2024 (5) TMI 1604 - AT - Service Tax

Classification of air transportation services and tax characterisation of operator charges as taxable passenger transport service, effect on prior tax paid

Analysis addresses classification of services for service tax: air transportation of passengers by an aircraft operator constitutes a taxable passenger ... Classification of services - services of transportation by air for domestic/international journey of passengers - services of Supply of Tangible Goods for Use - appropriation of service tax against the determination of service tax liability under STGU and confirmation of adjudged demands under the impugned order - levy of penalty. HELD THAT:- Section 65(105) (zzzo) of the Finance Act, 1994 provide that service provided to any passenger, by an aircraft operator, in relation to scheduled or non-scheduled air transport of such passenger embarking in India for domestic journey or international journey is a taxable service under that entry. On examination of the case records, it is found that in providing air passenger service on the basis of Non-Scheduled Operator Permit granted by DGCA to operate as an aircraft operator, the appellants are providing the services of transportation of RIL’s executives, personnel, nominees or passengers by aircrafts. Further, it is only with effect from 01.07.2010, the service tax levy was amended to cover the levy with respect to domestic journey by air transportation and earlier such levy was limited to international journey in specified class. Thus from the ingredients of the service provided by the appellants as evidenced in the case records and in terms of the agreements dated 15.01.2018 and 24.01.2018, the disputed service is definitely covered under the category taxable services provided under Section 65(105) (zzzo) of the Finance Act, 1994. In the case of Gosalia Shipping Pvt. Ltd. [1978 (5) TMI 1 - SUPREME COURT], the Hon’ble Supreme Court had laid down the difference between the ‘freight’ in the case of ‘carriage of goods’ and ‘payment for the use and hire of ship’ in case of ‘time charter’. In the facts of the present case, it is an undisputed fact that the invoice for the charges could be raised by the appellants - NSOP permit owner and aircraft operator and payment is effected for the same by RIL, only when the voyage/journey performed. Further, it is only when the voyage is completed by transportation of RIL’s executives, personnel, nominees or passengers based on the flying hours, the charges are received. The appellants were not entitled for ‘hire’, which is an amount payable irrespective of whether the aircraft had flown or not, based on time for which it is let out. Similarly, the appellants were not entitled for any ‘lease or rental charges’, which is an amount payable on leasing or renting of aircraft for specific period. The contracts entered in the present case between the appellants and RIL is therefore clearly not on time charter basis and is for the service of transportation of RIL’s executives, personnel, nominees or passengers. As per the definition clause, all port services be it loading, unloading of cargo, warfare, stevedoring, light vessel uses etc., should fall under the omnibus category of ‘port services’, as long as the host of services are provided within the port area. However, in respect of STGU service, no such exalted status has been conferred in respect of that service, by a similar provision as in regard to port service. Thus, it is highly improper on the part of the adjudicating authority to conclude that the services provided by the appellants are to be fitted into the taxable category of STGU, ignoring the statutory provisions, backed by the well laid principles of law that the activities would be categorized as ‘services of transport of passengers by air’, which attract payment service tax as a taxable service under specific sub-clause (zzzo) of Section 65(105) ibid, for levy of service tax thereon. Thus, in terms of legal provision of Section 65A ibid, it is found that the taxable service under sub-clause (zzzo) of sub-section (105) of Section 65 ibid i.e., services of transport of passengers by air is more appropriate in terms of specific coverage of the transactions under the present case. The taxable services rendered by the appellants in the present case has been correctly classified under sub-clause (zzzo) of sub-section (105) of Section 65 ibid. Accordingly, the appellants have also paid the applicable service tax on the taxable services at different times i.e., upto 30.06.2010 on the ‘Transport of passengers embarking in India for international journey by NSOP air service’ and after 01.07.2010,on both ‘Transport of passengers embarking in India for international journey and domestic journey by NSOP air service’. Therefore, there is no requirement of any appropriation of service tax already paid by the appellants. There are no merits in the impugned order, in so far as the adjudged demands were confirmed on the appellants - appeal allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the services provided by the appellants are classifiable as (a) non-scheduled air transport services (passenger) under Section 65(105)(zzzo) of the Finance Act, 1994, or (b) supply of tangible goods for use (STGU) under Section 65(105)(zzzzj) of the Finance Act, 1994. 2. Whether the service tax paid by the appellants under the category 'Transport of persons embarking in India for international journey by air service' is correctly appropriated against the demand confirmed under the STGU category. 3. Whether the appellants are liable for penalty under Sections 76 and 77 of the Finance Act, 1994 as determined by the adjudicating authority. 4. Whether the absence of issuance of passenger tickets and the nature of the agreements (right of first refusal, refundable deposit) affect the classification of the service as air transport or as supply of tangible goods. 5. Whether chartering the entire aircraft on a per flight basis falls within the scope of non-scheduled air transport services (passenger). 6. Whether the contractual and regulatory framework, including the Non-Scheduled Operator Permit (NSOP) and Civil Aviation Requirements (CAR), support the classification of the service as non-scheduled air transport service. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Classification of Services - Non-Scheduled Air Transport Service (Passenger) vs. Supply of Tangible Goods for Use (STGU) - Legal Framework and Precedents: Section 65A of the Finance Act, 1994 mandates classification according to the most specific description under Section 65(105). Section 65(105)(zzzo) covers services to passengers by aircraft operators for scheduled or non-scheduled air transport. Section 65(105)(zzzzj) covers supply of tangible goods for use without transferring possession and effective control. - The Civil Aviation Requirements (CAR), Aircraft Rules 1937, and the NSOP permit define and regulate non-scheduled air transport services, including charter operations. - Larger Bench Tribunal decisions clarify that non-scheduled (passenger) services include charter operations and do not require issuance of passenger tickets or published tariffs. - The Supreme Court decision distinguishes carriage of goods from hire of vessel, emphasizing that payment contingent upon actual carriage indicates transport service, not hire. - Court's Interpretation and Reasoning: The Tribunal examined the agreements, regulatory permits, and operational facts. The agreements with RIL provide for air transportation of personnel on a right of first refusal basis, not exclusive rental or lease of aircraft. - The NSOP permit and CAR allow non-scheduled operators to provide passenger transport either on per seat or charter basis, with no bar on chartering entire aircraft. - The appellants bear operational costs and are entitled to payment only for actual flying hours and completed journeys, indicating transport service rather than rental/hiring of aircraft. - The absence of passenger tickets and destination/passenger selection by RIL does not negate the service's character as non-scheduled air transport, as per CAR and Tribunal precedents. - The refundable deposit for right of first refusal does not convert the service into supply of tangible goods; it is an arrangement for priority booking, not transfer of possession or control. - Key Evidence and Findings: NSOP permit No. 02/2008 issued by DGCA; agreements dated 15.01.2008 and 24.01.2008; invoice demonstrating no charge for incomplete return journey due to weather; absence of exclusive possession or control by RIL; Tribunal's Final Order No. 50820-50821/2022 confirming non-scheduled passenger service classification. - Application of Law to Facts: The service is a non-scheduled air transport service (passenger) under Section 65(105)(zzzo) as the appellants provide transport by air of RIL's personnel without transferring possession or effective control of aircraft. - The service does not fall under STGU as there is no supply of tangible goods with or without possession/control transfer. - Treatment of Competing Arguments: Revenue's contention that the service is STGU based on supply of aircraft and right of first refusal was rejected due to lack of evidence of possession/control transfer and exclusive use. - Revenue's reliance on absence of passenger tickets and lack of published tariff was negated by CAR provisions and Tribunal precedents allowing charter operations without ticket issuance. - Distinction was drawn from case law cited by Revenue (e.g., Global Vectra Helicop Ltd.) where exclusive use and delivery of aircraft were facts, not present here. - Conclusion: The services provided by the appellants are correctly classifiable as non-scheduled air transport services (passenger) under Section 65(105)(zzzo) and not as supply of tangible goods for use under Section 65(105)(zzzzj). Issue 2: Appropriation of Service Tax Paid and Confirmation of Demands - Legal Framework: Service tax paid under a specific category can be appropriated against confirmed demand if classification is upheld. Section 65A(2) mandates preference to the most specific classification. - Court's Reasoning: Since the appellants had discharged service tax under the category 'Transport of persons embarking in India for international journey by air service' (Section 65(105)(zzzo)) correctly, there is no requirement for appropriation against STGU demands. - Findings: The service tax payments correspond to the correct classification and taxable period (international journey till 30.06.2010; domestic and international thereafter). - Conclusion: The service tax paid by the appellants is appropriate and no further demand or appropriation is justified. Issue 3: Liability for Penalty under Sections 76 and 77 of the Finance Act, 1994 - Legal Framework: Penalties under Sections 76 and 77 are imposed for non-payment or short payment of service tax. - Court's Reasoning: Since the service tax liability was correctly discharged under the appropriate category, and the classification of services as STGU is rejected, the basis for penalty fails. - Conclusion: Penalties imposed by the Commissioner are unsustainable and are set aside. Issue 4: Effect of Absence of Passenger Tickets and Nature of Agreements on Classification - Legal Framework and Precedents: CAR and Ministry of Civil Aviation guidelines clarify that non-scheduled operators are not required to issue passenger tickets and may operate on charter basis without published tariffs. - Court's Interpretation: The absence of passenger tickets and the right of first refusal with refundable deposit do not alter the essential character of the service as non-scheduled air transport. - Findings: The contractual terms and operational facts demonstrate transportation service rather than rental or leasing of aircraft. - Conclusion: These factors do not negate the classification as non-scheduled air transport service. Issue 5: Chartering Entire Aircraft as Part of Non-Scheduled Air Transport Services - Legal Framework: CAR defines charter operation as hire and reward for entire aircraft without individual tickets; permitted under NSOP for non-scheduled air transport services. - Court's Reasoning: Chartering entire aircraft is one mode of providing passenger transport service; no restriction exists against charter operations under non-scheduled air transport service classification. - Conclusion: Chartering entire aircraft is within the scope of non-scheduled air transport services (passenger). Issue 6: Regulatory and Contractual Framework Supporting Classification - Legal Framework: NSOP permit issued by DGCA under Aircraft Rules, 1937 and CAR governs non-scheduled air transport services. - Court's Reasoning: The appellants hold valid NSOP permits authorizing non-scheduled air transport services (passenger). The agreements conform to the permit conditions and CAR provisions. - Findings: The appellants operate aircraft with crew, maintain compliance with DGCA regulations, and provide transport services on a right of first refusal basis without transferring possession or control. - Conclusion: Regulatory and contractual framework supports classification as non-scheduled air transport services (passenger).