Supreme Court: User Development Fee Collected by Airports Not Subject to Service Tax

Supreme Court: User Development Fee Collected by Airports Not Subject to Service Tax

The Supreme Court while adjudicating an appeal filed by the Revenue upheld the order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) regarding the user development fee (UDF) collected by airport entities.

The bench comprising of Justices S. Ravindra Bhat and Dipankar Datta observed that the UDF levied and collected by airport operation, maintenance, and development entities such as Mumbai International Airport Pvt. Ltd., Delhi International Airport Pvt. Ltd., and Hyderabad International Airport Pvt. Ltd. (assessees) is not subject to service tax levy under the provisions of the Finance Act, 1994.

The brief background of the case is that all the assessees had entered into joint venture arrangements/agreements (hereafter referred to as ‘OMDA’) with the Airports Authority of India (hereafter referred to as ‘AAI’), a body corporate created by the Airports Authority of India Act, 1994 (hereafter referred to as ‘AAI Act’). Under OMDA, the assesses agreed to undertake some activities enjoined upon the AAI, by the AAI Act. The assessees were authorised, by various notifications (dated 27th February 2009) issued by the Central Government under Section 22A of the AAI Act to collect a ‘development fee’ at the rate of Rs. 100/- for every departing domestic passenger and Rs. 600/- for every departing international passenger at the concerned airports for a period of 48 months.

The Commissioner of Service Tax issued show cause notices demanding tax payment on the development fee collected by the assessees. The original authority confirmed the demands and imposed penalties. The assessees appealed to the CESTAT, which ruled in their favor, stating that the development fee was not subject to service tax levy.

The bench relied upon the decision passed in the case of Consumer Online Foundation vs. Union of India (2011), wherein it was held that the charges under Section 22A are not charges or any other consideration for services for the facilities provided by the Airports Authority.

The bench further referred to the case of Commissioner of Service Tax & Others vs. M/s. Bhayana Builders (P) Ltd. & Others (2018), wherein the Supreme Court has ruled that for service tax to be levied, there must be a taxable service provided by a service provider to a recipient in exchange for consideration and in the absence of any nexus to any service rendered, an amount charged, or value of service or goods provided without a consideration, would not be a taxing incident.

Applying the principles to the present case, the Court observed that the UDF collected by the assessee was to bridge the funding gap of project cost for the development of future establishment at the airports. There was nothing on record to show that any additional benefit has accrued to passengers, visitors, traders, airlines etc., upon levy of UDF during the period in question in the present case.

The Court pointed out that, “there is a distinction between the charges, fee and rent etc. collected under Section 22 of the AAI Act and the UDF levied and collected under Section 22A of the AAI Act. It is that the UDF is in the form of 'tax or cess' collected for financing the cost of future projects and there was no consideration for services provided by the assessee to the customer, visitors, passengers, vendors etc. The aggregate of collections in the bank accounts do not form part of profit and loss account.”

The Court further examined the circular issued by the Central Board of Excise and Customs (CBEC) on 18 December, 2006, which clarified that the collection of amounts in the form of taxes, sovereign dues, or statutory dues would not be subjected to service tax levy.

In the present case, the bench noted that neither was there any compulsion to levy development fee nor was the collection conditional upon its deposit in the government treasury. However, the absence of these features does not render UDF any less a statutory levy, opined the Court.

The Court explained, “Firstly, the ruling in Consumer Online Foundation (Supra) is conclusive that UDF is a statutory levy. Secondly, the collection is not premised on rendering of any service. Thirdly, 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. In this regard, the fact that the amount is not deposited in a government treasury, per se, does not make it any less a statutory levy or compulsory exaction. Nor does its discretionary nature, (in the sense that it may not be necessarily levied always) render it any less a statutory levy.”

The bench categorically stated that, Airport management has evolved; it is no longer the monopoly of the government; private participation is recognized. This sector is now regulated through a new regulator, i.e., the Airports Economic Regulatory Authority of India. As part of the Union’s economic policies, the upgradation and renovation of airports are funded through UDF, which is a statutory levy.

Lastly, the bench remarked that instead of the conventional practice of ensuring that amounts collected are deposited with the Government, an entirely new regulatory regime has been envisioned, under the Airports Authority of India (Major Airports) Development Fees Rules 2011, read with specific conditions imposed by the AAI on each assessee, which includes monitoring of amounts, nature of expenditure, submission of plans for expansion, renovation, their sanctioning etc. These rules and controls are in the public interest, and evidently intended to further efficiency in funding and swift taking up and completion of works, rather than funding through Finance Rules, which might entail delay, and cost overruns.

However, the public nature of these funds does not in any manner get undermined, merely because they are kept in an escrow account, and their utilization is monitored separately, stated the Court.

Thus, the Court upheld the orders passed by the CESTAT and dismissed the appeal filed by the Revenue.