Authority Tribunal
Educational Institute Of American ... vs Commissioner Of Income-Tax on 14 February, 1996
Equivalent citations: [1996]219ITR183(AAR)
RULINGS Authority for Advance Ruling No. 231 of 1995 Decided On: 14.02.1996 Appellants: Educational Institute of American Hotel and Motel Association Vs. Respondent: Commissioner of Income-tax Hon'ble Judges:
S. Ranganathan, Chairman, D.B. Lal and R.L. Meena, Members Counsels:
For Appellant/Petitioner/Plaintiff: N.A. Dalvi, Adv., Tara Rao, Chartered Accountant and K.V. Simon, Adv. For Respondents/Defendant: Surinder Paul Kaur, Adv.
Subject: Direct Taxation Acts/Rules/Orders:
Income Tax Act, 1961 - Sections 11, 10(22) and 245Q; Internal Revenue Code, 1954 - Section 501 RULING
1. An application dated June 27, 1995, has been made by Educational Institute of American Hotel and Motel Association under Section 245Q(1) of the Income-tax Act, 1961, for a ruling from the Authority on the following questions :
(i) Whether the applicant would be entitled to exemption under Section 10(22) of the Income-tax Act, 1961, in respect of its various amounts of income from the following sources in India :
(a) Conducting various courses and certification programmes in hospitality management and operations.
(b) Providing educational and training materials.
(c) Conducting seminars, workshops and other programmes.
(d) Providing training, course materials and instructional resources to the in-house faculty of various institutions.
(ii) Whether the applicant would be entitled to exemption under Section 11 of the Income-tax Act, 1961 ?
2. The applicant, "Educational Institute of American Hotel and Motel Association" (hereinafter referred to as "the El"), a non-resident, is a wholly owned subsidiary of the American Hotel and Motel Association and was set up in 1970. Under the Internal Revenue Code of 1954 in USA, it is enjoying tax exempt status under Section 501(c)(3) as an educational institution. It is governed by an elected board of trustees and it offers high quality educational and training resources to enhance the professionalism of the hospitality industry worldwide.
3. In 1993, the National Council of Hotel Management and Catering Technology (hereinafter referred to as "NCHMCT"), the apex Indian body overseeing hotel management and catering education under the Ministry of Tourism signed a memorandum of understanding with El, with Government approval, to use EI courses, resources and expertise with a view to improve the quality of hospitality education and training in India. As a consequence El opened a liaison office in Bombay in July, 1994, with the approval of the Reserve Bank of India. Subsequently, in February, 1995, the liaison office was upgraded to a branch office with the approval of the Ministry of Finance, Government of India, and the Reserve Bank of India. According to this MOU the applicant, EI had the following obligations :
The Institute will :
(a) provide a full and complete, world-recognised curriculum for all hospitality education programs in India ;
(b) make available for reproduction in India the texts, course materials, and software programs utilised in the. Institute's Hospitality Management Diploma ;
(c) provide a comprehensive faculty development program to upgrade the professionalism and instructional ability of those teaching hospitality management courses in India ;
(d) offer a comprehensive certification and registration program for individuals currently employed in the hospitality industry in India ;
(e) develop an accreditation system to permit the National Council to qualify and recognise proprietary schools ;
(f) develop through grant support, an entrance test to identify individuals best qualified to enter the hospitality industry ;
(g) establish an office in India to implement and co-ordinate the Institute's activities ;
(h) offer the National Council the lowest possible prices for the products and services sold to or utilised by the schools under the umbrella of the Government of India ;
(i) utilise Indian authors whenever possible in the development of customised programs.
4. As a consequence of this MOU, El entered into further agreement with 18 Indian institutions as on the date of the application, listed on page 96 of the brochure filed on December 1, 1995. Out of these 18 institutions, it signed Global Academic Program Licence Agreements (GAP) with (i, and entered into MOUs with 12 listed at serial Nos. 1-6 and 7-18, respectively. In respect of the income earned from these institutions, El requires certain clarifications under the Income-tax Act of 1961.
5. The case was heard on December 7, 1995. Shri N. A. Dalvi, Advocate, Ms. Tara Rao, Chartered Accountant, and Shri K. V. Simon, Regional Vice President, for South and West Asia (the head of the branch office in India) attended on behalf of the applicant. 'The Department was represented by the Commissioner of Income-tax, Bombay City II, who is having jurisdiction over the case.
6. The claim of the applicant is that it is a non-profit organisation which enjoys tax exempt status under the Internal Revenue Code in USA for which copies of letters of the US Department of Treasury have been filed. It has claimed that its activities are squarely covered by the term "Educational Institution" as per the requirements of Section 10(22) of the Income-tax Act. To support this view reliance was placed on the statement of purposes enclosed with the articles of association to which reference will be made later. Stress was laid on the fact that the Institute was not organised for pecuniary profit and no part of its net earnings ensure to the benefit of any member or director or to any other individual other than those who shall properly benefit from carrying out its purposes. Even in the event of dissolution or liquidation, the assets of the applicant can only be distributed exclusively to other entities created or organised exclusively for educational purposes similar to that of the applicant.
7. The Commissioner of Income-tax appearing on behalf of the Department stated that the applicant should be called upon to furnish rigorous proof in support of its claim which should not be accepted at its face value. If the applicant was able to prove that it was existing only for the purposes of education and not for any purpose of profit then alone it would become eligible for exemption under Section 10(22) of the Income-tax Act.
8. The moot question then is whether the activities of the applicant come within the definition of "income of educational institution" under Section 10(22). For the sake of clarity the said clause is reproduced below:
" Section 10(22): any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit."
9. On examination, the conditions precedent to the availability of the exemption to an educational institution can be stated thus :
(a) the educational institution must actually exist for the application of the said Section and the mere taking of steps would not be sufficient to attract the exemption ;
(b) the educational institution need not be affiliated to any university or Board, in fact a society need not itself be imparting education and it is enough if it runs some schools or colleges ;
(c) the educational institution must exist solely for educational purposes and not for purposes of profit but merely because there is a surplus that is to say, a surplus of receipts over expenditure, it cannot be said that the educational institution exists for profit ;
(d) an entity may be having income from different sources but if a particular income is from an educational institution which exists solely for educational purposes and not for purposes of profit, then that income would be entitled to exemption and further the income should be directly relatable to the educational activity.
10. Keeping in view these criteria, the activities of El in India have to be examined to determine the applicability of Section 10(22) to the income enumerated in question (i). The main thing to be seen is the objects of the institution and the source and utilisation of its income.
11. An examination of the "Statement of purposes" becomes essential at this stage. The activities undertaken and the rights of the applicant are as under :
"Prepare, formulate and distribute, either alone or in co-operation with others, courses of instructional material in the fields of hotel and motel ownership, maintenance and operation and fields related thereto for use in group study, home study or on-the-job training by students interested in such fields.
Own and operate a licensed private occupational school offering correspondence and residential courses in Michigan and other States in the following subjects : Hotel-Motel Management, Promotion, Procedures, Accounting, Law, Human Relations, Supervision, Food Service, Property Management, Maintenance, Purchasing and Related classes.
Have the right to charge and accept dues from members of the Institute and the right to accept contributions and gifts from members or non-members for carrying out the functions and purposes of the Institute.
To have the right to charge and accept royalties or fees from others for the use of courses of instruction and material supplemental thereto prepared by or for the Institute.
Have the right to receive and disburse money, borrow money and sign notes or other evidences of indebtedness.
Sponsor and encourage the formation of local chapters of Institute members for the purpose of arranging and conducting local study groups in hotel and motel subjects and promoting enrolment in home study courses offered by the Institute. "
12. Other aspects which assume importance are that when the Section says that the institution should not exist for purposes of profit, it does not mean that in the framing of objectives of the institution the item of surplus of receipts over expenses should be completely absent. There can be no doubt, that the purpose of making profits is not the real purpose where the articles of association of the institution clearly provide that its net earnings shall not enure to the benefit of any member or director or to any other individual. Further, even in the event of dissolution no member, trustee, officer of the applicant or any private individual shall be entitled to a share in its corporate assets. The tax exempt status of the applicant under the laws of USA though important has ultimately only persuasive value since the fulfilment of the requirements under the Income-tax Act of 1961 would alone determine the eligibility of the applicant under Section 10(22) of the said Act.
13. The actual activities which are currently carried on in India through GAP Licence Agreements and MOUs with 18 institutions mentioned above need to be examined, A copy of the GAP Licence Agreement has been given at pages 97 to 104 of the brochure and clause 10 enumerates the services of EI. For these services payment of $ 5,000 upon the execution of the licensing agreement and $ 5,000 as annual/maintenance fee, both being net of taxes as per clause 4 of the model agreement is to be made to EI. In addition payment of a fees to be established based upon time and individuals involved as per Clause 10 is to be paid to EI by the institution, Insurance cover is also to be provided by the institution as stipulated in clause 8, of the said agreement. With certain institutions EI has entered into MOUs a sample of which is given from pages 106 to 107 of the brochure. These are sales of courses at $ 60 or $ 65 through twelve months. These services are only for a trial period and may or may not lead to a more intimate educational/professional relationship.
14. A close analysis of the activities enumerated in Clause 10 of the GAP Licence Agreement and in the MOUs shows that these are either purely educational activities or related to provision of educational facilities. Thus, the applicant fulfils the conditions precedent enumerated above to the applicability of Section 10(22) of the Act. The objects and purposes also show that there is no profit motive in the activities of EI as even upon liquidation EI's assets do not inure to the benefit of any individual. So far as the activities in India are concerned if the letter of the Reserve Bank of India granting permission to EI to open a liaison office dated July, 1994, and letter of the Reserve Bank of India to upgrade it to a branch office under Section 29(l)(a) of the FERA dated February 10, 1995, are closely seen, paragraphs 3(ii), (iii) and (vi) put certain restrictions on the applicant regarding any new trading, commercial or industrial activity other than those approved thereby. Further by Clause 3(ix) of the same letter, the Reserve Bank of India exercises a certain amount of check over the applicant carrying out any other activity. By these the view that the applicant does not exist for "purposes of profit" is strengthened.
15. As the applicant, EI, fulfils the conditions for exemption under Section 10(22) of the Income-tax Act, the applicability of Section 11 of the Income-tax Act becomes academic and is not being examined. Interestingly, the applicant has raised a query regarding income from only four 'aspects of its activities which are enumerated in question (i). Hence, the ruling of the authority is limited to these four aspects only.
16. In conclusion, the answers to the questions framed are as under :
Question (i) : The applicant fulfils the conditions for granting exemption under Section 10(22) of the Income-tax Act and thus its income arising or accruing from the sources mentioned in the question would not be taxable.
Question (ii) : Since the answer to the first question is in the affirmative and in favour of the applicant, the second question becomes academic and need not be answered.