Education Industry and Service Tax Amendments in Budget 2010.

Vikas Y. Khare
Practising Company Secretary & Chairman Indirect Tax Committee, Mahratta Chamber of Commerce, Industries
and Agriculture

Education is a medium and necessity for upliftment of the society and of“Aam Adami ”who is an
important stakeholder in a society. India is lagging behind from most of the advance countries in
creating excellent infrastructure for education, whether basic education or advance education or main
stream education or alternate education. On the one hand the Government introduced Education and
Higher Education Cesses for providing required impetus to the education and higher education and on
the other hand it also imposed service tax on Commercial Coaching and Training Centers.

Various educational institutions impart training and conduct courses in different fields. Many of
these institutions issue certificates/degrees/diplomas to the candidates upon their successfully
completing such courses. Apart from government run or aided institutes imparting education,
training or coaching, there are several private run institutes or centers, which impart
education/training/coaching, teach skills, help in preparing for competitive examinations or run
classes on various subjects. The Government imposed Service tax on services provided by
‘commercial training and coaching centers’ (CTCC) in the year 2003. Right from the introduction
of service tax on CCTC, disputes have arisen in respect of the chargeability of service tax,
particularly on two issues,

1)dispute number one, whether the issue of certificates/degrees/diplomas granted by

educational institutions who are registered as charitable trust or a Companies not for profits
registered under the Companies Act, 1956 are CCTC and

2)dispute number two, which CCTC are eligible for exemption from Service Tax as per
exemption Notification No 24/2004 ST dated 10-09-2004 as vocational training institute.

Government’s Responses to the Disputes

Service Tax being indirect tax it is expected that the Government has an efficient system for
redressing the difficulties/disputes. However, it has been time and again observed that instead
of nipping the disputes from the bud it also to roll the dispute to from an avalanche. It can be
seen that after lapse of nearly six years the Government made its view point clear vide Circular
No. 107/1/2009-S.T., dated 28-1-2009.

Clarification on Commercial Nature of Institute

The Government clarified that many service providers argue that the word commercial
appearing in the aforementioned phrase, suggests that to fall under this definition, the
establishment or the institute must be commercial (i.e. having profit motive) in nature. It is
argued that institutes which are run by charitable trusts or on no-profit basis would not fall
within the phrase ‘commercial training or coaching center’ and none of their activities would
fall under the taxable service. This argument is clearly erroneous. As the phrase ‘commercial
training or coaching center’ has been defined in a statute, there is no scope to add or delete
words while interpreting the same. The definition commercial training or coaching center has
no mention that such institute must have ‘commercial’ (i.e. profit making) intent or motive.
Therefore, there is no reason to give a restricted meaning to the phrase. Secondly, service tax,
unlike direct taxes, is chargeable on the gross amount received towards the service charges,
irrespective of whether the venture is ‘profit making, loss making or charity oriented’ in its
motive or its outcome. The word “Commercial” used in the phrase is with reference to the
activity of training or coaching and not to the nature or activity of the institute providing the
training or coaching. Thus, services provided by all institutes or establishments, which fulfills
the requirements of definition, are leviable to service tax.

In an anxiety to save demands not resulting into liability the Government has taken illegal route
to amend the definition of Vocational Training Institute with retrospective effect from 1-7-
2003. In the explanatory notes D.O.F. No.334/1/2010TRUNewDelhi,dated26th February, 2010.
The following paras of the letter are worth noting:

“6.1 Commercial training and coaching service was introduced in Budget 2003 with a view to
tax the mushrooming coaching institutes and training centres which either provide coaching
classes for examinations or unrecognized courses in various areas such as, management,
marketing, engineering etc. The schools, institutes, colleges and universities providing courses
that lead to award of recognized diplomas/degrees and sports education were kept out of tax
net. These include universities created under a Central or State Act, institutes recognized by
UGC as universities or deemed universities, institutes granted recognition professional councils
like AICTE, Medical Council of India, Bar Council of India etc. To distinguish the former types of
institutes/centers from the latter, the word ‘commercial’ was used in the definitions of
‘Commercial training and coaching,' ‘Commercial Training and Coaching centers’ and ‘taxable
service’.

6.2 The use of the word ‘commercial’ in these definitions has led to certain unintended
consequences. A view has been taken that the term ’commercial’ appearing in various
definitions implies that the institute must be run with a profit motive to fall under the taxable
service. A number of tax payers resisted paying tax on this ground. In order to clarify the
legislative intent, the definition of the taxable service is being suitably amended, through
insertion of an Explanation, to clarify that the word ‘commercial’ means any training or
coaching that is provided for a consideration irrespective of the presence or absence any profit
motive. This amendment is being carried out retrospectively (from July 2003) so as resolve the
disputes pending at different levels of the dispute settlement system.”

In Easland Combines Versus Collector Of C. Ex., Coimbatore 2003 (152) E.L.T. 39 (S.C.) Hon’able
Supreme Court of India while deciding an issue judicial decision whether can be nullified by
retrospective legislation it held that Legislature can always render a judicial decision ineffective
by enacting a variety of law on the topic within its legislative field by fundamentally altering or
changing its character retrospectively . The Supreme Court in this case upheld the retrospective
amendment to Section 11A of the Central Excise Act, 1944 by Section 97 of the Finance Act,
2000.

However, in ITW Signode India Ltd. Versus Collector Of Central Excise 2003 (153) E.L.T. 501
(S.C.) doubted the above decision and observed that the two judges Bench of Supreme Court in
Easland Combines [2003 (152) E.L.T. 39 (S.C.)] took the view that in view of the amendment of
Section 11A(1) the decision rendered in Cotspun’s case would not be a good law and show
cause notice for correcting errors or mistake in approval, acceptance or assessment relating to
the rate of duty on or valuation of goods could be issued within the prescribed period and then
referred the matter to a bench of three judges.

However the Larger Bench of Supreme Court disposed of this matter holding that a statute
may be enacted prospectively or retrospectively. A retrospective effect indisputably can be
given in the case of curative and validating statute. In fact, curative statutes by their very nature
are intended to operate upon and affect past transactions having regard to the fact that they
operate on conditions already existing. However, the scope of the Validating Act may vary from
case to case.

Clarification on Vocational Training Institute

In the same circular it has been clarified now that the vocational training institutes are
exempted from service tax vide Notification No. 24/2004-S.T., dated 10-9-2004 (as amended).
By definition, such institutes should provide training or coaching that imparts skill to enable the
trainee to seek employment or undertake self-employment, directly after such training or
coaching. Disputes have arisen in respect of institutes that offer general course on improving
communication skills, personality development, how to be effective in group discussions or
personal interviews, general grooming and finishing etc. It is claimed that such training or
coaching improves the job prospects of a candidate and therefore they are eligible for
exemption as ‘vocational training institutes’. However, a careful reading of the definition shows
that the exemption is available only to such institutes that impart training to enable the trainee
to seek employment or self-employment. The courses referred to above do not satisfy this
condition because on their own such courses do not prepare a candidate to take up
employment or self-employment directly after such training or coaching. They only improve the
chances of success for a candidate who already has the required skill. Therefore, such institutes
are not covered under the exemption.

Let it be a stand of the Government, but the definition of the Vocational Training Institute does
not support the clarification issued by it and there are disputes involving service tax demands of
millions of rupees on many educational institutions including premier educational institutions .
In case of Doon Institute of Information Tech. P. Ltd. Versus C.C.E., Meerut-I 2008 (12) S.T.R.
459 (Tri. - Del.) after observation that “it is well settled that exemption notification is not only
to be construed strictly but also reasonably having regard to the language employed therein”
up held the exemption under Vocational Training Institute and may other judgment have
interpreted Vocational Training Institute with the words used in the words used in the
Notification No. 24/2004-S.T., dated 10-9-2004. It seems that most of the cases will go against
the Department in the matter.

Amendment of Definition Of Vocational Training Institute Notification No. 24/2004-S.T., Dated 10-9-2004

The Government has realized from the judgments of Customs, Excise Service Tax Tribunal
(CESTAT) that it has lost and going to lose many cases, booked and pending at various stages of
dispute settlement system. In view of the amendment has been made with prospective effects.
It can be inferred that the all the pending disputes will have impact of the judgment of DOON
INSTITUTE OF INFORMATION TECH. P. LTD. Versus C.C.E., MEERUT-I 2008 (12) S.T.R. 459 (Tri. -
Del.) .

Whereas the retrospective amendment in indirect taxation needs to be protested, the prospective
amendment in the definition of Vocational Training Institute is welcome step as it will bring clarity in
understanding a tax liability under service tax.

Thus, for the education Sector crux of the amendments of the Union Budget 2010 are:

1. Commercial Training and Coaching Centers are liable for service tax even if they are Charitable
Trust or Section 25 Company;
2. W.e.f. 27-02-2010 Vocational Training Institute means an Industrial Training Institute or an
Industrial Training Centre affiliated to the National Council for Vocational Training, offering
courses in designated trades as notified under the Apprentices Act,1961(52 of 1961).
3. In view of the change in definition of Vocational Training Institute the exemption from service
tax will apply only to Vocational Training, offering courses in designated trades as notified under
the Apprentices Act,1961(52 of 1961) and all other vocational training in management, technical
etc. will not eligible to exemption under service tax;
4. It is most likely that past demands of Service Tax contested on ‘Charitable Nature of the
Institute” will have to cross the hurdle of retrospective amendment .
5. Past demands of Service Tax contested on eligibility to the exemption as vocational institute are
likely to be decided in favor of CCTC subject to establishing the case on the basis of the fact that
it imparted skills to enable the trainee to seek employment or undertake self-employment,
directly after such training or coaching.

Thus, the Education industry has reason to cheer with tear with the amendments in service tax.