Affiliation Fees Collected by Universities Not Taxable Under Service Tax, Rental Income Exempt if Within Threshold: CESTAT [Read Order]

Rajiv Gandhi Proudyogiki Vishwavidyalaya, the appellant, is a state university in Bhopal engaged in providing higher education. The department issued a showcause notice demanding service tax of Rs. 6,07,01,622 along with interest and penalties on amounts collected by the university as affiliation fees, inspection fees, no-objection fees from affiliated colleges, and a small portion of rental income from letting out premises to banks, post offices, canteens, and shops inside the campus.

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The appellant’s counsel argued that granting affiliation to colleges is part of the statutory functions of a university under the Rajiv Gandhi Proudyogiki Vishwavidyalaya Adhiniyam, 1998, and does not involve any commercial activity or element of consideration required for service tax liability.

The counsel relied on the Karnataka High Court’s decision in the Rajiv Gandhi University of Health Sciences case, upheld by the Supreme Court, which held that granting affiliation is a statutory function in the furtherance of education and not a taxable service. The counsel also argued that since the affiliation fees were not taxable, the university’s rental income remained within the exemption threshold limit and was not taxable.

The revenue counsel argued that the university collected fees for granting affiliation and other permissions, which was a service provided for consideration and taxable under the Finance Act, 1994. The counsel also argued that rental income from leasing spaces within the campus was a taxable service.

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The two-member bench comprising Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) observed that the issue was already decided by the Karnataka High Court in the Rajiv Gandhi University of Health Sciences case, which held that affiliation granted by a university to colleges is part of its statutory duty, lacking commercial character and contractual consideration, and not a taxable service under service tax law. The tribunal further observed that the Supreme Court dismissed the revenue’s appeal against this judgment, confirming its correctness.

The tribunal explained that since the affiliation fees were not taxable, the appellant remained within the threshold exemption limit for its rental income, and the rental income was also not taxable. The tribunal held that the demand for service tax, interest, and penalties imposed on the appellant was not sustainable. The tribunal set aside the order-in-original passed by the Principal Commissioner and allowed the appeal.

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