Airport terminal DFS operations qualify as zero-rated supply under Section 16 IGST Act, exempt from CGST/SGST

The Madras HC ruled that levy of CGST/SGST on minimum guarantee/revenue share for DFS operations in airport terminals constitutes zero-rated supply under Section 16 of IGST Act, as these are beyond customs frontiers and outside India's territory. The court found the entire exercise revenue neutral, particularly for the period prior to 01.04.2021, and noted that revenue/Union did not seriously dispute this finding. Citing SC precedent that appeals need not be preferred where tax effect is revenue neutral, the HC concluded that supplies outside customs territory qualifying as zero-rated under Section 16 are not liable to GST. The court directed processing of refund application within four weeks with applicable interest and disposed of the appeal.

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The core legal questions considered by the Court in this matter are:

1. Whether Goods and Services Tax (GST) is payable on the minimum guarantee/revenue share paid by the petitioner for operating Duty Free Shops (DFS) at Chennai International Airport, considering that such supplies are outside the customs frontiers of India and thus zero rated under Section 16 of the Integrated Goods and Services Tax (IGST) Act.

2. Whether the petitioner is entitled to a refund of GST paid for the period from 01.01.2018 to 30.06.2018, given the contention that the levy of GST on such supplies was without authority of law.

3. Whether the respondents could refrain from collecting GST for the period July 2019 to March 2021 on the basis that the collection would be followed by a refund, rendering the transaction revenue neutral.

4. Whether the principle of revenue neutrality can be a valid ground to deviate from the statutory mandate requiring payment of taxes followed by a refund claim, even in cases of zero-rated supplies.

5. The procedural aspect regarding the refund application filed by the respondents and the timelines for its disposal.

Issue-wise Detailed Analysis:

1. Applicability of GST on Minimum Guarantee/Revenue Share in DFS Operations (Zero-Rated Supply Status)

The petitioner operates Duty Free Shops under a concession agreement with the Airport Authority of India and holds a Special Bonded Warehouse License under the Customs Act, 1962. The petitioner procures goods from foreign suppliers, stores them in customs bonded warehouses, and sells them within the DFS premises at the airport. The petitioner challenged the levy of CGST and SGST on the minimum guarantee/revenue share paid to the airport authority, contending that such supplies are outside Indian customs territory and thus qualify as zero-rated supplies under Section 16 of the IGST Act.

The Court noted that the petitioner had initially paid GST under protest for certain periods but reserved the right to claim refunds. The respondents continued to issue GST invoices for subsequent months. The Madurai Bench of the High Court had earlier restrained the respondents from collecting GST on these supplies and directed that the petitioner need not pay GST for the period prior to 28.02.2021, recognizing the zero-rated nature of the supplies.

During the hearing, the revenue conceded that the supplies in question are indeed zero-rated, obviating the need for the Court to examine the issue further. This concession was pivotal in the Court's approach.

2. Entitlement to Refund for GST Paid (01.01.2018 to 30.06.2018)

The petitioner sought refund of GST paid during the period 01.01.2018 to 30.06.2018, asserting that the levy was without authority of law. The respondents, however, had discharged GST liability for the period 01.01.2018 to 31.07.2019, even though the tax was not collected from the petitioner, treating the supplies as zero-rated.

The learned single judge had directed refund of the GST paid on the basis that the entire exercise of payment followed by refund is revenue neutral. The Court relied on established precedents affirming that where the tax effect is revenue neutral, there may not be a need for further appeal or contestation. The Court referred to authoritative decisions from the Supreme Court emphasizing that revenue neutrality can be a valid ground for disposing of appeals without further proceedings.

However, the Court clarified that the authorities remain free to verify whether the tax effect is indeed revenue neutral and, if not, to proceed in accordance with law.

3. Non-Collection of GST for July 2019 to March 2021 and Revenue Neutrality

For the period July 2019 to March 2021, the Madurai Bench had granted a stay, and accordingly, the respondents neither collected nor remitted GST. The respondents argued that even if GST were to be collected, it would be followed by a refund under the relevant GST provisions, rendering the entire process revenue neutral.

The Court accepted this position, noting that the learned counsel for the revenue conceded the zero-rated nature of the supplies and that the collection followed by refund would not result in revenue loss or gain.

The Court emphasized that the principle of revenue neutrality cannot be used to circumvent statutory provisions mandating payment of tax followed by refund claims but acknowledged that where the tax effect is revenue neutral, protracted litigation may not be warranted.

4. Statutory Requirement of Payment Followed by Refund and the Role of Revenue Neutrality

The revenue challenged the learned single judge's order on the ground that revenue neutrality cannot justify non-compliance with statutory provisions requiring payment of taxes followed by refund claims, even for zero-rated supplies.

The Court observed that the revenue did not seriously dispute the finding of revenue neutrality for the period prior to 01.04.2021. The Court relied on precedents where the Supreme Court held that appeals may be dispensed with if the tax effect is revenue neutral. The Court thus declined to interfere with the learned single judge's order.

Nonetheless, the Court clarified that the authorities are entitled to examine the actual revenue impact and proceed accordingly if revenue neutrality is not established.

5. Payment of GST on Concession Fee and Refund Claim Post 01.03.2021

The learned single judge had directed that the petitioner pay GST on the concession fee to the airport authority and thereafter claim refund as per Section 54 of the CGST Act with effect from 01.03.2021. This direction was not challenged by the petitioner and remains undisturbed.

6. Refund Application Processing

The Court directed that the refund application filed by the airport authority (respondent No.3) shall be processed and finalized within four weeks, along with applicable interest, in accordance with law.

Significant Holdings:

"...no appeal need be preferred where the tax effect is revenue neutral."

"...for the period prior to 01.04.2021, the petitioner need not pay any GST to the fourth respondent."

"The authorities are at liberty to examine as to whether the tax effect is in fact revenue neutral for the period prior 01.04.2021 or there is any loss of revenue. If authorities find the exercise to be not revenue neutral, it is open to the authorities to proceed in accordance with law."

"The direction of the learned judge that the petitioner has to pay GST on the concession fee to the fourth respondent and thereafter claim refund as per Section 54 of the CGST Act with effect from 01.03.2021 is not challenged by petitioner and remains undisturbed."

Core principles established include the recognition that supplies outside the customs territory qualifying as zero-rated under Section 16 of the IGST Act are not liable to GST, and that payment followed by refund in such cases is a revenue neutral exercise. The Court emphasized the importance of adhering to statutory provisions but also acknowledged practical considerations where tax effects do not impact government revenue.

In conclusion, the Court upheld the learned single judge's directions to refund GST paid for the period 01.01.2018 to 30.06.2018, confirmed non-collection of GST for July 2019 to March 2021 on revenue neutrality grounds, and maintained the requirement for payment of GST on concession fees post 01.03.2021 with refund claims. The refund application was ordered to be processed expeditiously.

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