Indian Medical Association, Kerala State Branch v. Union of India

Writ Appeals – Constitutionality of GST Amendments – Principle of Mutuality – Retrospective Taxation.

Held: Sections 2(17)(e) and 7(1)(aa) and Explanation thereto of the Central Goods and Services Tax Act, 2017, and Kerala Goods and Services Tax Act, 2017, declared unconstitutional and void as ultra vires Article 246A read with Article 366(12A) and Article 265 of the Constitution – Amendments deeming services by an association to its members as taxable supplies violate the principle of mutuality, requiring two distinct entities for “supply” or “service” as judicially established – Statutory redefinition of “supply” without constitutional amendment exceeds legislative competence – Retrospective operation from July 1, 2017, illegal for violating fairness and Rule of Law – W.A. No. 1659/2024 allowed; W.A. Nos. 1487/2024 and 468/2025 dismissed – No costs.

Court: High Court of Kerala at Ernakulam
Judges: Dr. Justice A.K. Jayasankaran Nambiar & Mr. Justice Easwaran S.
Date of Judgment: April 11, 2025
Case Numbers: W.A. Nos. 1659/2024, 1487/2024, 468/2025
Citation: 2025 KER 30517

Parties:

• Appellant in W.A. No. 1659/2024: Indian Medical Association, Kerala State Branch (IMA), represented by Dr. Joseph Benaven.
• Appellants in W.A. No. 1487/2024: Union of India, GST Council, Additional Director General, and Deputy Director, Directorate General of GST Intelligence.
• Appellant in W.A. No. 468/2025: State of Kerala, represented by the Secretary, Department of Finance.
• Respondents: Union of India, State of Kerala, GST Council, Additional Director General, and Deputy Director, Directorate General of GST Intelligence (varied by appeal).

Procedural History:

• Original Case: W.P.(C) No. 21297 of 2023, decided on July 23, 2024, by a Single Judge of the Kerala High Court.
• Appeals:
  • W.A. No. 1659/2024 by IMA, challenging the Single Judge’s dismissal of its constitutional challenge to GST provisions.
  • W.A. Nos. 1487/2024 and 468/2025 by the Union and State, respectively, challenging the Single Judge’s ruling against the retrospective operation of the amendments.
• Hearing Date: March 20, 2025.
• Judgment Date: April 11, 2025.

Facts:

• IMA, a registered society, operates various mutual benefit schemes (e.g., Social Security Schemes, Professional Disability Support Scheme, Professional Protection Scheme, Kerala Health Scheme, Pension Scheme) for its member-doctors. These schemes involve contributions like admission fees, annual subscriptions, and fraternity contributions, with benefits disbursed to members or their families upon events like death, disability, or litigation.
• IMA contended it was exempt from GST on these services due to the principle of mutuality, arguing that services provided to members are not taxable as they lack a distinct provider-recipient relationship.
• The Finance Act, 2021, amended Sections 2(17)(e) and 7(1)(aa) of the Central Goods and Services Tax Act, 2017 (CGST Act) and Kerala Goods and Services Tax Act, 2017 (KGST Act), introducing a deeming provision to treat services by an association to its members as taxable supplies, retroactively effective from July 1, 2017.
• IMA faced GST demands, including a show-cause notice for Rs. 45.32 crores plus interest and penalties, prompting it to file a writ petition challenging the constitutionality of the amendments and their retrospective application.
• The Single Judge upheld the amendments’ validity but struck down their retrospective operation as unfair. Both parties appealed.

Issues:

1. Constitutionality of Amendments: Are Sections 2(17)(e) and 7(1)(aa) and their Explanation in the CGST and KGST Acts unconstitutional for violating Article 246A read with Article 366(12A) and Articles 14, 19(1)(g), 265, and 300A of the Constitution, by overriding the principle of mutuality?
2. Retrospective Operation: Is the retrospective application of these amendments from July 1, 2017, legally sustainable?

Arguments:

IMA (Appellant in W.A. No. 1659/2024):

• Mutuality Principle: The principle of mutuality, recognized in cases like Calcutta Club Ltd. (2019), establishes that a club/association and its members are one entity, precluding taxable supply or service. This principle survives post the 46th Constitutional Amendment and applies to incorporated bodies.
• Constitutional Limits: Article 246A authorizes GST on “supply” of goods or services, which requires two distinct entities. The amendments’ deeming fiction, treating clubs and members as separate, exceeds the constitutional scope of “supply” under Article 366(12A), as it cannot cover self-service.
• Precedent: In Gannon Dunkerley (1958), statutory expansions of constitutional terms like “sale” were struck down unless supported by constitutional amendments. Similarly, expanding “supply” requires a constitutional amendment, not a statutory one.
• Retrospectivity: Retroactive taxation from 2017 is arbitrary, imposes unforeseen burdens (e.g., Rs. 45.32 crores demand), and violates fairness under Articles 14 and 19(1)(g). It’s not clarificatory but a new levy, as no GST was anticipated pre-2021, preventing IMA from collecting tax from members.

Union of India (Appellant in W.A. No. 1487/2024):

• Legislative Power: Article 246A grants broad powers to levy GST without restrictions on defining “supply” or “person.” The amendments validly deem club-member transactions as taxable supplies, within Parliament’s competence.
• Overriding Mutuality: The legislature can remove the basis of judgments like Calcutta Club through statutory amendments. The Explanation to Section 7(1)(aa) clarifies that clubs and members are distinct for GST purposes.
• Retrospectivity: The amendments are clarificatory, reinforcing the pre-existing liability under Section 7(1)(a). Most clubs paid GST pre-2021, indicating IMA’s liability was foreseeable. Retrospectivity is permissible unless it confiscates vested rights, which is not the case here.

State of Kerala (Appellant in W.A. No. 468/2025):

• Broad Interpretation: Per Lalta Prasad (2024), legislative entries like Article 246A should be interpreted widely. “Supply” should not be narrowly construed to exclude club-member transactions.
• No Mutuality Limitation: The common law doctrine of mutuality does not restrict Article 246A’s plenary taxing power. IMA, as an incorporated society, is a distinct legal entity, negating mutuality.
• Retrospectivity: Retrospective operation is expressly legislated and not oppressive. Taxation is a sovereign power, and fairness concerns do not override legislative intent.

Holding:

1. Constitutionality of Amendments:
   • The Court held that Sections 2(17)(e) and 7(1)(aa) and their Explanation in the CGST and KGST Acts are unconstitutional and void.
   • Reasoning:
     • The Constitution, under Article 246A and Article 366(12A), envisages GST on “supply” of goods or services, requiring two distinct entities (provider and recipient), as affirmed in Ranchi Club (2012) and Calcutta Club (2019).
     • The principle of mutuality, surviving the 46th Amendment, excludes self-supply or self-service from taxation. The amendments’ deeming fiction, treating club-member transactions as taxable supplies, contradicts the constitutional understanding of “supply” and “service.”
     • Unlike the 46th Amendment, which constitutionally expanded “sale” to include club-member transactions for goods, no such amendment supports taxing services here. The legislature cannot statutorily redefine constitutional terms without amending the Constitution.
     • The Court distinguished cases like Navnit Lal (1965) and Skill Lotto (2021), where statutory definitions aligned with constitutional terms’ broad interpretations, unlike here, where “supply” is judicially confined to two-party transactions.
     • The amendments lack legislative competence under Article 246A and violate Article 265 (no tax without authority of law).
2. Retrospective Operation:
   • Given the amendments’ unconstitutionality, the Court deemed it unnecessary to rule extensively on retrospectivity but agreed with the Single Judge that retroactive operation is illegal.
   • Reasoning:
     • Retrospective taxation, imposing unforeseen liabilities (e.g., Rs. 45.32 crores demand), violates fairness and the Rule of Law, a basic constitutional feature.
     • The State failed to justify retroactivity, which burdens entities unable to collect taxes for past periods, undermining constitutional rights under Articles 14 and 19(1)(g).

Disposition:

• W.A. No. 1659/2024 (IMA): Allowed. Sections 2(17)(e) and 7(1)(aa) and their Explanation in the CGST and KGST Acts are declared unconstitutional, with consequential reliefs to IMA.
• W.A. Nos. 1487/2024 (Union) and 468/2025 (State): Dismissed.
• Costs: No costs awarded.

Significance:

• Mutuality Upheld: Reinforces the principle of mutuality in GST law, protecting associations from taxation on member services absent a constitutional amendment.
• Constitutional Limits: Clarifies that statutory amendments cannot override judicially established meanings of constitutional terms like “supply” without amending the Constitution.
• Retrospective Taxation: Underscores fairness as a constitutional requirement, limiting retroactive tax laws that impose unforeseen burdens.

Counsel:

• For IMA: Sri. Arvind P. Datar (Senior Advocate), Sri. P.R. Renganath, and others.
• For Union: Sri. A.R.L. Sundaresan (Additional Solicitor General).
• For State: Sri. Mohammed Rafiq (Special Government Pleader, Taxes).

Note: This brief summarizes the judgment’s core elements. For precise legal application, refer to the full text of 2025:KER:30517.