Educational Buildings Not Commercial Merely Because Fees Are Charged: CESTAT Chennai

2. It was alleged that the appellants rendered taxable services under the category of ‘Works Contract Service’ by its services to educational institutions during the period from March 2008 to March 2011. They, however, did not pay Service Tax for the services rendered. Hence Show Cause Notice dated 23.4.2013 was issued and after due process of law, the learned Original Authority confirmed the demand along with interest and imposed penalties under various provisions of the Finance Act, 1994 (FA 1994). The appeal preferred by the appellant was rejected by the Commissioner (Appeals). Hence the appellants are before this Tribunal.

3. Shri G. Shiva Kumar, learned counsel appeared for the appellant and Shri Anoop Singh, learned Joint Commissioner (AR) appeared for the respondent.

4. The learned counsel for the appellant submitted that the dispute is whether works contract for construction for educational institution is taxable under Works Contract Service? The main crux is whether the building’s constructed for the said educational institutions can be regarded as ‘intended for commerce or industry’. The OIO states that so long as they (Education institution) collect fees they are commercial. He stated that educational institutions are meant for education and just because some amount is collected they will not cease to be non-profit and become commercial in nature. He placed reliance on the following judgments in this regard.

a. MCSARA Constructions Vs. The Commissioner of Central Excise, Velammal Education Trust – 2021 (3) TMI 1026 – Madras High Court

b. H. Kannan, Prop. Of Unikans Vs. CCE, Madurai & Vice Versa – 2018 (5) TMI 837 – CESTAT Chennai

c. M/s. SRM Engineering Construction Ltd. Vs. Commissioner of Service Tax, Chennai – II – 2018 (2) TMI 321 – CESTAT Chennai

d. P. Mariappan & Sons vs. CCE, Madurai – 2019 (2) TMI 596 – CESTAT Chennai

He also placed reliance on CBEC Circular No.80/10/2004-ST dated 17/09/2004 wherein it was clarified that buildings meant for educational institution cannot be considered as commerce or industry. He further stated that the SCN was issued beyond 18 months and hence the entire demand is beyond normal period. There is nothing to show suppression of fact, much less with an intention to evade tax, as alleged in the SCN other than to merely state that without audit of the Unit the issue would not have come to light. The issue is prone to interpretation as, there was a circular which states that educational institution cannot automatically be treated as being for Commerce. Hence there cannot be a demand for the extended period. The learned Counsel prayed that the appeal may be allowed.

5. The learned Joint Commissioner (AR) Shri Anoop Singh submitted on behalf of the department that there is no specific exemption from service tax for ‘work contract services’ rendered to educational institutions. He further stated that as per Section 65(25) read with Section 65(105)(zzc) of FA 1994, “commercial training or coaching center” shall include any centre or institute, by whatever name called, where training or coaching is imparted for consideration, and carrying on its activity with or without profit motive and the expression “commercial training or coaching” shall be construed accordingly. He hence stated that the buildings or civil structures used by the schools and colleges are by definition intended for commercial purposes only and thus satisfied the condition of the works contract service as being an activity primarily for the purposes of commerce or industry. He also invited our attention to the following case laws

a. M/s R.K. Enterprises Vs. CCE, Jaipur – I – 2017 (4) TMI 591 CESTAT New Delhi

b. M/s. G. Ramamoorthi Constructions (I) Pvt. Ltd. Vs. The Commissioner (Adjudication), Coimbatore – 2015 (11) TMI 845 Madras High Court

c. MCSARA Constructions Vs. The Commissioner of Central Excise, Velammal Education Trust – 2021 (3) TMI 1026 – Madras High Court

d. H. Kannan, Prop. Of Unikans Vs. CCE, Madurai & Vice Versa – 2018 (5) TMI 837 – CESTAT Chennai

e. M/s. SRM Engineering Construction Ltd. Vs. Commissioner of Service Tax, Chennai – II – 2018 (2) TMI 321 – CESTAT Chennai

6. Heard both sides. Classification of services is a matter relating to chargeability and the burden of proof is squarely upon the Revenue. If the Department intends to classify a service under a particular category, the Department must adduce proper evidence and discharge the burden of proof. The judgments of the Hon’ble Supreme Court in Union of India v. Garware Nylons Ltd. [1996 10 SCC 413]; H.P.L Chemicals vs. Commissioner of Central Excise, [2006 (197) E.L.T. 324 (S.C.)]; Puma Ayruvedic Herbal (P) Ltd. v. Commissioner of C. Ex., Nagpur [2006 (196) E.L.T. 3 (S.C.)], although rendered in the case of classification under the Central Excise Act is also relevant for classification of a service under the FA 1994.

7. The present issue relates to the activity undertaken by the appellant under Works Contract Service (WCS) as alleged by Revenue. The service was introduced and leviable to Service Tax with effect from 01/06/2007. Section 65(105)(zzzza) of the FA 1994, pertaining to WCS, is reproduced below;

Any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. Explanation. – For the purposes of this sub-clause, “works contract” means a contract wherein, –

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out, –

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or (d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or (e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects (emphasis added)

7. It is not disputed by the parties that what was involved was civil construction works for ‘Educational Institutions’. The appellants contention is that the activity cannot be said to be primarily for the purpose of commerce or industry as stated at (b) in the definition above and will hence not come under the levy during the relevant time. Whereas Revenue is of the view that Educational Institutions are, as per definition given in Section 65 (105) (zzzc), commercial training or coaching centers and the buildings or civil structures used by the schools and colleges are intended for commercial purposes satisfying the provisions of WCS.

8. We find that the dispute pertains to the phrase ‘primarily for the purposes of commerce or industry’. The Hon’ble U.S. Supreme Court in its judgment in Malat v. Riddell [383 U.S. 569 (1966)] held that, “primarily” means “of first importance” or “principally”. We shall examine the matter accordingly.

9. At the outset it must be stated that the statutory definition of a service given for a particular activity (commercial training or coaching) cannot be taken to understand the term ‘commerce or industry’ used for another service (WCS) when no ambiguity is involved. As a general principle of interpretation, where the words of a statutory provision are plain, and unambiguous, the intention of the Legislature is to be gathered from the language of the provision itself. The term ‘commerce or industry’ are commonly understood terms and do not require the aid of another definition from the statute to gather its intention. Commercial activities, relate to activities having profit as the primary aim. The Hon’ble High Court of Kerala in its judgment in Social Service Guild of Assissi Sisters v. K.S.E.B. [(1988)1 Ker LT 727 (733)] held as under;

14. “Commercial” in ordinary parlance, means “engaged in commerce” and “commercialize” in Webster’s Third New InternationalDictionarymeans:—“toengageinconduct,practice,or make use of for profit-seeking purposes as distinguished from participation,practice,oruseforspiritualorrecreationalpurposesor forothernon-pecuniarysatisfactions”.(emphasisadded)

10. Education institutions whether in the private sector or run by Government, other than purely charitable institutions, collect fees from its students. The fact that this collection of fees creates a surplus does not lead to the conclusion that the institution ceases to exist for educational purposes and becomes an institution primarily for the purposes of commerce or industry. An education institution for its modernisation, growth and sustenance needs to generate a surplus which it ploughs back to strengthen and sustain its educational activities. The test to be applied is of ‘predominant object’ of the activity of the institution and it is to be seen whether the institution exists for imparting education or merely to earn profits. One method is to look at the institutions balance sheet and to ascertain whether a bulk of the income/ profit/ surplus has been utilised for non- educational purpose. Second, whether the object of the institution is to make profit as opposed to educating persons i.e. education is not the prime objective of the organisation. Third, whether the profit/ surplus is reinvested for the purpose of achieving the objectives of education and is not distributed to any member of the organisation, other than for specific services provided in his/ her individual capacity. Fourth, whether the institution is declared to be a commercial institution by the Government etc. The list is not exhaustive. If one or more of these ingredients are present, the institution can prima facie be said to be created for the purposes of ‘commerce or industry’. We do not find any such test having been applied to verify the nature and objective of the educational institutions involved. The department has hence not discharged the initial burden in establishing chargeability of the service falling under WCS. Merely because the institutions are collecting a fee will not make the institution primarily for the purposes of commerce or industry. The demand must hence fail.

11. As regards invoking the extended period, it is settled law that mere failure to register and pay duty does not amount to willful suppression. The Act contemplates a positive action which betrays a negative intention of willful default. There must be some positive act from the side of the assessee to bring a charge of fraud, willful suppression etc with intention to evade payment of duty. No such allegation is found either in the SCN or in the findings of the Original Authority. The charge made is that the appellant ‘suppressed the vital fact of rendering Works Contact services to the abovementioned educational institutions from the knowledge of the department and not paid appropriate Service Tax without bringing out any negative intention of willful default. Normal audit objection based on legal reasoning does not lead to a charge of suppression. Something more is required. In any case the demand having failed on merits the issue of any demand, interest and penalty does not arise.

12. As for the judgments cited by Revenue, it is to be stated that the judgments in M/s. R.K. Enterprises pertains to ‘commercial or industrial construction service’ vs ‘works contract service’ and there is no discussion on the phrase ‘primarily for the purposes of commerce or industry’. Similarly M/s G. Ramamoorthy (supra) decided by the Hon’ble Madaras High Court leaves open and remands the issue whether the construction provided by the petitioner to the education institutions were meant to be used for academic purposes or for commercial purposes. The judgment of the Tribunal in Harsh Constructions Pvt Ltd (supra) goes against Revenue in as much as at para 5.2 it is held that prima facie the construction of colleges, Government hospitals or open university cannot be said to be commercial or industrial in nature and remands the matter for a final decision. The judgment of the Hon’ble Madaras High Court in Mcsara Constructions (supra) is also against Revenue as the Hon’ble Court directed the lower authority to examine the matter and render a finding as to whether the service rendered by the petitioner to the respondent is a commercial or industrial service by applying the test laid down by the Honourable Supreme Court in M/S Queen’s Educational Society vs Commr. Of Income Tax [AIR 2015 SC 3253 / 2015 (8) SCC 47]. The judgment of the Hon’ble Supreme Court is given in the context of section 10(23C)(iiiad) and (vi) of the Income Tax Act. The relevant portion is extracted below;

11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows:

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.

(2) The predominant object test must be applied – the purpose of education should not be submerged by a profit-making motive.

(3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.

(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes.

(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.

The Apex Court clearly held that the fact that the institution makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. The judgment of the Tribunal in H. Kannan (supra) again favors’ the appellant in as much as it holds that when the issue is mired in confusion and litigation for some time no penalty can be imposed. The judgment of the Tribunal in M/s SRM Engineering (supra) supports the appellant. The judgment states that it is established from the records that the buildings are predominantly used for educational activities, just because some incidental activities of renting of space for scientific or technical services or manpower recruitment services occurs it cannot be said that they are not primarily used for educational services. So, none of the cited judgments helps the Revenue’s cause. It is no surprise then that the judgments in Mcsara Constructions; H Kannan and M/s SRM Engineering mentioned above, have also been cited by the appellant in their favour.

12. For the reasons discussed, we set aside the impugned order and allow the appeal. The appellant is entitled for consequential relief, if any, as per law. The appeal is disposed of accordingly.

(Order pronounced in open court on 25.06.2024)