University Income From Rentals, Not Exempted From Service Tax: Karnataka High Court

The Karnataka High Court has held that the university is liable to pay service tax on the income earned from the rentals of buildings leased or licensed for banking facilities.

The bench of Justice Krishna S. Dixit and Justice Ramachandra D. Huddar has observed that when the university rents out its property for running a bank, the profit motive is abundant. It is not the case of the university that the banking services are agreed to be provided on a 'no profit, no loss basis' by prescribing a license fee as contradistinguished from rentals. However, providing banking facilities by no stretch of imagination can be held to be incidental to education. The term 'educational services' has been employed in these exemption notifications in a reasonable sense, if not restrictive.

The respondent- university is established under Section 3 of the Rajiv Gandhi University of Health Sciences Act, 1994, a state legislation. A set of subordinate legislations designated as 'Statutes' have been promulgated under the provisions of the Act. It has constituent colleges; several private colleges have been affiliated with it as well. The levies in respect of affiliation are borne by the affiliated colleges in certain sums of money, in the form of fees, delayed fees, charges, fines, penalties, etc. The university, apart from imparting education inter alia at the postgraduate level, normatively regulates the affiliated colleges. The university owns properties, some of which are rented out.

The appellant-department issued a Show Cause Notice complaining that during the period between July 2012 and September 2016, no service tax has been paid on the amount received by way of fees, charges, and penalties whilst granting affiliation/renewal and the rental income from its buildings. It also called for an explanation as to why the university has not been registered under the Finance Act, 1994.

A demand notice followed, asking the university to remit a total of Rs. 7,40,28,684. The university filed the writ petition with a slew of prayers. The single judge partly allowed the petition, granting relief qua the show cause notice and demand notice.

The department contended that the writ petition was not maintainable against the Show Cause Notice and the proposed demand, with the with the option to reply to the same being available to the noticeee. The Single Judge has treated only one single contention, i.e., as to service tax payable on the rentals, without touching several other grounds specifically urged; the Rulings of Madras & Gujarat High Courts, being per incuriam, do not lay down the correct position of law. A university, regardless of imparting education, has the predominant function of regulating the affiliated colleges, and therefore, it cannot be treated as an educational institution within the terminology of 'Service Tax Law' and therefore is liable to pay service tax. Even otherwise, it is liable to pay service tax because of renting its properties, whereby it has generated income, the activity not being in furtherance of education. The collection of rents, affiliation charges, and fines/penalty is not a statutory function in its true sense. They are all commercial activities that generate revenue. Therefore, they are not covered in the Negative List enacted in Section 66(1)D and Section 65B(44) of the Finance Act, 1994.

The assessee university contended that there is no thumb rule that no person can invoke writ jurisdiction against the Show Cause Notice even when it is absolutely without jurisdiction; where authorities act with demonstrable incompetence, a litigant cannot be relegated to the sending of replies to notices. A university like the respondent cannot be anything but an educational institution. It does not lose its character as an educational institution merely because it has rented out certain spaces and generates income. Granting of affiliation, its denial, or renewal do not have commercial elements, and therefore the amounts, such as fees, late fees, fines, penalties, etc., generated on account of said acts do not admit the idea of 'consideration' as employed in Section 65B(44) of the Finance Act, 1994. The statutory bodies that grant affiliation as a matter of statutory policy have the trappings of 'State Authorities' and their activities are pregnant with abundant public elements. Activities of educational/professional regulatory bodies cannot be termed 'commercial'.

The assessee contended that every educational institution during the particular period in question was not within the ambit of the Finance Act, 1994. Even otherwise, because of exemption notifications issued and continued from time to time, they are immune from service tax liability; the clarificatory circulars issued by CBEC being statutory bind the Revenue, especially when they have been acted upon.

The court, while partly allowing the appeal, modified the judgment to the effect that it seeks to levy service tax on the income accruing on account of or attributable to grant, renewal, withdrawal, or denial of affiliation/recognition to the institutions concerned, and that income/service would include a fee, late fee, fine, penalty, and the like. The court has also modified the judgment to the extent that the university is not immune from the levy of service tax on the income earned by leasing or licensing its immovable properties for providing or causing to be provided certain canteen facilities to the students, faculty, and staff.

The court directed that the department shall restructure and reissue the subject Show Cause Notice in the light of observations herein above made within six weeks. However, for all practical purposes, the notice shall be treated to have been issued on 20.04.2018 itself. It is open to the respondent university, to send its reply to the notice in contemplation within six weeks.

Counsel For Petitioner: Amit A Deshpande

Counsel For Respondent: Raghuraman

Citation: 2024 LiveLaw (Kar) 351

Case Title: Principal Additional Director General Directorate General Of Gst Intelligence Versus M/S Rajiv Gandhi University Of Health Sciences

Case No.: Writ Appeal No.856 Of 2022 (T-RES)

Click Here To Read The Order