Supreme Court clarifies tax liability of clubs supplying goods to members in sales tax cases: Cosmopolitan Club vs. State of Tamil Nadu (25 September 2008)

Date of the Judgment: 25 September 2008
Judges: S.H. Kapadia, B. Sudershan Reddy
The Supreme Court addressed the question of whether clubs are liable to pay sales tax on the supply of food and drinks to their members. The core issue revolves around whether such supplies constitute a ‘sale’ under the Tamil Nadu General Sales Tax Act, 1959. The bench, comprising Justices S.H. Kapadia and B. Sudershan Reddy, delivered the judgment.

Case Background

The case involves the Cosmopolitan Club, a club incorporated under Section 26 of the Companies Act, 1913. The dispute arose when the State of Tamil Nadu sought to levy sales tax on the club for the supply of food and drinks to its members. The club contested this, arguing that such supplies do not constitute a sale but are merely a transaction between the club and its members, where the club acts as an agent.

Timeline

Course of Proceedings

The club initially challenged the show cause notice issued in 1993 by filing a Writ Petition in the High Court, which was later transferred to the Tribunal. The Tribunal dismissed the matter on merits, a decision that was subsequently confirmed by the Madras High Court in the impugned judgment dated 5th December 2001. Following the High Court’s decision, an Assessment Order was passed against the club. The club then appealed to the First Appellate Authority, which also dismissed the appeal. As of the Supreme Court hearing, the matter (T.A.No. 17 of 2000) was pending before the Tribunal.

Legal Framework

The legal framework relevant to this case includes:

• Tamil Nadu General Sales Tax Act, 1959: The core statute under which the sales tax was being levied.
• Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959: Amended by Act 28 of 1984, with the insertion of clause (v), which states that “supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration, shall also be deemed to be sales.”
• Sale of Goods Act, 1930: The definition of “sale” in this Act is relevant to determine whether a transaction constitutes a sale.
• 46th Amendment of the Constitution: This amendment led to changes in the statute book concerning sales tax.

Arguments

Arguments by the Cosmopolitan Club:

• The club argued that when it supplies food or drinks to its members, it does not constitute a sale. The club acts merely as an agent of its members.
• Reliance was placed on the judgments in Secretary, the Madras Gymkhana Club Employees Union Vs. Management of the Gymkhana Club (1969) 1 SCR 742 and Joint Commercial Taxes Officer, Harbour Division-II, Madras Vs. Young Men’s Indian Association (1970) 1 SCC 462.
• The club contended that, based on the definition of “sale” in the Sale of Goods Act, 1930, there is no sale if there is no transfer of property from one to another. If the club acts as an agent for its members in supplying various preparations, no sale is involved as the element of transfer would be completely absent.

Arguments by the State of Tamil Nadu:

• The State relied on clause (vi) inserted to Section 2(n) of the 1959 Act, arguing that the supply of goods by the club to its members constitutes a sale after the amendment of Act 28 of 1984.
• The amendments were brought on the statute book in view of the 46th Amendment of the Constitution.

Issues Framed by the Supreme Court

1. What is the exact relationship between the club and its members in the matter of supply of food and drinks? Specifically, is the club acting as an agent of the members, or does the property in food and drinks pass from the club to the members?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Secretary, the Madras Gymkhana Club Employees Union Vs. Management of the Gymkhana Club (1969) 1 SCR 742: This case established that a club belongs to its members and can deal with the club as they like, identifying the club with its members at a given point in time.
• Joint Commercial Taxes Officer, Harbour Division-II, Madras Vs. Young Men’s Indian Association (1970) 1 SCC 462: This case dealt directly with the question of whether the supply of various preparations by a club to its members involves a transaction of sale. It was held that if the club acts as an agent for its members, no sale is involved.
• Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959: This section, as amended, includes the supply of goods by an association to its members as a deemed sale.
• Sale of Goods Act, 1930: The definition of “sale” in this Act was considered to determine if a transfer of property occurred.

Judgment

The Supreme Court set aside the judgment of the Madras High Court and remitted the matter to the Tribunal for a fresh determination. The Tribunal was directed to decide the pending appeal based on facts, considering the relationship between the club and its members in the supply of food and drinks. The Court emphasized the importance of determining whether the club acted as an agent of its members or whether the property in the goods passed from the club to the members.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to determine the true nature of the transaction between the club and its members. The Court emphasized the principle of mutuality and agency, which suggests that if the club is merely acting as an agent for its members, no sale occurs. The Court also considered the definition of “sale” under the Sale of Goods Act, 1930, which requires a transfer of property from one party to another.

Key Takeaways

• The tax liability of clubs on supplies to members depends on the nature of the club-member relationship.
• If a club acts merely as an agent for its members, no sales tax is applicable.
• The principle of mutuality is a key factor in determining whether a transaction constitutes a sale.

Development of Law

The ratio decidendi of the case is that the determination of sales tax liability for clubs depends on the factual relationship between the club and its members, particularly whether the club acts as an agent or whether there is a transfer of property. This clarifies the application of sales tax laws to clubs and similar organizations.

Conclusion

In summary, the Supreme Court’s judgment in the Cosmopolitan Club case emphasizes the importance of a factual determination of the relationship between a club and its members to ascertain sales tax liability on the supply of goods and services. The Court set aside the High Court’s decision and remitted the matter to the Tribunal for a fresh determination, taking into account the principles of mutuality and agency.

Category

• Sales Tax
  • Tamil Nadu General Sales Tax Act, 1959
  • Section 2(n), Tamil Nadu General Sales Tax Act, 1959
  • Sale of Goods Act, 1930
  • Mutuality Principle
  • Agency Principle
• Companies Act
  • Section 26, Companies Act, 1913
• Constitutional Law
  • 46th Amendment of the Constitution

FAQ

1. Are clubs required to pay sales tax on food and drinks supplied to their members?
   The answer depends on the nature of the relationship between the club and its members. If the club acts as an agent for its members, no sales tax is applicable.
2. What is the principle of mutuality in the context of club supplies?
   The principle of mutuality suggests that if a club is merely facilitating a transaction among its members without making a profit, it is not considered a sale.
3. What factors will the Tribunal consider in determining the tax liability of the Cosmopolitan Club?
   The Tribunal will consider the principle of mutuality and agency, as well as the exact relationship between the club and its members in the supply of food and drinks.