Construction of Educational Institution Non-Commercial in Nature, Exempt from Service Tax: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that the construction of educational institutions qualifies as a non-commercial activity and is therefore exempt from the levy of service tax.

M/s. Shree Mahalakshmi & Co. appealed against an order demanding service tax of ₹1.52 crore under the category of “Works Contract Service” for the period between April 2008 and June 2012.  The adjudicating authority had invoked the extended period of limitation under Section 73(1) of the Finance Act, 1994, to confirm the demand, along with interest and penalties under Sections 77 and 78 of the Act.

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The demand was based on the Department's view that construction services provided to educational institutions by the appellant were for commercial purposes, as the institutions charged fees and did not prove that they were operating without profit motive.

The appellant relied heavily on CBEC Circular No. 80/10/2004-ST, which clearly excluded from tax the construction of buildings meant for organizations established solely for educational, charitable, or religious purposes and not for profit. The appellant also cited the case of RGP Construction vs CCE, Salem (2024), where the Tribunal had previously held that construction for educational institutions did not attract service tax.

The Department had argued that educational institutions charging fees indicated a commercial activity and contended that CBEC's earlier circular was no longer applicable. It also stated that the appellant was paying VAT and registered with the Commercial Tax Department.

To the contention on VAT payment, the Tribunal pointed out that VAT liability on goods transfer in works contracts cannot be a standalone criterion to determine the commercial nature of the service.

In response to the Department’s reliance on the Supreme Court’s decision in Bangalore Water Supply & Sewerage Board, the Tribunal drew attention to the larger bench ruling in T.M.A. Pai Foundation vs State of Karnataka, where it was categorically held that education is a charitable occupation and institutions cannot aim for profiteering.

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In addition the bench relied on the decision of this tribunal in R.R. Tulasi India Pvt Ltd vs The Commissioner of CGST & Central Excise, Salem Commissionerate, where it was observed that the department Circular No.80/10/2004-ST dt. 17.09.2004 was not withdrawn even after issuance of following master circulars. The Board in this circular has explained that when the building is meant only for educational purposes, the levy of service tax is not attracted.

The bench clarified the legal position regarding burden of proof. It held that when a taxpayer believes that a particular service is not taxable based on a circular issued by the Board, the initial burden is on the Revenue to establish taxability under the law. Once the assessee demonstrates the basis of their belief, such as reliance on a circular, the onus shifts to the Revenue to prove that the belief was misplaced.

In the present case, the Revenue failed to provide evidence that the buildings constructed by the appellant were used primarily for commercial or industrial purposes, stated the bench.

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The Supreme Court in T.M.A. Pai Foundation vs State of Karnatakahad observed that “We, however, wish to emphasise one point, and that is that inasmuch as the occupation of education is, in a sense, regarded as charitable, the Government can provide regulations that will ensure excellence in education, while forbidding the charging of capitation fee and profiteering by the institutions. Since the object of setting up an educational institution is by definition “charitable”, it is clear that an educational institution cannot charge such a fee as is not required for the purpose of fulfilling that object.”

Accordingly, the bench of Ajayan TV and Vasa Seshagiri Rao set aside the impugned demand, ruling that the construction of buildings for educational institutions is non-commercial and falls outside the scope of service tax under Works Contract Service.

To Read the full text of the Order CLICK HERE

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