Definitive Lack Of Legislative Competence: Kerala High Court Declares Sections 2(17)(E), 7(1)(AA) & Explanation Thereto Of CGST Act As Unconstitutional
|The Kerala High Court was dealing with Writ Appeals, one filed by the Indian Medical Association, Kerala State Branch and the other two by the GST Officials of the Union and the Kerala State.
The Kerala High Court has declared Sections 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the Central Goods and Services Tax Act, 2017 (CGST) as unconstitutional.
The Court was dealing with a batch of Writ Appeals, one filed by the Indian Medical Association, Kerala State Branch and the other two by the GST Officials of the Union and the Kerala State against the Judgment of the Single Judge.
A Division Bench of Justice A.K. Jayasankaran Nambiar and Justice Easwaran S. held, “… a legislature has to be accorded a greater degree of latitude in laws relating to economic activities, and that no statute should be struck down unless it is vitiated by a constitutional infirmity. We do however find that the statutory provisions impugned in these proceedings suffer from a definitive lack of legislative competence. Accordingly the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017 and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the KGST Act are declared as unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India.”
The Bench noted that a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, a legislative body, that derives its legislative competence to enact a Statute from the Constitution, cannot give to the word/concept a meaning that goes against the meaning assigned to the same word/concept by the Supreme Court in the context of its setting under the Constitution. It added that, this is especially so because, when used in the Constitution in a particular sense, it is that sense of the word/concept that determines the very competence of the legislature to enact a law in relation to the subject represented by that word/concept.
Senior Advocate Arvind P. Datar and Advocate P.R. Renganath appeared for the Appellant while Additional Solicitor General (ASG) AR. L. Sundaresan and Special Government Pleader (SGP) Mohammed Rafiq appeared for the Respondents.
Factual Background
The Kerala State Branch of the Indian Medical Association (IMA) apprehended coercive action from the Directorate General of GST Intelligence for recovery of tax on various services rendered by it to its members. While it was the Petitioner's contention that it was not liable to pay tax on the supply of services to its members, it apprehended coercive action for recovery of tax when it was served with summons requiring it to produce details of the registration taken by it under the GST Act and their audited books of accounts and other financial documents for the financial years from 2017-18 to 2021-22. The Petitioner runs various mutual Schemes for the benefit of its member-doctors, e.g. Social Security Schemes or SSS (I, II, and III), Professional Disability Support Scheme (PDSS), Professional Protection Scheme, Kerala Health Scheme, etc. All the Schemes are to support fellow doctors, while one or two Schemes support their immediate family members.
The Petitioner believed that it was not liable to pay GST on services rendered by it to its members under the said Schemes since it was well settled through a line of precedents that the principle of mutuality would insulate services rendered by a Club/Association to its members from the levy of GST on supply of services. The underlying basis for the non-taxability of such services was the concept that when a Club/Association provides services to its members, there is no separate recipient of the services provided by the Club/Association and that the services were effectively provided by the members of the Club/Association to themselves. The said basis of non-taxability was, however, removed by an amendment of the provisions of Section 2(17)(e) and Section 7(1)(aa) read with the Explanation thereto of the CGST Act and the Kerala Goods and Services Tax Act, 2017 (KGST Act) that introduced deeming provisions making the supply of services by a Club/Association to its members a taxable supply for the purposes of the levy of tax. The amendment that was introduced through the Finance Act, 2021 was also made retroactive with effect from July 1, 2017, thereby adding to the financial woes of the Petitioner.
Single Judge’s Findings
The Single Judge, who heard the matter, found that insofar as the amendment to the CGST/SGST Act through Finance Act, 2021 had the effect of removing the basis of the immunity that was hitherto granted to the Petitioner on the principle of mutuality, and there was no merit in the contentions of the Petitioner as regards manifest arbitrariness of the statutory provisions, the declaration sought for in the Writ Petition could not be granted. The Judge, however, found that the retroactive operation given to the amendment could not be legally sustained on the principles of fairness and set aside the retroactivity envisaged for the amendment. Hence, the parties were before the Division Bench.
Court’s Reasoning
The High Court in the above context of the case, observed, “… it can be safely assumed that the Scheme of GST under the Constitution also contemplates the existence of at least two persons - a provider and a recipient before one can infer either a “supply” or a “service” for the purposes of the levy. In other words, the concepts of self-supply or self service are not envisioned under the Constitution for the purposes of the levy.”
The Court said that the concept of ‘supply’ and ‘service’ as understood under the Constitution and the CGST/SGST Acts (before their amendment) both excluded transactions informed by the principle of mutuality i.e., a supply/service from one entity to itself (self supply/self service) and, thus, even if there is now a deemed ‘supply’, based on the amendments effected to the CGST/SGST Acts, there is no deemed ‘service’ in circumstances where the service is rendered by a club or association to its members, since the definition of service has not been amended.
“What is significant is that the interpretation of the word 'income' as contained in earlier precedents was in the context of the Income Tax Act and not in the context of the Constitution itself. The Court held that the use of the word 'income' in the Entry in List I was sufficiently wide to take in loans advanced to a shareholder by a Company. The Court did not have to deal with a situation where the words in the Entry itself had acquired a definite meaning through judicial interpretation. Interestingly, the Court did observe that there had to be some rational connection between the items taxed and the concept liberally construed”, it noted.
Furthermore, the Court enunciated that the concepts of ‘supply’ and ‘service’ having been judicially interpreted as requiring at least two persons – a provider and a recipient, for inferring their existence, and the Supreme Court having held that the principle of mutuality has survived the 46th amendment to the Constitution, so long as the judgment holds sway as a binding precedent and/or the Constitution is not amended suitably to remove the concept of mutuality from the concepts of supply and service thereunder, the impugned amendment to the CGST/SGST Acts must necessarily fail the test of constitutionality.
“In the light of our above finding with regard to the unconstitutionality of the impugned statutory provisions, it is unnecessary for us to go into the validity of the retrospective/retroactive operation given to the said provisions. However, we might record our agreement with the findings of the learned Single Judge that held the said retrospective operation to be illegal. The principle of fairness is one that must inform all actions of a State, including legislation, since it is an essential aspect of the Rule of Law that is recognised as a basic feature of the Constitution”, it remarked.
The Court elucidated that the insertion of a statutory provision that alters the basis of indirect taxation with retrospective effect, so as to tax persons for a prior period when they had not anticipated such a levy and, consequently, had not obtained an opportunity to collect the tax from the recipient of their services, militates against the concept of Rule of Law.
“On its part, the State too would be found wanting in offering a valid justification for it’s legislative action. Over the last seven decades since the adoption of our Constitution the guarantees therein have been ensured to our citizenry through progression from a culture of authority to a culture of justification. Accordingly, in modern times the State is obliged to offer justification for all its actions that touch upon the constitutional rights, fundamental and otherwise, of its citizens. We do not find any such justification for the retrospective operation of the impugned statutory provisions”, it concluded.
Accordingly, the High Court allowed the Appeal of the IMA and dismissed the Appeals of the GST Officials.
Cause Title- Indian Medical Association, Kerala State Branch v. Union of India & Ors. (Neutral Citation: 2025:KER:30517)
Appearance:
Appellant: Senior Advocate Arvind P. Datar, Advocates P.R. Renganath, George Varghese, Manu Srinath, Nimesh Thomas, and Lijo John Thampy.
Respondents: ASG AR. L. Sundaresan and SGP Mohammed Rafiq.