The Hindu Business Line : Tax on parallel education that failed the test of Article 14

THE decision of the Kerala High Court in the Malappuram District Parallel College Association case may not have many parallels. Because the verdict, delivered on August 31, 2005, by Justice C. N. Ramachandran Nair, quashed service tax levy on parallel colleges in Kerala.

The Association had gone to court after the taxman had sought service tax from parallel colleges, treating them as `commercial training or coaching centres' as per Section 65(27) of the Finance Act, 1994. Were you to check the definitions on www.cbec.gov.in, you'd find that `commercial training or coaching' is defined as "any training or coaching provided by a commercial training or coaching centre."

`Commercial training or coaching centre' means any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports, with or without issuance of a certificate and includes coaching and tutorial classes but does not include preschool coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for time being in force.

Constitutional angle

The case is important for the different Articles of the Constitution cited. Crucially, the Association opposed the taxman's move thus: that the tax was `unauthorised, discriminatory, and hence violative of Article 14 of the Constitution of India,' which is about `equality before law'. The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India, declares that Article, as one notes from www.legalserviceindia.com.

At the High Court, it was M. K. Damodaran who appeared for the Association, while John Varghese, Additional Solicitor General of India, spoke for the respondent, Union of India. Damodaran didn't question the constitutional validity of service tax as such, because "the authority for legislation on service-tax was first derived by Parliament from the residuary Entry 97 of the Union List in the Seventh Schedule to the Constitution"; and by a later constitutional amendment, specific source of authority was conferred on it vide Entry 97A, one learns from the text of the judgment.

However, the Association drew the court's attention to the new Article 21A introduced by Constitution (86th Amendment) Act, 2002, text of which you can see on http://indiacode.nic.in. "The State shall provide free and compulsory education to all children of the age of six to fourteen years in such manner as the State may, by law, determine," it reads. Article 45 was also substituted with the following: "The State shall endeavour to provide early childhood care and education for all children until they complete the age of six years."

Article 41, titled `Right to work, to education and to public assistance in certain cases', also finds mention in the case. It says, "The State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want."

Tax on education

The Association argued that even if the State were not able to finance higher education as required under the Directive Principles of State Policy under Article 41 of the Constitution, it should not deny and discourage opportunities for education by adding cost to it in the form of tax on education which will certainly disable the economically weaker sections from pursuing higher studies. "There is certainly force in the contention," said the court.

However, Varghese, arguing for the Department, said that too many educational institutions were `mushrooming' and that education was carried on as business. Therefore, there was no illegality or even impropriety in levying tax on such educational institutions, he said.

Justice Nair said, "I am unable to appreciate this apprehension of the Government because this malady has to be corrected only by levying income-tax on the institutions and not by licensing the institutions to collect service-tax from students." There was no blanket tax exemption for educational institutions now, as in the form of the Section 10(22) of the Income-Tax Act, earlier; and exemption is provided with moderation in Section 10(23C), said the judge.

"Of course, Section 11 of the I-T Act which provides cover to large number of tax evaders under the guise of charity will continue to protect educational institutions as charity includes education also. If education is run on business lines, then solution is to amend Section 11 and other relevant provisions of the I-T Act withdrawing the exemptions to institutions and Government can simultaneously provide financial aid to beneficiaries which will put an end to misuse of income-tax provisions," he opined.

Thus the court wasn't convinced that the levy of service-tax on students could discipline those who make business out of education. "Tax on education, particularly when the incidence of tax is passed on to the beneficiaries, that is, the students, is a regressive legislation and has to be condemned, more so, when large number of poor people seek salvation through education and employment," reasoned Justice Nair.

There was a caveat, however. "The Supreme Court has repeatedly stated that courts, while examining constitutional validity, should not substitute judicial wisdom in the place of the legislature," stated Justice Nair. "So long as there is no constitutional bar against levy of service tax on education, and statute stands the test of Article 14 of the Constitution, then the levy has to be fully upheld, no matter whether the court considers the levy unwise, improper or even a regressive measure which is a policy matter to be left to the wisdom of the legislature." Accordingly, he rejected the Association's view that that service tax levied on education was against the spirit of Constitution and against the Directive Principles.

Test of Article 14

Does the levy of service tax stand the test of Article 14? This is the question on which the case hinged, because the Association had submitted that the `regular colleges affiliated to universities whether aided or self-financed' weren't getting similarly taxed, despite rendering the same services.

Damodaran contended that imparting of coaching to students for writing various university degree examinations (such as BA, B.Com, MA, and M.Com) did not come within the meaning of "commercial training". But the argument didn't find favour with the court, because Section 65(27) covered coaching in any form for imparting knowledge or skill or lessons on any subject or field, but for the exceptions specified.

Damodaran said that students coached by the parallel colleges appeared for university degree examinations as private students, wrote the same examinations, and got the same degrees as students of regular colleges affiliated to regular universities. Therefore, the regular colleges, whether aided or self-financed affiliated to universities, were also rendering the same service to students, he said. Though they are not awarding any degrees or diplomas, to lay claim to the exemption, they are not subjected to levy of service tax by the Department; if such colleges are not liable for payment of service tax, then there is no reason why the Association which is rendering same service should be treated differently and subjected to tax, he reasoned.

On this, too, the court differed in its view. It said that affiliated colleges conducted `course-study', requiring `minimum attendance in lecture classes and practical training'. In contrast, students trained by the parallel colleges were eligible to write examinations just by registration with the university without any need to undergo any course-study anywhere. Even though the affiliated colleges were not issuing any diploma or degree certificates, they were issuing course completion certificate to the students to make them eligible to write the examinations in terms of the university regulations, said the court. This was certainly an educational qualification prescribed by the university, and so they would come within the description of the exempted category under the definition clause, observed the court.

"Therefore the service rendered by the petitioners in coaching and training private students for examinations will attract service tax while regular aided or self-financed colleges affiliated to universities are outside the tax net."

Violative of Article 14!

After all these negations, how did the Association still win the case? Answer lies in paragraph 4 of the judgment. Damodaran had drawn the court's attention to the fact that because of service tax levy, students of parallel colleges had to pay more. Thus, the burden of service tax on education fell on the student community, comprising the less fortunate students, who were unable to get seats in regular colleges. The `less brilliant' students and those from `interior and remote areas of the State' came to parallel colleges, and yet `secured high ranks in the examinations conducted by the universities'.

These students were eligible for bus fare and other concessions as applicable to regular students. "Therefore the State Government also treats the students in affiliated colleges and parallel colleges as part of the same class. In any case, there can be no distinction between students undergoing private study in the parallel colleges and those undergoing course-study in the regular colleges, so long as the curriculum, the examinations written and the degrees obtained by them are one and the same," said Damodaran.

The judge ruled, therefore: "I find no distinction between students undergoing private study in parallel colleges and those undergoing study in affiliated colleges whether aided or self-financed in the same subjects for writing the same examinations. Therefore levy of service tax for services rendered by parallel colleges which indirectly falls on the students, but by simultaneously providing exemption to regular affiliated colleges allowing the students therein study free of tax, is patently discriminatory and violative of Article 14 of the Constitution of India."

It was significant that through an affidavit, the State Government had spoken of its helplessness in regard to levy of service tax, and that it had brought to the notice of the Central Government the difficulties experienced by parallel colleges in the matter of service tax.

Noting that the State Government too was in favour of exemption to the parallel colleges in the same way as granted to regular colleges, Justice Nair held that the levy of service tax on parallel colleges was `arbitrary and violative of Article 14 of the Constitution of India'.

Tailpiece

"He prepared the pre-Budget memorandum within five minutes!"

"By changing the year?"

Detaxification@TheHindu.co.in

D. Murali

More Stories on : Taxation | Detaxfication

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
On right track

Year 2005: Best and worst of times for Parliament

Inklings for India Inc

Tax on parallel education that failed the test of Article 14

Due for a `servicing'

Making amends for a lost deduction

Liaisoning can be taxing

Do genes score over merit in economic future?