The Service Tax Department has initiated the process of issuing Show Cause Notices to Education Institutions for charging Service Tax on Transportation Fees and Hostel Fees charged by them from their Students, Staff and Faculty for the period from 01-04-2013 to 10-07-2014.
As per information received, this entire process was initiated by a letter from the office of Director General of Central Excise Intelligence (DGCEI) regarding charging of service tax on Transportation Fees on services directly given by an educational institution to their Students, Staff and Faculty due to changes in the Entry No. 9 of the Mega Exemption Notification [Notification No. 25/2012] where the word ‘By’ has been removed from the Entry No. 9 of the aforesaid Notification.
A brief Summary of the entire case in noted below for ready reference:-
| PARTICULARS | FACTS OF THE CASE | REMARKS |
| Period Covered under proposed Retrospective Taxation | 01-04-2013 to 10-07-2014 | – |
| Department Contention | Education Institutes were liable to charge Service Tax from their Students on Transportation Fees and Boarding (Hostel) Fees against facility directly provided by them to their students. | Department has agreed that there is no Service Tax Liability if the same service is being outsourced from Third Party Vendor. |
| Basis of Department Contention | Notification No. 03/2013-ST dated 01-03-2013 (w.e.f. 01-04-2013) has amended the Notification No. 25/2012 Entry no. 9 and thereafter only services provided to an education institution in respect of education remained exempted from service tax by way of (a) auxiliary education service; or (b) renting of immovable property. | – |
| Reference | TRU Circular No. 172/7/2013-ST dated 19-09-2013 : Clarification issued by TRU on this matter | In para 3 of the said Circular, it has been clarified by TRU that all services related to Education are exempted.
Further, services provided to an education institute described as “Auxiliary Education Services” are also exempted. |
| Error by Department | Department has mis-interpreted the definition of the “Auxiliary Education Service” to include Services Directly provided by the Education Institution within the ambit of this Service. | If this interpretation is accepted then School Fees charged for imparting of Knowledge shall also be covered under Auxiliary Education Service and liable to Service Tax. |
| Impact | Notices have been issued to hundreds of Education Institutes (on trial basis) which may go upto Lakhs of Education Institutes if the same principal is applied across India | This will result in massive Litigation and huge burden on Department Officials that is bound to defuse in the Court of Law |
DEPARTMENTAL GROUNDS OF NOTICE, SUMMONS AND INTERROGATION
Notification No. 25/2012 dated 20-06-2012 (Entry No. 9) w.e.f. 01-07-2012 exempts services provided to or by an education institution in respect of education from Service Tax, by way of (a) auxiliary education service; or (b) renting of immovable property.
The above notification was later amended vide notification no 03/2013-ST dated 01-03-2013 (w.e.f. 01-04-2013) and only service provided to an education institution is respect of education remained exempted from service tax by way of (a) auxiliary education service; or (b) renting of immovable property.
The aforesaid notification was further amended vide notification no. 06/2014 dated 11-07-2014 (w.e.f. 11-07-2014) wherein specific clarity has been given on Services related to Education. Entry at Para 9 (a) has exempted all services provided by an education institution to its students, faculty and staff and entry at Para 9 (b) has exempted all services other than Renting of Immovable Property provided to an Education Institution.
It is believed by the department that for the period from 01-04-2013 to 10-07-2014, word ‘by’ has been removed from the Entry No. 9 of the Notification No. 25/2012, and any service that has a reference (including Rule of Ejusdem Generis) in the definition of “Auxiliary Education Service” provided by an Education Institution were Liable for charging of Service Tax by the Education Institution from their Students/ Parents.
Mis-Understanding by Department
We understand that the department is unable to understand the reason for removing ‘By’ from the definition of ‘Auxiliary Education Service’ for the period from 01-04-2013 to 10-07-2014. But merely inability to understand the intention of Law cannot be a reason to Levi Tax on an Exempted Service.
Our view is that ‘By’ was removed to cover Services given by Education Institutes to Third Parties as an outsourced service and not to their own students, staff and faculty members.
POINT OF LAW
1. The definition of the Auxiliary Education Service under Service Tax is noted below for ready reference:-
“Services relating to imparting any skill, knowledge, education or development of course content or any other knowledge–enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution.”
i) In the aforesaid definition, it is very clearly stated that any service that an education institution ordinarily carry out itself is termed as Auxiliary Education Service only when the same are outsourced from any other person; Therefore same service if directly provided by an Education Institute shall remain exempted;
ii) Further, it is also stated that transportation of students, faculty and staff of the institute is an activity which an education institution carry out themselves in the ordinary course of imparting education to its student; This implies that these services are intrinsic and inseparable from the basic education service and part & parcel of the Education Service covered under para (l) of the Negative List;
iii) The transportation of students, faculty or staff is an activity similar ‘Imparting of Knowledge and Skill’ by an Education Institution then how two different treatments can be done for the same for charging of Service Tax;
2. As evident from the aforesaid definition, ‘transportation of students, staff or faculty’ by an education institute is similar to ‘Imparting of Knowledge and Skill’ or ‘conduct of examination’ and is exempted from service tax under clause (l) of the Negative List of Service covered under Section 66 D of the Finance Act.
3. Attention is invited to clarification issued by the Tax Research Unit (TRU) vide Circular No. 172/7/2013-ST on 19th Sep, 2013 to address the concerns of the Education Institutions regarding Service Tax Liability.
Para 3 of the aforesaid circular is noted below for ready reference:-
“3. By virtue of the entry in the negative list and by virtue of the portion of the exemption notification, it will be clear that all services relating to education are exempt from service tax. There are many services provided to an educational institution. These have been described as “auxiliary educational services” and they have been defined in the exemption notification. Such services provided to an educational institution are exempt from service tax. For example, if a school hires a bus from a transport operator in order to ferry students to and from school, the transport services provided by the transport operator to the school are exempt by virtue of the exemption notification.”
Para 3 of aforesaid circular clearly dictates that all services related to education are exempted. Further, there are many services received by an education institution described as “Auxiliary Education Service” and the same have been defined under the notification for the purpose of exemption.
4. INTENTION OF LAW – The intention of the Law was always to exempt the Education Service and the Government of India has never intended to charge Service Tax from the Students (or their Parents) for Services that are integral to Education like Boarding (Hostel) Fees or Transportation Fees. In this context only the government has even granted exemption to the service received by the Education Institutions by outsourcing the same to other persons at Entry No. 9 of Notification No. 25/2012 for the period from 01-04-2013 to 10-07-2014.
It could be easily understood that if a Service received by an Education Institution from a Third Party (Outsourced) is exempted from Service Tax, then the intention of law is very clear and the same service cannot be treated as Taxable when it is provided by the Education Institute directly to its Students.
5. Although the DGCEI Letter has asked the departmental officials to charge service tax only on the Transportation Fees but the departmental officials are extending the interpretation to all the possible avenues including Hostel Fees. It is important to understand here that whether DGCEI has done its homework before issuing letter to the Field Officers or not. If the homework has not been done by DGCEI then this letter should itself be reviewed and if they have done the homework then there is no reason for the Field Officer to doubt their competence and believe that they have by mistake forgot to mention ‘Hostel Fees’ in there letter issued to them. If DGCEI could specifically ask for Transportation Fees then there is no reason why they could not mention charging Service Tax on Hostel Fees.
OUR VIEW ON THE SUBJECT
1. The definition of the ‘Auxiliary Education Service’ requires a better scrutiny by the TRU and DGCEI and they must try to assess the definition in completeness instead of reading in-between the lines;
2. The intention of Law and its Legal standing must be understood before building this case, as this case will have national impact covering lakhs of Education Institutions and resulting in deployment of Lakhs of Man-days for the Department as well as handling Lakhs of Litigation across India;
For any further information or clarity on the subject you can contact CA Ritul Patwa on email : rp@ritulpatwa.com