The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad has held that amounts attributable to the sale of books and study material, hostel charges, mess charges and several other receipts having no nexus with coaching cannot be included in the taxable value for levy of service tax.
The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has found no cogent or specific grounds for invoking the extended period. It reiterated that mere non-payment of tax by itself does not establish suppression of information and consequently held invocation of the extended period to be bad in law.
The appellant/assessee was engaged in providing coaching to students preparing for examinations such as AIIMS, EAMCET and AIEEE through around 35 branches. The dispute arose because the assessee collected amounts under different heads, including tuition fee, study material, hostel fee, mess fee and “other fee”, while service tax was principally being paid on tuition fees.
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The Revenue took the position that Commercial Training and Coaching Service was taxable and that service tax was payable on the gross amount charged and collected. It therefore sought to bring receipts under various other heads into the taxable value under Section 67 of the Finance Act, 1994.
The batch of appeals consequently raised several issues, including service tax on study material, hostel and mess charges, “other fee”, miscellaneous receipts and the applicability of Notification No. 12/2003-ST. The Tribunal was also called upon to examine the extended limitation period and penalties.
One of the principal issues before the Tribunal concerned the amounts collected towards books and study material.
The CESTAT noted that under Section 65B(44) of the Finance Act, certain transactions, including deemed sales within Article 366(29A) of the Constitution, stood outside the definition of “service”.
The Tribunal further examined the Andhra Pradesh VAT law and observed that sale of books fell within the ambit of the VAT legislation. Although books, periodicals, journals and charts were exempt from VAT, their exempt status did not change the essential character of the transaction.
The Bench observed that where goods are leviable to VAT, the fact that they are exempt from actual payment of VAT cannot convert the transaction into a service. For the period before the negative-list regime, Notification No. 12/2003-ST also provided for exclusion of the value of goods sold from the gross value of taxable services.
Importantly, the Tribunal rejected the reasoning that study material could not constitute a genuine sale merely because individual books or materials had not been separately priced or billed.
The records showed that invoices reflected fees towards study material/books and the assessee’s books of account separately accounted for income from study materials. The Tribunal held that sale of books as a distinct activity could not be denied merely because the books or materials were not individually billed or priced.
The Tribunal also found fault with the adjudicating authority’s attempt to treat supply of study material as an integral part of coaching or as a bundled service.
It noted that there was no indication in the show cause notice that the Department had alleged that supply of study material was an integral component of coaching or part of a bundled service. Consequently, reliance upon such an additional ground at the adjudication stage went beyond the scope of the show cause notice and could not be sustained.
The Tribunal further referred to precedents holding that the value of goods and materials sold was exempt from the gross value of taxable services. It concluded that sale of study material to students was a distinct activity from the provision of coaching and training, even if there was some connection between the two.
Another issue concerned compliance with the conditions attached to Notification No. 12/2003-ST.
The assessee produced a Chartered Accountant’s certificate to establish that it had not availed credit in respect of the relevant inputs. The Revenue objected to the certificate having been produced at a later stage.
The Tribunal, however, found that the assessee had satisfactorily explained the delay. It noted that the certificate had been issued after verification of financial statements, profit and loss accounts, balance sheets, books of account, ledgers and ST-3 returns.
Accordingly, the Revenue could not deny the exemption merely because of the late submission of the CA certificate or an inadvertent reference concerning the nature of credit.
The CESTAT also ruled against the Revenue on the inclusion of hostel and mess charges.
The Tribunal noted that in earlier proceedings concerning the same assessee, the adjudicating authority itself had held that the gross amount included in taxable value must have a nexus with the taxable coaching service.
While tuition fees were directly connected with Commercial Training and Coaching Services, lodging, boarding, food and accommodation represented separate facilities. Therefore, amounts collected for those facilities could not automatically form part of the taxable value of coaching services.
The assessee had also contended that many students did not opt for hostel facilities, demonstrating their independent character.
Accordingly, the Tribunal concluded that the service tax demands on hostel fee and mess fee were not sustainable.
Another significant issue concerned additional income of ₹10 crore disclosed before the Income Tax authorities.
The assessee explained that the amount had been declared for income-tax purposes and reflected as other income. The service tax authorities sought to tax the amount on the basis that the assessee had failed to demonstrate that it arose from a non-taxable activity.
The Tribunal rejected this approach.
It held that for service tax purposes, the burden was on the Department to establish that the income arose from provision of a particular taxable service. The mere fact that an amount had been accepted as income under income-tax law was insufficient to establish a taxable service transaction under the Finance Act.
The Department had failed to establish that the ₹10 crore represented consideration for any particular taxable service. The demand therefore could not be sustained merely because the assessee had disclosed the amount before the Income Tax authorities.
The Tribunal similarly rejected demands relating to several other receipts where the Department failed to demonstrate their connection with Commercial Training and Coaching Services.
These included amounts relating to sale of applications, material fee, reservation of seats, other income, caution deposits, dhobi charges, pocket money, library deposits, BITSAT, sale of N-SAT applications, periodical examination fees, admission fees and sale of ID cards.
The Tribunal found that several of these receipts were either in the nature of sale of goods or lacked the necessary nexus with the coaching service.
In its consolidated findings, the CESTAT consequently held that the demands relating to these categories could not be sustained.
The Tribunal also examined a differential service tax demand arising from differences between figures appearing in financial statements and ST-3 returns.
The assessee explained that the differences arose from income-receivable entries or journal vouchers passed in March, while the corresponding tax was paid in April.
The Tribunal found that the entire service tax amount had ultimately been paid in the subsequent month and that there was no actual escape of service tax. It therefore held that a differential demand could not be sustained merely on the basis of the financial and accounting system adopted by the assessee.
The dispute additionally covered service tax on rent received for a building.
The assessee stated that the premises had been rented to Narayana Education Society, an educational institution. The Tribunal accepted that the premises had been rented to an educational institution and held that the rental could not be subjected to service tax under the applicable statutory provisions and exemption notification.
Consequently, the demand on rental income was also held unsustainable.
The CESTAT further delivered an important finding on invocation of the extended limitation period.
It noted that the taxability of various components of the assessee’s receipts had already been the subject of prolonged litigation and previous show cause notices.
The Tribunal observed that although the service tax regime underwent changes from July 1, 2012, the fundamental issue remained whether transactions involving sale or deemed sale of goods could be subjected to service tax.
The ₹10 crore disclosure had also been made by the assessee itself before the Income Tax authorities and had not been withheld or suppressed.
Once the extended period was held inapplicable, the Tribunal held that the penalty under Section 78 could also not survive in the circumstances of the case.
It further accepted that the disputes arose from the assessee’s bona fide understanding regarding the taxability of the different receipts. Penalties under Sections 76 and 77 were consequently waived under Section 80 for the applicable periods.
The Tribunal held that service tax demands on books and study material were unsustainable both before June 30, 2012 and under the negative-list regime. Demands on hostel and mess fees were also held unsustainable.
“Other fee” could not be taxed to the extent it represented study material, hostel fee, mess fee or otherwise lacked nexus with the core coaching activity. Differential service tax on tuition fee and the disputed rental income were also held unsustainable.
The assessee was held eligible for Notification No. 12/2003-ST, as amended, up to June 30, 2012. The extended period and Section 78 penalty were held inapplicable, while penalties under Sections 76 and 77 were waived under Section 80.
The Tribunal did not hold tuition fees themselves exempt from service tax. In the individual appeals, demands relating to tuition fee under CTCS were upheld where applicable. For example, in Appeal ST/22164/2015, the tuition-fee demand was upheld while demands relating to other fees, study material and mess fee were set aside.
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