior to introduction of the Negative List and the one that has been made available post introduction of the negative list based taxation scheme. The issue has arisen mainly because of the way in which the new exemption Notification has been drafted which leaves ample scope for different interpretations in a given circumstance with regard to the subject matter under discussion. In addition to this there is always the view that services provided by such Associations to members should not be taxed owing to the concept of mutuality i.e. members themselves making up the Association and that services provided are to members themselves which cannot be taxed in their own hands.  

In order to consider a particular subject matter as a service, the same should be capable of being brought under the definition of “service” as defined in Section 65B (44) of Chapter V of Finance Act 1994. The term has been defined to mean any activity carried out by a person for another for consideration, and includes a declared service, but shall not include

an activity which constitutes merely,

i. a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

ii. such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or

iii. a transaction in money or actionable claim;

a provision of service by an employee to the employer in the course of or in relation to his employment;

fees taken in any Court or tribunal established under any law for the time being in force.

The term “activity” has not been defined and we would have to understand the same in common parlance. The term “activity” could be understood to refer to an occupation or pursuit in which a person is active. It would involve both physical and/or mental exertion. This would be wide enough to cover a variety of services without any restriction in terms of scope.

Another important aspect in ascertaining service tax liability would be the concept of “person” as service tax would be leviable only where service is provided by one to another for a consideration. The term “person” has been defined u/s 65B (37) to include the following – “an individual, a Hindu undivided family, a company, a society, a limited liability partnership, a firm, an association of persons or body of individuals, whether incorporated or not, Government, a local authority, or every artificial juridical person, not falling within any of the preceding sub-clauses;”

The aforesaid definition includes within its scope an association of persons (whether incorporated or not) as a person for the sake of levying tax. This definition would have to be seen in light of the explanation 3 to Section 65B (44) defining “service” as the said explanation specifically relates to the treatment of association of persons and its members. The said explanation goes thus – "For the purposes of this Chapter - 

(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;”

Concept of mutuality

The usage of the word “shall” in the aforesaid explanation clause is significant and it makes the requirement of regarding an association of persons and its members as distinct, mandatory and not optional. In its application, the word “shall” has to be distinguished from “may” as confirmed by the Courts. In Pratap Singh Kaison Vs Gurmej Singh (AIR 1958 Punjab 409, 411), the Court held thus – “Where the word “shall” is used in a statute the presumption is that its use is imperative and not merely directory, particularly when it is addressed to a Court or a Public Servant and when a right or benefit depends on its imperative use.”

The aforesaid clause is significant even though the same is only part of an explanation because it has to be read with the definition of “person” indicated earlier and is indicative of the legislative intent to regard an individual and the association of persons of which he is a member, as distinct persons. This would have an impact in terms of the services provided by the Association of Persons to its members as the same could be regarded to be provided by one person to another and taxed under service tax subject to the presence of consideration for the same. 

It is worthwhile to note here that once the legislative intent is clearly evident in any statute going by the principle of literal construction of the same, courts cannot ignore such intent and would have to respect legislative intent as confirmed by the Supreme Court in Commissioner of Customs & Central Excise Versus M/s Hongo India (P) Ltd. & Anr. (2009 (236) ELT 417 (SC)).

This is relevant from the point of view of the fact that in the past, the Courts have upheld the principle of doctrine of mutuality i.e. the principle of “no man can trade with himself” where it came to a question of taxing income of the association earned from its members. However, in the context of service tax, considering the specific intention from legislature to deem the unincorporated association and its members as different persons, the principle of mutuality in the humble opinion of the Author would have to be ignored. The explanation 3 to Section 65B (44) only seeks to clarify the intent which is evident even if we consider Section 65B (37) alone as association of persons or body of individuals whether or not incorporated are sought to be treated as persons distinct from individuals/members who would also be regarded as persons.

At the same time, it is interesting to note that the Jharkhand High Court in Ranchi Club Ltd. Versus Chief Commissioner of Central Excise & Service Tax (2012 (26) STR 401 (Jharkhand)) has held services provided by a club to its members as not amounting to service on the grounds of principle of mutuality. This decision of the Court was based on an old verdict of the Supreme Court in The Joint Commercial Tax Officer, Harbour Division II, Madras Versus Young Men´s Indian Association, Madras and Others (1970 (26) STC 241 (SC)) wherein the Court had held supply of food and snacks to its members by the association as not amounting to sale of goods under The Sale of Goods Act 1930 as the association was held to merely act on behalf of the members.

However, considering the fact that the High Court is bound by the verdict of the Superior Court regarding the basic principles of interpretation of statutes as well as the fact that there is a specific intent on part of the legislature to regard Associations and members as distinct persons, the Author is of the view that the verdict of the High Court given above merits judicial review.

Therefore, the view of holding an association as being liable to service tax on services provided by it to its members subject to availability of any possible exemption by ignoring the doctrine of mutuality may be followed by assessees.

With effect from 01st of July 2012, all services other than those covered by the negative list u/s 66D are taxed at twelve percent (plus applicable cess) going by charging Section 66B. The said negative list does not cover maintenance services provided by the Association to its members. Having said this, we would have to go through Notification 25/2012 ST dated 20th June 2012 issued by Government of India.

Clause 28 (c) of the said Notification provides for an exemption in respect of collections made from members by an unincorporated body or a non-profit entity registered under any law for the time being in force, up to an amount of rupees five thousand per month per member. The said clause is to be read with the initial paragraph of the Notification and would appear as given below -

“In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act 1994 (hereinafter referred to as the said Act) and in supersession of notification number 12/2012- Service Tax, dated the 17th March, 2012, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) vide number G.S.R. 210 (E), dated the 17th March, 2012, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the following taxable services from the whole of the service tax leviable thereon under section 66B of the said Act, namely:-

28. Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution -

(a) as a trade union;

(b) for the provision of carrying out any activity which is exempt from the levy of service tax; or

(c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex;”

Clause (c) indicated above would be relevant in the context of maintenance services provided by the Association to its members as maintenance services themselves would be taxable and not regarded as exempted services.  The said clause deals with exemption on collections towards amounts payable by the Association to outsiders or third parties for sourcing of goods or services. The phrase “sourcing of goods or services from a third person” is relevant in this context as the exemption does not cover charges for services provided by the Association through its own employees. In other words, where the Association charges members for services provided by itself or through its own employees, the same would be taxable and not be eligible for the exemption of Rupees five thousand per month per member.

A review of the aforesaid contents of Notification 25/2012 ST would reveal that the Notification at the very outset seeks to exempt specified taxable services from the whole of service tax as indicated in the opening paragraph. This is relevant as the exemption is not in respect of value of taxable services but on taxable services themselves. Going purely by the opening paragraph, one could conclude that any exemption in the said Notification in succeeding paragraphs or clauses would have to be complete in respect of specified services and not partially in terms of value of such services.

However, having sought to wholly exempt service tax on the specified taxable services, clause 28 (c) talks about exemption up to an amount of rupees five thousand per month per member. This could create a doubt in terms of taxability of the service where the collection/contribution from a member exceeds Rupees five thousand per month. There could be two interpretations in this regard. While the first interpretation could be to tax only the value in excess of Rupees five thousand, and claiming a blanket exemption of Rupees five thousand on contribution from each member, the second interpretation would be the conservative one of taxing the entire contribution from a member where the amount exceeds Rupees five thousand.

The other issue which arises is whether the contribution from all members would be taxed where the contribution from any one member exceeds the said limit of Rupees five thousand. In order to answer these questions, we would have to refer the fundamental principles of interpretation of statutes as well as the usual pattern of issue of exemption Notifications in Service Tax till date as well as those followed post 01st of July 2012. This would enable us to ascertain the logic as well as the intention of the legislature in drafting of the clause as more than one interpretation seems possible at this juncture.

A review of the various exemption Notifications issued under Service tax till date reveals that while most of the Notifications exempted the taxable services specified from the whole of service tax thereon, there is only one Notification which spoke of value of taxable services. A reference to the General Exemption Notification 33/2012 ST dated 20th June 2012 indicates that the same deals with exemption on taxable services of aggregate value not exceeding ten lakh rupees in any financial year. The term “aggregate value” has also been defined to mean the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year excluding the value of wholly exempted services. This consequently has led to treatment of the exemption as a threshold exemption meaning taxing of only value of service where the same during the year exceeds Rupees ten lakhs and only on the value exceeding the said limit.

Notifications exempting the taxable services themselves generally exempt the entire taxable service specified from service tax irrespective of value thereof. Even Notification 25/2012 ST which is a subject matter of our discussion, exempts the taxable services in general without referring to value of taxable services in the opening paragraph.

At this juncture, it would also be worthwhile for us to review the contents of Notification 8/2007 St dated 01st March 2007 which granted an exemption to a Residents’ Welfare Association in respect of services provided to its members. The contents of the said Notification are reproduced below –

“In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services, specified in sub-clause (zzze) of clause (105) of section 65 of the said Finance Act, provided or to be provided, by a resident welfare association  where the sole criterion for its membership is the residential status of a person in a residential complex or locality, to its members, from the whole of the service tax leviable thereon under section 66 of the said Finance Act, subject to the condition that the total consideration received from an individual member by the said association for providing the said services does not exceed three thousand rupees per month.”

Though the said Notification cannot be taken as a yardstick for interpreting the contents of Notification 25/2012 as both the Notifications operate in a different taxing environment and backdrop, it is worth noting that the aforesaid Notification was clear cut in terms of wordings used and intention conveyed.  In other words, the ambiguity exists in case of clause 28 (c) alone considering the usage of the words in drafting the said clause.

As far as interpretation of the clauses in the exemption Notification is concerned, the views of the Courts would once again assume significance. In M/s Konkan Synthetic Fibres Vs Commissioner of Customs (Import) Mumbai (2012 (278) ELT 37 (SC)), the Court relied on some of the earlier verdicts to reiterate as follows –

“Literally "exemption" is freedom from liability, tax or duty. Fiscally it may assume varying shapes, specially, in a growing economy. In fact, an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden of progressive approach of fiscal provisions intended to augment State revenue. But once exception or exemption becomes applicable no rule or principle requires it to be construed strictly.

Truly speaking, liberal and strict construction of an exemption provision is to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction. (Union of India v. Wood Papers Ltd. and Mangalore Chemicals and Fertilisers Ltd. v. Dy. Commr. of Commercial Taxes to which reference has been made earlier.)"

In G.P. Ceramics Private Limited v. Commissioner, Trade Tax, Uttar Pradesh, (2009) 2 SCC 90, the Honorable Supreme Court observed thus:-

“It is now a well-established principle of law that whereas eligibility criteria laid down in an exemption notification are required to be construed strictly, once it is found that the applicant satisfies the same, the exemption notification should be construed liberally. [CTT v. DSM Group of Industries (SCC para 26); TISCO v. State of Jharkhand (SCC paras 42 to 45); State Level Committee v. Morgardshammar India Ltd.; Novopan India Ltd. v. CCE & Customs; A.P. Steel Re-Rolling Mill Ltd. v. State of Kerala and Reiz Electrocontrols (P) Ltd. v. CCE.]". Therefore, one can clearly see the need for strict construction of exemption notification to ensure eligibility of assessee followed by liberal construction once the assessee is found to be eligible for the said exemption.

It is also relevant here to note that the Courts have also discussed scenarios where two possible interpretations would be possible and resolved the issue in favour of assessee in certain circumstances. The Honorable Supreme Court in Sun Export Corporation Vs Collector of Customs Bombay (1997 (93) ELT 641 (SC)), has held that where there are two views possible, it is well settled, that one favourable to the assessee in matters of taxation has to be preferred.

A similar view was also taken in Parle Exports (P) Ltd Vs Collector of Central Excise (1988 (38) ELT 741 (SC)). The Court in the latter case also relied on an old decision in Caroline M Armitage & Others Vs Frederick Wilkinson (1878 (3JA.C. 355 at 370) where it was held that in the event of there being a real difficulty in ascertaining the meaning of a particular enactment, the question of strictness or of liberality of construction arises. The Judicial Committee reiterated in the said decision that in a taxing Act provisions establishing an exception to the general rule of taxation are to be construed strictly against those who invoke its benefit. While interpreting an exemption clause, liberal interpretation should be imparted to the language thereof, provided no violence is done to the language employed.

The aforesaid paragraph would assume significance in view of the usage of the word “up to” in the said clause which has the potential to lead to different interpretations in the absence of reference to “value” or “aggregate value” in the opening paragraph of the said Notification.

In order to see whether any alternate interpretation would be possible at all, we would have to construe the Notification as a whole including the said clause as well as the opening paragraph of the Notification. This would result in a better understanding of the intention behind issuing an exemption clause in the Notification unless there is a drafting error present in the concerned clause. 

We could also refer the Mimansa Rules of Interpretation of statutes the usage of which has been upheld by the Honorable Supreme Court in Ispat Industries Ltd Vs Commissioner of Customs Mumbai (2006 (202) ELT 561 (SC)) and also followed in M/s. Harvel Agua India Private Limited Versus State of Himachal Pradesh and others (2013 (07) TMI 301 Himachal Pradesh (HC)) as well as in Multi Commodity Exchange of India Ltd. Versus Central Electricity Regulatory Commission (2011 (2) TMI 1281 Bombay (HC)). In the present context, it would be relevant for us to visit the second General Principle of Interpretation and that is the “linga” principle.

This principle as explained in K.L Sarkar’s Book on Mimansa Rules of Interpretation (Fourth Edition), involves ascertaining the meaning of a word or expression when it is not clear on the face of it, and of its latent force or suggestive power by the suggestive power of some other word or expression. The linga is of two kinds –

- When the ambiguity and the doubt regarding the meaning and effect of a word or a sentence are removed by the suggestive power of some particular word or words in the sentence itself.

- When such ambiguity and doubt are removed by the suggestive power of some other passage which bears upon it.

In the present context, the ambiguity in clause 28 (c) could be resolved if we were to consider the main/initial paragraph of Notification 25/2012 ST bearing upon it. The conclusion would be to exempt taxable services provided to members of association where the contribution from each member does not exceed Rupees five thousand per month. Where the contribution from any one member exceeds this limit, the Association would be liable to service tax on services provided to members collectively. This is by virtue of the exemption clause referring to services “to its own members” rather than to each member individually.

Consequently, in the humble opinion of the Author it would not be possible to split the value of such service to subject a portion of the same exceeding the limit, to tax while leaving aside the stipulated sum of Rupees five thousand per month per member. This would mean the entire contribution from a member being taxable where the amount exceeds rupees five thousand per month. This interpretation would however be based on the premise that the exemption is for the taxable service as a whole rather than a part of the service. Where the intention is to exempt a portion of the service, in such a way, that value thereof less than Rupees five thousand per month per member would be exempted from tax in any case including a scenario where the contribution exceeds this amount, the same in our humble opinion would have to be specifically clarified by CBEC unless necessary amendments made to the concerned Notification.

Here, it is worthwhile noting that the Department has clarified through its circular 175/1/2014 ST dated 10.01.2014 that where the collection from any member exceeds Rs. 5000 per month, the entire collection from such members would be subjected to tax. However, the Association would be entitled to use the benefit of threshold exemption under Notification 33/2012 ST dated 20.06.2012 in respect of the aggregate value of taxable services.

The aforesaid view would also have to be seen in light of the definition of “exemption service” in Rule 2(e) of the Cenvat Credit Rules 2004. Even though this is framed in the context of Cenvat credit eligibility, a review of the same could indicate the scenarios foreseen by the law makers and the remedy therefor in terms of credit availability. The principle of “prakarana” which happens to be a general principle of interpretation under Mimansa Rules of Interpretation could be used to gather the intent. This principle looks at logical interpretation by relying on some other text in another part of the statute when a sentence or clause by itself does not indicate its purpose but its purpose becomes clear when read with such other text.

The definition of the term has been reproduced below –

““exempted service” means a-

1. taxable service which is exempt from the whole of the service tax leviable thereon; or

2. service, on which no service tax is leviable under section 66B of the Finance Act; or

3. taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken;

but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.”

A review of the aforesaid definition would reveal that while clause 1 deals with services wholly exempted clause 3 deals with services where part of the value is exempted with the condition of non-availability of credit on inputs and input services. In other words, there is no comprehending of a scenario where a part of the value of taxable service is exempted with no restriction as to cenvat credit availment. Now the resulting interpretation of the exemption clause in Notification 25/2012 ST read with this definition could be seen in two ways. One view could be to infer no restriction on credits where exemption of rupees five thousand per member is claimed. This would mean clause 28 (c) operating as a threshold exemption clause with no restriction on credit availment. But this could hardly be called a safe view considering the fact that there is hardly any threshold exemption available with no restriction as to credits. 

The alternate view could be that the legislature never foresaw such a scenario as no such exemption existed in the said Notification 25/2012 ST. This would once again result in a conservative view being taken of clause 28 (c) meaning the said clause not operating as a threshold exemption clause. Assessees would be better advised to segregate credits following principles set out in Rule 6 of Cenvat Credit Rules 2004 where they do avail the benefit of exemption of Rs. 5000 per month per member in the event of collections from some members suffering tax consequent to the limit being exceeded in terms of collections from them.

Having discussed the taxability of contributions from members, we now venture to discuss the concept of reimbursements. While the aforesaid Circular issued makes a reference to reimbursements being kept outside tax net provided concept of pure agent is satisfied, it would be pertinent for us to see whether the concept of taxing reimbursements would hold good at all. Where the consideration for the service is in monetary terms, service tax is to be charged on the gross amount charged for the service u/s 67(1)(i). While the concept of charging tax has been clarified, what has not been specifically clarified in the said Section is the concept of “consideration” and “gross amount charged”.

While the explanations (a) and (c) to the said Section only seek to indicate what the terms include, we do not have a specific definition as to what they actually mean. But going by the general understanding of the term “consideration” one can safely say that the same refers to something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances. In order to recognise something as consideration, the same should go into the pocket of the concerned party and be capable of being regarded as a reward for his services.

Where there is consideration for the service, the gross amount charged as consideration would be liable to service tax. The Madras High Court in Commissioner of Service Tax Versus M/s. Sangamitra Services Agency (2013 (7) TMI 862 Madras High Court) held thus with regard to reimbursements collected by the C&F agent – “if a receipt is for reimbursing the expenditure incurred for the purpose, the mere act of reimbursement, per se, would not justify the contention of the Revenue that the same, having the character of the remuneration or commission, deserves to be included in the sum amount of remuneration/Commission”.

In Intercontinental Consultants & Technocrats (P) Ltd Vs UOI & Another (2013 (29) STR 9 (Del-HC)), the High Court held reimbursements not liable to service tax. It held thus -

“Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld. 

Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made “for carrying out the provisions of this Chapter” i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax.” 

The aforesaid view of the Delhi high Court was also followed in Sercon India Private Limited Through Mohan Goel Versus Commissioner (adjudication) Service tax (2013 (3) TMI 449 Delhi (HC)). It is worthwhile to note here that the Supreme Court had earlier in the context of Section 67 of the Act held reimbursements as not liable to service tax and not includible in the gross amount charged for the service in M/s Reliance Industries Ltd Vs CCE&C Rajkot (2009 (3) TMI 859 SC). This decision once again assumes significance in light of the decision of the High Courts. Therefore, in the humble opinion of the Author, reimbursements cannot be subjected to tax till such time the views of the High Court is disagreed with by the Supreme Court. This aspect has however been sought to be ignored in the concerned circular. This would mean the onus of proving collections as reimbursements at actuals being on the concerned Association.

By CA Srikantha Rao T

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