Is a Co-operative Housing Society liable to pay service tax?

About 15,000 housing societies in city like Mumbai is an attractive destination to collect revenue for the Service Tax Department, which we hear has already started actions in this direction. Some of the societies in South Mumbai have also started collecting service tax from members after receiving press threats from Department "to pay or face stern action with heavy penalties". It appears that the officials of the Department are quite sure that the Co-operative Housing Societies are liable to pay service tax, under the category of "Club or Association Services". An attempt is made in this article to analyze the gamut Service Tax in general and its provisions pertaining to Club or Association Services in particular, as regards to its applicability to a Co-operative Housing society.

Requisites for levy of Service Tax

As per the scheme of Chapter V of the Finance Act (No. 2) 1994, as amended from time to time (The Act), for the purpose of levy of Service Tax, the following four conditions have to be satisfied.

1. a service which should be further defined as taxable,

2. a service provider,

3. a service receiver and

4. consideration

At first place it is to be noted that the word "Service" is not defined under the law. However, the word "taxable service" is defined in various clauses of section 65(105) in relation to different kind of services which are taxable under the Act. The word "taxable services" itself presupposes existence of a service. Due to absence of meaning of "service" under the Act, lot of confusions prevails today.

The Act defines who is a service provider and a service recipient in relation to different categories of taxable services under section 65(105). Since the levy is on provision of service, the meaning of what is sought to be covered is given in various clauses of s. 65 itself.

The word "consideration" was not used in the Act until the substitution of s. 67 providing for valuation of taxable service by the Finance Act, 2006. Prior to amendment, s. 67 defining value of taxable service used the word "gross value of taxable service". However, since 18th April 2006, s. 67 provides for valuation of taxable service, in case where the consideration is not wholly or partly consisting of money or where the consideration is not ascertainable. [Service Tax (Determination of Value) Rules, 2006]

Club or Association Service – definition u/s. 65(25a)

"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—

1. any body established or constituted by or under any law for the time being in force; or

2. any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or

3. 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

4. any person or body of persons associated with press or media."

The definition of taxable service is provided in section 65(105) (zzze) as,

"to its members, by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount

Keeping in view the requisites for charge of service tax under the law and the provisions of "Club or Association Service", we need to be examine its applicability to the co-operative housing societies vis-à-vis its members.

A co-operative housing society is a mutual organization which is formed and managed by its members.. The concept of mutuality is well established under the direct tax laws on the principal that no body can make profit out of himself. Similarly, under indirect tax laws also the concept is accepted according to the event giving raise to the charge. Under sales tax law, no sales tax is levied if the material is transferred to ones own unit or branch, though price is charged. Under excise law, the question of mutuality does not arise as the dutiable event arises when the goods are manufactured. In case of service tax, the principle of mutuality is accepted by the Courts, some of them are as follows :-

The learned Calcutta High Court observed in Dalhousie Institute’s case as follows:–

The principle of mutuality in the instant case was also squarely applicable, as going by the definitions of mandap, mandap keeper and the taxable service, the facility of use of the premises to the members by its club could not be termed to be a letting out nor the members of the club using the facility of any portion of the premises for any function could be termed to be a client. The services rendered by any person to his client presupposes the element of commerciality and obviously this transaction must be involved with the third parties, as opposed to the members of the club. [Para 16]

The same High Court observed in Saturday Club’s case as follows:–

It appears that to negate the effect of above decisions, the Government has introduced a taxable service under the category of "Club or Association Service" by the Finance Act, 2005 effective from 16-6-2005.

However, the Service Tax Department has failed to appreciate the distinction between an ordinary club and a housing society. Under the deeming provisions, artificial charge may be created in case of a club as it may render a taxable service to its members which would be otherwise taxable under the provisions of the Act but may be escaping tax net due to commonality of the ownership of the club. However, if any service (?) which is not a taxable service per-se even under the Act, no charge can be created by doing away with the mutuality concept. The Department has sought exactly this in its overzealous attempt to recover more and more revenue.

From the definition of Club or Association Service, it appears that every person or association of persons is covered as service provider. Due to blurring up the mutuality concept a co-operative housing society may fit into the definition as service provider and a member of the society as "Service Recipient".

As regards to provision of "service", the definition of Club or Association Service expands the scope and include "facilities" or "advantages" also. However, still a question remains that whether a member of Co-operative Housing receive any facility or advantage from the society. For this purpose, we may look into the functions of a co-operative housing society.

A Co-operative Housing Society normally does the following activities :–

• Collection of municipal and other taxes from the members and pay to the authorities.

• Provide common lights, water supply etc. to the members.

• Making security arrangements for the building, insurance etc. and other peripherals like sweepers etc.

• Maintenance and repairs of building, common compound, lift cable connection etc.

• Transfer of shares or interest of the members in individual flats upon collection of transfer fees.

• Provision of club house, swimming pool etc for member’s use at separate fees.

Let us now examine above functions one by one from the point of view of service tax. Collection of municipal and other charges and payment thereof would merely mean arrangement to facilitate collective payment necessitated by the fact that the municipal corporation issue a combined bill in the name of the society and therefore a combined payment may be needed. Similarly, a common water tank is required because the building gets common connection of water supply from the municipal corporation. From this water tank separate pipe lines are drawn for supply to individual flats. The compound and passage of the building require proper lighting, upkeep etc. Similarly, in case of security and insurance arrangements, the same are for building of the society and the society is a recipient of the service for which it pays service tax on input services. The society in turn does not provide any such service or for that matter any facility or advantage to its individual members. In respect of maintenance and repairs to the building, common cable connection etc. also, the society is a recipient of service and not a provider of service to members as it does not undertake any such service to the member’s individual flats. Most of this is in relation to the property which belong to the society and the bills are received in the names of the society. And the society does not charge any service charge to its members for providing such service or even enter into any contract with members. Further, in all these cases, the society does not even fit into the definition of service provider, as provided under different categories. Transfer of shares is a statutory function carried by a society. In view of this, it is highly arguable that in such cases whether the society provide any service, facility or advance to its members.

It must be noted that there may be a different situation in case the society has swimming pool, heath club etc. The Act has specified these as categories of taxable service, but charge of service tax was not complete due to mutuality of interest. Having blurred this concept, it appears that valid charge of service tax may be created on receipt of any fees or charge for use of these facilities.

Let us now turn to the important aspect of consideration. As regards to receipt of subscription or any other amount, as a requisite in the definition, it may be noted that such "subscription" or "any other amount" should be in form of consideration. It is a moot question that whether there is any consideration flowing from members to the society. In reality the members do not pay any subscription to the society. The meaning of subscription is a periodical payment towards membership of an organization. In case of the society, a member need not pay any subscription for keeping its membership alive as the membership of the society is by virtue of holding ownership of a flat or being a share holder. In fact, what members pay to the society is allocation of expenditure or taxes paid by the society. At the end of the financial period, such collection may be found on higher side or lower side for which the members are entitled to receive surplus or to make good the deficiency.

Let us also examine, the meaning of the words "any other amounts". These words are preceded by the word "subscription". Under the principals of interpretation of taxing statutes, this is covered under what is called a rule of "Ejusdem Generis" This rule means "of the same kind and nature" which means where a general word is preceded by a specific word, the general word would take meaning of the nature of the specific word. Therefore, the words "any other amounts" would also take the meaning like or nature of the word "subscription". Therefore, any other amount which is not in the character of subscription would not be covered for the purpose of this definition. This principal of "Ejusdem Generis" is propounded by the Hon’ble Supreme Court in case of Siddheshwari Cotton Mills vs. UOI 39 ELT 498 (1989) and other courts in India.

In view of above discussion, it is highly arguable that whether a society can be regarded as providing any service, facility or advance to its members for a consideration. It needs to be emphasized that a co-operative housing society is different in character then any other club or association, as vital element of service and consideration, both are absent in case of a housing society. However, in case of swimming pool, health club etc, the situation may be different as discussed above.

Let us now refer to the minimum taxable limit as applicable under Service Tax. Notification No. 6/2004 dated 1-3-2004 exempt taxable service up to Rs. 4 lakhs in a financial year. Accordingly, small societies not having collection up to Rs. 4 lakhs would in any case not be covered. However, the question would be what amount should be included in the value of taxable service. As per Commissioner of Service Tax, Mumbai, municipal taxes would not covered. However, unfortunately there is no Board clarification to support to this.