CESTAT Delhi Quashes Service Tax Demand On Charitable Society Running Educational Activities

The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has allowed an appeal filed by a charitable society, holding that it cannot be subjected to service tax for educational and community development activities where fees or contributions are collected for charitable purposes, and the society had a bona fide belief it was exempt.

A Bench of Judicial Member Binu Tamta and Technical Member Rajeev Tandon set aside Rs. 3.2 crores demand against a charitable society registered under the Rajasthan Co-operative Societies (the appellant), noting that the society's primary and dominant purpose was charitable, and that the collection of nominal fees for training, accommodation, or cultural programmes did not constitute profiteering or personal gain.

The appellant was engaged in imparting education, awarding scholarships, providing accommodation for needy students, and conducting cultural and religious programs. It collected nominal fees or advance rent, and receipts from guest houses were booked in financial statements following auditor advice.

The dispute arose when the Department confirmed the demand, along with interest and penalties, under several sections of the Finance Act, 1994, alleging that the society (appellant) had charged fees for training, accommodation, and renting activities.

The society contended that it was eligible for exemption under Mega Exemption Notification No. 25/2012-ST, as its activities were charitable in nature. Residential accommodation and social/cultural programmes were either free of charge or left at the discretion of beneficiaries, demonstrating that the purpose was community upliftment and not profit.

The Tribunal noted that the appellant was not registered with service tax authorities, acting in bona fide belief that it was rendering non-taxable services. Applying the 'primary and dominant purpose' test, CESTAT observed:

“The fact that the appellant was duly exempted under section 12AA of the Income Tax Act, apart from their registration under the Rajasthan Co-operative Registration Act, are sufficient enough to corroborate the premise that the appellant harboured a bonafide belief of being covered within the scope of the Mega Exemption Notification No. 25/2012 ST dated 20.06.2012, exempting charitable organizations. We find that indeed the appellant is so covered and exempted from payment of Service Tax, by virtue of the said exemption notification.”

The Tribunal further emphasised that mere collection of nominal fees or contributions does not convert charitable activities into taxable services, and that the appellant's primary objective remained charitable, with no personal gains involved.

Accordingly, it set aside the service tax demand along with interest and penalties, and allowed the appeal, granting full exemption to the charitable society.