The Income Tax Appellate Tribunal, Cochin Bench, has clarified a critical distinction in tax compliance for educational institutions: payments made to teaching faculty on an hourly, performance-based basis without statutory employment benefits constitute professional fees, not salary. This ruling resolves long-standing ambiguity for coaching centers nationwide and reinforces the primacy of contractual intent over administrative controls in determining TDS obligations.
Background & Facts
The Dispute
The appellant, M/s. Brilliant Study Centre Private Limited, operates a private coaching institute in Kottayam, Kerala, providing preparatory coaching for competitive entrance examinations such as NEET, JEE, and GATE. The Income Tax Department initiated proceedings under Section 201(1) and 201(1A) of the Income Tax Act, 1961, alleging that the appellant had failed to deduct tax at source under Section 192 (for salary) and instead incorrectly deducted tax under Section 194J (for professional fees) on payments made to 121 teaching faculty members.
Key Facts
- The appellant engaged 121 teachers on an hourly basis for imparting coaching services between FY 2018-19 and AY 2023-24.
- Teachers were not provided with appointment letters or written employment contracts.
- No statutory benefits such as Provident Fund, Gratuity, ESI, leave encashment, medical insurance, or bonus were extended to the teachers.
- Remuneration was structured as a combination of a fixed amount and a variable component based on the number of lectures delivered, labeled as "professional fees."
- Teachers were required to maintain attendance and adhere to working hours (5 - 7 hours daily), but were not subject to daily supervision of teaching methodology.
- Teachers were prohibited from teaching at other coaching centers during their engagement with the appellant, but were free to engage in private practice after fulfilling a two-year service condition.
- Teachers were required to give one-day notice for leave and were eligible for an annual 10% remuneration increase.
- Teachers filed their income tax returns under Section 44ADA, declaring the receipts as professional income, which was accepted by the Assessing Officer in their individual assessments.
- The appellant had initially treated some teachers as salaried employees but transitioned them to professional status based on market practices and the nature of their engagement.
Procedural History
- 18 December 2023: Survey under Section 133A(2A) conducted at the appellant’s premises to verify TDS compliance for FY 2018-19 to AY 2023-24.
- Summons issued under Section 131: To 16 teachers and the managing director; statements collected from 21 teachers.
- 5 June 2024: Show cause notice issued by the Income Tax Officer (TDS), Kottayam, alleging short deduction of tax under Section 192.
- 14 June 2024: Appellant submitted written reply asserting that teachers were independent professionals and TDS under Section 194J was correct.
- 4 April 2025: Order passed under Section 201(1) by the ITO(TDS), Kottayam, holding the appellant as assessee in default, with tax demand of ₹765,124 and interest of ₹183,629 (total ₹948,753).
- 27 March 2026: Commissioner of Income Tax (Appeals) - 1, Coimbatore, dismissed the appellant’s appeal, upholding the ITO’s order.
- 3 June 2026: Hearing before the Income Tax Appellate Tribunal, Cochin Bench.
- 16 June 2026: Judgment pronounced by the Tribunal.
The Parties' Positions
For the Appellant
The appellant contended that the teachers were independent professionals engaged under a contract for service, not a contract of service. It emphasized the absence of employer-employee indicia: no statutory benefits, no fixed salary structure, no termination procedures akin to employment, and no control over teaching methodology. It relied on multiple judicial precedents, including Hindustan Coca Cola Beverage Pvt. Ltd. v. CIT, Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., and the Mumbai ITAT decision in Entertainment Network (I) Ltd., to argue that the nature of the relationship was professional, not employment-based.
For the Respondent
The Revenue contended that the appellant exercised sufficient control over the teachers through fixed working hours, attendance registers, non-compete clauses, leave rules, and incremental pay structures, thereby establishing an employer-employee relationship. It relied on the District Intermediate Education Office v. ITO (Hyderabad) decision and argued that the use of the term "salary" in internal records and the provision of transport and medical facilities indicated an employment relationship. It further contended that the acceptance of professional income in the teachers’ assessments was irrelevant to the appellant’s TDS obligation.
Relief Sought
The appellant sought quashing of the orders dated 4 April 2025 and 27 March 2026, annulment of the tax demand of ₹948,753, and a declaration that TDS under Section 194J was correctly applied.
The Legal Issue
The central question was whether payments made by a coaching institute to teaching faculty, who are engaged on an hourly basis without statutory employment benefits and with no control over pedagogical methods, constitute salary under Section 192 or professional fees under Section 194J of the Income Tax Act, 1961.
Arguments Presented
For the Appellant
The appellant relied on the landmark judgment in Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (2020), where the Supreme Court held that the nature of the relationship must be determined by the terms of the contract and economic reality, not merely by administrative controls. It cited the Madras High Court’s decision in Dr. Mathew Cherian v. Assistant Commissioner of Income-tax [2023] 151 taxmann.com 154, which held that even with fixed hours and non-compete clauses, the absence of statutory benefits and the independence in professional execution negate an employer-employee relationship. It further emphasized that the teachers filed returns under Section 44ADA, which the Revenue accepted, and that the Entertainment Network (I) Ltd. case directly paralleled the facts, where radio jockeys were held to be professionals.
For the Respondent
The Revenue argued that the appellant exercised comprehensive control over the teachers’ availability, working hours, leave, and exclusivity, which are hallmarks of employment. It contended that the use of the term "salary" in internal documents and the maintenance of attendance registers were conclusive evidence of an employment relationship. It also argued that the acceptance of professional income in the teachers’ assessments was a separate issue and could not override the appellant’s statutory obligation to deduct tax under Section 192.
The Court's Analysis
The Tribunal undertook a detailed analysis of the distinction between a contract of service (employment) and a contract for service (independent professional engagement). It emphasized that the key test, as laid down in Sushilaben Indravadan Gandhi and affirmed in Dharangadhara Chemical Works Ltd. v. State of Saurashtra, is whether the hirer has the right to control not just the result, but the manner in which the work is performed.
"The regulations, restrictions, guidelines and control exercised in regard to logistical and administrative functions of the workforce are not unique to a hospital and I am hard-pressed to identify any establishment that does not exercise some degree of control over the administrative and logistical functioning of the workforce, be they salaried or otherwise."
The Tribunal noted that while the appellant required attendance, fixed hours, and exclusivity, it did not control the teaching methodology, curriculum delivery, or professional judgment of the teachers. The teachers were free to design their own pedagogical approach, subject only to the overall syllabus.
The Tribunal further observed that the absence of statutory benefits - PF, gratuity, medical insurance, leave encashment - was a decisive factor. It cited the Madras High Court’s reasoning that the right to private practice, even if regulated, does not transform a professional relationship into an employment one. The fact that the teachers were paid a variable component based on lecture volume, and that their income was assessed under Section 44ADA, further supported the professional nature of the engagement.
The Tribunal distinguished the District Intermediate Education Office case, noting that the government institution involved had formal contracts and statutory obligations absent here. It also rejected the Revenue’s reliance on internal terminology like "salary," holding that labels used for administrative convenience cannot override the substance of the relationship.
The Tribunal concluded that the economic reality of the arrangement - independent professionals offering specialized services, paid for output, without employment benefits - aligned with the definition of professional fees under Section 194J. The non-compete clause was held to be a legitimate business interest, not an indicium of employment.
The Verdict
The appellant succeeded. The Tribunal set aside the orders dated 4 April 2025 and 27 March 2026, quashed the demand of ₹948,753, and held that the appellant was not an assessee in default. The Tribunal ruled that tax deduction at source under Section 194J was correctly applied, and no liability under Section 192 arose. The appeal was allowed in full.
What This Means For Similar Cases
Professional Engagement Trumps Administrative Controls
- Practitioners must now focus on the substance of the engagement - control over work methodology, statutory benefits, and payment structure - rather than attendance registers or internal labels.
- Coaching institutes, hospitals, and consulting firms can structure engagements with professionals using fixed hours and exclusivity clauses without triggering Section 192 obligations, provided no employment benefits are provided.
Acceptance of Professional Income by Revenue Is Material
- If the recipient of payments files returns under Section 44ADA and the Revenue accepts such treatment, it strengthens the case that the payment is professional income, even if the payer initially classified it differently.
- The principle of approbation and reprobation applies: the Revenue cannot treat the same receipt as professional income in the hands of the recipient and salary in the hands of the payer.
Precedent Now Binding for Educational Institutions
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The Sushilaben Gandhi and Dr. Mathew Cherian precedents are now directly applicable to coaching centers nationwide.
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Institutions must ensure that agreements with faculty explicitly state the professional nature of the engagement, avoid statutory benefit provisions, and structure remuneration as variable fees tied to output.
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The burden of proving an employer-employee relationship now rests squarely on the Revenue, requiring concrete evidence of control over professional execution, not merely logistical management.
