The House of Lords inflicted its biggest defeat on the Government this week, voting for the third time to overturn the so-called Scottish anomaly of the Teaching and Higher Education Bill.

For the first time in 30 years, peers sent a Bill back to the Commons for a third time, after voting by 319 to 108 to reverse a clause which waives tuition fees for the fourth year of a Scottish degree for Scots, but not for students from other parts of the UK. Students from all other countries of the European Union will only have to pay three years’ fees.

The Government said it had no intention of backing down, which could lead to a constitutional crisis if the peers stick to their guns. The stand-off could ultimately delay for a year the Bill which introduces tuition fees and establishes a General Teaching Council.

Lord Steel, the former leader of the Liberal Party, who moved the amendment said: “We are a revising chamber. What does that mean? It does not mean that we have to do whatever the Government wish . . . It is no part of our function to legislate nonsense and not when it is nonsense on sticks.”

He later called it a sensational result and said: “The Government has been defeated by an overwhelming coalition of Liberal Democrats, Conservatives, crossbenchers, bishops and Labour backbenchers. Only Labour’s obedient troops backed the Government’s incoherent and unjust position.”

He told peers it would mean a student in Cumbria would pay the Pounds 1, 000, but one from Umbria would not. A student from Rotherham would pay and one from Rotterdam would not.

He was supported by Lord Shore, the former Labour Cabinet member, who said it was a matter of discrimination. “Most of my colleagues in the other place (House of Commons), if they were allowed a free vote on the issue, would make clear their own feeling of repugnance,” he said.

The peers claimed it would cost the Government Pounds 2 million and not the Pounds 27m claimed for applying the rule to all four-year courses.

Lord Sewel, Scottish minister, warned his opponents about voting against the will of the elected chamber. He said: “How many times is it right and proper for an unelected chamber to reach the stage of defying the will of the elected chamber?”

Baroness Blatch, Conservative education spokesman, was bullish. “The feeling was so strong in the House of Lords, I would be surprised if it lies down on this one.”