2024 (8) TMI 209 - HC - Service Tax

University's educational services exempt from service tax; affiliation fees lack quid pro quo element for taxation

The Karnataka HC held that a University's income from specified educational services falls under the Negative List and is not subject to service tax. ... Maintainability of writ petition - Levy of service tax - respondent-University being an ‘educational institution’ - taxability of income from affiliation and allied functions. Respondent-University, ‘educational institution’ or not - HELD THAT:- The income earned by the University on account of specified educational services is not within the tax net because of Negative List. However, the income earned by the University by any other activity like renting out buildings, etc. is within the taxability, unless the same falls in the Exemption Notifications issued by the Central Government u/s. 93 of the Act. Taxability of income from affiliation and allied functions - HELD THAT:- An activity carried out without any consideration like donations, gifts or free charity ordinarily is outside the ambit of service. The concept ‘activity for a consideration’ involves an element of contractual relationship wherein the person doing the activity does so at the desire of another in exchange for a consideration. There should be something like quid pro quo. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an ‘activity for consideration’ even though such an activity may lead to accrual of gains to the person carrying out the activity. Thus, an award received in consideration for contribution over a life time like Nobel Prize, Jnana Peeta, etc., will not be a consideration. the concept of sovereign function being impertinent, does not factor in the discussion. The function related to affiliation cannot be treated as a ‘bundled service’ under clause (3) of section 66F of the Finance Act, 1994, either. The interests/fines/penalties leviable on account of default also have a thick connect with the fees regularly leviable and therefore, they would partake the character of fees only. In view of all this, the Revenue is not justified in levying Service Tax on the income accruing to the University on account of affiliation during the academic year between 2012-13 and 2016-17. The periodicity of collection of affiliation related fees pales into insignificance. Income from non-educational activities of educational institutions and service yax liability - HELD THAT:- When an activity figures in the Negative List, the same is not liable to service tax at all. This is one scenario. The other is a case of exemption from tax by virtue of statutory notifications. Former is a case of non-applicability of charging section whereas, the latter is a case of its applicability. There lies a subtle difference between these two, and mistaking one to be other will have implications to Caesar & Citizen. Not recognising this difference, is consequential. Initial taxability of services is one thing and its exemption from tax is another - the question of exemption from tax liability arises when exempted activity/entity does not figure in the Negative List. The respondent-University answers the definition of educational institution since it provides services that fall into sub-clause (ii) of clause (l) of section 66D of the Finance Act, 1994. In fact, the education catered by the University broadly fits into the definition of auxiliary educational services. He is also right in pointing out that an otherwise interpretation of this Exemption Notification would defeat the very purpose for which it has been issued. The said exemption is continued vide Notification No. 3/2013-ST dated 1.3.2013, as well - No contention is taken up by the Revenue as to why these Notifications should not be taken cognizance of for according benefit claimed by the Assessee thereunder. They are not shown to be contrary to the intent & policy content of the parent statute, either. Application disposed off. 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.