2022 (8) TMI 707 - HC - Service Tax

University affiliation fees held exempt from service tax; show cause quashed except for rental income issues left open

HC held that affiliation granted by the petitioner University to private colleges is an activity in furtherance of providing education, covered by ... Services by way of education as part of a curriculum for obtaining a qualification recognised by law (Clause (l) of Section 66D) - Exemption from service tax for educational services - Bundled service - essential character test for incidental activities - Jurisdiction to issue show cause notice proposing levy of service taxServices by way of education as part of a curriculum for obtaining a qualification recognised by law (Clause (l) of Section 66D) - Exemption from service tax for educational services - Affiliation fees received by the University are to be treated as consideration for educational services exempt from service tax. - HELD THAT: - The University, established under the State Universities Act, performs functions of imparting education both directly and through affiliated colleges, including regulation of curriculum and conduct of examinations. The fee charged from affiliated colleges for affiliation is a service rendered in furtherance of providing education and therefore falls within the activity contemplated by Clause (l) of Section 66D which places education as part of a curriculum for obtaining a recognised qualification on the exemption list. The respondents' contention that affiliation fee is a separate commercial consideration for affiliating private institutions is rejected as erroneous; the activity of granting affiliation is integrally linked to the educational service rendered by the University and is exempt from service tax. [Paras 8, 11]Affiliation fee received by the petitioner is exempt from service tax as part of educational services and cannot be taxed.Bundled service - essential character test for incidental activities - Exemption from service tax for activities incidental to education - Rent received from buildings let out for canteen, bank and similar facilities is incidental to and naturally bundled with the educational service and thus exempt once educational activity is exempted. - HELD THAT: - The buildings let out by the University provide facilities (canteen, bank, etc.) that are essential for effective functioning of the institution in furtherance of imparting education. Under the bundled service rule, where various elements are naturally bundled in the ordinary course of business, the bundle is treated as a single service which gives it its essential character. As these activities are incidental and naturally bundled with the University's educational service, the rent received is part of the exempted activity and therefore not liable to service tax. [Paras 12, 13, 14, 15]Rent from buildings used to provide essential facilities to the University is incidental to the exempt educational service and is exempt from service tax.Jurisdiction to issue show cause notice proposing levy of service tax - The show cause notice and consequential demand issued by the Authority were not sustainable and are set aside. - HELD THAT: - Although ordinarily an assessee should respond to a show cause notice before approaching the Court, this case concerns the core question whether the activity of granting affiliation and the related receipts are taxable at all. The respondents had taken a clear stand before the Court that affiliation fees were taxable. Given the legal determination that the affiliation fees and incidental rents fall within the exemption, it is inappropriate to remit the petitioner to the adjudicating authority. Accordingly, the impugned show cause notice and the statement of demand have been quashed and further action pursuant to them set aside. [Paras 16, 17, 18]Impugned show cause notice and statement of demand are set aside; further action pursuant thereto is quashed.Final Conclusion: The writ petition is allowed: the show cause notice dated 20.04.2018 and the statement of demand dated 28.02.2019 are quashed, holding that affiliation fees and rents incidental to the University's educational activity fall within the exemption from service tax, and consequential actions are set aside. Issues:1. Jurisdiction of authorities to levy service tax on affiliation fees and rents received by a university.2. Exemption of affiliation fees from service tax under Section 66D of the Finance Act, 1994.3. Classification of affiliation fees as consideration for educational services.4. Taxability of rent received from buildings let out by the university.5. Application of Section 66F(3) of the Act to bundled services provided by the university.6. Dispute regarding jurisdiction and necessity of approaching the court without replying to the show cause notice.Analysis:1. The petitioner, a university receiving affiliation fees, penalty for delayed payments, and rents, challenged a show cause notice proposing service tax on these amounts. The petitioner argued that as per Section 66D and relevant notifications, affiliation fees for providing education services are exempt from service tax. The respondents contended that affiliation fees are not part of educational services but for services provided to private institutions. The court noted that the university, established under the Karnataka State Universities Act, imparts education directly and through affiliated colleges, making affiliation fees a consideration for educational services.2. The court referred to Section 66D(l) of the Act, which exempts services by way of education as part of a curriculum for obtaining a recognized qualification from service tax. The court held that the university's act of granting affiliation to colleges is a service in furtherance of education, thus falling under the exemption.3. Regarding the rent received from buildings let out for university activities like canteen and bank facilities, the court applied Section 66F(3) of the Act on bundled services. It concluded that these activities are essential for running the university and naturally bundled with educational services, thus exempting the rent from service tax.4. The court emphasized that the dispute was not about quantifying service tax but the authority's jurisdiction to demand tax on educational activities. Since the authorities claimed the affiliation fees were taxable, the court found it inappropriate to relegate the petitioner to the adjudicating authority.5. Consequently, the court set aside the show cause notice and the demand statement, ruling in favor of the petitioner and disposing of the writ petition accordingly.