No Service Tax on Not for profit organizations: CESTAT

AIT News Network

MUMBAI. A recent ruling AIT-2008-11-CESTAT  of Customs Excise & Service Tax Tribunal has come as a mega relief for Not for Profit Organizations providing service of training or coaching.

According to the Tribunal such organizations are not a commercial concern and the training or coaching provided by GLIM is not a commercial activity and thus not liable to service tax.

The Institute in question  conducts Post Graduate Programme in Management (PGPM), a 12 months fulltime programme and Executive MBA, a part time course.  GLIM has academic and research collaborations with Illinois Institute of Technology, Chicago, Yale University, USA and Nanyang Technological University, Singapore.  Following investigation into the activities of GLIM, the department came to a tentative conclusion that GLIM is a “commercial training or coaching centre” for the purpose of Finance Act, 1994 . It appeared to be an establishment providing commercial training or coaching for imparting knowledge or lessons on any subject or field other than sports  as defined in clause 26 of Section 65 of the Act.  The diploma/degree issued by GLIM is not recognized by law.  All India Council of Technical Education (AICTE) has not recognized the institute.  It was observed that during the year 2004-05 GLIM had earned excess income over expenditure of Rs. 84,41,777/- and  had transferred Rs. 80 lakhs to its infrastructure project fund. After due process of law, the Commissioner (Service Tax) vide his order in original No. 14/07 dated 30.04.07, concluded that GLIM imparted commercial training or coaching as defined in Section 65(26) of the Act. He found that the  institute being a licensee under Section 25 of the Companies Act, 1956 and being granted the status of a public charitable trust under the Income Tax Act, 1961 did not alter the character and classification of service provided by the institute. The institute was a  “not for profit” organization under the Income Tax Act. But that fact was not relevant for the Finance Act 94. He also rejected the plea of the institute that it was “a vocational training institute” as the institute did not impart training which equipped the students with any particular skill to take up a vocation like typing or tailoring. He demanded from GLIM service tax of Rs.1,44,05,390/- and education cess of Rs. 2,39,112/- on a value of Rs. 14,70,51,997/- for the  training or coaching service provided by it during the period 1/4/04 to 31/7/06.  He also imposed penalties under Sections 76, 77 and penalty equal to the service tax demanded under Section 78 of the Act.  The order also demanded interest on the service tax demanded in terms of Section 75 of the Act.

The CESTAT has ruled as under:

“The provision of education by an institution will attract service tax only if the institution is a commercial concern.  A commercial concern is run with the sole object of making profit.  In the case of the appellants, no individual gains any profit by its operations.  The MOA clearly spells out that no income earned by the company shall be paid by way of dividend, bonus or otherwise by way of profit to any member of the company or to anybody else through the members. If any surplus remains when the company is wound up, it shall be transferred to another institution run for the same object as the company or for some charitable object.  These facts indicate that GLIM is not a commercial concern and therefore, training or coaching rendered by it is not liable to service tax as “commercial training or coaching”. 

Though the appellants earned some surplus income from the activity of imparting education, we hold that activity they are engaged in is predominantly one of public utility benefiting eligible youth  thereby sub-serving a much larger interest of providing useful talents  to the  industry and ultimately the economy of the country.  No individual is gaining any monetary benefit out of the activity of GLIM. 

Healthcare and education are social services essential to provide minimum quality of life to the people of a country.  As the demand for these services cannot be met by the Public Sector alone, private sector fills the gap. For most of them in the private sector, health & education are lucrative business. However, we find that education in the instant case is not a business.  The primary object of GLIM is to impart education. Profit making is not its main motive.  The refrain of the several judicial authorities cited is that profit motive characterizes a commercial concern as against general public utility in the case of a charitable organization. Therefore GLIM is not a commercial concern and the training or coaching provided by GLIM is not a commercial activity. “

(Click here for full text of ruling AIT-2008-11-CESTAT)

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