The landscape of luxury tax legislation has undergone a significant evolution, particularly in the realm of clubs and hotels. This transformation is not merely a chronological progression but a nuanced adaptation to the changing dynamics of the hospitality and leisure industry.
In pursuit of diversifying its revenue streams, the Government of Delhi instituted Luxury Tax commencing on 1st November 1996 [1] (Hereinafter referred to as ‘the Original Act’), targeting diverse establishments such as hotels, lodging houses, and clubs. Subsequently, the scope of the luxury tax was augmented as of 9th August 2012, encompassing services rendered by Banquet Halls, Gyms, and Spas [2] . It was further amended by the Delhi Tax on Luxuries (Amendment) Act, 2012 (Hereinafter referred to as ‘the Amendment Act’).
In a recent judgment [3] by the High Court of Delhi on November 17, 2023, the Delhi Gymkhana Club, a not-for-profit company under Section 25 of the erstwhile Companies Act, 1956 (hereinafter referred to as ‘the Act’), challenged the validity of an order passed by the Commissioner (Entertainment and Luxury Tax). The dispute revolved around the imposition of luxury tax on the club's activities for the financial years 2009-10, 2010-11, and 2011-12. The judgment, pronounced by Hon'ble Justices Yashwant Varma and Justice Ravinder Dudeja, delves into the intricate web of luxury tax laws, definitions, and amendments.
The petitioner, Delhi Gymkhana Club, contested the order asserting its status as a social club governed by the principle of mutuality. The club claimed it was duly incorporated as per Section 25 of the Act and, therefore, not liable to pay luxury tax under the Delhi Tax on Luxuries Act, 1996.
Evolution of Luxury Tax Law Pertaining to Clubs and Hotels:
The case involved an analysis of the Delhi Tax on Luxuries Act, 1996, and its subsequent amendment in 2012. The original act primarily focused on taxing the turnover of receipts related to the provision of residential accommodation by hoteliers. However, the 2012 amendment broadened the scope to include banquet halls, gymnasiums, health clubs, and spas.
The original Act defined the expression ‘business’ in Section 2(b) as “the activity of providing residential accommodation and any other service in connection with, or incidental or ancillary to such activity of providing residential accommodation, by a hotelier for monetary consideration [4] ”
It also defined the words 'club', 'establishment', 'hotelier, and 'luxury provided in a hotel' in the following terms:-
Section 3 [5] of the Original Act, serves as the charging provision and delineates the imposition and assessment of tax on the turnover of receipts of a hotelier. The key provisions are as follows:
Levy of Tax on Hotelier's Turnover:
Subsection (1) stipulates the imposition of a tax on the turnover of receipts of a hotelier, subject to the provisions of the Act and the accompanying rules.
Tax Rate and Notification:
Subsection (2) outlines that the tax rate shall not exceed fifteen per cent and empowers the government to notify the specific rate from time to time. Different rates may be notified for distinct classes of hotels based on the charges for luxury they provide.
Computation of Charges:
The proviso under subsection (2) elucidates the computation of charges for tax liability when charges are levied other than on a daily basis or per room. It mandates proportional computation based on the total period of occupation of the accommodation.
Inclusion of Service Charges:
Subsection (3) addresses the inclusion of service charges, levied and retained by the hotelier (not paid to the staff), as part of the charges for luxury provided in the hotel.
Tax on Concessional or Nonexistent Charges:
Subsection (4) asserts that if luxury provided in a hotel is not charged or is charged at a concessional rate, the tax shall still be levied and collected at the rate specified in subsection (2) as if full charges were paid.
Exemption for Food and Drinks:
Subsection (5) provides an exemption from tax on the turnover of receipts for the supply of food and drinks if the hotelier is liable to pay sales tax under the Delhi Sales Tax Act, 1975.
Treatment of Tax Collected Separately:
Subsection (6) clarifies that tax collected separately by the hotelier is not considered part of the receipt or turnover of receipts of the hotelier for the purposes of this Act.
The term ‘luxury’ was introduced by the 2012 Amendment Act [6] and is defined to encompass the use of goods, services, property, etc., for enjoyment, comfort, pleasure, or consumption beyond the necessity of life. Specific inclusions under "luxury" are detailed for banquet halls, gymnasiums, hotels, and spas.
Amendments to Section 3 - Incidence and Levy of Tax:
Section 3 outlines the incidence and levy of tax on the turnover of receipts of a proprietor. Notably, it empowers the government to notify the tax rate, not exceeding fifteen percent. Different rates may be notified for different classes of luxuries provided. The section specifies the computation of tax liability when charges are levied other than on a daily basis or per room. Service charges levied and retained by the proprietor, not paid to the staff, are deemed part of the turnover of receipts for tax purposes. Even if luxury is not charged or is charged at a concessional rate, the tax is levied and collected as if full charges were paid. Exemptions from tax are provided for turnover related to food, drinks, and certain goods under the Delhi Value Added Tax Act, 2005.
Tax collected separately by the proprietor is not considered part of the receipt or turnover for the purposes of the Act.
Application of Principle of Mutuality:
The principle of mutuality is a legal principle that comes into play when an entity, such as a company, collects money from its members and applies it for their benefit. The key aspect of this doctrine is the identity in the character of those who contribute and those who participate in the surplus. The Supreme Court of India has elaborated this principle in the case of Royal Western India Turf Club India Ltd. v. Commissioner of Income Tax [7] .
The Supreme Court explained that when there is identity between the contributors and the beneficiaries of the surplus, the incorporated company may be considered a mere instrument or a convenient agent for carrying out what the members might otherwise do for themselves. In essence, it implies that if a company exists for the benefit of its members, and there is no profit motive involved in transactions among the members, the principle of mutuality suggests that such transactions should not be treated as generating profits for taxation purposes. The emphasis is on the reciprocal relationship between contributors and beneficiaries, where any surplus is seen as a return to the contributors rather than as a profit of the company.
Luxury Tax on Club Facilities:
The Delhi High Court in the Delhi Gymkhana Club Case [8] provided an analysis that focuses on the expansion of the tax levy introduced by the 2012 Amendment Act. The amendment extended the scope of the levy from just an "establishment," as defined in Section 2(g) of the Act, to activities defined under both Sections 2(eb) and 2(g). This meant that the tax was now applicable not only to establishments like hotels but also to banquet halls, gymnasiums/health clubs, and spas.
However, the High Court observed that the definition of "luxury" under Section 2(i) includes specific activities, such as accommodation or space in a banquet hall, services in a gymnasium or health club, accommodation and services in a hotel, or facilities and services in a spa. The petitioner, according to the Court, did not fall within any of these specified activities.
This analysis is crucial when examining the word "receipt" as defined in Section 2(m). The Delhi High Court points out that for the levy of tax, the petitioner, considered as an establishment under Section 2(g), must not only provide luxury but must also generate income or receipts from the provision of that luxury. The Court suggested that the petitioner's receipts fell within the scope of Section 2(m) since their income was not derived from providing a luxury as defined under the Amendment Act. This distinction is significant for determining the applicability of the luxury tax to the petitioner.
In 'Trivandrum Club vs. Sales Tax Officer, [9] ’ a reputed club in Thiruvananthapuram, challenged the levy and demand of luxury tax on rent and other charges collected by the club from guests staying in A/C cottages, A/C rooms, and non-A/C rooms attached to the club. The club had no dispute regarding the luxury tax payable under Section 4(2A) of the Kerala Tax on Luxuries Act, 1976, however, the dispute arose concerning the luxury tax demanded for the rent and other charges collected from guests residing in the mentioned rooms and cottages.
The central issue in the case was whether the Trivandrum Club, being a club and not a hotel, was liable to pay luxury tax on room rentals and other charges for accommodation and facilities provided to guests.
The High Court of Kerala, in its analysis, considered whether the cottages and rooms attached to the club fell within the definition of a "hotel" under Section 2(e) of the Kerala Tax on Luxuries Act. The club contended that it did not engage in a business activity of renting out rooms for profit, and therefore, it should not be considered a hotel liable to pay luxury tax. However, the Court held that the definition of "hotel" under the Act is broad, encompassing even guest houses run by the Government or corporations.
The High Court also emphasized that specific provisions existed for charging luxury tax on clubs, including a yearly tax per member and tax on rent collected for facilities like 'auditoriums and kalyanamandapams attached to clubs'.
Ultimately, the High Court concluded that cottages and rooms attached to clubs fell within the definition of "hotel," making them liable for luxury tax.
Lastly, in the matter of M/s Mahindra Holiday & Resort India Ltd. & Ors. vs. The Intelligence Officer & Ors. [10] , the Kerala High Court conclusively determined that a ‘timeshare arrangement’, characterized by the agreement between the assessee and the member pertaining to accommodation for residence or use in a hotel, unequivocally falls within the purview of luxury as defined by the Kerala Tax Luxuries Tax Act, 1976. As a result, it has been established as subject to taxation under the aforementioned Act.
The High Court in this case emphasised that membership fees or annual subscription fees are not subject to taxation. Instead, the charges per day are determined based on fixed rates or tariffs for each type of room during a specific season. The High Court stated that the charges, as applicable during the enjoyment of the privilege, are considered even when calculating liquidated damages for members unable to secure accommodation after a confirmed booking. The same has been held in 'Godfrey Phillips India Ltd. v. State of U.P. [11] '. The Court asserted that the activity being taxed falls within the definition of luxury under the Kerala Act, which includes accommodation for residence or use in a hotel.
Implications for Future Cases:
The Delhi Gymkhana Club case highlights the importance of challenging tax laws at their inception to establish a strong legal footing. It also highlights the evolving nature of tax legislation and the need for meticulous legal scrutiny in adapting to changes. As tax laws continue to evolve, future cases will likely grapple with similar intricacies, emphasizing the need for a nuanced understanding of both the principles of mutuality and statutory amendments.
