2024 (11) TMI 1541 - AT - Service Tax

Appeal allowed; payments for flight operations are transport of persons by air, differential tax and penalties quashed

CESTAT allowed the appeal and set aside the impugned order. The Tribunal held payments for flight operations (Apr 2010-Mar 2014) constituted 'transport of ... Classification of service - supply of tangible goods service or transportation of passenger by air service - payment received between April 2010 and March 2014 from clients of flight operations - HELD THAT:- Across all national jurisdictions, air operations are rigidly controlled and for obvious reasons. While all means of transport using fuel and public spaces are regulated, carriage of persons that involves temporary movement into the atmosphere in a ‘motorized capsule’ is even more so; after all, in terra firma and tumidum mare, humans are equipped to survive unlike in the air that the ‘first flight’ of Daedalus and Icarus showed to their cost. With the opening up of the skies over India for carriage, other than by the ‘national carriers’, new classes of operators were statutorily acknowledged for enforcing mutual obligation between them and passengers to be enforced under the authority of the State vested in the Directorate General of Civil Aviation (DGCA). Civil Aviation Rules (CAR) have, therefore, been notified under the empowerment the Aircraft Act, 1934 and Aircraft Rules, 1937 by this statutory authority to erect a regulatory framework insofar as air travel is concerned. Indeed, such travel governs the relationship of passenger who chooses to be in the custody of the personnel of the aircraft during the period of travel with the licenced operator. The details prescribed therein may have only contextual relevance but the regulatory scheme posits legislative acknowledgement that passenger is catered to when travelling by air on aircraft flown by licenced operator; the distinction is only between private and other than private aircraft so far as rigidity of regulatory framework is concerned. Consideration is a third aspect of ‘taxable service’ but it is the provider and recipient that underscores the essence of the ‘taxable event’ in a ‘destination based consumption tax’ as the levy has been described by the Hon’ble Supreme Court in All India Federation of Tax Practitioners and others v. Union of India [2007 (8) TMI 1 - SUPREME COURT]. In the present dispute, the contractual engagement between corporate entity, having interest in the passenger to be transported, and the licenced operator, essentially for guaranteeing availability of means of travel and for discharge of terms of consideration, has been erroneously accorded interpretational significance over a relationship legislated upon well before, and acknowledged definitionally in, the tax came into being. The manner of description and method of payment of consideration does not make for any ‘taxable service’ but only serves as measure for levy and tangible evidence of intangible service having been rendered. The decision to travel and the destination of the travel are not determined by the artificial person. The impugned order is, thus, incorrect in having negated the rendering of ‘transport of persons by air’ service solely for the reason that the contract was entered into and consideration paid by an artificial person. Turning to the assigned ‘taxable service’ enumerated as section 65(105)(zzzzj) of Finance Act, 1994, the communication from Central Board of Excise & Customs (CBEC) upon incorporation of ‘supply of tangible goods service’ in 2008 sets out the distinguishment with the event taxed on transfer of ‘possession and effective control’ alienated from the taxing jurisdiction of the Union under the constitutional empowerment of Article 366 (29A). The impugned order has narrowed down the relevant ‘taxable service’ by reference to this expression in the enumeration. Neither should the expression deployed to exclude the jurisdiction to legislate be considered as the entirety of description of the service intended to be taxed. It was, therefore, of essence for the show cause notice to evidence ‘use’ by the appellant-assessee and for subjecting the consideration to tax to the extent that there is no encroachment upon taxability arising from ‘right of possession and effective control’ that is legislatively, and constitutionally, excluded. It was to this aspect of conformity of activity with the first limb within the bounds of the second that the second communication [circular no. 20/COMMR(ST)/2009 dated 9th February 2009] of Central Board of Excise & Customs (CBEC) commended scrutiny of contracts. The scope for taxing, as service, is, thus, contained within the second limb even as the first limb offers jurisdiction - The resort to ‘supply of tangible goods service’ clears fails to sustain the demand of differential tax. The demand, for October 2009 to June 2012, of ₹ 18,74,121 under section 66A of Finance Act, 1994 read with Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 for the period upto June 2012, and under Place of Provision of Service Rules, 2012 for the period thereafter, is premised on the displacement of the ‘taxable service’ crystallised by the adjudicating authority. That membership fees paid for navigation charts and electronic flight bag updates as well as administration charges to be paid for corporate trusts were covered within ‘support service of business or commerce’ and ‘banking and financial services’ has neither been examined in depth nor justification offered in the impugned order. This demand, too, fails. The demands on the appellant-assessee lack support of law. Likewise, the penalty imposed on the individual also fails - the impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments received by an aircraft operator under charter agreements (October 2009-March 2014) constitute consideration for 'transport of passengers by air' service or for 'supply of tangible goods service' as defined in the Finance Act, 1994, and thereby liable to differential service tax and related penalties. 2. If classification as 'supply of tangible goods service' is sustained for any period, whether the contractual terms evidenced transfer of 'right of possession and effective control' of aircraft to the customer so as to attract that entry. 3. Whether entitlement to abatement under the specific notifications for 'transport of passengers by air' applies to the appellants for relevant periods and thus negates or reduces any differential tax liability. 4. Whether ancillary demands for imported support services and ineligible CENVAT credits (membership fees, electronic updates, administration charges, cellular, staff medical insurance, AAI penal charges) are sustainable under the applicable place-of-provision and CENVAT Credit Rules. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Proper classification - 'transport of passengers by air' v. 'supply of tangible goods service' Legal framework: Pre-amendment and post-amendment entries in section 65(105) / section 65B(44) of the Finance Act, 1994 define competing taxable services: clause (zzzo) (transport of passengers by air) and clause (zzzzj) (supply of tangible goods including machinery, equipment and appliances for use without transfer of possession and effective control). Notifications conferring abatement for air transport and CBEC circulars interpreting clause (zzzzj) are operative for different periods. Precedent treatment: The adjudicating authority relied on Tribunal decisions (notably King Rotors & Air Charter, Global Vectra) endorsing classification as supply of tangible goods; the appellants relied on decisions (Mesco Airlines, Karnavati Aviation, and Larger Bench pronouncements) treating charter as non-scheduled air transport service. High Court observations in Indian National Shipowners' Association were considered for analogy. Interpretation and reasoning: The Court examined statutory text, the regulatory scheme (Aircraft Act, CAR/NSOP regime), and the purpose of the transport-entry which nominates provider and recipient. The Court emphasized that charter operations fall within the regulated category of non-scheduled air transport and that the legislative scheme contemplates air transport as a distinct taxable event (provider = aircraft operator; recipient = passenger). The manner of contracting (corporate customer, payment structure, absence of ticketing) does not alter the underlying taxable activity - carriage of passengers by a licensed operator. Conversely, clause (zzzzj) must be read to tax supply of tangible goods (machinery/equipment/appliances) for use; reading aircraft within that entry produces constitutional and textual anomalies and would lapse into taxing means of transport generally contrary to the statutory scheme. Ratio vs. Obiter: Ratio - charter of aircraft operated under NSOP is, in substance, non-scheduled air transport service where the recipient is the passenger, and corporate contracting does not convert the service into supply of tangible goods. Obiter - peripheral observations from maritime vessel cases are not determinative for air charter classification and cannot be extended to defeat the specific tax entry for air transport. Conclusion: Classification as 'supply of tangible goods service' for the purpose of recovering differential tax was unsustainable where the activity is governed by NSOP/charter operation and otherwise falls under 'transport of passengers by air.' The impugned re-characterisation was incorrect for the periods when air transport entry was applicable. Issue 2: Whether contractual terms transferred 'right of possession and effective control' so as to attract clause (zzzzj) Legal framework: Clause (zzzzj) taxes supply of tangible goods 'including machinery, equipment and appliances for use, without transferring right of possession and effective control'; CBEC circulars instructed scrutiny of contracts to determine transfer of right to use and possession/control. Precedent treatment: Adjudicating authority and some Tribunal decisions found contractual clauses (exclusive use, time-based payment, guaranteed availability) sufficient to show transfer of use; opposing authorities and Larger Bench decisions held charter remains aircraft operation and not supply of goods. Interpretation and reasoning: The Court held that the constitutional reservation of state power (Article 366(29A)(d)) and the wording of clause (zzzzj) require a construction that confines that entry to goods such as machinery/equipment/appliances - not aircraft used for carriage of passengers. The Court found textual incongruity if clause (zzzzj) were stretched to cover aircraft; the correct inquiry is whether the contract objectively transfers the right to use as distinct from making an aircraft available as part of regulated air transport operations. Here, existence of NSOP, retention of operational control by licensed operator, regulation of passenger carriage by DGCA, and the essential fact that the service provided is carriage of persons meant that no effective transfer of possession/control occurred that would convert the transaction into supply of tangible goods. Ratio vs. Obiter: Ratio - contractual provisions indicative of availability or exclusive use do not ipso facto amount to transfer of possession/effective control where the statutory/regulatory regime and substance of the transaction are of air carriage. Obiter - detailed parsing of hypothetical contractual clauses beyond the record was unnecessary. Conclusion: On facts before the Court, contractual terms did not establish transfer of right of possession and effective control so as to attract clause (zzzzj); therefore re-classification was unsustainable. Issue 3: Entitlement to abatement under notifications for 'transport of passengers by air' Legal framework: Notifications issued under section 93 of the Finance Act permitted abatement (e.g., notification nos. 6/2012-ST and 26/2012-ST) for the category 'transport of passengers by air' from prescribed dates; regime changes (negative list/section 65B(44)) altered taxonomy from July 2012 onward. Interpretation and reasoning: The Court recognized three distinct periods with different legal regimes: (i) prior to 1-7-2010 when air transport entry was limited; (ii) 1-7-2010 to 30-6-2012 before substitution of definitions; (iii) from 1-7-2012 when service definition changed. The Court found that where the activity properly falls within transport of passengers by air, abatement notifications apply as per their effective dates; the appellants' availing of abatement and payment under VCES for certain periods did not amount to conclusive acquiescence to a rival classification for prior periods. The legislative and regulatory recognition of charter operations and the specific abatement notifications favor treatment as transport service where applicable. Ratio vs. Obiter: Ratio - entitlement to notification abatement follows correct classification as transport of passengers by air and the effective dates specified; prior voluntary payments under remedial schemes do not re-characterize the nature of the service for earlier periods beyond what law prescribes. Obiter - shifting of tax burden to customers during investigations does not prove correctness of re-classification. Conclusion: Where the activity is transport of passengers by air, appellants are entitled to abatement as per applicable notifications for the relevant periods; the bulk differential demand premised on denial of abatement fails. Issue 4: Ancillary demands - imported support services and CENVAT credit denial Legal framework: Services provided from outside India are taxable under section 66A and related rules; CENVAT Credit Rules (rule 2(l) definition of input service and rule 14) govern admissibility of credit. Interpretation and reasoning: The Court found the impugned order did not sufficiently examine or justify classification of membership fees, electronic flight bag updates, and administration charges as taxable imported support services, nor properly reason denial of credits (cellular, staff medical insurance, AAI penal charges) as not being input services. The impugned order lacked detailed legal and factual analysis to sustain these ancillary demands. Ratio vs. Obiter: Ratio - demands for imported support services and CENVAT credit recovery must be grounded in specific analysis under the applicable rules; generalized conclusions are insufficient. Obiter - specific facts for each service require case-by-case adjudication which the impugned order did not provide. Conclusion: Ancillary demands for Rs. 18,74,121 (imported services) and Rs. 7,37,271 (CENVAT credit recovery) were unsustainable for lack of reasoned justification and are set aside. OVERALL CONCLUSION The Court concluded that the impugned demands and penalties arising from re-classification of charter operations as 'supply of tangible goods service' lack legal support: the regulated nature of charter operations under DGCA/NSOP and the statutory/textual construction of the Finance Act entries command treatment as 'transport of passengers by air' where applicable; contractual form and corporate contracting do not alter that substance; entitlement to abatement follows the correct classification and applicable notifications; ancillary demands for imported services and CENVAT denial were inadequately reasoned. The impugned order was set aside and appeals allowed.