2021 (3) TMI 773 - AT - Service Tax

Air travel agents' target incentives not taxable under 'business auxiliary service' per section 65A of Finance Act.

The Tribunal determined that air travel agents are promoting their own business rather than that of airlines or CRS Companies, and thus, target-based ... Levy of Service Tax - Incentive received by service receiver from service provider, on appreciable performance - Validity of demand made without specifying the sub clause of BAS under which the activities are covered - validity of service tax demand, under the taxable category of BAS in absence of three parties – service provider, service receiver and targeted audience - demand under the case value of service is fixed under an option provided under the Rules - validity of claiming liability without specifying the consideration for service as provided under section 67 of the Chapter V of Finance Act, 1994 as amended up to date - validity of demand made in absence of the relationship of service provider and service receiver? - these matters were placed before Division Bench for decision. Whether the air travel agent is promoting it own business and not the business of the airlines? - HELD THAT:- For an activity to be considered as promotional, it is necessary that a service provider must “promote” or “endorse” the service of the client. It has, therefore, to be seen whether in the present case the travel agent is encouraging a passenger to purchase a ticket of a particular airline. The facts reveal that the travel agent is only providing options to the passenger and it the passenger who determines the airline for travel. It is only when the target of having achieved the pre-determined number of bookings is achieved that the airline pays an incentive to the travel agent. It cannot, therefore, be said that the travel agent is promoting the services of any airline. Incidentally, the airlines may benefit if more tickets are sold, but this would not mean that the travel agent is providing a service for promoting the airlines - by rendering of services connected to travel by air, a travel agent would render “air travel agent” services, which services cannot be said to be for ‘promotion or marketing’ for the airlines. Whether the air travel agent is promoting the business of CRS companies? - HELD THAT:- Mere selection of software or exercising of a choice would not result in any promotional activity. The Department has not pointed out at any ‘activity’ undertaken by an air travel agent that promotes the business of the CRS Company - The passenger cannot be deemed to be an audience for promotion of the business of CRS Companies, for the passenger can neither book directly through a CRS Company nor can a passenger be influenced by any travel agent to book through a particular CRS Company. Section 65A of the Finance Act - HELD THAT:- The two competing entries are “air travel agent” service and “BAS”. It would be seen from the definition of “air travel agent” that it includes all services connected with or in relation to the booking of passage for travel by air. The services in question are booking of airlines tickets and for achieving a pre-determined target, the air travel agent also receives an additional amount in the form of incentives/commission from the airlines or the CRS Companies. The receipt of incentives commission would not change the nature of the services rendered by the travel agent - This apart, the definition of BAS would also reveal that the service provider must promote or market the service of a client. As noticed above, it is not a case where the air travel agent is promoting the service of airlines/CRS Companies. The air travel agent is, by sale of airlines ticket, ensuring the promotion of its own business even though this may lead to incidental promotion of the business of the airlines/CRS Companies. Thus, in terms of the provision of section 65A (2)(a) of the Finance Act, the classification of the service would fall under “air travel agent” services and not BAS. Whether Incentives paid for achieving targets are taxable? - HELD THAT:- In this regard following can be held: (i) the air travel agent is promoting its own business and is not promoting the business of the airlines; (ii) the air travel agent is not promoting the business of the CRS Companies; (iii) in any view of the matter, the classification of the service would fall under “air travel agent” service and not “BAS” in terms of the provisions of section 65A of the Finance Act; and (iv) the incentives paid for achieving the targets are not leviable to service tax. Further, i. view of above submissions, it would not been necessary to decide that once the IATA agent has discharged his service tax liability in terms of section 67 of the Finance Act or rule 6 (7) of the 1994 Rules, no further service tax could be demanded on the amount paid to or passed on by the IATA agent. Application disposed off. Issues Involved:1. Whether service tax can be levied on target-based incentives paid to travel agents by airlines under the category of 'business auxiliary service' (BAS).2. Whether the commission paid by CRS Companies to travel agents can be subjected to service tax under BAS.3. Whether a demand can be confirmed without specifying the sub-clause of BAS under which the activities are covered.4. Whether demand of service tax can be confirmed under BAS in the absence of three parties – service provider, service receiver, and targeted audience.5. Whether service tax liability can be fastened without specifying the consideration for service as provided under section 67 of the Finance Act, 1994.6. Whether service tax liability can be fastened in the absence of the relationship of service provider and service receiver.Detailed Analysis:1. Target-Based Incentives and Service Tax:The Tribunal concluded that the air travel agent is promoting its own business and not the business of the airlines. The travel agents provide options to passengers, and the passenger determines the airline for travel. The incentives paid by airlines to travel agents are based on achieving a pre-determined number of bookings and do not constitute promotional services for the airlines. The Tribunal referred to the Madras High Court decision in Airlines Agents Association vs. Union of India, which held that air travel agents render services to passengers and not to airlines, and thus, the commission paid to them is not for promoting the business of airlines.2. Commission by CRS Companies and Service Tax:The Tribunal held that the air travel agent is not promoting the business of CRS Companies. The CRS commission is paid to a travel agent if an agreed level of segments is booked. The passenger is unaware of the CRS Company used by the travel agent, and the travel agent's choice of CRS system is for its own business enhancement. The Tribunal referred to a Circular issued by the Central Board of Excise and Customs, which clarified that shared expenses between insurance companies and re-insurers do not constitute BAS as the customer is unaware of the re-insurer's role.3. Demand Without Specifying Sub-Clause of BAS:The Tribunal did not address this issue directly as the show cause notice and the adjudicating order had confirmed the demand under section 65(19)(ii) of the Finance Act.4. Demand of Service Tax Without Three Parties:The Tribunal held that a passenger cannot be deemed to be an audience for the promotion of the business of CRS Companies. The passenger cannot directly use the CRS software to book an airline ticket, and thus, the travel agent is not promoting the CRS Company's business to the passenger.5. Service Tax Liability Without Specifying Consideration:The Tribunal concluded that incentives paid for achieving targets are not leviable to service tax. Section 67 of the Finance Act specifies that service tax is chargeable on the gross amount charged by the service provider for the service provided. Incentives are not transaction-specific and are based on general performance, not on any particular service transaction. The Tribunal referred to the Supreme Court decision in Union of India vs. Intercontinental Consultancy and Technocrats, which held that service tax is on the value of services actually rendered.6. Service Tax Liability Without Relationship of Service Provider and Receiver:The Tribunal did not address this issue directly as the primary findings resolved the matter.Conclusion:The Tribunal concluded that:- The air travel agent is promoting its own business, not the business of the airlines.- The air travel agent is not promoting the business of CRS Companies.- The classification of the service would fall under 'air travel agent' service and not BAS in terms of section 65A of the Finance Act.- Incentives paid for achieving targets are not leviable to service tax.Answers to Referred Issues:1. Incentives received by a service recipient from a service provider cannot be subjected to service tax.2. This issue does not arise as the show cause notice and adjudicating order had confirmed the demand under section 65(19)(ii) of the Finance Act.3. A passenger cannot be deemed to be an audience for the promotion of the business of CRS Companies.4. Fourth, fifth, and sixth issues do not arise for consideration and are not answered.