Tuition Fee Is Taxable Only When A Corresponding Service Is Rendered By The Educational Institution: Hyderabad ITAT

The Hyderabad Bench of ITAT has ruled that the tuition fee collected in advance is not taxable in the year of receipt and that the tuition fee is taxable only when a corresponding service is rendered by the educational institution. The Bench, consisting of K. Narasimha Chary (Judicial Member) and Rama Kanta Panda (Accountant Member), held that examination fee collected from students on behalf of the foreign universities is not taxable as 'Fees for Technical Services'. The ITAT ruled that teaching includes the activity of examinations, which is excluded from the definition of 'Fees for Technical Services' as per the exemption clause contained in the DTAAs (Double Taxation Avoidance Agreements). The assessee, Hyderabad Educational Institutions Private Limited, is an Indian company which runs a school and a pre-school. The academic year followed by the schools is different from the financial year followed for the purpose of accounting and filing income tax returns. Thus, the academic year of the school fell into different financial years. The assessee collects tuition fee from the students every quarter for the entire academic year. However, the assessee only recognizes the tuition fee collected for the relevant financial year as revenue in the books of accounts. The tuition fee collected by the assessee with respect to the academic year that falls in the succeeding financial year is treated by it as an advance and is shown as a liability in the books of accounts. The Assessing Officer (AO) opined that since the assessee was not required to return any part of the fee collected, the tuition fee shown by the assessee as an advance amounted to accrual of income. Thus, the AO passed an order making certain additions to the assessee's income. Also, the assessee made certain foreign remittances to the University of Cambridge, UK and the International Baccalaureate, Switzerland. The said remittances were made towards payment of examination fee collected from the students, and as fees for training of teachers, setting up of question papers and syllabus. The assessee did not deduct any tax at source under Section 195 of the Income Tax Act, 1961 before making the said remittances. The assessee had contended before the AO that the said remittances were not 'Fees for Technical Services' and thus no income accrued or arose to the said foreign universities in India. The AO however opined that skilled educational services were rendered by the said foreign universities to the assessee which fell within the ambit of the expression 'Fees for Technical Services' under the Income Tax Act, on which the assessee was required to deduct tax at source. Thus, the AO passed an order disallowing the foreign remittances made by the assessee. Against the order passed by the AO, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The assessee averred before the CIT (A) that all receipts received during the financial year did not tantamount to income and that unless and until the corresponding expenditure was taken into consideration, a distorted picture of income would be depicted. The CIT(A) held that if receipts pertaining to a period beyond the financial year were included in the income of the said year, it would lead to distortion of income. Thus, the CIT (A) directed the AO to delete the additions made with respect to the tuition fee collected by the assessee for an academic year that fell in the succeeding financial year. With respect to the order passed by the AO disallowing the foreign remittances made by the assessee, the CIT(A) held that the assessee was only a pass-through entity and that the examination fee collected by the assessee on behalf of the students was remitted in toto to the foreign universities. The CIT(A) ruled that the amounts paid by the assessee to the said foreign universities did not fall within the ambit of technical services or royalty services, as defined in the DTAAs entered into by India with UK and Switzerland. Thus, the CIT(A) allowed the appeal of the assessee and quashed the orders passed by the AO. The revenue department filed an appeal before the ITAT against the order of the CIT(A). The assessee Hyderabad Educational Institutions contended before the ITAT that the tuition fee collected by it in advance did not accrue as income. The assessee averred that the income accrued to the assessee only after the relevant expenditure, like the salaries of teachers and other related expenses, was met in the relevant financial year. The ITAT observed that though the tuition fee was received by the assessee in the last quarter of a financial year, the corresponding service was rendered by the assessee in the next quarter which fell in the next financial year. The ITAT ruled that income accrues only when the services are rendered and not when the promise for rendering the services...

Tuition Fee Is Taxable Only When A Corresponding Service Is Rendered By The Educational Institution: Hyderabad ITAT

Parina Katyal

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