2025 (6) TMI 1816 - AT - Service Tax

University affiliation fees for colleges ruled non-taxable as education-related services under service tax law

CESTAT NEW DELHI ruled in favor of appellant university regarding service tax on affiliation fees collected from affiliated colleges. Following precedent ... Taxability of service - appellant was granting affiliation to various colleges for which they were collecting charges - affiliation fees - inspection fees - no objection fees from such affiliated colleges - HELD THAT:- The issue relating to affiliation fee is no longer res integra and has been decided in favour of the appellant by the Tribunal in the case of M/s Jiwaji Vishwavidhyalaya versus Commissioner, CGST & CE, Bhopal [2025 (5) TMI 153 - CESTAT NEW DELHI]. The Tribunal relied on the decision of the Karnataka High Court in Rajiv Gandhi University of Health Sciences, Karnataka [2022 (8) TMI 707 - KARNATAKA HIGH COURT] where it has been held that the act of a University in granting affiliation to a private college has to be considered as a service in furtherance of providing education and the decision of the department to consider otherwise is erroneous. As regards the service tax on rental income, as the affiliation fee has been held as not taxable, hence the appellant enjoys the threshold exemption on such rental income. Hence, the demanded is also set aside along with the penalties imposed on the appellant. The impugned order-in-original is set aside and the appeal is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the fees collected by the appellant university for granting affiliation, inspection, and no objection certificates to various colleges constitute taxable services under the Finance Act, 1994, specifically under the definition of 'service' in Section 65B(44) and the negative list under Section 66D.Whether the rental income earned by the appellant from letting out university premises to banks, post offices, canteens, and other entities is liable to service tax.Whether imposition of penalty and interest under Sections 75 and 78 of the Finance Act, 1994, for non-payment of service tax on the above activities is justified.The applicability and interpretation of statutory provisions governing affiliation under the Rajeev Gandhi Proudyogiki Vishwavidyalay Adhiniyam, 1998, vis-`a-vis the Finance Act, 1994.The relevance and binding effect of judicial precedents, including the Supreme Court's dismissal of the Special Leave Petition challenging the Karnataka High Court's decision on the taxability of affiliation fees.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxability of Affiliation Fees and Allied ChargesRelevant Legal Framework and Precedents: The Finance Act, 1994 defines 'service' under Section 65B(44) as 'any activity carried out by a person for another for consideration.' Section 66D lists services that are exempt (negative list). The Rajeev Gandhi Proudyogiki Vishwavidyalay Adhiniyam, 1998, governs the statutory functions of the university, including affiliation. Judicial precedents include the Karnataka High Court's decision in Rajiv Gandhi University of Health Sciences (2022), affirmed by its Division Bench (2024), and the Supreme Court's dismissal of the Revenue's Special Leave Petition (2025). The Tribunal also relied on its own decision in M/s Jiwaji Vishwavidhyalaya versus Commissioner, CGST & CE (2025).Court's Interpretation and Reasoning: The Tribunal examined the nature of affiliation as a statutory function performed by the university under its enabling Act. Affiliation was held to be a public law function, not a commercial activity. The Court emphasized that the definition of 'service' requires an 'activity carried out by a person for another for consideration' within a contractual or commercial context. The Tribunal analyzed the concept of 'consideration' in detail, referencing Section 2(d) of the Indian Contract Act, 1872, and relevant case law, highlighting that consideration implies quid pro quo and contractual reciprocity.The Tribunal noted that affiliation fees are statutory levies imposed as part of the university's regulatory role to grant or withdraw affiliation, which is a pre-condition for colleges to admit students and confer degrees. These activities lack the commercial elements necessary to constitute 'services' under the Finance Act. The fees collected are not payments for services rendered to another in a contractual sense but statutory charges for regulatory functions.Key Evidence and Findings: The Tribunal relied on the statutory provisions of the university Act, particularly Sections 4, 45, and 48, which vest the university with powers to affiliate, recognize, and withdraw affiliation of colleges. The fees charged are prescribed by the university statutes and relate to these statutory functions. The Tribunal also considered the absence of any notification exempting such fees from service tax, but found that the negative list under Section 66D does not explicitly exclude these fees, and the nature of the activity is determinative.Application of Law to Facts: Applying the legal principles, the Tribunal concluded that the affiliation fees do not constitute taxable services because they are statutory charges levied in discharge of public duties, not commercial transactions for consideration. The Tribunal distinguished this from activities where a university might provide services for consideration in a commercial sense.Treatment of Competing Arguments: The Department argued that affiliation fees fall under taxable services as per the Finance Act, relying on the Madras High Court decision in Pondicherry University vs. Joint Commissioner (2024), which upheld service tax on affiliation fees. The Tribunal distinguished this decision on facts and emphasized the binding Karnataka High Court decisions and the Supreme Court's dismissal of the Revenue's SLP, which confirmed the non-taxability of affiliation fees. The Tribunal rejected the Department's contention that the affiliation activity is a 'bundled service' under Section 66F(3) of the Finance Act.Conclusions: The Tribunal held that the income from affiliation fees and allied charges is not liable to service tax. The statutory nature of affiliation and the absence of a commercial element preclude the activity from being a 'service' under the Finance Act.Issue 2: Taxability of Rental Income Earned by the UniversityRelevant Legal Framework and Precedents: Service tax on rental income is generally subject to threshold exemption under the Finance Act. The Tribunal considered the threshold exemption available and the fact that rental income was relatively small compared to the affiliation fees.Court's Interpretation and Reasoning: Since the Tribunal held that the affiliation fees are not taxable, the appellant's overall turnover from taxable services falls below the threshold limit for service tax registration and payment. Therefore, the rental income, being below the threshold, is exempt.Key Evidence and Findings: The rental income was Rs. 31,494, which is insignificant compared to the threshold limit for service tax registration.Application of Law to Facts: The Tribunal applied the threshold exemption provisions and concluded that the rental income is not taxable in the present case.Treatment of Competing Arguments: The Department did not strongly contest this point once affiliation fees were held non-taxable.Conclusions: The rental income is exempt from service tax under the threshold exemption.Issue 3: Imposition of Penalty and Interest under Sections 75 and 78 of the Finance Act, 1994Relevant Legal Framework and Precedents: Sections 75 and 78 of the Finance Act provide for interest and penalty in cases of non-payment or short payment of service tax.Court's Interpretation and Reasoning: Since the Tribunal held that the appellant was not liable to pay service tax on affiliation fees and rental income, the demand of service tax itself is unsustainable. Consequently, the imposition of interest and penalty based on that demand is also unjustified.Key Evidence and Findings: The penalty imposed was equal to the service tax demand, reflecting the Department's view of deliberate non-compliance.Application of Law to Facts: The Tribunal applied the principle that penalty and interest cannot be levied where the underlying tax demand is invalid.Treatment of Competing Arguments: The appellant argued erroneous levy of penalty and interest; the Department maintained the demand but conceded the affiliation fee issue was covered by binding precedents.Conclusions: The Tribunal set aside the penalty and interest imposed along with the service tax demand.3. SIGNIFICANT HOLDINGSThe Tribunal made the following crucial legal holdings:'The act of a University in granting affiliation to a private college has to be considered as a service in furtherance of providing education and the decision of the department to consider otherwise is erroneous.''Affiliation is a statutory function enjoined by law and lacks commercial elements necessary to constitute a taxable 'service' under the Finance Act.''An activity carried out without consideration in the contractual or commercial sense does not fall within the definition of 'service' under Section 65B(44) of the Finance Act, 1994.''The decision of the Karnataka High Court in Rajiv Gandhi University of Health Sciences, affirmed by the Division Bench and upheld by the Supreme Court by dismissal of the Special Leave Petition, is squarely applicable and binding.''Since the affiliation fees are not taxable, the appellant's rental income falls below the threshold exemption limit and is thus not liable to service tax.''Penalty and interest imposed under Sections 75 and 78 of the Finance Act, 1994, cannot be sustained where the underlying service tax demand is invalid.'Final determinations:The demand of service tax on affiliation fees, inspection fees, and no objection certificate fees is set aside.The service tax demand on rental income is also set aside due to threshold exemption.The penalties and interest imposed on the appellant are quashed.The appeal is allowed, and the impugned order-in-original is set aside.