MARCH 2, 2010

Commercial training or Coaching service – Will attempt to overturn Tribunal judgments succeed?

By Santosh Hatwar

TWO significant amendments were made in this Budget to expand (or rather restrict?) the scope of taxable services provided by a ‘Commercial training or coaching centre'.

Firstly, an explanation is proposed to be inserted under clause (zzc) of sub-section 105 of Section 65 of the Finance Act, 1994 which declares that the expression ‘commercial training or coaching centre' occurring in this sub-clause and in clauses ( 26 ), ( 27 ) and ( 90a ) ibid shall include any centre or institute, by whatever name called, where training or coaching is imparted for consideration, whether or not such centre or institute is registered as a trust or a society or similar other organisation under any law for the time being in force and carrying on its activity with or without profit motive and the expression ‘commercial training or coaching' shall be construed accordingly.

The scope of this amendment is explained by TRU in its clarification dated February 26, 2010 as follows:

“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/centres from the latter, the word ‘commercial' was used in the definitions of ‘Commercial training and coaching', ‘Commercial training and coaching centres' 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 taxpayers resisted paying tax on this ground. In order to clarify the legislative intent, the definition of the taxable service is being suitable 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.”

Simply put, charity or no charity, all commercial training or coaching centres, whether they are registered as a trust or a society or similar organization is proposed to be brought under the tax net retrospectively from July 1, 2003. As mentioned briefly in an earlier write up in the TIOL's Budget Analysis, this is an attempt to undo various landmark Tribunal judgments. But the question is whether the Government will be successful in its attempt.

In Mallappuram District Parallel College Association vs. Union of India 2006-TIOL-35-HC-KERALA-ST the Kerala High Court held as follows:

“………… on going through sub-clause (27) of section 65 it is clear that coaching in any form for imparting knowledge or skill or lessons on any subject or filed, except the subjects specifically excluded by the said definition clause are covered by it ……….In the circumstances, the petitioners' contention that students trained by them are getting diploma or degree certificate after writing university or board examinations in the same way as students studying similar subjects in regular aided or self-financed colleges does not make them eligible for exemption under the exemption clause…….”(Emphasis supplied).

However, the High Court restricted the scope of this judgment only to the petitioners.

On the other hand, Chennai Bench of CESTAT delivered a landmark judgment discussing the scope and object of what is ‘commercial' to determine the taxability of activities of an institution imparting higher education. In Great Lakes Institute of Management Ltd vs. CST, Chennai 2008-TIOL-134-CESTAT-MAD wherein the Tribunal observed:

“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.”

Further, in Magnus Society vs. CCE, Hyderabad 2008-TIOL-1812-CESTAT-BANG the Bangalore Bench of CESTAT sought to explain the concepts of ‘commercial training or coaching' and ‘education' by observing as follows:

“……….. “Commercial training or coaching” is very narrow in scope. It means imparting of a particular skill by the said institution, there are several commercial coaching or training centres which imparts skill in computers, literacy, computer operation, spoken English or accountancy. They are so many things. Whereas, education is a very broad term, which includes in its scope the development of personality. It may include coaching or training but that's only a part of education. Education develops several skills, whereas, what is meant by “commercial training or coaching” in the definition given in the Finance Act has a very narrow meaning and it is not so broad enough to contain in its hold institutions imparting higher learning like MBA or Management in Computer Science or any other discipline. They would not be called as “commercial training or coaching centres”. There are many institutions preparing students for entrance examination to various universities. They may be called as “commercial training or coaching” but not institutions which offer degrees, which are recognized by law.”

More or less similar views were expressed by the CESTAT in ICFAI, Hyderabad vs. CCE, Hyderabad-II 2008-TIOL-2036-CESTAT-BANG wherein the Tribunal observed as follows:

“……….. Education is a very broad term. Education is the overall development of body, mind, intellect. It is for the development of the personality of any person getting that education. But, training and coaching are narrow in scope. That is why, even in Board's clarification, which we will reproduce later, the example given is that of certain institutions coaching students for examinations like IIT Joint Entrance Exam or the medical entrance exam, etc. Such coaching or training centres have definitely a profit motive because they have to train the students to become proficient in getting through particular examinations .”

As stated above, by virtue of inserting an explanation, the Government has sought to bring into the tax net all commercial training or coaching centres whether they have a profit motive or not. But it remains to be seen whether the Government's attempt to tax institutes whether they are charitable or not will be successful in view of the subtle distinction that was made out by the CESTAT in the Magnus Society case and ICFAI case.

While the department may be under an impression that they have resolved the issue in their favour, mere insertion of an explanation with retrospective effect will not set the cash registers of the Revenue ringing unless all the issues surrounding the issues of what actually constitutes ‘coaching' or ‘training' or ‘education' are legally set to rest whether by the Courts or by the Parliament. Above all where is the recovery mechanism for effecting recovery of tax retrospectively?

While the Government can ponder over this aspect, the second aspect is the amendment to the definition of ‘vocational training institute' in Notification 24/04-ST dated September 10, 2004 for the purpose of granting exemption under ‘Commercial training or coaching service'.

Hitherto, in the explanation under Notification 24/04-ST ‘vocational training institute' was defined as follows:

(i) "vocational training institute" means a commercial training or coaching centre which provides vocational training or coaching that impart skills to enable the trainee to seek employment or undertake self-employment, directly after such training or coaching;

In the Notification 03/2010-ST the amended definition reads as follows:

“(i) 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).  

By virtue of this amendment, the scope of ‘vocational training institute' is now redefined only to cover ITIs or ITCs affiliated to National Council for Vocational Training and which are offering courses in designated trades under Apprentices Act, 1961.

In the TRU Clarification dated February 26, 2010, in paragraph 6.1(b) it is stated as follows:

“The exemption from service tax on ‘Commercial training or coaching service' extended to vocational training institutes vide notification No. 24/2004-ST dated 10.09.2004 is being limited by introducing a new definition of vocational training institutes. Service tax exemption will be available only to industrial training institutes or industrial training centres affiliated to National Council of Vocational Training (NCVT) and offering courses in the designated trades covered under Schedule I of the Apprentices Act, 1961. The List figuring under Schedule I of the

Act covers engineering as well as non-engineering skills/trades.”

Whether this amendment actually limits or restricts the scope of the definition of a ‘vocational training institute' for the purpose of this exemption notification or not, would be a matter of fact if we reckon the following aspects:

In terms of Section 2(e) of Apprentices Act, 1961, ‘designated trade' means any trade or occupation or any subject field in engineering or technology  or  any  vocational course which the Central Government, after consultation with the Central  Apprenticeship  Council,  may,  by  notification  in the Official Gazette, specify as a designated trade for the  purposes of this Act.

As per the information available from the official website of the Department of Employment and Training, Government of India, altogether 188 trades in 35 trade groups are designated for the purpose of trade apprentices under the Apprentice Act, 1961. Further, there are around 101 subject fields in engineering and technology designated for graduate/technician apprenticeship and around 94 subject fields designated for technician (vocational) apprentices.

When the service tax officials in the field come face to face with this reality it remains to be seen if the scope is actually being limited or restricted considering the fact that they have a herculean task of identifying these institutes and allowing their claims in terms of this exemption notification.

So it's a long and arduous battle of wits that lies ahead. Advocates and Consultants can have a hearty laugh because their cash registers are sure to ring.