Industry Associations not liable to Service Tax on Membership fees

 R S Sharma Indirect Tax Expert

 Whether the Superintendent of Service Tax will also issue summons to wife of Chairman of CBEC who happens to be President of IRSLA (Indian Revenue Service Ladies Association) and also to IRS Association for examining the leviability of service tax on Membership fees of their Association, on case to case basis, under the notified taxable service of Membership of Club or Association, as to whether they are entitled to exemption from service tax as a “charitable” association as directed by CBEC Circular No. 84/2/2006-ST dated 19^th September 2006; is the question asked by one of my clients. 

With Service tax department armed with the weapon of Circular No. 84/2/2006-ST dated 19^th September 2006 to shoot the Associations on the scope of term “charitable” used in the definition of club or association service; the field officers are going to be busy examining the matter of applicability of exemption from service tax as a charitable association or club on a case-by-case basis.

The Circular F. No.137/123/2006-CX-4 clarifies as under:

 “The issue is whether any club or association that enjoys exemption under the provisions of Income Tax Act on the ground of being a public charitable institution gets automatically excluded from levy of service tax under section 65(105)(zzze) read with section 65(25a) of the Finance Act, 1994.

2. Exemption under the Income Tax Act on the ground of being a public charitable institution is of no consequence to levy of service tax.  Levy of service tax is entirely governed by the provisions contained in the Finance Act, 1994 and the rules made thereunder.

3. The definition of “charity” and “charitable” as defined in Black’s Law Dictionary may be kept in mind.  “Charity” is defined as “aid given to the poor, the suffering or the general community for religious, educational, economic, public safety, or medical purposes”, and “charitable” as “dedicated to a general public purpose, usually for the benefit of needy people who cannot pay for the benefits received”.

4. The officer concerned should examine the matter on a case-by-case basis, and the decision should be made after taking into account all material facts and statutory provisions.”

According to Section 65(105) (zzze) of the Finance Act,1994 “taxable service” means any service provided or to be provided to its members, by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount. 

The term “charitable” is not defined under the Finance Act, 1994 as amended which is statutory provision for levy of service tax. The following legal issue arise on the applicability of service tax on Membership of Club or Association:

1. Whether the Circular dated 19^th September issued by CBEC can define the term “charitable” when the said term has neither been defined under the Finance Act,1994 nor under Central Excise Act which is applicable when a term is not defined under the Finance Act?

2. Whether the Circular can hold that “Exemption under the Income Tax Act on the ground of being a public charitable institution is of no consequence to levy of service tax”?

3. Whether CBEC Circular is legally sustainable?

Service Tax on Clubs and Associations has come into effect with effect from 16^th June 2005 with Notification No. 15/2005-Service Tax dated 7^th June 2005 notifying the 16th day of June, 2005 as the date on which the provisions of the clause 88  of the Finance  Act 2005 amending Section 65 of the Finance Act,1994 shall come into force.

Section 65 (25a) of the Finance Act, 1994 provides as under:

“club or association” means any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include —

(i)     any body established or constituted by or under any law for the time being in force; or

(ii)    any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or

(iii)   any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or

(iv)   any person or body of persons associated with press or media;”

For falling under category (3) above an Association is required to pass twin tests

First Test : being engaged in any activity having objectives  which are in the nature of public service

Second Test: and are of a charitable, religious or political nature

The term “Public service” has neither been defined under the Finance Act nor under Central Excise Act which is applicable to service tax matters; a general definition of “public service” is to be applied in this case and the concept of general public utility is to be examined.

Adverting to the concept of general public utility, it is observed that "general" means pertaining to a whole class; "public" means the body of people at large; and the word "utility" signifies usefulness. Thus, the advancement of any object of benefit to the public or a section of the public as distinguished from an individual or a group of individuals, would be of charitable purpose. The expression" any other object of general public utility" is of the widest connotation. It prima facie includes all objects which promote the welfare of the general public. An object of public utility need not be an object in which the whole of the public is interested. It is sufficient if a well defined section of the public benefits by the object. Therefore, the expression "object of general public utility", is not restricted to objects beneficial to the whole mankind. An object beneficial to the people of India is an object of general public utility. to serve a charitable purpose, it is not sine qua non that the object should be to benefit the whole of mankind or even all persons living in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from specified individuals. The section of the community sought to be benefited must undoubtedly be sufficiently defined and identifiable. Education also comes within the ambit of charitable purpose.

In England the term "charity" was defined in the statute of Elizabeth (strictly in fashion, style and language as used in the original statute) as. "relief of aged, impotent and poor people, ..... " As per literal interpretation of the statute, in order to avail the benefit of charity one must qualify all the conditions laid down i.e. he should be aged, impotent and poor. But this interpretation as well as the interpretation of CBEC is far from pragmatism and outdated. The words aged, impotent and poor ought not to be construed conjunctively, so as to deny benefit separately to aged people, impotent people and poor people. This aspect was considered in the case of Re Robinson, Davis vs Robinson (1950) 2 All E R 148. It was held in the said case that the words, "aged, impotent and poor" in the statute of Elizabeth should be read disjunctively so that aged people need not also be poor to come within the ambit purview, and scope of the statute.

The general meaning of “Public service’ is “A service performed for the benefit of the public, especially by a non profit organization. Industry and other Associations are engaged in activity having objectives  which are in the nature of public service . The development of Trade and Industry, increase in gainful employment, raising living standard of population etc are the biggest public service which Industry Associations are doing.

Second Test: Whether Associations are engaged in activities which are of a charitable nature ?

The income and property of the Associations whensoever derived are applied solely towards the promotion of the objects of the Association and no portion thereof is paid or transferred directly, or indirectly by way of profit to the members of the Association. Thus the motive of Associations is non profit and they are not-for-profit organizations.

The activity of Industry Associations have been for the promotion, protection and development of trade, commerce and industry in India and to promote Indian business in matter of Inland and Foreign Trade, transport, industry and manufacturers, finance and all other economic subjects. The activities of Associations are charitable within the meaning of section 2(15) of the Income Tax Act, 1961.  Associations are also eligible for exemption u/s 10(23C) (iv) of the Income Tax Act, 1961.

The expression "charity" or "charitable purposes" do not admit of rigid definition. In order to understand what these expressions legally convey, one can merely enumerate its various aspects and characteristics as they have been recognised by the laws of the land. "Charity" denotes instincts of piety and benevolence, dictated by desire to do good. In  Commissioner for Special Purposes of Income-Tax Vs. John Frederic Pemsel (1891) 3 T C 53 (HL), Lord Macnaghten laid down that charitable purposes could be put under the four heads, viz. for the relief of poverty; for the advancement of education; for the advancement of religion; and for other purposes beneficial to the community not falling under any of the preceding heads. It was laid down in White vs. White (1893) 2Ch. 41 (CA) that "any mode of promoting the welfare of mankind" would be a charitable object.”

Even if an object or purpose may not be regarded as charitable in its popular signification as not tending to give relief to the poor of for advancement of education or medical relief, it would still be included in the expression "charitable purpose" if it advances an object of general public utility. The law recognises no purpose as charitable unless it is of a public character. That is to say, a purpose must, in order to be charitable, be directed to the benefit of the community or a section of the community. In Royal Choral Society vs. IR, it was held by  the court of appeal that cultivation and improvement of public taste in music and other fine arts is education and thus falls within the category of charitable purposes.

In case of “Trustees of the Tribune" AIT-1939-01-PC, the Privy Council held that charity does not necessarily involve an eleemosynary element (meaning charity does not mean merely supplying goods or services free of cost).

Even the Supreme Court has held in case of CIT v. Andhra Pradesh State Road Transport Corporation AIT-1986-03-SC that even a Road Transport Corporation which is run on commercial lines should be treated as a charitable trust entitled to exemption if the profit derived by the corporation is not distributed to any private individuals but is made over to the State Government for being utilized exclusively for development of roads.

Further, the Apex Court in case of Andhra Pradesh State Road Transport Corporation AIT-1986-03-SC held as under:

“No activity can be carried on efficiently, properly, adequately or economically unless it is carried on on business principles. If an activity is carried on on business principles, it would usually result in profit, but, as pointed out by this court in Surat Art Silk Cloth Manufacturers Association's case AIT-1979-03-SC, it is not possible so to carry on a charitable activity in such a way that the expenditure balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realisation but would reflect unsound principles of management. What section 22, therefore, does when it states that it shall be the general principle of a road transport corporation that in carrying on its undertakings it shall act on business principles is to emphasise the objects set out in section 3 for which a road transport corporation is established and to prescribe the manner in which the general duty of the corporation set out in section 18 is to be performed. It is now firmly established by the decisions of this court in Surat Art Silk Cloth Manufacturers Association's case AIT-1979-03-SC and Bar Council of Mahrashtra's case [1981] 130 ITR 28 (SC), that the test is " What is the predominant object of the activity whether it is to carry out a charitable purpose or to earn profit? " If the predominant object is to carry out charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity.”

Since the predominant object of Associations is to carry out charitable purpose and not to earn profit; an Association passes the second test that it is of charitable nature.

It is, therefore, concluded that service rendered by a not-for-profit Association with objectives of public service is not taxable at all and the answer to all the three issues raised as above will be in negative and CBEC Circular dated 19^th September 2006 is not legally sustainable is liable to be quashed by High Court.

It is well-settled by several Apex Court rulings that though a Circular is binding on the Departmental Officers; neither a tax payer nor an assessee is bound by the Circular. There are already several precedents of CBDT and CBEC Circulars being quashed by High Courts.

CBEC is following a practice of issuing draft Circulars for comments by Industry before issue of fair Circulars. But in this case; no draft Circular was issued. This gives an additional ground for challenging the Circular.

It would be better if CBEC stops issuing Circulars as though Circulars are meant for clarifying the issues, they create more confusion and litigation. Over a lakh demand notices will be issued to all Associations including Resident Welfare Associations relying on the definition of “charitable” given in the Circular. But what would be the ultimate result?-All will be dropped as happened in the case of demands issued relying on illegal Circular of DG-Service Tax which stated that service tax is required to be paid on full value of freight and not on 25% of the value. Why  not the taxpayers claim the cost of litigation from the Government, which in turn can claim from DG-Service Tax, as it resulted in undue harassment to Industry and a national wastage of time and stationary. Though DG Service Tax withdrew the said communication; but the departmental officers are still not aware of withdrawal of said Circular and the tax payers are running from pillar to post for obtaining the copy of withdrawal of said Circular so that the demands issued to them may be dropped. 

Government should know how to collect the taxes. If the intention is to bring all Associations including even Resident Welfare Associations under service tax net; the Finance Act 1994 will be required to be amended and the definition of the term “charitable” will be have to be inserted. Still there is time for the Government to save Associations from unwarranted litigation. As a face saving device, CBEC can seek legal opinion of Solicitor-General of India who can give his independent opinion on the issue and legality of the Circular.   

Did you ever notice that when you put the words "The" and "IRS" together, it spells "THEIRS"

(The Writer is a Well Known Consultant and is advising several MNCs and Indian Corporates on Service Tax, Central Excise & Customs matters. He can be mailed at rssharma@gmail.com  )

“If, from the more wretched parts of the old world, we look at those which are in an advanced stage of improvement, we still find the greedy hand of government thrusting itself into every corner and crevice of industry, and grasping the spoil of the multitude. Invention is continually exercised, to furnish new pretenses for revenues and taxation. It watches prosperity as its prey and permits none to escape without tribute”.-Thomas Paine

Question: "I understand that Congress is considering a so-called 'flat' tax system. How would this work?"

Answer: "If Congress were to pass a 'flat' tax, you'd simply pay a fixed percentage of your income, and you wouldn't have to fill out any complicated forms, and there would be no loopholes for politically connected groups, and normal people would actually understand the tax laws, and giant talking broccoli stalks would come around and mow your lawn for free, because Congress is NOT going to pass a flat tax, you pathetic fool."-Dave Barry.