2024 (8) TMI 209 - HC - Service Tax

Service tax on university activities: Court exempts affiliation income but allows tax on certain property rentals for banks

A high court addressed whether a university's functions attract service tax. It held that the university qualifies as an educational institution under the ... Negative List - Service (as activity carried out for consideration) - Exemption Notifications issued under Section 93 - Activity centric levy - Affiliation and allied statutory functions as non commercial acts - Renting of immovable property - taxability - Predominant object test - Writ against show cause notice - exceptions for lack of jurisdiction - Remand for fresh adjudicationWrit against show cause notice - exceptions for lack of jurisdiction - Maintainability of writ petition challenging the Show Cause Notice - HELD THAT: - The Court held that a writ petition challenging a Show Cause Notice is not impermissible as a thumb rule. Exceptional circumstances justify entertaining a writ petition - specifically where the issuing authority lacks competence, where jurisdictional facts for issuing the notice are absent, or where it is apparent that a reply would make no difference. The University's plea that its services fell outside the Act's ambit and that exemption notifications applied presented a prima facie case warranting examination on merits; accordingly the preliminary objection to maintainability was rejected.Writ petition was maintainable in the circumstances; preliminary objection to entertain the writ failed.Negative List - Service (as activity carried out for consideration) - Activity centric levy - Whether the respondent University is an 'educational institution' within the Service Tax law and whether its core educational services fall within the Negative List - HELD THAT: - On statutory functions, powers under the RGUHS Act (including provision of instruction, conducting examinations, conferring degrees, establishing research and constituent colleges) establish that the University is an educational institution. The Court observed that Sub clause (ii) of clause (l) of Section 66D (education as part of curriculum for obtaining a qualification recognised by law) covers the University's degree/diploma conferring activities. The Negative List is activity centric; the specified educational services rendered by the University during the relevant period are excluded from service tax.The University qualifies as an educational institution and its specified educational services fall within the Negative List and are not taxable for the period in question.Affiliation and allied statutory functions as non commercial acts - Service (as activity carried out for consideration) - Taxability of income derived from grant/renewal/withdrawal/denial of affiliation, and fees, late fees, fines and penalties levied in relation thereto - HELD THAT: - The Court analysed the definition of 'service' (activity carried out for another for consideration) and the nature of 'affiliation' under the RGUHS Act. Granting, renewing or withdrawing affiliation is a statutory duty performed in discharge of public law functions and lacks the contractual quid pro quo characteristic of a commercial activity 'for consideration.' Late fees, fines and penalties connected to affiliation were held to partake of the character of fees levied under statute and not to convert the affiliating act into a taxable commercial service. Consequently, the levy of service tax on such affiliation related receipts for the academic period between 2012 13 and 2016 17 was held to be unjustified.Income from affiliation/recognition and allied fees, late fees, fines and penalties is not liable to service tax for the relevant period.Renting of immovable property - taxability - Exemption Notifications issued under Section 93 - Predominant object test - Whether income from leasing/licensing university property for banking and canteen facilities is exempt from service tax under the Exemption Notifications - HELD THAT: - The Court examined the text of successive Exemption Notifications. Earlier notifications (2012/2013) had broader formulations including auxiliary educational services and explicitly listed certain services; later notifications (2014, 2016, 2017) retained some exemptions (e.g., catering, transport, security, conduct of examinations) but omitted 'renting of immovable property' from the exempted text. Applying ordinary meaning and the structure of the notifications, the Court concluded that renting/licensing campus space for banking (and similar commercial lets) cannot be treated as incidental/exempt educational activity and is not covered by the later exemption notifications. By contrast, leasing/licensing for canteen facilities intended for students, faculty and staff was found to be within the exempted 'catering' description and thus falls within exemption.Leasing/licensing for banking and similar commercial services is not exempt; leasing/licensing for canteen facilities to students, faculty and staff is exempt under the Notifications.Exemption Notifications issued under Section 93 - Remand for fresh adjudication - Binding effect and scope of Exemption Notifications and consequent procedural directions - HELD THAT: - The Court held that the Exemption Notifications issued under Section 93 are instruments of law binding on the Revenue and the University is entitled to rely on them insofar as they are applicable. Noting differences across notifications, the Court construed their terms and directed the Revenue to restructure and reissue the Show Cause Notice limited to matters not foreclosed by the judgment, treating it as having been issued on the original date, and to decide afresh after permitting the University to reply and be heard.Exemption Notifications bind the parties; the SCN is to be reissued limited to the matters not held to be non taxable, and the matter remanded for fresh adjudication in accordance with the observations.Remand for fresh adjudication - Issues left open for fresh consideration by the adjudicating authority - HELD THAT: - The Court expressly kept open all contentions other than those foreclosed by its observations - including questions as to requirement of registration and other taxable components not finally decided. It directed the Revenue to reissue/restructure the Show Cause Notice and to decide the matter afresh after receipt of reply and personal hearing as may be appropriate, thereby remitting the remaining disputed factual and legal determinations to the adjudicating authority.All other contentions, including registration requirement and undisclosed taxability issues, are remitted for fresh adjudication by the Revenue.Final Conclusion: The appeal is allowed in part: the High Court's quashing of the Show Cause Notice is set aside only insofar as it precluded adjudication on (i) levy of service tax on income from affiliation/recognition (which the Court holds not taxable for the period concerned) and (ii) taxability of rents/licences for canteen (exempt) and for banking/commercial lets (not exempt). The Show Cause Notice is to be restructured and reissued limited to the matters not foreclosed, and the Revenue shall decide the matter afresh after permitting the University to reply and be heard; other contentions, including registration, are left open for re adjudication. Issues Involved:1. Maintainability of the writ petition against the Show Cause Notice.2. Whether the respondent-University qualifies as an educational institution under the Service Tax Law.3. Taxability of income from affiliation and allied functions.4. Taxability of income from non-educational activities of educational institutions.5. Applicability of Exemption Notifications to the respondent-University.Detailed Analysis:I. Maintainability of Writ Petition:The Revenue contended that the writ petition was not maintainable against the Show Cause Notice, arguing that the University should have responded to the notice instead. However, the court noted that there are exceptions to this general rule, such as when the authority lacks competence, when jurisdictional facts are missing, or when it is clear that the authority is determined to proceed regardless of any reply. The court found that the University's case fell within these exceptions, as it argued that it was outside the scope of the Finance Act, 1994 due to the Negative List and exemption notifications. Therefore, the preliminary objection to the writ petition's maintainability was dismissed.II. Status of Respondent-University as an Educational Institution:The Revenue argued that the University, primarily engaged in regulating affiliated colleges, did not qualify as an educational institution under the Service Tax Law. However, the court found that the University performs various educational functions, such as providing instruction and training, conducting examinations, and conferring degrees. The court cited decisions from the Madras and Gujarat High Courts, which held that universities are educational institutions. The court concluded that the respondent-University qualifies as an educational institution, and its services fall within the Negative List under Section 66D(l) of the Finance Act, 1994, thus exempting it from service tax for specified educational services.III. Taxability of Income from Affiliation and Allied Functions:The Revenue contended that the income from granting affiliation, renewal, and related fees constituted a taxable service. The court examined the definition of 'service' under Section 65B(44) of the Finance Act, 1994, which requires an activity carried out for consideration. The court found that the University's activities related to affiliation and recognition are statutory functions lacking commercial elements and do not fit the definition of 'activities carried on for consideration.' Therefore, the income from these activities is not subject to service tax.IV. Taxability of Income from Non-Educational Activities:The Revenue argued that income from renting out properties for canteens, banks, and other facilities is taxable. The court agreed that the levy of tax is activity-centric and not dependent on the nature of the service provider. However, it distinguished between different types of non-educational activities. The court held that income from renting properties for banking facilities is taxable, as it is not incidental to education. Conversely, income from renting properties for canteen facilities is exempt from service tax, as it falls under the exemption for catering services provided to students, faculty, and staff.V. Applicability of Exemption Notifications:The court examined various Exemption Notifications issued between 2012 and 2017. It found that the respondent-University qualifies as an educational institution under these notifications, which exempt certain services from service tax. The court noted that while the earlier notifications included 'renting of immovable property' as an exempted service, the later notifications did not. Therefore, the income from renting properties for banking facilities is not exempt, whereas income from renting properties for canteen facilities is exempt.Conclusion:The court allowed the appeal in part, modifying the impugned judgment. It held that the Show Cause Notice is quashed to the extent it seeks to levy service tax on income from affiliation and related functions. However, the University is not immune from service tax on income from renting properties for banking facilities. The Revenue was directed to restructure and reissue the Show Cause Notice, and the University was given the opportunity to respond. The matter was remanded for fresh consideration, with all other contentions kept open for retrial. Costs were made easy.