Tuition Fee Is Taxable Only When A Corresponding Service Is Rendered By The Educational Institution: Hyderabad ITAT

The Bench, consisting of K. Narasimha Chary (Judicial Member) and Rama Kanta Panda (Accountant Member), held that examination fee collected from students on behalf of the foreign universities is not taxable as 'Fees for Technical Services'.

The ITAT ruled that teaching includes the activity of examinations, which is excluded from the definition of 'Fees for Technical Services' as per the exemption clause contained in the DTAAs (Double Taxation Avoidance Agreements).

The assessee, Hyderabad Educational Institutions Private Limited, is an Indian company which runs a school and a pre-school. The academic year followed by the schools is different from the financial year followed for the purpose of accounting and filing income tax returns. Thus, the academic year of the school fell into different financial years.

The assessee collects tuition fee from the students every quarter for the entire academic year. However, the assessee only recognizes the tuition fee collected for the relevant financial year as revenue in the books of accounts. The tuition fee collected by the assessee with respect to the academic year that falls in the succeeding financial year is treated by it as an advance and is shown as a liability in the books of accounts. The Assessing Officer (AO) opined that since the assessee was not required to return any part of the fee collected, the tuition fee shown by the assessee as an advance amounted to accrual of income. Thus, the AO passed an order making certain additions to the assessee's income.

Also, the assessee made certain foreign remittances to the University of Cambridge, UK and the International Baccalaureate, Switzerland. The said remittances were made towards payment of examination fee collected from the students, and as fees for training of teachers, setting up of question papers and syllabus. The assessee did not deduct any tax at source under Section 195 of the Income Tax Act, 1961 before making the said remittances. The assessee had contended before the AO that the said remittances were not 'Fees for Technical Services' and thus no income accrued or arose to the said foreign universities in India.

The AO however opined that skilled educational services were rendered by the said foreign universities to the assessee which fell within the ambit of the expression 'Fees for Technical Services' under the Income Tax Act, on which the assessee was required to deduct tax at source. Thus, the AO passed an order disallowing the foreign remittances made by the assessee.

Against the order passed by the AO, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The assessee averred before the CIT (A) that all receipts received during the financial year did not tantamount to income and that unless and until the corresponding expenditure was taken into consideration, a distorted picture of income would be depicted. The CIT(A) held that if receipts pertaining to a period beyond the financial year were included in the income of the said year, it would lead to distortion of income. Thus, the CIT (A) directed the AO to delete the additions made with respect to the tuition fee collected by the assessee for an academic year that fell in the succeeding financial year.

With respect to the order passed by the AO disallowing the foreign remittances made by the assessee, the CIT(A) held that the assessee was only a pass-through entity and that the examination fee collected by the assessee on behalf of the students was remitted in toto to the foreign universities. The CIT(A) ruled that the amounts paid by the assessee to the said foreign universities did not fall within the ambit of technical services or royalty services, as defined in the DTAAs entered into by India with UK and Switzerland.

Thus, the CIT(A) allowed the appeal of the assessee and quashed the orders passed by the AO. The revenue department filed an appeal before the ITAT against the order of the CIT(A).

The assessee Hyderabad Educational Institutions contended before the ITAT that the tuition fee collected by it in advance did not accrue as income. The assessee averred that the income accrued to the assessee only after the relevant expenditure, like the salaries of teachers and other related expenses, was met in the relevant financial year.

The ITAT observed that though the tuition fee was received by the assessee in the last quarter of a financial year, the corresponding service was rendered by the assessee in the next quarter which fell in the next financial year.

The ITAT ruled that income accrues only when the services are rendered and not when the promise for rendering the services is made. Thus, the ITAT held that the income would accrue only on the rendering of services. The ITAT added that when the tuition fee was received in the last quarter of the financial year, no service was rendered and that the service was rendered in the following quarter which fell in a different financial year. Thus, the ITAT held that the right to receive the tuition fee and the accrual of the receipt happened only when the services were rendered, i.e., during the following quarter that fell in the subsequent financial year.

"….we are of the considered opinion that the assessee was right in recognizing the revenue in the financial year in which the corresponding service was rendered, because it is only on consideration of the expenses relating to the rendering of services, the correct picture of income emerges, and it is only such income is taxable and not every receipt."

With respect to the order of the CIT(A) allowing the foreign remittances made by the assessee, the revenue department contended that high end technical services involving syllabus framing, paper setting and paper evaluation were provided by the said foreign universities to the assessee.

Thus, the revenue department averred that though the exclusion clause of the DTAA exempts amounts received for "teaching in or by educational institutions" from the expression of 'Fees for Technical Services', the said high end technical services do not fall within the ambit of the exclusion clause.

The ITAT noted that the assessee was imparting instructions in India as per the syllabus set by the foreign universities, and that the foreign universities were conducting examinations before issuing the degrees. Thus, the ITAT upheld the view of the CIT(A) that the assessee was only a pass-through entity who was collecting the examination fee from the students on behalf of the foreign universities.

The ITAT observed that as per Article 13 (5)(c) of the DTAA between India and the UK, and Article 12 (5)(a) of the DTAA between India and Switzerland, the definition of fees for technical services excludes the amounts received for "teaching in or by educational institutions".

The ITAT ruled that the term 'teaching in or by educational institutions' is not confined to the activity of imparting instructions alone and that teaching includes the activity of examinations. Thus, the ITAT held that the said particular activity rendered by the foreign universities fell within the ambit of the exemption clause contained in the DTAAs.

Therefore, the ITAT upheld the order of the CIT(A) and dismissed the appeal of the revenue department.

Case Title: Dy. Commissioner of Income Tax, Hyderabad versus M/s. Hyderabad Educational Institutions Pvt Ltd

Dated: 26.05.2022 (Hyderabad ITAT)

Representative for the Appellant: Mr. Y.V.S.T. Sai, CIT-DR

Representative for the Respondent: Mr. V. Srinivasan

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