Contributions from members, recovered for spending on weekly meetings, other petty administrative expenses amounts to supply

The Hon'ble AAR, Maharashtra in the matter of M/S. Rotary Club of Mumbai Elegant [Advance Ruling No. GST-ARA-26/020-21/B-108 dated December 9, 2021] held that, contributions from club members, recovered for spending on weekly meetings, other petty administrative expenses amounts to ‘supply' and the activity of collecting contributions and spending towards meeting and administrative expenditures only, is business under Central Goods and Services Tax Act, 2017 ("CGST Act").

Facts

M/S. Rotary Club of Mumbai Elegant ("the Applicant") is a group of people who carry out various charitable causes and activities from donations received from members, amount collected through various other channels and accruals of the corpus fund. Donations/charity received are used exclusively for the purpose of donation/charity and no amount is utilized for administration purposes. In addition to that, sums are recovered from all the members for expending the same for the weekly and other meetings and other petty administrative expenses incurred which include the expenses for the location and refreshments and facilitation of meetings of its members held for the members to review existing activities and consider new projects for execution. In these meetings, the charitable proposals are considered, discussed & approved or rejected for taking up as a likely cause for execution. No facilities/benefits are provided such as recreation etc. by club.

Furthermore, the administration and working of the Applicant and implementation of policies are established and implemented on the concept of mutuality.

Issues

1. Whether contributions from the members, recovered for expending the same for the weekly and other meetings and other petty administrative expenses incurred including the expenses for the location and light refreshments, amounts to or results in a supply, within the meaning of supply and leviable to tax?
2. Whether the activity of the Applicant would be considered as ‘business' as envisaged under Section 2(17) of the CGST Act?

Held

The Hon'ble AAR, Maharashtra in Advance Ruling No. GST-ARA-26/020-21/B-108 dated December 9, 2021 held as under:

• Analysed Section 7 of the CGST Act and observed that, the Applicant and its members are distinct persons and the contribution received by the Applicant, from its members is nothing but consideration received for supply of goods/services as a separate entity. The principles of mutuality is not applicable in view of the amended Section 7 of the CGST Act and therefore, GST on the amounts received from its members would be levied.
• Noted that, as per Section 7(1)(aa) of the CGST Act, the expression "supply" includes the activities or transactions, by a person, other than an individual, to their members or constituents or vice versa, for cash, deferred payment or other valuable consideration and the meetings conducted by the Applicant including food, refreshment, etc. are nothing but activities carried out by the Applicant for its members.
• Observed that, the amendment to Section 7 of the CGST Act, clearly treats the Applicant and its member as two different persons where there is a supply of services from the Applicant to its members and thus there is a supply by the Applicant to its members and consideration is received in the form of "fees".
• Opined that, from a plain reading of the Section 2(17) of the CGST Act, it is clear that the activities of the Applicant falls under the ambit of "business".
• Held that, contributions from the members, recovered for expending the same for the weekly and other meetings and other petty administrative expenses incurred including the expenses for the location and light refreshments, amounts to or results in a supply.

Our comments

• It is to be noted that sub-section (aa) of the Section 7(1) of the CGST Act has been inserted vide the Finance Act, 2021 dated March 28, 2021 w.e.f. July 01, 2017 but the same is yet to be notified.
• Further, in pre-GST era also there has been dispute regarding the taxability of transactions between clubs, associations, etc. and its members. The superseding provision is inserted to do away with the principle of mutuality in pre-GST regime upheld in the case of Hon'ble SC in the cases of State of West Bengal & Ors. v. Calcutta Club Limited [Civil Appeal No. 4184/2009 dated October 03, 2019] and Chief Commissioner of Central Excise and Service & Ors. v. Ranchi Club Ltd. [Civil Appeal No. 7497/2012 dated October 03, 2019] upheld the doctrine of mutuality and stated that there cannot be sale of goods or provision of services between the incorporated private clubs/ associations and its members owing to the principle of mutuality which treats such clubs/ associations and its members as the same person. It is to be noted here that while the Explanation 3 to Section 65B(44) of the Finance Act, 1994 created a deeming fiction to treat activities between an unincorporated association and its members as deemed supply.
• Furthermore, AAAR, Maharashtra in Re: Rotary Club of Mumbai Queens Necklace [Order No. MAH/AAAR/SS-RJ/15/2019-20 dated November 06, 2019] has held that subscription/membership/admission fees collected by Rotary Club on Mumbai Queen's Necklace is not liable to GST as the entire such amount is expended towards meetings and administrative expenditures, which do not constitute business under Section 2(17) of the CGST Act. If it is held that the activities constitute supply then it would be subject to double taxation as the amount spent towards meetings and administrative expenditures is already subject to GST at the hands of suppliers of these input services or goods used in the meeting or events and would be clearly against the legislature's intention of forming GST, as it clearly doesn't embrace the idea of double taxation.
• Conversely, AAAR, West Bengal on same facts in Re: Association of Inner Wheel Clubs of India [Appeal Case No. 11/WBAAAR/2018 dated March 20, 2019] has held that GST is leviable on such membership fees.
• Further, AAAR, Maharashtra, in the case of Lions Club of Poona Kothrud (Order No.- MAH/AAAR/SS-RJ/32A/2018-19 dated August 14, 2019), held that the membership fees collected are not only meant for administrative expenses but also for organizing leadership programs for direct benefits of the members. Therefore, GST is leviable on the amount collected by the club.
• Thus, divergent ruling have been given by AAR/ AAAR and therefore amendment of Section 7(1)(aa) of the CGST Act has been made to do away with the principle of mutuality (and unsettled the settled jurisprudence with specific overriding effect over judgments) with retrospective date to ensure the levy of GST on supply of goods and services by clubs or association to its members irrespective of whether or not the entity is incorporated. However, it has to be borne in mind that the same is not effective yet thus cannot be relied upon by the AAR, AAAR, Courts etc. to decide a case.