Supreme Court rules User Development Fee not subject to Service Tax: Central GST Delhi vs. Delhi International Airport Ltd. (2023)

Date of the Judgment: 19 May 2023

Citation: Civil Appeal No(s). 8996 of 2019

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

Is the User Development Fee (UDF) collected by airport operators a payment for services, and therefore subject to service tax? The Supreme Court of India recently addressed this question, clarifying the nature of UDF and its taxability. The court examined whether the UDF, collected by airport operators for the development of airport infrastructure, constitutes a service provided to passengers, thus attracting service tax under the Finance Act, 1994. This judgment has significant implications for airport operators and passengers alike.

Case Background

The case involves appeals against orders of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The service tax authorities argued that the User Development Fee (UDF) collected by airport operators should be subject to service tax under the Finance Act, 1994. The airport operators, including Mumbai International Airport Pvt. Ltd., Delhi International Airport Pvt. Ltd., and Hyderabad International Airport Pvt. Ltd., had agreements with the Airports Authority of India (AAI) to operate and develop airports.

These operators were authorized to collect a development fee from departing passengers: Rs. 100 for domestic and Rs. 600 for international passengers, for a period of 48 months, as per notifications issued by the Central Government under Section 22A of the Airports Authority of India Act, 1994 (AAI Act). The tax authorities issued show cause notices demanding service tax on these collected development fees.

The CESTAT initially remanded the matter for fresh adjudication, considering earlier Supreme Court decisions. The original authority then confirmed the tax demands and imposed penalties. However, the CESTAT, in the impugned orders, allowed the appeals of the airport operators, holding that the development fee was not liable to service tax. This led to the present appeals before the Supreme Court.

Timeline

Legal Framework

The court considered several key legal 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, it was defined as “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: States 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: Specifies the functions of the authority, including determining tariffs for aeronautical services, development fees, and passenger service fees.
• Rule 88 of the Aircraft Rules, 1937: Allows collection of Passenger Service Fee from embarking passengers.
• Rule 89 of the Aircraft Rules, 1937: Allows collection of User Development Fee at major airports.
• Section 22 of the AAI Act: Authorizes AAI to charge fees or rent for various services and facilities at airports.
• Section 22A of the AAI Act: Authorizes AAI to levy and collect development fees from embarking passengers for upgrading or developing airports.

Arguments

Revenue’s Arguments:

• The revenue contended that airport operators function as licensees of airports and collect UDF for enhancing services like passenger lounges and amenities.
• UDF is collected for specific renovation, maintenance, development, and upgradation of airports, which are necessary due to cost escalations.
• The amounts collected are for services rendered and providing access to the airport, thus taxable under “airport services.”
• The revenue relied on a circular No. 106/Commr (ST)/2009 dated 08.07.2011, which stated that service tax is paid by the various airports on passenger services fee and UDF but no tax is paid on development fees.
• The revenue argued that the definition of airport service is wide and includes any service provided or to be provided by any person in the airport.
• The revenue distinguished the decision of the Kerala High Court in the case of Cochin International Airport Ltd. because in that case, what was in issue was user fee while in the case in hand it is UDF.
• The revenue argued that the levy of DF under Section 22A of the AAI Act is discretionary and subject to the approval of the Central Government, and is meant for funding or financing the costs of upgradation, expansion or development of the airport.
• The revenue contended that the amounts collected cannot be termed as levy, because they are not deposited with the government treasury.
• The revenue argued that the decision of this court in the case of Consumer Online Foundation v Union of India had expressed the view that DF appeared to be in the form of tax or cess, but was not a legally collected tax.
• The revenue submitted that in the above decision, there is no clear finding that DF is a tax or cess and the same was held to be ultra vires the AAI Act on the ground that the rate could not have been fixed by the Central Government, but only by making a rule by AERA which has not been done.
• The revenue argued that DF has not been collected as tax or cess and therefore, the contention that DF is a tax on which there cannot be any service tax is incorrect.
• The revenue relied on the judgment reported as Krishi Upaj Mandi Samiti v Commissioner of Central Excise and urged that the nature of UDF is similar to the optional collection made by market committees who perform services, which are not in the nature of a statutory activity or a sovereign function, and if such services are rendered for a consideration, they are subjected to levy.

Airport Operators’ Arguments:

• The airport operators argued that the decision in Consumer Online Foundation v. Union of India has concluded that the development fee is a tax, unrelated to any service provided, and there is no consideration involved.
• The taxable activity did not occur in this case, as the collections were intended for future developments whereas the ‘airport’ referred to in Section 65(105) (zzm) is an existing airport.
• The operators emphasized that the ruling of the Kerala High Court in Cochin International Airport Limited vs. Collector Central Excise has held that UDF is collected to fulfil the funding gap for development of airports, and cannot be termed as service. This ruling was upheld by the Supreme Court.
• The scope of activities of the assessee vis-a-vis passengers who bear the burden of development fee needs a closer look. Passengers in an airport intend to travel by an airline which has the said airport as a scheduled port of call.
• The contractual nature of this relationship is enshrined in the ticket which provides access to the airport, process through check-in and security, space for waiting and necessary amenities and provision for boarding an aircraft.
• There is nothing to show that passengers have to make payments for any of these activities. These facilities were available without any additional charge before the imposition of ‘development fee’. Such services continue to be available after its quashing. No additional benefit accrues to the passenger during the period of levy of ‘development fee.’
• The operators contended that Sections 22 and 22A of the AAI Act are in the context of substitution of the constitutional funds of the Union of India, for deposit and drawing with that of the accounts of AAI.
• The operators argued that Section 22 of the AAI Act enables AAI to charge for the facilities it provides, while the levy under Section 22A is compulsorily charged from passengers and placed in an escrow account.
• The operators highlighted that in Consumer Online Foundation (Supra), this court has ruled, are “dehors the facilities that the embarking passengers get at the existing airports”.
• The operators argued that in view of the declaration of law, CESTAT correctly held that the charges collected by the assesses under Section 22A of the AAI Act cannot be regarded as considered for services rendered.
• The operators submitted that the decision in Krishi Upaj Mandi Samiti (supra) is distinguishable, as that case dealt with a discretionary charge, i.e., renting of premises, which is materially different from a compulsory exaction under Section 22A of the AAI Act.
• The operators relied on the decision of this court in Commissioner of Service Tax vs. Bhayana Builders (P) Ltd, where it was stated that under Section 67 of the Finance Act, 1994, not every amount charged by the service provider is taxable, and the amount charged should be “for such service provided” to be taxable.
• The operators contended that Consumer Online Foundation (supra) has ruled that there is no nexus between the amounts charged under Section 22A of the AAI Act and any service provided.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a dedicated section. However, the core issue addressed by the court 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 the following authorities:

Judgment

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

How each authority was viewed by the Court?

• Consumer Online Foundation v. Union of India [2011 (5) SCR 911]*: The court heavily relied on this case, stating it conclusively established that development fees are a statutory levy, not a charge for services.
• Commissioner of Central Excise v. Cochin International Airport Ltd. [2010 (17) STR J 79 (S.C.)]*: The court noted that this case upheld the Kerala High Court’s ruling that UDF is collected to fulfill funding gaps for airport development and cannot be termed as a service.
• Cochin International Airport Limited vs. Collector Central Excise [2009 (16) STR 401 (Ker.)]*: The court noted that this case held that UDF is collected to fulfill the funding gap for development of airports, and cannot be termed as service.
• Acer India Ltd. and Orissa Cement Ltd. v. State of Orissa [1991 Supp (1) SCC 430]*: The court referred to this case in the context of the initial remand by CESTAT, but did not explicitly discuss its relevance to the main issue.
• Krishi Upaj Mandi Samiti v Commissioner of Central Excise [2022 (1) SCR 700]*: The court distinguished this case, stating that the fee in that case was a discretionary charge for renting premises, unlike the compulsory statutory levy under Section 22A of the AAI Act.
• Commissioner of Service Tax vs. Bhayana Builders (P) Ltd [2018 (1) SCR 1128]*: The court relied on this case to emphasize that for service tax to apply, there must be a nexus between the amount charged and the service provided. Since the development fee was not for any service, it was not taxable.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the understanding that the User Development Fee (UDF) is a statutory levy intended for the development of airport infrastructure and not a payment for services rendered to passengers. The court emphasized the following points:

• Statutory Nature of UDF: The court reiterated that the UDF is a compulsory exaction under Section 22A of the AAI Act, meant for specific purposes like airport upgradation and development. This was a key factor in distinguishing it from service fees.
• No Direct Service for UDF: The court highlighted that passengers do not receive any specific service in exchange for the UDF. The fee is collected for future development, not for any current service provided.
• Escrow Account and Regulatory Control: The fact that the UDF is deposited in an escrow account and its utilization is monitored by AAI further solidified its nature as a statutory levy, rather than a payment for services.
• Previous Rulings: The court heavily relied on its previous judgment in Consumer Online Foundation v. Union of India, which had already established that development fees are not charges for services but a form of tax or cess.
• Distinction from Section 22 Charges: The court clearly distinguished between the charges collected under Section 22 of the AAI Act, which are for services provided, and the UDF collected under Section 22A, which is a statutory levy for development.

The court’s reasoning focused on the statutory and non-service-related nature of the UDF, which led to the conclusion that it is not subject to service tax.

Sentiment Analysis Ranking of Reasons

Fact:Law Ratio

The court’s decision was primarily driven by legal interpretations and precedents (80%), with factual considerations playing a secondary role (20%).

Logical Reasoning

Implications

The Supreme Court’s ruling has significant implications for various stakeholders:

• Airport Operators: Airport operators are no longer required to pay service tax on the User Development Fee (UDF) collected from passengers. This reduces their tax burden and simplifies their financial operations.
• Passengers: The ruling ensures that passengers are not indirectly burdened with service tax on the UDF. This may not directly reduce the cost of travel, but it clarifies the nature of the fee and prevents potential double taxation.
• Government: The government’s revenue from service tax on UDF will be reduced. However, the ruling provides clarity on the taxability of such fees, which may help in better tax administration and policy-making.
• Legal Clarity: The judgment provides legal clarity on the nature of UDF, establishing that it is a statutory levy and not a charge for services. This reduces the scope for future disputes and litigation on this issue.

Conclusion

The Supreme Court’s decision in Central GST Delhi – III vs. Delhi International Airport Ltd. (2023) is a significant ruling that clarifies the nature of the User Development Fee (UDF) collected by airport operators. By holding that UDF is a statutory levy and not a payment for services, the court has provided much-needed clarity on its taxability under the Finance Act, 1994. This decision has implications for airport operators, passengers, and the government, and is likely to reduce future litigation on this issue. The ruling underscores the importance of distinguishing between statutory levies and service charges in the context of taxation laws.