2017 (3) TMI 1024 - AT - Service Tax

Business Auxiliary services - activities namely Ground Traffic, other support service and Handling agreement performed by AIL (Air India Limited) - Held that - In terms of this agreement, AASL was required to pay AIL certain consideration amounting to approx. 4%. In terms of this agreement AIL was to execute the entire function of running operations on behalf of AASL. The activities included ticketing, IT Support, Billing and Accounting, Administration of Foreign Exchange Transactions, Revenue collection, Reservation support etc. In return, AASL was to pay AIL equivalent to 4% of the revenue generated by AASL. Even though AIL has been raising bills against the services provided by them to AASL, they were also providing financial help to AASL by way of bearing its loss and further providing financial aid to keep AASL afloat. AIL s ground for non-payment of service tax is that they have not received this consideration in terms of 4% of the revenue earned. This factum can be settled through a certificate from an independent Chartered Accountant, who may be asked to look into the books of AASL and AIL for the relevant period and may be asked to certify whether such consideration has been received AIL by book transfer or otherwise, as per the terms of the agreement entered into between two companies. If the consideration has been received by AIL, then we are of the view that service tax is liable to be paid by AIL on such receipts - matter remanded for this purpose. Time limitation - Held that - the argument taken by appellants that service tax was not paid on the basis of bonafide belief that service tax was not payable, is not convincing - Consequently, Revenue is entitled to invoke the extended period of limitation in this case. Aircraft lease charges - demand - Held that - These clauses clearly show that lease charges were to include maintenance charges and AIL was under obligation to maintain and repair the aircrafts as part of the lease agreement. Thus this maintenance agreement cannot be considered as an independent and separate agreement. Accordingly, in the impugned order, it has been rightly concluded that the aircraft lease service cannot be subjected to service tax under the category of Management, Maintenance and Repair. Appeal allowed by way of remand.

Issues Involved:
1. Jurisdiction of Additional Director General, DGCEI to issue the show cause notice.
2. Relationship between AIL and AASL and its impact on service tax liability.
3. Non-recovery of expenses by AIL and its impact on service tax liability.
4. Applicability of extended period of limitation for issuing the show cause notice.
5. Service tax demand on Management, Maintenance, and Repair Services provided by AIL to AASL.

Detailed Analysis:

1. Jurisdiction of Additional Director General, DGCEI to issue the show cause notice:
The appellant argued that the show cause notice issued by Additional DG, DGCEI was bad in law as he did not have the jurisdiction to issue it, citing the decision of the Hon'ble Delhi High Court in Mangali Impex Limited vs. UOI. However, the Tribunal noted that the decision in Mangali Impex Limited dealt with customs duty under Section 28 of the Customs Act, 1975, whereas the present case pertains to service tax under the Finance Act, 1994. The Tribunal found that CBEC Notification No. 3/2004 dated 11.03.2004 appointed the ADG, DGCEI as the proper officer under Rule 3 of Service Tax Rules, 1994, thereby validating the jurisdiction of ADG DGCEI to issue the show cause notice.

2. Relationship between AIL and AASL and its impact on service tax liability:
The appellant contended that AIL and AASL, being a 100% subsidiary, should not be considered as a service provider and recipient. The Tribunal, however, noted that despite being a subsidiary, AASL and AIL are distinct entities with separate registrations under the Companies Act and maintained separate books of accounts. The agreements created a legal fiction that AASL is a separate entity from AIL, and services were rendered by AIL to AASL for a consideration of 4% commission. Thus, service tax was deemed payable by AIL on the commission received from AASL, subject to verification of actual receipt of consideration.

3. Non-recovery of expenses by AIL and its impact on service tax liability:
AIL argued that they could not recover all expenses from AASL due to the latter's losses, and hence, there should be no service tax liability. The Tribunal decided that the matter required verification of whether the consideration was received by AIL through book transfers or otherwise. It remanded the issue to the adjudicating authority to obtain a certificate from an independent Chartered Accountant to confirm the receipt of consideration by AIL from AASL.

4. Applicability of extended period of limitation for issuing the show cause notice:
AIL contended that the show cause notice was time-barred as it was issued beyond one year and that their activities were in the public domain. However, the Tribunal found that the statutory auditors had pointed out non-payment of service tax, and AIL had not paid service tax despite collecting it from ticket sales. The Tribunal concluded that the extended period of limitation was applicable due to suppression of facts by AIL.

5. Service tax demand on Management, Maintenance, and Repair Services provided by AIL to AASL:
The Revenue appealed against the dropping of service tax demand of approximately ?103 Crores, arguing that the maintenance charges were part of the lease agreement. The Tribunal reviewed the agreements and concluded that the lease charges included maintenance charges, and thus, the maintenance agreement could not be considered independent. The Tribunal upheld the dropping of the service tax demand under the category of Management, Maintenance, and Repair Services.

Orders Passed:
(a) The grounds of jurisdiction and limitation raised by the appellant were dismissed.
(b) Service tax was deemed payable on the consideration received by AIL from AASL for Ground Traffic, other support services, and Handling services. The matter was remanded to the adjudicating authority for a de-novo decision after obtaining a certificate from an independent Chartered Accountant regarding the receipt and quantum of consideration.
(c) The Revenue’s appeal was dismissed.

The appeal was remanded to the Original Adjudicating Authority for a de-novo decision with proper opportunity for hearing and admission of additional evidence as per law.

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