Kerala High Court Dismisses Indian Medical Association's Petition Challenging GST Levy On Supply Of Goods And Services To Its Members

The Kerala High Court has dismissed the writ petition filed by the Indian Medical Association challenging the levy of GST on supply of goods and services to its members.

The bench of Justice Dinesh Kumar Singh has observed that the Parliament/State Legislature has amended Section 7(a) by inserting Section 7(aa) by the Finance Act, 2021. The amendment is neither beyond legislative competence nor offends any of the fundamental rights guaranteed under Part III of the Constitution of India nor is manifestly arbitrary or capricious. Therefore, the amendment brought in Section 7(a) 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 petitioner, Indian Medical Association, 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 is like a member's club. Only qualified modern medical doctors are eligible to become members of the petitioner association. The property of the association is held for and on behalf of the members. There are also regional branches of the petitioner in various towns in Kerala, which are separate bodies. The petitioner association runs schemes as a self-help group. These schemes are run with the aim of 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. The 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. Therefore, 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.

In the 46th Amendment (1981) of the Constitution, in an attempt to legitimize the levy of sales tax on a club/association, the “tax on sale or purchase of goods” is defined in broader terms to include 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. However, the Supreme Court in State of West Bengal v. Calcutta Club emphatically held that the principle of mutuality continued even after the 46th Amendment.

The Parliament brought in the 101st Amendment by inserting Article 246A, empowering the Parliament and the state legislatures to levy goods and services tax under Article 246A. Article 366 was also amended, and 366 (12A) was inserted by the 101st Constitution Amendment, which defined goods and services tax as a “tax on supply of goods or services or both." Supply of goods or services would mean supply by one person to another. There cannot be a supply of goods or services by a person/entity to itself, such as in the case of a club/association, as they are not two separate persons/entities.

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. 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 contended that a combined reading of Articles 246(A) and 366 (12A) would provide that the goods and services tax means any tax on the supply of goods and services or both. As such, the parliament and the State legislature have concurrent powers to make laws with respect to goods and services tax viz tax on supply of goods and services or both. The power conferred by the Constitution on the parliament and the State legislature is to make laws to levy tax on the supply of goods and services. There is no reference to the term 'person' either under Article 246A or 366 (12A). When there is no reference to the term 'person' in the Constitution for the levy of goods and service tax, it is well within the wisdom of the parliament and the State legislature to define 'Person' and levy of tax on transactions on supply of goods and services between such persons.

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.

The court held that before the amendment was brought in inserting Section 7(aa) by the Finance Act, 2021, the law of mutuality was well established in the principle of taxation in case of supply of goods and services by clubs/associations to its members. The GST is an indirect tax to be paid by the recipient of goods and services. When the law of mutuality, as held in the Calcutta club case, was understood by the authorities as well as the petitioner, the petitioner did not collect the GST. However, 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 held that the writ petitions so far as the challenge to the constitutionality of Section 7(aa) is concerned are dismissed. However, it is held that the provisions of Section 7(aa) will have prospective operation with effect from 01.01.2022.

Counsel For Petitioner: George Varghese

Counsel For Respondent: Muhamed Rafiq

Case Title: Indian Medical Association Versus UOI

Citation: 2024 LiveLaw (Ker) 469

Case No.: WP(C) NO. 23853 OF 2023

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