2025 (5) TMI 153 - AT - Service Tax

Levy of service tax - affiliation fee collected by the appellant from affiliated colleges - rental income earned by the appellant from renting of immovable property. Service tax on affiliation fee - HELD THAT - Apparently and admittedly the issue stands settled by the Hon ble Supreme Court in Principal Additional Director General Vs. M/s Rajeev Gandhi University of Health Sciences 2025 (1) TMI 1550 - SC ORDER in favour of assessee. The decision of Hon ble Karnataka High Court in Rajeev Gandhi University of Health Sciences 2024 (8) TMI 209 - KARNATAKA HIGH COURT has been accepted by Hon ble Supreme Court. The High Court had held 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 - thus appellant is not liable to pay any service tax with respect to the amount of affiliation fee. Tax liability on the income received for rendering renting of immovable service - demand has been confirmed only for want of any evidence/rebuttal from the appellant - HELD THAT - Right from the stage of filing the reply to the show cause notice till the stage of personal hearing before the original adjudicating authority the appellant has provided the amount as has been received by the appellant in the respective financial year - Notification No. 33/2012-ST dated 20.6.2012 prescribes exemption from payment of tax if the amount received in the prior financial year is less than the threshold limit of Rs. 10 lakhs. Hence the findings arrived at by the original adjudicating authority are contrary to the evidence already on record and are contrary even to the observations in para 26 the impugned order itself. Hence the demand even on renting of immovable property has wrongly been confirmed. Conclusion - The affiliation fees charged by educational institutions for statutory regulatory functions are not taxable services under the Finance Act and that rental income below the prescribed threshold is exempt from service tax. Appeal allowed.

Summary

The core legal questions considered in this appeal are twofold: (i) whether the affiliation fee collected by the appellant from affiliated colleges is liable to service tax, and (ii) whether the rental income earned by the appellant from renting of immovable property attracts service tax liability.

Regarding the first issue, the relevant legal framework includes Entry No. 9 of Notification No. 06/2014 dated 11.07.2014, Section 65B(44) of the Finance Act, 1994 (defining 'service'), and the statutory provisions governing the powers and functions of the university under the respective University Act. The appellant contended that the affiliation fee is not taxable as it is a fee charged for a public duty of affiliating colleges, which is not a commercial activity carried out for consideration as envisaged under the Finance Act. The appellant relied heavily on the recent Supreme Court decision which accepted the Karnataka High Court ruling in the Rajeev Gandhi University of Health Sciences case, where the court held that the affiliation fee does not constitute a taxable service. The Karnataka High Court's reasoning emphasized that affiliation is a sovereign function, a public duty performed by the university to grant colleges the privilege to impart education, and that such fees are not consideration in the commercial sense but are statutory fees for regulatory functions. The court also examined the concept of consideration in contract law, noting that only activities carried out for consideration (quid pro quo) attract service tax. The affiliation fee, being a statutory levy for public regulatory functions, does not meet this criterion.

The Tribunal accepted the Supreme Court's endorsement of the Karnataka High Court's reasoning, which was detailed and included references to the definition of affiliation, the statutory provisions under the university act (such as Sections 2(a), 4, 45, and 48), and the nature of the fee as a non-commercial regulatory charge. The Tribunal also noted that the affiliation fee is not a bundled service under Section 66F(3) of the Finance Act and that fines or penalties connected with affiliation fees retain the character of fees rather than taxable consideration. Consequently, the Tribunal concluded that the appellant is not liable to pay service tax on affiliation fees collected during the relevant financial years.

In contrast, the Department relied on a decision of the Madras High Court in Pondicherry University Vs. Joint Commissioner of GST & Central Excise, where the affiliation fee was held taxable. However, the Tribunal gave precedence to the Supreme Court's ruling, which has overriding authority, thereby rejecting the Department's contention.

On the second issue concerning the rental income from immovable property, the legal framework includes the threshold exemption limit prescribed under Notification No. 33/2012-ST dated 20.06.2012, which exempts service tax liability if the aggregate amount received in the previous financial year is below Rs. 10 lakhs. The Department contended that the appellant had not raised this plea before the adjudicating authority and that no rebuttal was provided, justifying confirmation of demand. However, the Tribunal found that the appellant had consistently disclosed the rental income amounts in the reply to the show cause notice and during personal hearings. The evidence on record, including the impugned order's own tabulation, showed that the rental income was below the threshold limit in each relevant financial year. Therefore, the Tribunal held that the demand for service tax on rental income was wrongly confirmed, as the exemption was applicable.

The Tribunal also noted that the adjudicating authority's finding was internally inconsistent, as it acknowledged the lack of rebuttal but failed to consider the exemption notification and the evidence provided. The Tribunal thus reversed the demand on rental income.

In conclusion, the Tribunal held that the appellant is not liable to pay service tax on either the affiliation fee or the rental income from immovable property. The order imposing the demand was set aside, and the appeal was allowed.

Significant holdings include the Tribunal's reliance on the Supreme Court's authoritative interpretation of the term 'consideration' and the nature of affiliation fees, emphasizing that such fees are statutory regulatory charges and not taxable services. The Tribunal stated:

"The function related to affiliation cannot be treated as a 'bundled service under clause (3) of section 66F of the Finance Act, 1994. The interests fines/penalties levialble 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."

Further, the Tribunal emphasized the importance of the threshold exemption for rental income, stating:

"Notification No. 33/2012-ST dated 20.6.2012 prescribes exemption from payment of tax if the amount received in the prior financial year is less than the threshold limit of Rs. 10 lakhs. Hence, we hold that the findings arrived at by the original adjudicating authority are contrary to the evidence already on record and are contrary even to the observations in para 26 the impugned order itself."

Thus, the core principles established are that affiliation fees charged by educational institutions for statutory regulatory functions are not taxable services under the Finance Act, and that rental income below the prescribed threshold is exempt from service tax. The final determinations were that the appellant's liability to pay service tax on both counts was negated, and the impugned demand was set aside accordingly.