Income from renting varsity buildings for banking facilities subject to service tax: Karnataka High Court

Bengaluru: The Karnataka High Court has ruled that income from rental of buildings leased or licenced for banking facilities on university campuses is not exempt from service tax.

A division bench comprising Justice Krishna S Dixit and Justice Ramachandra D Huddar made this ruling on an appeal by the Central Board of Direct Taxes, challenging a July 26, 2022, order from a single bench upholding a petition by the Rajiv Gandhi University of Health Sciences (RGUHS), Bengaluru.

The varsity contested a 2018 show-cause notice and a subsequent demand notice in 2019 for Rs 7,40,28,684.

The notice had claimed that the university failed to pay service tax on fees, charges and penalties while granting affiliations or renewals, and rental income from its properties. The single bench had ruled that, as an educational institution, the university was exempt from service tax under the Finance Act, 1994, and thus did not require service tax registration.

However, the tax authorities argued that the university should be liable for service tax, as the rental of properties and collection of fees were commercial activities unrelated to education. They contended that such activities were not covered by the Negative List in Section 66(1)D and Section 65B(44) of the Finance Act. The bench observed that renting property for banking purposes demonstrated a profit motive.

"It is not the case of the university that the banking services are agreed to be provided on ‘no profit no loss basis’ by prescribing licence fee as contradistinguished from rentals. However, providing banking facilities by no stretch of imagination can be held to be incidental to education,” the court said.

The court did, however, set aside the portion of the notice related to service tax on income from grants, renewals, or denials of affiliation and from leasing properties for canteen facilities.

The authorities have been directed to revise and reissue the show-cause notice within six weeks, taking the court's observations into account.

“The Appellant-Revenue shall decide the matter afresh within next eight weeks following the receipt of reply; it shall provide an opportunity of personal hearing to the lawyer/representative of the university if requested, since the matter involves complexities,” the bench said.