2025 (10) TMI 386 - HC - VAT / Sales Tax

Statutory university's primary object is education; printing and selling prospectuses incidental, not taxable business under KVAT Act

Karnataka State Open University, Muktha Gangotri Versus The State of Karnataka, Represented By The Commissioner of Commercial Taxes, The Deputy Commissioner of Commercial Taxes, Audit And Recovery 3, Mysore, The Joint Commissioner of Commercial Taxes, (Appeals), Mysuru (Vice Versa).

The HC held the statutory university's primary object is education and the printing and sale of prospectuses are incidental to that object, not a ... Requirement of statutory university established to impart education to register - respondent-University is engaged in “business” or not - printing and sale of prospectus can be regarded as incidental or ancillary to such business or not - HELD THAT:- From the material placed before this Court, it is evident that the respondent-University was established and is engaged in the primary object of imparting education. The prospectus contains various details regarding the nature of the courses and services to be provided by the University to its students. It is further noted that the respondent-University receives grant-in-aid from the State. The printing of prospectus is undertaken solely in furtherance of the main object of imparting education and is, therefore, incidental. When viewed in conjunction with the principal object of the University, the sale of prospectus and any surplus arising therefrom cannot be characterized as “business.” - The State has not placed any material to suggest otherwise. Moreover, the printing and sale of prospectus occurs only at the commencement of the academic year and, therefore, cannot be regarded as an activity marked by volume, frequency, continuity, or regularity. The sale of prospectus is an integral part of the educational process, and it bears no characteristics of a commercial objective that would classify it as business, commerce, trade, or any analogous activity. The Coordinate Bench of this Court in Manipal University [2014 (7) TMI 72 - KARNATAKA HIGH COURT], after prescribing the test as set out in paragraph 21 and examining the facts, observed that the University collected substantial amounts from the sale of prospectus, with volume, frequency, continuity, and regularity of transactions. The Court further held that the University had earned profits with a commercial motive, and that its activities, therefore, fell within the ambit of “business.” Consequently, by virtue of such commercial activity, the University was required to register as a dealer under the KVAT Act - If the facts of the present case are tested against the principles laid down in Manipal University (supra), it is evident that the respondent-University is not registered as a dealer. The finding of profit by the Assessing Authority has no reference to the books of accounts maintained by the University. The Assessing Authority, relying solely on the cost of the prospectus, concluded the existence of a profit motive and the commercial nature of the activity. No contrary material has been placed on record to disprove the University’s contention that the cost of the prospectus includes charges for other services, namely printing, processing of applications, evaluation of eligibility, registration, and admission of students. The Coordinate Bench of this Court in Manipal University categorically held that if the main activity is not business, then the connected, incidental, or ancillary activities, such as sales, would not ordinarily amount to business unless the revenue establishes an independent intention to carry on business in such connected, incidental, or ancillary activities. In such cases, the onus to prove an independent intention to carry on business in connection with, or incidental to, the sales rests upon the Department. It is, therefore, necessary to ascertain whether the Department has shifted this burden or has established an independent intention to conduct business through the connected, incidental, or ancillary activity of selling prospectus with application forms. The Revenue-State has failed to establish that the University had an independent intention to conduct business through these connected, incidental, or ancillary activities. Consequently, the burden always remained on the Revenue to prove that the University carried on business in such activities. This burden has not been discharged by the appellant-State, which relies solely on the contention that the prospectus were sold at a higher price. The mere sale of prospectus at a higher price, without considering the University’s explanation that the fee charged is composite in nature, cannot satisfy the requirement set out in paragraph 21 of Manipal University - Once it is held that the respondent-University is not a dealer and is not required to be registered as a dealer under the KVAT Act, it necessarily follows that the University is not required to file returns and has no taxable turnover. In that event, the issue regarding interest and penalty becomes wholly academic. The substantial questions of law are answered in favour of the appellant-University and against the respondent-State - both Sales Tax Revision Petitions are disposed of. ISSUES PRESENTED AND CONSIDERED 1. Whether a statutory university established to impart education is a 'dealer' and liable for registration under the Karnataka Value Added Tax Act, 2003 (KVAT Act), on account of printing and sale of prospectuses. 2. Whether the activity of printing and selling prospectuses, integral to the educational purpose, constitutes 'business' or 'carrying on business' under Sections 2(6) and 2(12) of the KVAT Act, thereby rendering such sales taxable. 3. Whether charging a price for prospectuses higher than printing cost, without detailed accounts, suffices to establish profit motive and independent intention to carry on business for the purpose of VAT liability. 4. Whether interest and penalty under the KVAT Act (notably Sections 36/39 and 72) for non-payment/non-filing can be levied where the entity is not a dealer or where intent to evade tax is not established. ISSUE-WISE DETAILED ANALYSIS - Issue 1 & Issue 2 (Grouped): Whether the statutory university is a 'dealer' and whether sale of prospectus constitutes 'business' under the KVAT Act Legal framework: Sections 2(6) ('business'), 2(12) ('dealer'), 2(34)/(35)/(36) (turnover/taxable turnover), Section 4 (liability to pay tax) and registration provisions of the KVAT Act govern whether an entity must register and pay tax. Definitions treat 'business' inclusively and contemplate inclusion of incidental or ancillary transactions, but the inclusion presupposes a main activity of trade/commerce or an independent intention to conduct business in incidental activities. Precedent treatment: The Court relied on established principles from higher authority decisions that assess 'carrying on business' by reference to volume, frequency, continuity, regularity and profit motive (though profit motive may be statutorily excluded from the definition), and on decisions holding incidental sales will not be taxable unless independent intention to carry on business in the incidental activity is shown. Prior coordinate authority had applied these tests to a factual matrix where prospectus sales were regular and substantial and concluded registration and taxation were required; other authorities held distribution at cost for a non-commercial object did not constitute business. Interpretation and reasoning: The Court examined the statutory university's primary object - imparting distance education - and the factual matrix: prospectus content is informational and ancillary to admissions, printing and sale occur at academic session commencement, and the university receives state grant-in-aid. The State failed to produce accounts or material showing profit or continuity/regularity indicative of a commercial enterprise. The Court applied the burden principle: where main activity is non-business, the revenue must prove an independent intention to carry on business in the incidental activity. Mere pricing higher than printing cost, unsupported by accounting particulars and untested against composite charges (application processing, evaluation, registration, admission-related services), cannot establish a business/commercial character. The Court distinguished facts from cases where substantial, frequent, and profit-yielding prospectus sales were evidenced. Ratio vs. Obiter: Ratio - where the main and dominant activity of an entity is non-commercial (education), incidental sales (prospectus) do not, without proof of an independent intention to carry on business, render the entity a 'dealer' under the statute; the onus lies on the revenue to establish business nexus in the incidental activity. Obiter - references to comparative authority and illustrations of non-exhaustive fact distinctions (e.g., grant-in-aid relevance, single annual sale versus continuous commercial activity) serve as explanatory guidance but are consistent with the binding ratio. Conclusions: On the material before the Tribunal and this Court, the university is not a 'dealer' and the printing and sale of prospectuses, being incidental and integral to the educational objective, do not amount to 'business' under Sections 2(6) and 2(12) of the KVAT Act. The State failed to discharge the burden to demonstrate volume, frequency, continuity, regularity, or independent profit motive sufficient to convert incidental educational activity into taxable business. Consequently, no registration, no taxable turnover, and no liability under Section 4 arise. ISSUE 3: Whether pricing of prospectus above printing cost, absent complete accounts, establishes profit motive/independent intention to carry on business Legal framework: The statutory definitions permit inclusion of incidental transactions within 'business' when an independent intention to carry on business emerges; evidentiary proof of profit, accounts and transactional characteristics are relevant indicia. Precedent treatment: Authorities hold that mere sale at cost or incidental distribution for furtherance of primary object does not constitute business; conversely, sustained and substantial receipts from sales have been held to demonstrate business in other cases when supported by accounts. Interpretation and reasoning: The Court found the State's contention based solely on a comparatively higher price unsubstantiated because there were no books of account or breakdowns demonstrating profit or the composite nature of charges. The Court emphasized that price alone, without corroborative accounting that isolates profit, cannot discharge the revenue's burden to show an independent commercial intention. Ratio vs. Obiter: Ratio - pricing above cost, standing alone and unsupported by accounts or proof of independent business intention, is insufficient to establish taxable business. Obiter - commentary on the types of evidentiary particulars that would be required (detailed accounts, frequency, volume) is illustrative guidance. Conclusions: The State's reliance on price comparison without accounting particulars fails to establish profit motive or independent intention to carry on business; therefore, it cannot convert incidental educational activity into taxable business. ISSUE 4: Whether interest and penalty under the KVAT Act can be levied where the entity is not a dealer or where intent to evade tax is not established Legal framework: Interest and penalty provisions (notably Sections 36/39/72 as applied in adjudication) attach to liabilities of dealers, including for non-payment/non-filing. Penal consequences typically require statutory applicability (i.e., existence of liability) and, in some instances, may contemplate mens rea or culpable omissions depending on statutory language and jurisprudence. Precedent treatment: The Tribunal set aside interest and penalty, reasoning that imposition requires intent to evade tax; the Court reviewed submissions and the statutory scheme that links interest/penalty to dealer obligations and noted academic character of the issue if no dealer liability exists. Interpretation and reasoning: Having held that the university is not a dealer and had no taxable turnover under the KVAT Act, the Court found interest and penalty issues to be moot. The Court rejected the State's submission that ignorance of law or non-compliance independently sustains interest/penalty where statutory preconditions (being a dealer/registration requirement) are absent. The Court observed that interest as compensatory arises only where there is an existing tax liability; penalty likewise presupposes statutory non-compliance by a person within the Act's ambit. Ratio vs. Obiter: Ratio - where an entity is not a 'dealer' and has no tax liability under the Act, interest and penalty provisions are inapplicable; the question of intent to evade does not arise and becomes academic. Obiter - remarks on the nature of interest as compensatory and the State's submission regarding ignorance of law are explanatory. Conclusions: Interest and penalty could not be sustained once the foundational finding - that the university is not a dealer and has no taxable turnover - is upheld; therefore, the Tribunal's deletion of interest and penalty (and the consequent setting aside of reassessment and recovery notices) is supported by the Court's conclusions. FINAL CONCLUSIONS (Tied to Issues) The Court set aside the reassessment orders and consequential demands for the assessment periods in question, answering the substantial questions in favour of the statutory university (no dealer status; sale of prospectuses incidental to educational activity not taxable) and rendering interest/penalty issues academic. No order as to costs.