By TIOL News Service

MUMBAI, JUNE 12, 2017: THE appellant has challenged the order passed by the Commissioner (TAR), Mumbai which confirmed the demand of service tax of Rs.27,92,54,560/- along with interest and penalties.

The impugned order holds that the appellant is a recipient of 'Banking and other financial services' and 'Maintenance and repair' services provided by foreign entities and, hence, liable to be taxed, in accordance with section 66A of FA, 1994.

Of the total demand set out in the show cause notice, the adjudicating authority has dropped the demand of Rs.1,64,69,166/- on the ground that it pertained to the period prior to 18th April 2006 when section 66A was incorporated.

The facts go thus -

+ Appellant, a wholly owned subsidiary of Air India, operates the low cost carrier, Air India Express, flying to West Asia and South East Asia. The aircraft are either owned or leased and are financed by external commercial borrowings. The payments made to the financial institutions comprise exposure fee, arrangement fee, agency fee, security trustee and commitment fee. The tax liability on these payments of Rs.2,80,04,76,554/- for availing external commercial borrowing is computed at Rs.13,42,71,746/- for 2006-07 to 2009-10.

+ Furthermore, as part of the operating lease agreement, the upkeep and maintenance of aircraft, in accordance with prescribed standards is the responsibility of the appellant and the lessors insist upon a maintenance reserve fund contributed by the appellant as a guarantee. The appellant is reimbursed from out of this fund for any maintenance or repair undertaken upon the aircraft on submission of prescribed documentation. On a total remittance of Rs.1,39,22,12,424/- made by appellant between 1 st April2005 and 31 st March 2010, tax liability of Rs.16,14,51,980/- has been computed.

+ The appellant has questioned the tax liability with the claim that they are not the borrower of funds for acquisition of the aircrafts but M/s Golden State Aircraft LLC, that the charges remitted to EXIM Bank is for a counter-guarantee to the financial institutions by an instrument of the Government of the United States of America which would not conform to inclusion among ‘Banking or financial institutions', and that the amount paid to the fund for maintenance and repair is not an expense owing to the repairs/maintenance being carried in the establishment of the appellant.

+ It is also contended that the demand is barred by limitation as, being a public sector enterprise, ill-gotten fruits of evasion of taxes would not accrue to their benefit and that the levy of tax under section 66A of FA, 1994 carries with it the privilege of availment of CENVAT credit rendering this revenue neutrality to be a disincentive for evasion of tax.

After considering the submissions made by both sides, the Member (Technical) writing for the Bench made the following observations -

Maintenance and repair services:

+ That the appellant undertakes maintenance and repair and that the lessor does not, is undisputed. Levy of service tax is contingent upon rendering of taxable service by a provider to recipient and is charged on the consideration made over to the former by, or on behalf of, the latter . At first sight, it would appear from the transactions that the relationship between the lessor and the lessee is not one of provider and recipient of the service of maintenance or repair of aircraft. This perception is strengthened by the findings of the adjudicating authority who, after taking note of the manner in which the maintenance reserve fund is created and utilised, has held that, by being in receipt of contributions towards this fund from the appellant, the lessor takes on the mantle of being a deemed provider of the service. This deeming fiction is not borne out by the statute or rules pertaining to service tax. There is not a whit of evidence that the lessor has, at any stage, undertaken repairs of the aircraft.

+ The funding of repairs or maintenance undertaken by a third party or by the appellant will not transform the lessor into a service provider; indeed, it is far-fetched to consider a paymaster to be a provider of any service. Furthermore, the fund appears to be a mere accumulation of amounts as a security to be utilised if the appellant were to default in its contractual undertaking to maintain the aircraft according to prescribed standards. To hold contributions to be a consideration for taxable service would not be in conformity with the definition of the taxable service which, in section 65 (105) (zzg) of Finance Act, 1994, is ‘any service provided, or to be provided to any person, by any person in relation to maintenance or repair'…

+ In the absence of any evidence that the payments have been made as quidpro quo for maintenance and repair of aircraft, the contributions cannot be subject to tax.

Banking and other financial services:

+ Tax liability is sought to be fastened on payments made in connection with acquisition of aircraft by availing loans from financial institutions outside the country. … Normally, the obligation to discharge the tax liability vests in the provider of the taxable service; however, in view of the legal non-existence of the overseas entity, being beyond the jurisdiction of the taxing statute, the recipient of the service is deemed to be the provider and the obligation to discharge tax liability transferred accordingly. Such a deeming fiction does not erase the primary requirement to identify the taxable service as provided to the recipient and, in accordance with the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, the receipt of the taxable service by an entity located in India…

+ It is, therefore, all the more essential that the provision of the service, the nature of the relationship between the overseas entity that purportedly received the service and the entity in India, and the manner in which the payment for service has, in effect, moved from the Indian entity be examined in detail as a prelude to crystallising the tax liability. A mere linking of the various segments of section 66A of Finance Act, 1994 and the payment made by a remotely connected overseas entity which has entered into a distinct agreement with other overseas entities would not suffice to justify the levy of tax on reverse charge.

+ In order to ascertain the liability to tax, it would be in the interest of justice to remand the matter back to the adjudicating authority to determine the tax liability after considering the various aspects narrated supra .

Conclusion: Portion of the demand pertaining to ‘maintenance or repair service' held to be without authority of law. As regards demand under the category ‘Banking or financial services', the matter is remanded. The issue of bar of limitation is also to be considered by the adjudicating authority.

(See 2017-TIOL-1970-CESTAT-MUM)