Taxability on Affiliation Fees Collected by Universities: Supreme Court upholds HC’s decision to quash SCN, Dismisses DGGI’s SLP [Read Judgement]

The Supreme Court has dismissed a Special Leave Petition filed by the Directorate General of GST Intelligence ( DGGI ), challenging a Karnataka High Court order that had quashed show-cause notices (SCNs) issued to Bangalore University for service tax demands on affiliation fees.

The Supreme Court bench, comprising Justices J.B. Pardiwala and R. Mahadevan, declined to interfere with the High Court’s decision, thereby affirming the non-taxability of such fees as part of the educational services rendered by universities.

A show-cause notice requesting service tax from Bangalore University on income obtained through the awarding, renewing, and rescinding of affiliation with private colleges gave rise to the legal dispute.

The institution contested the notice, claiming that such activities are either protected by exemption notices or fall under the purview of educational services and are not taxable services under the Finance Act of 1994.

The Karnataka High Court, in its judgment dated September 2, 2024 relied heavily on an earlier decision of Rajiv Gandhi University of Health Sciences. In that case, the Court held that income derived by the university from affiliation and related activities including fees, late fees, penalties, and fines is not liable to service tax as it lacks the essential character of "consideration" under Section 65B(44) of the Finance Act, 1994.

The High Court observed that such affiliation-related functions are statutory obligations carried out in the public interest and lack commercial elements that would qualify them as taxable services. The affiliation process, it noted, creates an institutional relationship regulated by law, and the fees associated with it are incidental to the delivery of educational services, not a quid pro quo exchange.

Further, the Court stated that during the relevant period (July 2012 to September 2016), educational institutions, including universities, were either exempt from service tax or covered under the Negative List provisions of the Finance Act.

It also clarified that the services rendered by universities as part of curriculum-related education for recognized qualifications fell squarely within the scope of the Negative List up to May 2016 and continued to be exempted through subsequent government notifications. Accordingly, the High Court concluded that the show-cause notices were without jurisdiction and deserved to be quashed.

Coming to the present situation before the supreme court, the DGGI’s SLP was met with a succinct dismissal, with the Court stating it saw no reason to interfere with the judgment of the High Court.

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