Supreme Court rules User Development Fee is not subject to service tax: Central GST Delhi – III vs. Delhi International Airport Ltd (2023) INSC 572

Date of the Judgment: 19 May 2023

Citation: 2023 INSC 572

Judges: S. Ravindra Bhat, J., Dipankar Datta, J.

Can the government levy service tax on a fee collected for the future development of airports? The Supreme Court of India recently addressed this crucial question in a case involving the collection of User Development Fees (UDF) by airport operators. The court examined whether these fees, meant for airport upgrades and expansions, should be subjected to service tax under the Finance Act, 1994. The judgment was delivered by a two-judge bench comprising Justice S. Ravindra Bhat and Justice Dipankar Datta, with Justice S. Ravindra Bhat authoring the opinion.

Case Background

The case revolves around appeals filed by the service tax authorities against orders of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT). The core issue was whether the User Development Fee (UDF) collected by airport operators is subject to service tax under the Finance Act, 1994. The airport operators, including Delhi International Airport Ltd (DIAL), Mumbai International Airport Pvt. Ltd., and Hyderabad International Airport Pvt. Ltd., had agreements with the Airports Authority of India (AAI) to operate and maintain airports.

These operators were authorized by the Central Government to collect a development fee from departing passengers. The fee was set at Rs. 100 for domestic and Rs. 600 for international passengers for a 48-month period. The service tax department demanded tax on these collected fees, arguing they were payments for services rendered. The CESTAT, however, ruled in favor of the airport operators, stating that the development fee was not liable to service tax. This led to the current appeals before the Supreme Court.

Timeline:

Course of Proceedings

The Commissioner of Service Tax issued show cause notices to the airport operators, demanding service tax on the development fees collected. These notices were adjudicated, and the demands were confirmed. The CESTAT remanded the matter, directing fresh adjudication, but the original authority again confirmed the demands. The CESTAT then allowed the appeals of the airport operators, holding that the development fees were not subject to service tax, leading to the current appeals before the Supreme Court.

Legal Framework

The legal framework for this case includes several key provisions:

• Section 65 (105) (zzm) of the Finance Act, 1994: Defines “airport service” as “any service provided or to be provided by airports authority or by any other person in any airport or a civil enclave.” Before 1 July 2010, the definition was: “to any person, by airports authority or any person authorised by it, in an airport or a civil enclave”
• Section 65 (3d) of the Finance Act, 1994: Defines “airport authority” as the “Airports Authority of India constituted under section 3 of the Airports Authority of India Act, 1994 (55 of 1994) and also includes any person having the charge of management of an airport or civil enclave.”
• Section 68 (1) of the Finance Act, 1994: Mandates that every person providing taxable service shall pay service tax.
• Section 67 (1) of the Finance Act, 1994: Stipulates that the value of taxable service is the gross amount charged by the service provider.
• Section 13 of the Airports Economic Regulatory Authority of India Act, 2008: Sets out the functions of the authority, including determining tariffs for aeronautical services and the amount of development fees.
• Rule 88 of the Aircraft Rules, 1937: Deals with Passenger Service Fee.
• Rule 89 of the Aircraft Rules, 1937: Deals with User Development Fee.
• Section 22 of the Airports Authority of India Act, 1994: Allows the Authority to charge fees for services and facilities at airports.
• Section 22A of the Airports Authority of India Act, 1994: Authorizes the Authority to levy and collect development fees from embarking passengers for airport upgrades and expansions.

Arguments

Revenue’s Arguments:

• The revenue argued that airport operators function as licensees of airports and collect user development fees (UDF) for enhancing services like passenger lounges and amenities.
• They contended that UDF is collected for services rendered and providing access to the airport, thus being taxable under “airport services.”
• The revenue relied on a circular from the Central Board of Excise and Customs (CBEC) stating that service tax is paid on passenger service fees and UDF but not on development fees, which should be taxed under “airport services”.
• The revenue distinguished the Kerala High Court’s decision in Cochin International Airport Ltd. by stating that it dealt with user fees, not UDF.
• The revenue argued that Section 22A of the AAI Act allows for the “levy” of DF, but it is not a tax because it is discretionary and subject to the approval of the Central Government.
• The revenue argued that the amounts collected are for services rendered and providing access by the airport, and are thus taxable.
• The revenue contended that the definition of “airport service” is wide and includes any service provided by any person in the airport, making it a taxable service.
• The revenue argued that the decision of the Supreme Court in Consumer Online Foundation v Union of India did not find that DF is a tax or cess, and that the issue in that case was the validity of the levy, not the levy of service tax on DF.
• The revenue relied on Krishi Upaj Mandi Samiti v Commissioner of Central Excise, arguing that UDF is similar to optional collections made by market committees for services, which are subject to levy.

Assessees’ Arguments:

• The assessees argued that the decision in Consumer Online Foundation concluded that the collections are a tax, unrelated to any service, and without consideration.
• They contended that the taxable activity did not occur as the collections were for future developments, whereas the ‘airport’ in Section 65(105)(zzm) is an existing airport.
• The assessees emphasized that the Kerala High Court’s ruling in Cochin International Airport Limited vs. Collector Central Excise, which was upheld by the Supreme Court, held that UDF is collected to fulfil the funding gap for development of airports and cannot be termed as service.
• The assessees argued that passengers do not make payments for the basic facilities provided at the airport, and no additional benefit accrues to them during the levy of development fees.
• The assessees contended that the levy under Section 22A of the AAI Act is compulsorily charged from passengers and is placed in an escrow account for specific purposes, unlike charges under Section 22.
• The assessees argued that the Supreme Court in Consumer Online Foundation had held that collections under Section 22A are “dehors the facilities that the embarking passengers get at the existing airports” and are “not charges or any other consideration for services for the facilities provided by the Airports Authority.”
• The assessees argued that the decision in Krishi Upaj Mandi Samiti is distinguishable as that case was concerned with discretionary charges, unlike the compulsory exaction under Section 22A of the AAI Act.
• The assessees relied on Commissioner of Service Tax vs. Bhayana Builders (P) Ltd, stating that not every amount charged by a service provider is taxable, and there must be a nexus between the amount charged and the service provided.
• The assessees argued that there is no nexus between the amounts charged as DF/UDF and any service rendered, and therefore, such amounts cannot be liable to service tax.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

1. Whether the User Development Fee (UDF) collected by airport operators is subject to service tax under the Finance Act, 1994.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered several authorities in its judgment:

The Court also considered the following legal provisions:

• Section 65 (105) (zzm) of the Finance Act, 1994: Definition of “airport service”.
• Section 65 (3d) of the Finance Act, 1994: Definition of “airport authority”.
• Section 68 (1) of the Finance Act, 1994: Mandate to pay service tax.
• Section 67 (1) of the Finance Act, 1994: Valuation of taxable service.
• Section 13 of the Airports Economic Regulatory Authority of India Act, 2008: Functions of the authority.
• Rule 88 of the Aircraft Rules, 1937: Passenger Service Fee.
• Rule 89 of the Aircraft Rules, 1937: User Development Fee.
• Section 22 of the Airports Authority of India Act, 1994: Fees for services and facilities at airports.
• Section 22A of the Airports Authority of India Act, 1994: Levy and collection of development fees.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Consumer Online Foundation v. Union of India [2011 (5) SCC 360]* to establish that development fees are a statutory levy, not a charge for services. The court emphasized that the nature of the levy under Section 22A of the AAI Act is not a consideration for services provided by the Airports Authority.
• The Supreme Court relied on Commissioner of Central Excise v. Cochin International Airport Ltd. [2010 (17) STR J 79 (S.C.)]* to support the view that UDF is collected to fulfil the funding gap for development of airports, and cannot be termed as service.
• The Supreme Court distinguished Krishi Upaj Mandi Samiti v Commissioner of Central Excise [2022 (1) SCR 700]*, stating that UDF is not similar to the optional collections by market committees. The court noted that the fee in Krishi Upaj Mandi Samiti was discretionary, whereas UDF is a compulsory exaction.
• The Supreme Court relied on Commissioner of Service Tax vs. Bhayana Builders (P) Ltd [2018 (1) SCR 1128]* to argue that there must be a nexus between the amount charged and the service provided for service tax to apply. The court held that in the case of UDF, there is no such nexus.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The court emphasized that the User Development Fee (UDF) is a statutory levy under Section 22A of the Airports Authority of India Act, 1994, and not a charge for services. This was highlighted by the court’s reliance on the Consumer Online Foundation case, which established that the levy is “dehors the facilities that the embarking passengers get at the existing airports.”
• The court noted that UDF is intended for the future development, upgradation, and expansion of airports, not for services currently provided to passengers. This distinction was crucial in determining that UDF is not a consideration for any service.
• The court highlighted that the amounts collected as UDF are deposited in an escrow account, not under the control of the assessees, and their utilization is monitored and regulated by law. This indicated that the funds are for public purposes and not for the benefit of the airport operators.
• The court distinguished the UDF from the charges, fees, and rent collected under Section 22 of the AAI Act, which are for services and facilities provided to airlines, passengers, and traders. The court emphasized that there is no contractual relationship between passengers and the airport authority for the UDF.
• The court relied on the principle that for service tax to be applicable, there must be a nexus between the amount charged and the service provided, as established in Bhayana Builders. The court found that this nexus was absent in the case of UDF.
• The court also considered the circular issued by the CBEC, which clarified that statutory dues are not subject to service tax. Though the UDF is not directly deposited into the government treasury, the court found it to be a statutory levy due to its nature and the controls placed on its utilization.

Logical Reasoning:

The court considered alternative interpretations but rejected them. The revenue argued that UDF was a charge for services, but the court found that the UDF is a statutory levy for future development, not for services currently provided. The court also rejected the argument that the absence of direct deposit into the government treasury makes it less of a statutory levy, emphasizing the controls on its utilization. The court concluded that the UDF is not a consideration for any service and therefore not subject to service tax.

The Supreme Court’s decision was unanimous. The court held that the User Development Fee (UDF) collected by airport operators is not subject to service tax under the Finance Act, 1994. The court reasoned that UDF is a statutory levy, not a fee for services, and is meant for future development, not for services currently provided.

The court quoted from its previous decision in Consumer Online Foundation:

“the object of Parliament in inserting Section 22A in the 2004 Act by the Amendment Act of 2003 is to authorize by law the levy and collection of development fees from every embarking passenger de hors the facilities that the embarking passengers get at the existing airports.”

The court also stated:

“The nature of the levy under Section 22A of the 2004 Act, in our considered opinion, is not charges or any other consideration for services for the facilities provided by the Airports Authority.”

Further, the court held:

“the amounts collected are deposited in an escrow account, not within the control of the assesses. Fourthly, the utilization of funds, is monitored and regulated by law.”

Key Takeaways

• User Development Fee (UDF) collected by airport operators is not subject to service tax.
• UDF is considered a statutory levy for future airport development, not a payment for services.
• The decision reinforces that there must be a clear nexus between the amount charged and the service provided for service tax to apply.
• The judgment clarifies the distinction between charges under Section 22 and levies under Section 22A of the AAI Act.

Directions

The Supreme Court did not issue any specific directions in this judgment. The court dismissed the revenue’s appeals, upholding the CESTAT’s decision that the development fee collected was not liable to service tax.

Development of Law

The ratio decidendi of the case is that the User Development Fee (UDF) collected by airport operators is not subject to service tax under the Finance Act, 1994 because it is a statutory levy for future development and not a payment for services. This judgment reinforces the principle that for service tax to be applicable, there must be a clear nexus between the amount charged and the service provided. This decision clarifies the distinction between charges under Section 22 and levies under Section 22A of the AAI Act, thereby solidifying the legal position that UDF is a statutory levy akin to a tax or cess, rather than a service charge. This is consistent with the findings of Consumer Online Foundation v. Union of India, which held that development fees are a statutory levy, not a charge for services.

Conclusion

The Supreme Court’s ruling in Central GST Delhi – III vs. Delhi International Airport Ltd clarifies that the User Development Fee (UDF) collected by airport operators is not subject to service tax. The court’s decision rests on the premise that UDF is a statutory levy meant for future development, not a payment for services. This judgment provides much-needed clarity on the nature of UDF and its tax implications, reaffirming that a clear nexus between the amount charged and the service provided is essential for service tax to be applicable.

Category

Parent Category: Service Tax

Child Category: Airport Services

Child Category: User Development Fee

Parent Category: Finance Act, 1994

Child Category: Section 65(105)(zzm), Finance Act, 1994

Child Category: Section 65(3d), Finance Act, 1994

Child Category: Section 68(1), Finance Act, 1994

Child Category: Section 67(1), Finance Act, 1994

Parent Category: Airports Authority of India Act, 1994

Child Category: Section 22, Airports Authority of India Act, 1994

Child Category: Section 22A, Airports Authority of India Act, 1994

Parent Category: Airports Economic Regulatory Authority of India Act, 2008

Child Category: Section 13, Airports Economic Regulatory Authority of India Act, 2008

FAQ

Q: What is User Development Fee (UDF)?

A: User Development Fee (UDF) is a fee collected from passengers at airports, primarily for the purpose of funding future development, upgrades, and expansions of airport infrastructure.

Q: Why did the Supreme Court rule that UDF is not subject to service tax?

A: The Supreme Court ruled that UDF is not subject to service tax because it is a statutory levy, not a payment for services. The court emphasized that UDF is meant for future development and there is no direct nexus between the fee and any specific service provided to passengers.

Q: What is the difference between UDF and other airport charges?

A: UDF is different from other airport charges like landing fees or passenger service fees. UDF is specifically for funding future development, while other charges are for services currently provided. Additionally, UDF is a statutory levy, while other charges may be contractual.

Q: What does the term “statutory levy” mean in this context?

A: A statutory levy is a charge imposed by law, in this case, under Section 22A of the Airports Authority of India Act. It is not a voluntary payment for a service but a compulsory exaction for a specific purpose.

Q: How does this ruling affect airport operators?

A: This ruling benefits airport operators as they are not required to pay service tax on the UDF they collect. This reduces their tax burden and simplifies their financial operations.

Q: How does this ruling affect passengers?

A: Passengers may not see an immediate change. The UDF will continue to be collected, but this ruling ensures that the funds are used for airport development without the added burden of service tax.

Q: What is the significance of the “nexus” between service and charge?

A: The “nexus” refers to a direct connection between the amount charged and the service provided. For service tax to apply, there must be a clear link between what is paid and the service received. The Supreme Court found that this nexus was absent in the case of UDF.