Brief Facts of the Case:M/s. Karnavati Aviation Pvt. Ltd., (formerly known as M/s. Gujarat Adani
Aviation Pvt. Ltd.) having office at Shikhar, Ground Floor, Nr. Railway Crossing,
Navrangpura, Ahmedabad (here-in-after referred as “M/s KAPL”) is engaged in providing
charter flight to various organizations. They have been providing various services falling
under the category of “Air transport of passengers service” and “management, maintenance
or repair service” and are for the same registered with Service Tax.
1.1
The intelligence gathered by the Officers of the Directorate General of Central
Excise Intelligence, Ahmedabad Zonal Unit, Ahmedabad (herein after referred to as
“DGCEI” for brevity) revealed that M/s. Karnavati Aviation Pvt. Ltd., (formerly known as
M/s. Gujarat Adani Aviation Pvt. Ltd.) having office at Shikhar, Ground Floor, Nr. Railway
Crossing, Navrangpura, Ahmedabad (here-in-after referred as “M/S KAPL”) is engaged in
providing chartered flights to various organizations but not paying appropriate service tax
payable thereon under “Supply of Tangible Goods Service” as specified under Section 65
(105) (zzzzj) of the Finance Act, 1994.
1.2
Accordingly, M/s KAPL was called for to furnish information such as
- copy of service tax registration certificate;
- copies of bills raised during the years 2008-09;
- details of service tax paid;
- details of External Commercial Borrowings (ECB) obtained;
- details of the commercial charges paid to the overseas lender / facilitator for
availing ECB and whether service tax is paid on such commercial charges
as per the provisions of Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 or
not, vide letter F. No. DGCEI/AZU/8-2/2010-11 dated 31-05-2010.
1.3
M/s KAPL vide their replies dated 22-06-2010 and 19-09-2010 submitted the
following details / documents:
service tax registration certificate obtained for “Air transport of
passengers service” and “management, maintenance or repair service”
copies of bills issued during the year 2008-09 and 2009-10
Copies of balance sheets of the years 2008-09 and 2009-10
Copies of ST-3 returns filed for the years 2008-09 and 2009-10, and
details of ECB borrowed from foreign bank and commercial charges
paid to the arranger for availing ECB.
1.3.1
M/s KAPL vide the above letters further informed that initially they did not pay
service tax on commercial charges paid for availing ECB under bonafide belief that there was
no liability of service tax on this charges. However, on receipt of letter from DGCEI, they
paid the amount of service tax along with interest. Copies of challan dated 18-06-2010
evidencing payment of service tax of Rs. 5,24,538/- and interest of Rs. 23,428/- was also
furnished.
1.4
M/s KAPL have vide their letter 05-07-2010 contended that they were not
liable for payment of service tax under the category of “supply of tangible goods service” as
the essential prerequisite for the application of the taxing entry of ‘supply of tangible goods
service’ is that the transaction in question must be a transaction for the supply of goods. The
concept of supply has been examined in the judgment of Somnath Rath V/s. Bikram Deshari
Arukh (AIR 1999 Orr 110) wherein the Hon’ble High Court has taken the view that the word
“supply” is to be construed as being akin to a transaction of sale and dispatch. Thus, the
services provided under the category of ‘supply of tangible goods’ cannot be extended to
include transportation of persons.
1.4.1
A typical characteristic of scheduled air transport services is that flights are
operated as per predetermined time tables and the flights are open to use by members of the
public. In contradiction, a charter which does not operate according to the public time table
Page 2 of 37
and which is not open to members of the public would fall within the scope of the term “nonscheduled air transport”. The taxing entry for transportation of passengers by air service
clearly covers both scheduled air transport and non scheduled air transport (including
charters). The legislature therefore, has clearly contemplated charters as being taxable under
a taxing entry related to transport viz., the taxing entry for “transportation of passengers by
air service”. From the definition of taxable service of “Transportation of passengers by air
service, it is clear that the legislature has restricted the levy, whether on scheduled transport
services or non-scheduled air transport services, only to an international journey. Consistent
with the legislative desire to tax domestic and international journeys, the charters to
undertake domestic and international journeys would be liable to service tax under the taxing
entry for “Transportation of passengers by air service”.
1.4.2
In view of the above, they claimed that there was no liability of service tax
under the category of supply of tangible goods service.
1.4.3
Regarding copies of agreement entered with the parties to whom bills were
raised on the basis of fare per seat, they stated that they had not entered into written
agreement with parties to whom the bills were raised during the aforesaid period.
2.1
A statement of
Shri Anurag Mathur, Deputy General Manager
(Operations) of M/S KAPL was recorded on 21.9.2010. He has in his statement interalia
stated that:
- M/S KAPL was into non-scheduled operation of aircraft from June, 2008 onwards;
- they purchased Hawker 850 XP in June, 2008 and another charter flight viz.,
Challenger 605 in the month of November, 2009;
- Hawker-850-XP can carry 8 passengers and Challenger-60S can carry 9 passengers
(excluding crew);
- they operate charter flight either single flight or series of flights as per the requirement
of their clients;
- their clients include M/s Mundra Ports & SEZ Ltd., M/s. Adani Power Ltd., M/s
Torrent Power Ltd., M/s. GSEC Ltd., M/s. Zydus Wellness Ltd., M/s Saurastra
Travels Pvt, Ltd., M/s Saurastra International Travel Company (SITC), etc;
- rates for charter operations were determined on mutually agreed tariff based on
destination and the number of days or time of charter hire and their client has to pay
the agreed tariff irrespective of the number of passengers actually carried;
- they had issued bills showing rate per seat for the accounting purpose; that rate per
seat was arrived at by dividing rate fixed for a trip by total seating capacity of the
charter flight (not by actual number of passengers travelled);
- they had "aircraft charter hire or use agreement" entered with M/s Adani Power Ltd.
and M/s. Mundra Port & Special Economic Zone Ltd;
- they had not entered into a written agreement with other clients;
- they had three agents working for the company in getting clients for charter flight
operation viz., M/s GSEC Aviation Ltd and M/s. Saurastra Travels Pvt. Ltd. and M/s
Saurastra International Travel Company; that M/s GSEC Aviation Ltd was given 5%
of bill amount as trade discount;
- they do not have any such understanding with M/s. Saurastra Travels Pvt. Ltd. and
M/s. Saurastra International Travel Company;
- for the charter flights booked through these companies, M/S KAPL raise bills and no
discounts were offered;
- these agents may bill to the clients as per their understanding with the clients; that M/S
KAPL do not raise bills to their clients;
- they raise bills to their clients or to their booking agents after completion of the charter
flight operation i. e., after completion of the journey; that they raise bills / invoices in
the name of the companies, who had booked the charter flight or in the name of
booking agents;
- they do not ask for number of persons who were going to travel in the charter flight at
the time of booking of charter aircraft because their charter flights were booked on the
basis of distance of destination;
Page 3 of 37
-
-
-
charter operation in an operation for hire and reward in which the departure time,
departure location and arrival locations were specially negotiated with the customer or
the customers representative for entire aircraft. No ticket was sold to individual
passenger for such operation;
they do not issue passenger tickets under Rule 3(1) of the Second Schedule of the
Carriage by Air Act, 1972, as they normally charge for all seats in the aircraft
irrespective of the actual number of passengers; that their company had paid service
tax in the months of September, 2008 to March, 2009 under "Transport of passengers
embarking in India for international journey by air service" on the gross value of bills
charged for charter operations;
they had taken CENVAT credit of input services of service tax paid for airport charges
and administrative expenses such as telephone bill, insurance, etc;
2.2
Another statement of Shri Anurag Mathur, Deputy General Manager
(Operations) of M/s KAPL was recorded on 23-11-2010. He has in his statement interalia
stated that the facts and figures contained in Annexure - A attached to the notice were
correct and factual as per bills / invoices issued by their company and that the details of
service tax charged and service tax not charged during the period from 18-06-2008 to 3103-2010 were as under:
Sr.
Whether service tax
Remark
Bill No. & Date
No.
paid or not
Domestic journey
1
1/18-06-2008 to 19/01-09-2008
Not paid service tax.
2
20/16-09-2008 to 23/20-09-2008
Paid service tax.
3
24 & 25 both dated 20-09-2008
Not paid service tax.
4
26/16-10-2008
Paid service tax
5
27/16-10-2008
Not paid service tax.
6
28/19-10-2008 to 35/01-12-2008
Paid service tax.
7
36/01-12-2008 to 85/26-02-2009
Not paid service tax.
8
86/28-02-2009
Paid service tax.
9
87/28-02-2009105/31-03-2009
Not paid service tax.
10
1/6-4-2009 to 77/31-08-2009
Not paid service tax.
11
78/02-09-2009 to 229/31-03-2010
Paid service tax.
Domestic journey
Domestic journey
Domestic journey
Domestic journey
Domestic journey
Domestic journey
International journey
Domestic journey
Domestic journey
Both Domestic &
International
journey.
2.2.1
On being asked to give the reasons for paying service tax on some bills and not
paying service tax on other bills particularly during the period from 18-06-2008 to 31-082009, he stated that his company obtained service tax registration under the category of
"Transportation of Passenger by Air service". They have been paying service tax on
international charter operations. For operation of charters in domestic sectors, they had not
paid service tax till August, 2009. The reason for charging service tax in some bills and not
charging service tax on other bills upto August, 2009 was to be ascertained from his office.
He would furnish the reply in this regard within three days. However, he said that they have
been charging and paying service tax on charter operations carried for international journeys
as well as for domestic journeys from September, 2009 onwards.
Page 4 of 37
2.2.2
On the issue of payment of service tax on the value of services received from
outside India and for which payment made in foreign currency, he stated that his company
had paid service tax of Rs. 5,22,274/- on the payment made to foreign service providers
regarding maintenance of their charter flights under "Management, Maintenance & Repair
Service" in the first half of the year 2008-09 on reverse charge basis under Section 66A of the
Finance Act, 1994. Similarly in the year 2009-10, his company made payment of service tax
of Rs. 5,24,537/-along with interest of Rs. 23,427/- on the value of commercial charges paid
for availing ECB of US$ 18,500,000 through e-payment on 18-06-2010. Further they had
paid service tax of Rs. 5,22,274/- on the payment made to foreign service providers relating
maintenance of their charter flights under "management, maintenance & repair service" in the
first half of the year 2008-09. Apart from the above, they had also paid service tax of Rs.
5,49,387/- & interest of Rs. 1,25,409/ - for the year 2008-09 and service tax of Rs. 9,48,294/& interest of Rs. 1,23,611/vide e-payment challan dated 30-10-2010.
3.
M/s KAPL vide their letter dated 30-11-2010 furnished the details of payment
made in foreign currency to service providers abroad and service tax payment particulars or
reason for not paying service tax was explained as under :Sr.
No.
1
Name of
service
provider
Honeywell
Description in
ledger
account
Aircraft
Services
Amount
paid in INR
Amount
paid in INR
2008-09
2009-10
5333854
2
Jet Aviation
Dubai LLC
Repair &
maintenance
aircraft parts
3
Rockwell
Collins
Aircraft
Services
310244
Aeronautical
Radio of
Thailand Ltd
CAMP
Systems
International
Inc
Repair &
maintenance
aircraft parts
132002
6
Jeppesen
GMBH
Aircraft
Services
0
7
Aerospace
Concepts
Inspection
Charges
0
8
Kellette &
Aircraft
Singleton
Hiring
Investment Ltd
0
9
Emirates CAE
Training
Flight Training
Expenses
LLC
0
10
Rich Aviation
Services
0
4
5
Repair &
Maintenance
of Aircraft
Training
expenses
66646060
465375
Page 5 of 37
M/S KAPL’s
contention
9206735 Service tax paid
Service tax paid on
service component.
4118511 Value of spare parts
not liable for service
tax.
Aircraft
data
–
620330 service
tax
not
payable
Aircraft
data
–
0 service
tax
not
payable
Aircraft
475116 service
payable
data
–
tax
not
Aircraft
data
–
1220025 service
tax
not
payable
Delivery inspection
706950 of aircraft – service
tax not payable.
Transport
of
passenger by air
11390031
service – service tax
not payable
Service provided as
well as received
outside
India
–
Service Tax not
194732
payable
794675
1.
2.
3.
4.
5.
6.
7.
8.
9.
Payment made to Honeywell International Inc was towards maintenance services
program. They had paid the service tax under reverse charge mechanism in terms
of Section 66A of the Finance Act, 1994 read with Rule 2(1)(d) of Service Tax
Rules, 1994 under the category of maintenance and repair service.
Payment made to Rockwell Collins was towards procurement of Navigation Data
as required for aircraft. They paid such amount towards subscription of the data.
They had wrongly shown the said amount under the head “Repair & maintenance”
in the financial statement. Service tax was not required to be paid on the above
transaction as the amount was paid towards subscription of the data and no service
was involved in the transactions. Copies of invoices were annexed.
Payment made to Aeronautical Radio of Thailand was towards Height Monitoring
Data for aircraft. They had wrongly accounted the same under the head “Repairs
& maintenance” in the financial statements. They paid the amount for
subscription of height data and no service was involved in the transactions.
Copies of invoices were annexed.
With respect of payment to Jet Aviation Dubai LLC, they clarified that the engine
of aircraft was sent for repair purpose to Jet Aviation Dubai LLC. Bills of Jet
Aviation towards replacement and services. They had paid service tax on service
component. Details of service tax payment along with invoices and challans
enclosed. In respect of payment made in the year 2009-10, they had not paid
service tax claiming that this was rental charges for engine supplied by M/s. Jet
Aviation Dubai LLC and service tax was not leviable. They stated that this
expense was wrongly posted under maintenance & repair ledger.
Payment to CAMP Systems International Inc was towards subscription of
maintenance tracking text and accordingly it was not liable to service tax.
However, they had wrongly shown the same under “Repair & maintenance
service” in the financial statement. Copies of invoices were annexed.
Payment to Aerospace Concepts was towards delivery inspection of Aircraft and
not towards repairs and maintenance service even though the same was classified
under the head of repairs and maintenance service in the financial statement.
Copies of invoices were annexed.
Payment to Jeppesen GMBH was towards subscription, not towards repairs &
maintenance service even though the same was shown under the head of repairs
and maintenance service in the financial statement. Copies of invoices were
annexed.
With respect to payment to Kellent & Singleton, they stated that Section
65(105)(zzzo) of the Finance Act, 1994 defines taxable service in respect of
“Transport of passengers by air service” as under:
“Taxable service means any service provided or to be provided to any passenger,
by an aircraft operator, in relation to scheduled or non-scheduled air transport of
such passenger embarking in India for international journey, in any class other
than economy class.
Explanation 1 – For the purposes of this sub-clause, economy class in an aircraft
meant for scheduled air transport of passengers means (i)
Where there is more than one class of travel, the class attracting the
lowest standard fare; or
(ii)
Where there is only one class of travel, that class.
Explanation 2 – For the purposes of this sub-clause, in an aircraft meant for nonscheduled air transport passengers, no class of travel shall be treated as economy
class.
The above service was not liable to be taxed under reverse charge
mechanism in the hand of M/s. Karnavati Aviation Pvt. Ltd since the same was
excluded from “Taxation of Services (Provided from Outside India and Received
in India) Rules, 2006 as mentioned under category (iii) of the above rules. Copy
of service contract enclosed.
With respect to payment to Emirates and Rich Aviation, they had submitted that
“Commercial training or coaching service” has been defined under Section 65(26)
of the Finance Act, 1994. In terms of the definition, commercial training and
Page 6 of 37
coaching means training and coaching provided in commercial training and
coaching centre. Taxable service has been defined under Section 65(105) (zzc).
9.1.1 Taxable service means any service provided or to be provided to any person by a
commercial training or coaching centre in relation to commercial training or
coaching.
Commercial training or coaching centre has been defined under Section 65(27)
of the Finance Act, 1994 as under: “commercial training or coaching centre” means any institute or establishment
providing commercial training or coaching for imparting skill or knowledge or
lessons on any subject or field other than the sports, with or without issuance of
a certificate and includes coaching or tutorial classes but does not include preschool coaching and training centre or any institute or establishment which
issues any certificate or diploma or degree or any educational qualification
recognized by law for the time being in force.”
9.1.2 In terms of the above definition, any services provided for imparting skill or
knowledge or lessons on any subject of field other than the sports, was
chargeable to tax under the category of ‘commercial training or coaching centre’.
9.1.3 Definition excludes the following services from the net of tax:
 Pre-school coaching;
 Any institute or establishment which issues certificate or diploma or degree or
 Any educational qualification recognized by law and sports.
9.1.4
From the face of the invoice (copy enclosed), it could be observed that services
had been provided to the pilots for improving their skills towards air crafts. Since
the above service was not excluded from net of tax, it was chargeable to service
under the category of ‘Commercial Training or Coaching Services’. However, the
service in question has been provided to their company’s pilots outside India, the
question will arise whether service tax will be charged under reverse charge
mechanism in terms of Section 66A of the Finance Act, 1994 read with Rule
2(1)(d) of the Service Tax Rules, 1994.
9.1.5
Category of “Commercial Training or Coaching” falls under Rule 3 (iii) of
Taxation of Services (Provided from Outside India and Received in India) Rules,
2006. Service will be taxable in India if such taxable services have been
performed entirely or partially in India. In other words, if the entire service has
been performed outside India, it will not be chargeable to tax. As in the present
case, service provider viz., Rich Aviation Services and Emirates and CAE Flight
Training LLC provided services outside India, the said service was out of purview
of Rule 3(iii) of the above Rule and therefore, it was not liable to be taxed.
4
M/s KAPL furnished further submission dated 17-12-2010, under which they
furnished copies of invoices/ bills received from M/s. Honeywell for the services provided
for the year 2008-09 and copies of invoice / bill received from M/s. Jet Aviation Dubai LLC
for the services provided in the year 2009-10.
4.1
They had submitted reconciled statement of payment made and service tax paid
under the reverse charge mechanism under maintenance and repair service along with copies
of ledger accounts.
4.2
-
They further stated that:
They had hired an engine from M/s. Jet Aviation Dubai LLC during the
financial year 2009-10 on which service tax was not applicable. A copy of bill
received from M/s. Jet Aviation Dubai LLC was furnished.
They had paid amount of Rs. 41,18,511/- towards hiring of engine.
They understood that the hiring of engine for aircraft falls under the taxable
entry of ‘supply of tangible goods service’. Section 65(105)(zzz) of the Act
defines the taxable service as any service provided or to be provided to any
person, by any other person in relation to supply of tangible goods including
Page 7 of 37
machinery, equipment and appliances for use, without transferring right of
possession and effective control of such machinery, equipment and appliances.
The essential ingredients of the definition are:
o
the service provider can be any person; the service receiver can be
any other person i.e., by person other than the service provider;
o
the service must be in relation to supply of goods;
o
the goods supplied must be tangible goods, including machinery,
equipment and appliances;
o
the supply of said goods must be for use apparently by the service
receiver;
o
The supply of machinery, goods or appliances must be without
transferring right of possession and effective control of those
items. The transfer of right to use any goods was leviable to sales
tax / VAT as deemed sales of goods [Article 366(29A)(d) of the
Constitution of India].
-
They had installed the engine hired from Jet Aviation Dubai LLC in their
Hawker Aircraft. During the period of hiring of engine, the effective control
and possession of engine was with them. M/s. Jet Aviation Dubai LLC had no
control and possession of engine during the currency of hiring of engine by
them. Therefore the vital ingredient to fall under the taxable entry of supply of
tangible goods service, i.e., supply of machinery, goods or appliance must be
without transferring right of possession and effective control of those items is
missing in the above transaction and accordingly it was not service under the
category of taxable service. Hence no service tax was applicable on the said
transaction of hiring of engine.
5.
Another statement of Shri Anurag Mathur, Deputy General Manager
(Operations) of M/S KAPL was recorded on 22.12.2010. He has in his statement interalia
stated that the scope of taxable service under the category of ‘Transport of passengers
by air services’ covers only international journey and not domestic journey; that
domestic journey was not covered within the purview of service tax till 01-07-2010;
that accordingly, transport of passengers by aircraft for domestic journey was not a
service, neither exempted nor taxable; that they understood that the requirement of
maintaining CENVAT credit register for input services used for domestic journey
does not arise.
5.1
They rented an engine from M/s Jet Aviation Dubai LLC because
aircraft’s engine suffered a bird hit at Ahmedabad airport and the engine suffered a
major damage. Therefore it was necessary to remove the engine and send it for repair
purposes. Thus it was necessary to remove the engine and send it for repair at
authorized service center. To keep the aircraft flying they had to rent one engine to
replace the damaged one. Accordingly they had rented an engine from M/s. Jet
Aviation Dubai LLC. The rental charges of engine was wrongly accounted under the
head of repairs and maintenance. From the perspective of financial statement
presentation, the same was shown under the head of operating expenses. The gross
value of renting charges worked out to Rs.4,11,18,511/-. They had not paid service
tax on this value.
6.
PROVISIONS OF SUPPLY OF TANGIBLE GOODS SERVICE :-
6.1
M/s. Karnavati Aviation Pvt. Ltd. is engaged in the business of charter
operations. As a charter aircraft operator, they provide charter aircrafts on hire basis. For
this they have entered into agreement with their client’s viz., M/s. Mundra Ports & SEZ Ltd.
and M/s. Adani Power Ltd. They called these agreements in the name of “AIRCRAFT
CHARTER HIRE OR USE AGREEMENT”. From the information available it
was evident that these two companies hire the charter aircraft frequently. They were
Page 8 of 37
also having agents viz., M/s. GSEC Aviation Ltd., M/s. Saurastra Travels Pvt. Ltd.,
and M/s. Saurastra International Transport Company for booking charter aircraft.
Apart from these, they also cater to the needs of other persons or companies on
demand.
6.2
M/s KAPL operates charter service on the basis of agreement entered with the
companies but not with passengers. In fact the rate for charter operation was
determined on the basis of rate per hour or on the basis of distance of destination.
Number of passengers who travel was not relevant for them. Moreover, M/S KAPL
also provides pilots, aviation staff and other licensed crew for operation of the aircraft as
well as qualified maintenance crew for servicing of the aircraft. Therefore effective control
of the charter flight remains with the M/s KAPL.
6.3
Section 65 (105) (zzzzj) of the Finance Act, 1994 defines the taxable service as
any service provided or to be provided to any person, by any other person in relation to
supply of tangible goods including machinery, equipment and appliances for use, without
transferring right of possession and effective control of such machinery, equipment and
appliances.
6.4
The fact as admitted by M/S KAPL themselves that they own and operate a
charter flight as non-scheduled air transport services operator. They have been permitted for
the same by the Ministry of Civil Aviation. The charter flight was supplied to any person
whenever they need it, on consideration of the price mutually determined by them.
6.5
M/s KAPL has been permitted to operate and provide services as a nonscheduled operator by the Director General of Civil Aviation. Such types of services are
generally provided as a charter operation. Sub-rule 3 of Rule 134 of the Aircraft Rules, 1937
specifies that no air transport service, other than a scheduled transport service or an air
transport service to which the provisions of Sub rule 1 or 2 of Rule 134 apply, shall be
operated except with the special permission of the central government and subject to such
conditions as it may think fit to impose. This Civil Aviation Requirement contains the
requirements for grant of permit for Non-Scheduled Air Transport Services (Charter
Operations). This CAR was issued under provisions of Rule 133A of the Aircraft Rules,
1937.
6.6
Under Civil Aviation Requirement (CAR), the following definitions are given
in relation to operation carried by non- scheduled transport operators.
“Non-Scheduled air transport services(passenger) means air transport services other
than scheduled air transport services as defined in the Rule 3 of the Aircraft Rules,
1937.” Such services are also called as Non-Scheduled (air taxi) services, which may
be on charter basis and /or non- scheduled basis, the operator is not permitted to publish
time schedule and issue tickets to passengers.
“Charter operation is an operation for hire and reward in which the departure time,
departure location and arrival locations are specially negotiated with the customer or the
customer's representative for entire aircraft. No ticket is sold to individual passenger
for such operation.”
6.7
The charter operation being carried on the basis of hire and reward was same as
supply of tangible goods by the hirer, where effective control remains with the operator.
6.8
The CBEC vide letter Dy. No. 20/Comm(ST)/2009 dated 02-09-2009 has
clarified that chartering of aircrafts by a client only confers him with the right to use the
aircraft and the owner of the aircraft in such case does not transfer right of possession. As to
whether effective control over the aircrafts is transferred or not would be a question of fact
to be determined in each case. Where the crew is also provided by the owners of the aircraft
as in a wet lease of aircraft effective control is not transferred.
Page 9 of 37
6.9
Shri Anurag Mathur, authorized person of M/S KAPL in his statement dated
21-09-2010 stated that rates for charter operations were determined on mutually agreed
tariff based on destination and the number of days or time of charter hire. Their
client has to pay the agreed tariff irrespective of the number of passengers actually
carried / travelled. Moreover, it was admitted that pilots, aviation staff and other
licensed crew for operation of the aircraft as well as qualified maintenance crew for servicing
of the aircraft was provided by M/S KAPL. Therefore as per the CBEC’s above cited
clarification dated 09-02-2009, providing of charter aircraft on hire basis without transfer of
right of possession and without transfer of effective control of the charter aircraft is taxable
service under section 65(105) (zzzzj) of the Finance Act, 1994 as “supply of tangible goods
service”.
6.10
It was also noticed that M/S KAPL had started showing rate per seat
from September, 2008 onwards. On being asked if the rate for charter operations was
determined based on the negotiated amount per trip depending upon the distance of
destination, then why had they shown in their bills as rate per seat, Shri Anurag
Mathur stated that charter aircraft rate was determined on the basis of distance to be
travelled for a trip irrespective of number of passengers going to travel. However,
they showed rate per seat for the accounting purpose. Rate per seat was arrived at by
dividing rate fixed for a trip by total seating capacity of the charter flight (not by
actual number of passengers travelled).
6.11
From the copies of the agreements titled as “AIRCRAFT CHARTER HIRE &
USE AGREEMENT” entered by M/S KAPL with M/s. Mundra Port & SEZ Ltd and M/s.
Adani Power Ltd., it could be seen that the agreements contain the following terms and
conditions: i. The client would request M/S KAPL to operate either a single or a series of flights to
different destinations which would be intimated from time to time;
ii. M/S KAPL would operate the flights as and when required on a mutually agreed
tariff plus taxes (except income tax) based on destination and the number of days or
time of charter hire. Considering that the aircraft is operated by the said assessee
under non-scheduled operators permit, this flights/series of flights would be operated
as non scheduled operations;
iii. M/S KAPL would provide pilots, aviation staff and other licensed crew for operation
of the aircraft as well as qualified maintenance crew for servicing of the aircraft;
iv. The clients would have to pay M/S KAPL the agreed tariff irrespective of the
number of passengers actually carried. All these flights will be subject to due
approval by DGCA, AAI and other govt. authorities as the case may be and will
include defence authorities in case of defence areas and other foreign civil aviation
authorities in case of operations abroad;
v. Based on the fact that the client would reimburse the cost of all seats deployed for
any given flight / flights the settlement would be by means of an invoice and
individual passenger tickets need not be issued.
6.12
From the above mentioned terms and conditions, it becomes clear that the M/s
KAPL provides pilots, aviation staff and other licensed crew for the operation of the aircraft
as well as qualified maintenance crew for servicing of the aircraft. It was apparent from the
above that the said assessee only allows its clients to use their charter flights without
transferring right of possession and effective control of the charter flights. In other words,
possession and effective control of the charter flights remains with M/S KAPL. Even the title
of the agreement viz., “AIRCRAFT CHARTER HIRE & USE AGREEMENT” exemplify
that the agreement was for hiring of charter aircraft.
6.13
M/S KAPL had varied the method of billing to camouflage their hiring of
charter by showing as if bills were issued per seat basis notwithstanding their unambiguous
agreements with their clients that billing would be done on the basis of mutually agreed tariff
based on the distance of destination or hours of fly. For example, billing for the period from
Page 10 of 37
June, 2008 to November, 2008 was done on per hour basis. However, the bills issued for the
period from December, 2008 to December, 2009 show the rate per seat. Again from the
month of January, 2010 onwards, billing was done on the basis of per hour.
6.14
Similarly, there was no regularity or consistency in payment of service tax. It
could be seen that in the bills issued during the months of October, 2008 to December, 2008
i.e., from bill No. GAAPL/08-09/020 dated 16-09-2008 to GAAPL/0812/035 dated 01-122008 they have charged service tax in their bills issued to their clients even for the journey
performed within India (domestic journey). For the period from 02-12-2008 to 31-08-2009,
no service tax was charged and paid by them. However, from 01-09-2009 onwards they have
charged and paid service tax even for the journey performed within India (domestic journey).
On being asked to explain the reasons for inconsistency in charging service tax in certain
bills and not charging service tax in other bills of the same year for the same service, Shri
Anurag Mathur, authorized person of M/S KAPL could not give any valid reason for doing
so.
6.15
M/S KAPL in their reply dated 05-07-2010 had elaborated the meaning of word
“SUPPLY”, which was not of much relevant in the present context. As clarified by the
CBEC vide at para 4.4.3 of Circular/letter No. 334/1/2008-TRU dated 29-2-2008, “Proposal
is to levy service tax on such services provided in relation to supply of tangible goods,
including machinery, equipment and appliances, for use, with no legal right of possession or
effective control. Supply of tangible goods for use and leviable to VAT / sales tax as deemed
sale of goods, is not covered under the scope of the proposed service. Whether a transaction
involves transfer of possession and control is a question of facts and is to be decided based on
the terms of the contract and material facts. This could be ascertainable from the fact
whether or not VAT is payable or paid”. As stated above, possession and effective control of
the charter flight rest with M/S KAPL only. It was evident from the copies of bills that no
VAT was paid by them. All these facts demonstrate that the service provided by M/S KAPL
was appropriately covered under “Supply of tangible goods service”. Though M/S KAPL
cited this Board’s clarification, they blindfolded themselves from reading beyond the world
“supply”.
7.
PROVISIONS OF TRANSPORT OF PASSENGERS BY AIR SERVICE: -
7.1
M/S KAPL has claimed the service of charter operations under “Transport of
passengers by air service” as per Section 65(105) (zzzo) of the Finance Act, 1994. As the
said assessee claims that their service is covered under “Transport of Passengers by Air
Services”, it may be prudent to cast a view on the provisions of the Finance Act, 1994
relating to this service to under the provisions and its relevancy in the present issue.
7.2
Earlier, when “transport of passengers by air service” was levied under Section
65 (105) (zzzo) of the Finance Act, 1994 w.e.f. 1-5-2006, taxable service was defined as ‘any
service provided or to be provided to any passenger, by an aircraft operator, in relation to
scheduled or non-scheduled air transport of such passenger embarking in India for
international journey, in any class other than economy class. In addition, the definition also
contained Explanations 1 and 2 providing meaning of economy class’.
7.3
However, with effect from 01-07-2010, sub-clause (zzzo) of section 65 (105)
defining taxable service has been substituted by the Finance Act, 2010 to provide that taxable
service means ‘any service provided or to be provided to any passenger, by a aircraft
operator, in relation to scheduled or non-scheduled air transport of such passenger embarking
in India for domestic journey or international journey’.
7.4
Thus, if service provider is the ‘aircraft operator’, i.e., any person who provides
the service of transport of passengers by aircraft, and service receiver is the passenger, i.e.,
any person boarding an aircraft in India for performing domestic or international journey,
then the service is liable for service tax under transport of passenger by air service.
Moreover, Notification No. 26/2010-Service Tax dated 22-06-2010 prescribes effective rate
Page 11 of 37
of service tax under Transport of passengers by air service (w.e.f. 1.7.2010) as defined under
Section 65(105)(zzzo) of the Act at :
(a) ten percent of the gross value of the ticket or rupees one hundred per journey,
whichever is less, for passengers travelling in any class, within India;
(b) ten percent of the gross value of the ticket or rupees five hundred per journey,
whichever is less, for passengers embarking in India for an international journey in
economy class:
7.5.
In the instant case, it was clearly established from the documents adduced from
M/s KAPL and admitted by them that they do not provide any service to any passenger.
They provide charter aircraft on hire basis to the companies. Their rate was determined on the
basis of duration of flying or on the basis of distance of destination. They do not issue any
ticket to the passengers. They do not ask for name of passengers who were going to travel.
This was because their charter rate was nothing to do with the passengers. The passengers
who had travelled in the charter aircraft had not made any payment for the journey. The
payment was made by the company which hired the aircraft. Therefore, provisions of
transport of passengers by air service was not applicable to the service of charter operation
provided on hire by M/S KAPL.
7.6
The Office of the Director General of Civil Aviation, New Delhi has issued
“CIVIL AVIATION REQUIREMENT – SECTION 3 AIR TRANSPORT SERIES ‘C’
PART-V” prescribing “MINIMUM REQUIREMENTS FOR GRANT OF PERMIT TO
OPERATE NON-SCHEDULED AIR TRANSPORT SERVICES (CHARTER
OPERATION)’ on 17th May, 2000, where in it is clearly defined that, “Charter operation is
an operation for hire and reward in which the departure time, departure location and arrival
locations are specially negotiated with the customer or the customer’s representative for
entire aircraft. No ticket is sold to individual passenger for such operation”.
7.7
In the instant case, M/S KAPL had not issued tickets to passengers. They had
produced copies of invoices issued to the firms’ such as M/s. Adani Power Ltd., Mundra Port
& SEZ Ltd., M/s. SITC, M/s. GSEC Aviation Ltd., etc. Therefore, the services provided by
M/s KAPL appeared to be not covered under “Transport of Passengers by Air Service”.
7.8
Contrary to their claim they had paid service tax in respect of the bills issued in
the month of October, 2008 to December, 2008 i.e., from bill No. GAAPL/08-09/020 dated
16-09-2008 to GAAPL/0812/035 dated 01-12-2008 and in respect of bills issued from 01-092009 i.e., bill No. M/S KAPL/0078/09-10 onwards they have charged and paid service tax
even for the journey performed within India (domestic journey). This clearly proves that
they were aware of their service tax liability. But they intentionally misled the department as
if their service was not liable to service tax in the garb of transport of passengers by air
service. Shri Anurag Mathur, authorized person of M/s KAPL in his statement dated 21-092010 did not give any reason for making payment under transport of passengers by air
service in respect of domestic journey.
7.9
Therefore, the service rendered by them was appropriately covered under the
supply of tangible goods service, as discussed above.
8.
PROVISIONS RELATING TO CLASSIFICATION OF SERVICES:
8.1
Method to be adopted to classify a service is enunciated in Section 65A of the
Finance Act, 1994. In light of the guidelines set at sub-section (2)(a) of Section 65A of the
Finance Act, 1994, it could be said that M/s KAPL had hid the facts regarding the mode of
operation and transaction carried with their clients / companies but not with passengers, and
claimed and obtained service tax registration under “Transport of Passengers by Air Service”
as per section 65(105)(zzzo) of the Finance Act, 1994. For this purpose, they raised the bills
on per seat basis even though the charges were collected from the companies for the whole
charter flight irrespective of the number of passengers travelled. Thus, their service appeared
Page 12 of 37
to be appropriately classifiable under “supply of tangible goods service” as discussed herein
above as per Section 65 (105)(zzzzj) of the Finance Act, 1994.
9.
PROVISIONS
SERVICES:
RELATING
TO
DETERMINATION
OF
VALUE
OF
9.1
Provisions relating to determination of valuation of taxable service for charging
service tax was provided under Section 67 of the Finance Act, 1994. As per this section,
value for the purpose of charging service tax shall be the gross amount charged by the service
provider for such service provided or to be provided by them. In the instant case, M/s KAPL
has excluded certain value under garb of crew subsistence, handling charges, aircraft
detention or extension of watch. No such provisions exists in this section to exclude value of
these charges. Therefore, M/S KAPL was liable for pay service tax on the gross value of
services charged to their customers.
9.2
M/s KAPL was liable to pay service tax of Rs. 2,94,31,475/- (Rupees two crore
ninety four lakh thirty one thousand four hundred seventy five only) under “supply of
tangible goods service”, for the period from 18-06-2008 to 31-03-2010, as detailed and
quantified in Annexure A, attached with the show cause notice. M/s KAPL had paid service
tax of Rs.1,20,39,331/- (Rs. 16,93,902/- in the year 2008-09 and Rs.1,03,45,426/- in the year
2009-10) under transport of passengers by air service. Bill-wise information giving details of
value of services, service tax charged and service tax paid (as given in ST-3 returns) was
given in Annexure A. This had resulted in short payment of service tax of Rs. 1,73,92,144/(Rupees one crore seventy three lakh ninety two thousand one hundred forty four only). The
same was required to be recovered from them along with interest. Abstracts of ST-3 returns
showing payment of service tax in the year 2008-09 and 2009-10 was provided in Annexure
– B.
10.
SERVICE TAX ON TAXABLE SERVICES PROVIDED RECEIVED FROM
OUTSIDE INDIA AND RECEIVED IN INDIA UNDER SECTION – 66A OF THE
FINANCE ACT, 1994:
From the copies of balance sheets of M/s KAPL, it was found that they had
incurred expenditure in foreign currency during the years 2008-09 and 2009-10 respectively.
The expenditure was incurred towards interest charges paid to foreign bank, purchase of
navigation data and books & periodicals, aircraft fuels, airport charges, processing fees,
repair and maintenance of aircraft, training expenses, etc. It appeared that expenditure made
for processing fees paid to foreign banks, payments made for training, payments made for
maintenance and repair, payment made for inspection charges and payment made for hiring
of aircraft were liable for payment of service tax under “Banking and other financial
services”, “Commercial training or coaching services” “Management, maintenance or repair
services”, “Technical inspection and certification service” and “supply of tangible goods
services” as these expenditures incurred against receipt of taxable services from the service
providers who have permanent address or usual place of residence, in a country other than
India. But M/s KAPL had not paid service tax payable thereon as provided under Section
66A of the Finance Act, 1994 read with Taxation of Services (Provided from Outside India
and Received in India) Rules, 2006 and Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. The
details are explained as under:
10.1
PROVISIONS RELATING TO “BANKING & OTHER FINANCIAL
SERVICES:
10.1.1
From the information furnished by M/s KAPL, it was found that they had
borrowed External Commercial Borrowing (ECB) of US$ 18,800,000 from Export
Development Canada arranged through its office located at 151 O’Connor Street, Ottawa,
Canada, K1A 1K3 in the month of October, 2009. Arranger charged commission / fee on
this ECB. This service falls under Banking and other financial services as defined under
Section 65 (105)(zm) of the Finance Act, 1994.
Page 13 of 37
10.1.2
The CBEC, New Delhi vide letter F. No. 275/7/2010-CX.8A dated 30-06-2010
had clarified that the levy of service tax on taxable services received in India from a nonresident, not having any office in India, arises on reverse charge basis, w.e.f.1.1.2005 as has
been upheld by the Apex Court in the cases M/s. Hindustan Zinc Ltd and M/s. Aditya
Cement Ltd.
10.1.3
It was evident that service provider viz., Export Development Canada arranged
through its office located at 151 O’Connor Street, Ottawa, Canada, K1A 1K3 is a non
resident firm, not having any office in India. Therefore, M/S KAPL was liable to pay service
tax on the amount of commission paid for ECB on reverse charge basis.
10.1.4
M/S KAPL has not paid service tax till the same was pointed out by the
DGCEI. They admitted their lapse and paid service tax payable thereon along with interest
i.e., service tax of Rs. 5,24,537/- and interest of Rs. 23,427/- through e-payment dated 18-062010. Details of service tax paid on the value of commercial charges was given in
Annexure-C-1 enclosed with the notice.
10.2
PROVISIONS RELATING TO MANAGEMENT, MAINTENANCE OR
REPAIR SERVICES:
10.2.1
As per section 65(105)(zzg) of the Finance Act, 1994 the taxable service
(management, maintenance or repair services) means any service provided or to be provided
to any person, by any person in relation to management, maintenance or repair.
10.2.2
M/s KAPL in their letter dated 30-11-2010 submitted that foreign currency
expenditure as given at Sr. No. 3 to 7 & 9 and 10 of table of Para 3.4 above, were incurred
for subscription of navigation data, height monitoring data, subscription for technical
publications, etc. But by mistake, they had showed these expenses under repairs and
maintenance of aircraft service. Perusal of invoices furnished by M/s KAPL showed that
these expenses appeared to have been wrongly shown under repair and maintenance.
Therefore, these expenses appeared to be relating to purchase of data and not taxable.
10.2.3
Further M/s KAPL vide their letter dated 17-12-2010 stated that the expenses
of Rs. 41,18,511/- shown under maintenance and repair in 2009-10 (as given at Sr. No. 2 of
table of Para 3 above), were in fact pertaining to rental charges paid for hiring of engine for
aircraft from M/s. Jet Aviation Dubai LLC but wrongly accounted for under maintenance and
repair head. Therefore for charging service tax on hiring of engine, the issue is dealt under
“Supply of tangible goods service”, which is discussed at para 8.3 of the show cause notice
(para 10.3 of this order).
10.2.4
From the ledger accounts of expenditure made in foreign currency, it was found
that they paid Rs.7,19,79,914/- in 2008-09 and Rs. 92,06,735/- in 2009-10 towards
maintenance and repair. The value of expenditure shown in this ledger account includes
value of spare parts also. As the value of parts, do not form part of service, they were
excluded from the taxable value. In view of the above, service tax payable under
maintenance and repair service work out to Rs. 26,36,513/-. They had made payment of
service tax of Rs. 10,51,504/- as per their own assessment and reported in ST-3 returns. This
has resulted in short payment of service tax of Rs. 15,85,009/-. During the course of
investigation, they had paid service tax of Rs. 15,85,009/- along with interest of Rs.
2,70,322/-. Detailed information such as value of services and service tax payable,
service tax short paid and service tax paid during the course of investigation was given in
Annexure – C-2 enclosed to the notice.
10.3 PROVISIONS RELATING TO
HIRING CHARTER AIRCRAFT AND
ENGINE OF AIRCRAFT FROM OUTSIDE INDIA (SUPPLY OF TANGIBLE
GOODS SERVICES):
Page 14 of 37
10.3.1
From the information obtained from M/s KAPL, it was found that they had
hired a charter aircraft from M/s. Kellett & Singleton Aviation and entered into an agreement
on 22-10-2009 to operate between Ahmedabad-Moscow-Ahmedabad. As per the agreement
Charter price of EURO 1,62,500 should be paid in full, cleared funds prior to commencement
of the flight departure from base airport. Charter price includes the costs incurred in the
operation of the aircraft, the cost of crew, fuel, oil, lubricants, maintenance, insurance,
landing and navigation fees, airport charges, and similar operational expenses and ground
transportation of passengers. The charter price was not determined on the basis of number of
passenger to be travelled.
10.3.2
M/S KAPL vide their letter dated 30-11-2010 had claimed that the hiring of
charter aircraft under Transport of passengers by air service as defined under Section 65(
105)(zzzo) of the Finance Act, 1994 and claimed exemption from payment of service tax
under Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in
India) Rules, 2006. The contention of M/S KAPL is contrary to the provisions of Section 65A of the Finance Act, 1994.
10.3.3
From the above, it could be said that M/S KAPL had hired charted aircraft from
M/ s. Kellett & Singleton Aviation, who had provided charter hiring service from outside
India. Classification of hiring of charter based on negotiated price depending on the distance
to be travelled or flying time but not on the basis of number of passengers who travel was
appropriately classifiable under "Supply of tangible goods service" Section 65( 105)(zzzzj) of
the Finance Act, 1994, as discussed in detail supra.
10.3.4
Since the service provided from outside India, the liability to pay service tax lie
on M/S KAPL as provided under Section 66A of the Finance Act, 1994 read with Rule 3(iii)
of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. In
Rule 3(iii) of the said Rules, 2006, the criterion prescribed for charging service tax on
"supply of tangible goods service" received from outside India on reverse charge basis is that
the location of recipient of service in India. In the instant case, M/S KAPL is located in India.
They being the service receiver, they were liable to pay service tax on services received from
outside India on reverse charge basis.
10.3.5
Similarly in another case, M/S KAPL had hired aircraft engine from M/s. Jet
Aviation Dubai LLC and paid Rs. 41,18,511/- as rental charges in the year 2009-10. They
showed in their ledger account under maintenance and repair expenses but not paid service
tax payable thereon. On being asked to furnish the copy of invoice and to give reason for not
paying service tax, they, vide their letter dated 17-12-2010, claimed that this expense was
wrongly shown under maintenance and repair. In fact it relates to hiring of aircraft engine
from M/ s. Jet Aviation Dubai LLC. They contention was that no service tax was payable on
this expenses because they hired aircraft engine. The contention of M/S KAPL was not
tenable because the right of possession was not transferred i.e., M/ s. Jet Aviation Dubai LLC
remained the owner of the engine and after usage, the said engine was returned to the owner.
Moreover, M/S KAPL had not paid any sales tax / VAT. The CBEC vide D.O.F. No.
334/1/2008-TRU dated 29-02-2008 clarified that "Whether a transaction involves transfer of
possession and control is a question of fact and is to be decided based on the terms of the
contract and other material facts. This could be ascertainable from the fact whether or not
VAT is payable or paid." As no VAT is paid in this transaction, it attracts service tax.
10.3.6
It was seen from the ledger account of the year 2009-10 that they paid Rs.
1,55,08,542/- towards hire charges(Rs. 1,13,90,031/- towards Aircraft Hiring to M / s. Kellet
& Singleton Investment Ltd, Dubai, UAE & Rs. 41,18,511/- to M/s. Jet Aviation Dubai LLC
towards hiring of aircraft engine). But no service tax was paid on this value of hiring charges.
In these cases, they were liable to pay service tax on reverse charge mechanism under supply
of tangible goods services. • The service tax payable work out to Rs. 15,97,380/(includes
education cess and Secondary & Higher Education Cess). The same was required to be
recovered along with interest. Information regarding value of services and service tax
payable is provided in Annexure - C-3 enclosed with the notice.
Page 15 of 37
11.
PROVISIONS RELATING TO CENVAT CREDIT:
11.1
Even if it were to be presumed that the said assessee’s contention of
hiring of charter flight is covered under Transport of passengers by air service,
services provided to passengers for the domestic journey is exempt from payment of
service tax whereas service provided to international journey is chargeable to service
tax during the period under investigation i.e., from June, 2008 to March, 2010. It is
found that they are availing CENVAT credit. They have not produced any document
evidencing maintenance of separate accounts for receipt, consumption and inventory
of input services meant for use in providing output services and the quantity of input
service meant for use in the exempted services and take CENVAT credit only on that
quantity of input services which is intended for use in providing output service on
which service tax is payable.
11.2
Rule 6 (1) of CENVAT Credit Rules, 2004 stipulates that CENVAT credit
shall not be allowed on such quantity of input service which is used for provision of exempted
services, except in the circumstances mentioned in sub-rule (2). In the sub-rule (2) of this
rule says that where provider of output service avails of CENVAT credit in respect of any
input services, and provides such output service which are chargeable to tax as well as
exempted services, then, the provider of output service shall maintain separate accounts for
receipt, consumption and inventory of input and input service meant for use in providing
output service and the quantity of input meant for use in the exempted services and take
CENVAT credit only on that quantity of input service which is intended for use in providing
output service on which service tax is payable. Sub-rule (3)(i) of this rule further provides
that the provider of output service, opting not to maintain separate accounts, the provider of
output service shall pay an amount equal to eight per cent. of value of the exempted services.
Amount to be paid is at ther rate of 6% from 07-07-2009. Option provided in sub-rule (3)(ii)
may not be available to them as they have not followed the procedure and fulfilled the
conditions set out in sub-rule (3A) of this rule.
11.3
On being asked to produce CENVAT credit register maintained for input
services used providing exempted services, Shri Anurag Mathur in his statement
dated 22-12-2010 stated that the scope of taxable service under the category of
transport of passengers by air services covers only international journey and not
domestic journey. Domestic journey was not covered within the purview of service
tax till 01-07-2010. Accordingly, transport of passengers by aircraft for domestic
journey is not a service, neither exempted nor taxable. Accordingly, they understood
that the requirement of maintaining CENVAT credit register for input services used
for domestic journey does not arise.
11.4
It is seen from the information furnished by them that gross value of
exempted services provided was Rs. 11,96,02,749/-. As they had not maintained
separate CENVAT credit account as per sub-rule (2) of Rule 6 of CENVAT Credit
Rules, 2004, they should have paid an amount equal to eight per cent. of value of the
exempted service, till 06-07-2009. From 07-07-2009, the amount payable under this rule is
at six per cent of the value of exempted services. The value of exempted services provided
and amount to be paid is as under: Sr.
No.
1
2
Period
18-06-2008 To 06-07-2009
07-07-2009 to 31-08-2009
TOTAL
Value of exempted
services provided
10,49,86,451
1,46,16,298
11,96,02,749
Rate of
payment
8%
6%
Amount payable
83,98,916
8,76,978
92,75,894
11.5
It could be seen from the above that they should have paid an amount of Rs.
92,75,894/- as per Rule 6(3)(i) of CENVAT Credit Rules, 2004. As they had not paid this
Page 16 of 37
amount, the same was required to be recovered from them under Rule 14 of CENVAT Credit
Rules, 2004 read with Section 73 of the Finance Act, 1994.
12
In view of above, it appeared that M/s KAPL had not paid service tax by
suppression of facts and in contravention of provisions of the Finance Act, 1994 relating to
levy and collection of service tax and Rules made there under with an intent to evade the
payment of service tax. M/s KAPL intentionally did not include the gross value of receipt of
charter operation in their ST-3 returns. M/s KAPL had also subverted the provisions of the
Finance Act, 1994 by mis-classifying their service under “Transport of passenger by air
service” with an intention to evade payment of duty statutorily payable under “Supply of
tangible goods service”. Their ploy of misclassification was exposed by their own action by
paying service tax as per their whim and wishes and not adhering to the statutory provisions
by randomly charging service tax on certain bills and not charging service tax on other bills.
12.1
Similarly, M/s KAPL had suppressed the facts regarding commercial charges
paid for availing ECB to a foreign entity not having office in India with an intention to evade
payment of service tax. Further, M/s KAPL had also suppressed the charges paid for receipt
of taxable services of “technical inspection and certification services”, “management,
maintenance or repair services” and “supply of tangible goods services”.
12.3
Further M/s KAPL had availed CENVAT credit on input services which were
used in providing taxable services as well as exempted services. They neither maintained
separate accounts of inputs services used in taxable services and exempted services nor paid
an amount at the rate specified under Rule – 6(3)(i) of CENVAT Credit Rules, 2004. They
suppressed this fact from the department with an intention to avail CENVAT credit on input
services used in providing exempted services also, and to evade payment of service tax
through cash / PLA.
12.4
Therefore, it appeared that the proviso to subsection [1] of Section 73 of the
Finance Act, 1994 was applicable to invoke the extended period of five years for the recovery
of service tax short paid / not paid by them.
13.
In view of the above, it appeared that the said assessee had contravened the
provisions of:
>
Section 65A of the Finance Act, 1994 in as much as they have mis-classified their
service of “supply of tangible goods service”;
>
Section 66A of the Finance Act, 1994 in as much as they suppressed the facts of
availing of services from the foreign entity not having office India and for not paying
service tax under “banking and other financial services”, “technical inspection and
certification services”, “management, maintenance or repair services” and “supply of
tangible goods services” with an intention to evade payment of service tax;
>
Section 67 of the Finance Act, 1994 in as much as they failed to pay appropriate
service tax on the gross value amount charged by them for service of supply of
tangible goods service provided by them and banking and other financial services,
“technical inspection and certification services”, “management, maintenance or repair
services” and “supply of tangible goods services” received from the foreign bank not
having office in India as service was provided by the service recipient himself in
India;
>
Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994,
in-as-much as they have not paid service tax as detailed in Annexure-A to the notice
to the credit of the Government of India;
>
Section 69 of the Finance Act, 1994 read with Rule – 4 of the Service Tax Rules, 1994
in as much as they failed to obtain service tax registration under “banking and other
financial services”, “technical inspection and certification services”, and “supply of
tangible goods services”;
>
Section 70 of the Finance Act, 1994 read with Rule 7 of the Service Tax Rules, 1994,
in as much as they had not declared the correct value of taxable service to the
department in the prescribed return in form ST-3.
Page 17 of 37
>
Rule 6 of CENVAT Credit Rules, 2004 in as much as they have failed to maintain
separate account of input services used for providing exempted output services and not
paid an amount at the rate specified therein;
13.1
M/s KAPL had short paid / not paid the service tax, therefore, it appeared that
they were liable to penal action under Section 76 of the Finance Act, 1994.
13.2
Further, it appeared that M/s KAPL had suppressed/concealed the value of
taxable service with an intent to evade payment of service tax. They had not paid service tax
by way of suppression of facts and contravened the provisions of Finance Act, 1994 relating
to levy and collection of service tax and Rules made there under and provisions of CENVAT
Credit Rules, 2004 with intent to evade payment of service tax. It therefore, appeared that
M/s KAPL was liable to penal action under Section 78 of the Finance Act, 1994.
14.
Therefore a show cause notice bearing F.No.DGCEI/AZU/36-98/2010-11 dated
05.01.2011 was issued to M/s. Karnavati Aviation Pvt. Ltd., having office at Shikhar,
Ground Floor, Nr. Railway Crossing, Navrangpura, Ahmedabad calling upon them to show
cause to the Commissioner of Service Tax, Ahmedabad, having his office at 1st Floor,
Central Excise Bhavan, Nr. Panjra Pole, Ambavadi, Ahmedabad – 380 015 as to why:i.
The service of charter operation provided should not be classified under “Supply of
tangible goods services” as defined under Section 65 (105)(zzzzj) of the Finance Act,
1994 read with Section 65A ibid.
ii.
Service Tax amounting to Rs. 1,73,92,144/- (Rupees one crore seventy three lakh
ninety two thousand one hundred forty four only ), (includes Education Cess and
Secondary and Higher Education Cess) which was short paid by them during the years
2008-09 and 2009-10, as per Annexure – A, should not be demanded and recovered
from them under Section 73 of the Finance Act, 1994 by invoking extended period of
five years as per proviso to sub-section (1) of said Section;
iii.
Interest at appropriate rate should not be demanded and recovered from them on
service tax not paid as mentioned at (ii) above, under the provisions of Section 75 of
the Finance Act, 1994;
iv.
Service tax of Rs. 5,24,537/- (includes Education Cess and Secondary and Higher
Education Cess) payable on the commission paid to foreign bank / institution not
having office India under “Banking and other financial services”, as per Annexure –
C-1, should not be demanded and recovered under Section 73 of the Finance Act,
1994 by invoking extended period of five years as per proviso to sub-section (1) of
said Section;
v.
Service tax of Rs. 5,24,537/- (includes Education Cess and Secondary and Higher
Education Cess) paid on the commission paid to foreign bank / institution not having
office India should not appropriated against their service tax liability as mentioned at
(iv) above.
vi.
Interest at appropriate rate should not be demanded and recovered from them on
service tax not paid as mentioned at (iv) above, under the provisions of Section 75 of
the Finance Act, 1994;
vii.
Interest of Rs. 23,427/- paid by them should not be appropriated against their interest
liability as mentioned at (vi) above.
viii.
Service tax of Rs. 15,85,009/- (includes Education Cess and Secondary and Higher
Education Cess) which was short paid on the value of services received from the
service providers not having office in India under “management, maintenance or
repair services” as per Annexure – C-2, should not be demanded and recovered under
Page 18 of 37
Section 73 of the Finance Act, 1994 by invoking extended period of five years as per
proviso to sub-section (1) of said Section;
ix.
Service tax of Rs. 15,85,009/- (includes Education Cess and Secondary and Higher
Education Cess) paid during the course of investigation on the value of payments
made in foreign currency to service providers not having office India should not
appropriated against their service tax liability as mentioned at (viii) above.
x.
Interest at appropriate rate should not be demanded and recovered from them on
service tax not paid as mentioned at (viii) above, under the provisions of Section 75 of
the Finance Act, 1994;
xi.
Interest of Rs. 2,70,322/- paid by them should not be appropriated against their interest
liability as mentioned at (x) above.
xii.
Service tax of Rs. 15,97,380/- (includes Education Cess and Secondary and Higher
Education Cess) payable on the payments made in foreign currency to service
providers not having office in India under “supply of tangible goods services” as per
Annexure – C-3, should not be demanded and recovered under Section 73 of the
Finance Act, 1994 by invoking extended period of five years as per proviso to subsection (1) of said Section;
xiii.
Interest at appropriate rate should not be demanded and recovered from them on
service tax not paid as mentioned at (xii) above, under the provisions of Section 75 of
the Finance Act, 1994;
xiv.
Amount of Rs. 92,75,894/- not paid in terms of Rule 6(3) of CENVAT Credit Rules,
2004 should not be recovered under Rule – 14 of CENVAT Credit Rules, 2004 read
with Section 73(1) of the Finance Act, 1994;
xv.
Interest at appropriate rate should not be demanded and recovered from them on the
amount not paid as mentioned at (xiv) above, under the provisions of Section 75 of the
Finance Act, 1994;
xvi.
Penalty under the provisions of Section 76 of the Finance Act, 1994, as amended,
should not be imposed on them for failure to pay Service Tax, as mentioned
hereinabove;
xvii.
Penalty under Section 77 of the Finance Act, 1994, as amended, should not be
imposed on them for violation of provisions of Section 65A, Section – 66A, Section –
69 and Section 70 of the Finance Act, 1994, and rules made thereunder;
xviii.
Penalty under Section 78 of the Finance Act, 1994, as amended, should not be
imposed on them for suppressing the full value of taxable services and material facts
from the department resulting into short payment / non-payment of Service Tax,
Education Cess and Secondary & Higher Education Cess as mentioned herein above.
15. DEFENCE REPLY FILED BY M/S KARNAVATI AVIATION
PRIVATE LIMITED ON DATED 04.02.2011.
15.1
The demand raised by the Department is erroneous and bad in law and has been
made without a proper understanding of the true nature and essence of the services rendered
by the Noticee.
Page 19 of 37
PROVIDING CHARTER FLIGHT TO VARIOUS ORGANIZATIONS:
15.2
They were not liable to pay service tax under the category of the “Supply of
Tangible Goods service” in view of the following:
 the taxing entry of “Supply of Tangible Goods Service” gets attracted only in
case where there is a “supply” of aircraft. The concept of “supply” has been
examined in the judgement of the Hon’ble High Court in Somnath Rath v.
Bikram Deshari Arukh (AIR 1999 Orr 110), where the Hon’ble Court has
taken the view that the word “supply” is to be construed as being akin to a
transaction of sale and dispatch. In this regard they have relied on the
following:
TRU Circular No. D.O. F. No.334/1/2008-TRU dated 29.2.2008
Circular F.No. 354/63/2008-TRU dated 18.06.2008
Navin Chemicals Mfg. & Trading Co. Ltd. v. Collector of Customs,
(1993) 4 SCC 320
C.K.P. Mandal v. Commissioner of Central Excise, Mumbai, 2006(4)
STR 183 (Bom.)
Recent decision of the Hon’ble High Court in Indian National
Shipowners’ Association v. Union of India 2009[14]S.T.R.289
Circular Dy.No 20/Comm (ST)/2009 dated 7th February, 2009.
 Any service provided or to be provided to any passenger, by an aircraft
operator, in relation to non-scheduled air transport of such passenger
embarking in India for international journey is already covered under the taxing
entry as laid down under Section 65(105)(zzzo). Therefore, the above Circular
dated 7th February, 2009 can be interpreted only to mean that only the act of
giving the right to use the aircraft by such non-schedule aircraft operator can be
brought within the purview of “Supply of Tangible Goods Service” and not an
activity of transportation. In this regard they have placed reliance on the case
namely Bimetal Bearings Limited and Ennore Foundries Limited v. CCE
2009 (163) ECR 85 (Tri.-Chennai). Further, as per the Indian National
Shipowners’ Association (Supra) as well as Circular Dy.No 20/Comm
(ST)/2009, what is covered within the purview of the taxing entry “Supply of
Tangible Goods Service” is the chartering of aircraft, thereby meaning the hire
of aircraft for temporary use. The service provided by the Noticee is essentially
for the transportation of passengers. It does not involve the letting out of the
aircraft for use by the Clients, but involves the execution of transportation of
the passengers to their pre-determined destinations.
 the taxing entry of “Supply of Tangible Goods Service” is applicable in a
situation where there is a “supply of goods” per se. In order for the said taxing
to apply, it is essential that the recipient of services is provided with the goods,
which he is free to use in any manner desired by him. The service obligation
gets discharged when the supply is completed and there is clearly no
contemplation of a rendition of service beyond such supply. The service
recipient may use the goods supplied to him in any manner which he desires.
 It is settled law declared by the Hon’ble Supreme Court that a tax can only be
levied in terms of the clear language used by the Legislature in a taxing entry.
There can be no imposition of tax by implication or conjecture. A transaction
is either directly the subject matter of the tax sought to be imposed by the
taxing entry, or failing that cannot be taxed under the particular taxing entry.
Once the true nature of the transaction in question has been determined, a
transaction can only be taxed if it falls within the four corners of the provisions
of the taxing statute. In this regard, reference can be made to the following
decisions:
CCE v/s Acer India Limited 2004 (172) ELT 289 (SC)
Page 20 of 37
-
I.T.C. LTD. Vs. Union OF India 1991 (53) E.L.T. 234 (Cal.)
A V Fernandes vs. The State of Kerala (AIR 1957 SC 657)
 For determining the issue of liability to Service tax, the Ministry of Finance has
by its Circular D.O.F.NO.334/4/2006-TRU dated 28.2.2006 reiterated the
settled law on the issue of taxability to the effect that before determining the
taxability of a transaction, it is essential to first determine the true commercial
nature of the transaction in question. Hence, it is clear that if the essence / true
commercial nature of the contract is “supply” of tangible goods i.e. supply of the
Aircraft per se, clearly the Noticee is liable to pay Service tax under the taxing
entry of “Supply of Tangible Goods Service”. If however, the essence / true
nature of the contract do not involve “supply”, the services are not liable to
Service tax under the said taxing entry. They have placed reliance on the
following cases:
- UOI vs. Playworld Electronics Private Ltd (AIR 1990 SC 2002)
- Amaresh Enterprises vs. CCE [2007(8) STR 611 (Tri.-Kol.))
 If discharge of the contract is accomplished only by undertaking the journey, the
essence of the contract is a contract of carriage. However, if the discharge of the
contract is completed the moment Aircraft is supplied for use; it is a contract for
supply as against a contract for carriage. In the present case, the true commercial
nature of the contract is that it is a contract for ensuring that client’s can travel
domestically on the aircraft between pre-determined sectors. As per the settled
law, the taxability of the contract and the activities undertaken thereunder will
have to be determined on the basis of the true commercial nature of the contract.
In terms of the true commercial nature of the contract in question, it cannot be
classified or taxed under the taxing entry for the “Supply of Tangible Goods
service” and will require to be classified under the taxing entry for
“Transportation of Passengers Embarking in India for International Journey by
Air Service”.
 It is submitted that in respect of services provided to their clients, clearly the
essence of the contractual arrangement is the rendition of services of
transportation and not supply of Aircraft per se. It is submitted that in respect of
such services undertaken by them it is clear that:
(i) The true nature of the transaction emanates from the fact that the service
obligation is tied into the factor of transportation of the passengers from one
destination to another, and the activity is not merely a supply of aircraft. The
service offered is not directed on the aircraft, but it undertakes the journey
which the client, desires to take;
(ii) The clients have to communicate to the Noticee the destination and forward/
return routes. Each such flight is for undertaking a journey between such
destinations;
(iii) All permissions related to the flight, arrangements for refueling at
destination, inspection, flying crew, ground crew etc. are based upon the
activity of transportation of the Passengers from one destination to another;
(iv) The clients are not allowed to alter their plans or direct the aircraft to other
destinations or to operate the aircraft with their crew or otherwise deal with
the aircraft if the aircraft belonged to them i.e. the client has no say as to how
the aircraft is operated in rendering that service and the service essentially
remains specific to the particular destination so chosen and pre-determined
by the clients.
(v) The amount is also negotiated on the basis of sector proposed to be travelled
by the client. The Invoice clearly states that the charge is for the sectors
travelled specified in the Invoice. Hence, it is a clear commercial
understanding that the charge is for a sector basis. Clearly the true nature of
activity is providing transportation services.
Page 21 of 37
 the manner in which payments are made cannot be determinative of the nature of
services rendered by the Noticee. Clearly, the nature of services has to be
determined based on the commercial obligation under the contract and not based
upon whether the payments are hourly or on a per passenger basis. The
commercial obligation under the contract is to transport the passengers from one
destination to another. The commercial obligation is not discharged merely by
supply of aircraft.
 the transportation undertaken by the Noticee is destination specific, wherein the
destinations are pre-determined by the clients and the Noticees undertake to
transport the passengers to the said destination. The mere fact of charging of the
Clients on a per hour basis or agreed tariff value, does not alter the fact that the
Noticees, on every such event of transportation, undertake to transport the
passenger to a particular destination (as pre-determined by Clients). The Invoice
raised on seat basis or agreed tariff value basis is merely a method of calculating
consideration and cannot not lead to a conclusion that the obligation under the
contract was to ‘Supply’. the fact that the consideration under the contract is
based on a per hour of operation or agreed tariff value from one destination to
another as opposed to per hour of making the aircraft available to their clients, is
infact clearly indicative of the fact that the service is not completed merely by
supply of the aircraft but for transportation of passengers from one destination to
another.
 In the case of the Nagpur Electric Light and Power Co., Ltd. and Ors. v. K.
Shreepathirao AIR 1958 SC 658, the apex Court declared the settled position
of law that a definition clause in an enactment must derive its meaning from the
context or subject. Therefore, the taxability is required to be determined based on
the definition of Taxable service of “Supply of Tangible Goods Service” and not
based on the mode of payment. A comparison can be made to the service of
transportation of goods by roads with transportation by Air. The rendition of
service occurs with the completion of transportation of goods to the predetermined destination. In such a situation, if the Service Provider decides to
charge on the basis of number of hours it took to deliver the goods or agreed
tariff rate, then that does not alter the nature of transaction which is
transportation of goods and make it liable under the entry of “Supply of Tangible
goods for use”.
 In this regard, similar to the decision of the Hon’ble Supreme Court in UOI vs
Gosalia Shipping (Pvt.) Ltd [1978] 113 ITR 307(SC) the payments were made
for undertaking the activity of transportation. The nature of the contract is in the
nature of voyage charter and not time charter. Once the sectors for which the
travel is to be undertaken is decided, the client has no discretion whatsoever to
either alter the course or use the Aircraft in any other manner. The Aircraft can
only be used for transportation on a pre-determined sector. The mode of payment
cannot alter the nature of service.
 If the interpretation of the Department that the terms “supply” has relevance with
reference to “use” is accepted, then:
(a)
If the equipment is supplied without any earmarked use or if the
equipment supplied is not used at all by the service recipient there would
be no liability to Service tax;
(b)
any specific use of equipment for rendition of any service by the
equipment operator e.g. use of equipment by a contractor for
construction service or erection and commissioning activities etc. would
get classified under the taxing entry of “Supply of Tangible Goods
Service”.
Page 22 of 37
This is not the interpretation that is intended to be put forth by the
Legislature which wants to tax any “supply” as opposed to any “supply for use”,
as is clear from the Circular F.No. 354/63/2008-TRU dated 18.06.2008
 The taxing entry of “Supply of Tangible Goods Service” is applicable in a
situation where the there is a “supply of goods” per se. In order for the said
taxing to apply, it is essential that the recipient of services is provided with the
goods, which he is free to use in any manner desired by him. The service
obligation gets discharged when the supply is completed and there is clearly no
contemplation of a rendition of service beyond such supply. The service recipient
may use the goods supplied to him in any manner which he desires.
 The taxing entry of “Supply of Tangible Goods Service” gets attracted only in
case where there is a “supply” of aircraft. In order for the said taxing to apply, it
is essential that the recipient of services is provided with the goods, which he is
free to use in any manner desired by him. The service obligation gets discharged
when the supply is completed and there is clearly no contemplation of a rendition
of service beyond such supply. The service recipient may use the goods supplied
to him in any manner which he desires. The taxing entry of “Supply of Tangible
Goods Service” would imply that the service recipient is putting the tangible
goods so supplied into service/use, thereby involving a positive action on part of
the service recipient. However, clients themselves are not putting the aircraft
so supplied in use. The act of use of the aircraft is done by the Noticee and the
service recipients merely undertake the services of transportation arising out of
such use of the aircraft by the Noticee. There is clearly no positive act of
utilization of the aircraft by clients, so as to be included under the entry of
“Supply of Tangible Goods Service”. They have relied on the following circular
and judgments
- Circular F.No. 354/63/2008-TRU dated 18.06.2008
- Circular Dy.No 20/Comm (ST)/2009 dated 7th February, 2009
- S.M. Ram Lal & Co. v. Secretary to Government of Punjab 1969 (2) UJ
373 (SC)
- Ravi Shankar Sharma v. The State of Rajasthan and Anr. 1993 CriLJ 1458
- Ashish and Co-and Ors v. Collector of Customs 1986 (25) ELT 114 (TriDel)
- Dell International Services India Pvt. Ltd. v. CIT (International Taxation)
[2008] 305I TR 37 (AAR)
 Analysis of the contractual arrangement between the Noticee and Clients,
revealed that the true nature of the Agreement is a contract of carriage to
undertake various journeys for the customer or their nominees and not a contract
for supply of goods for use. The essence of the contractual arrangement is not to
supply equipment, the essence is that the Noticee with the objective of
transporting persons from one place to another on an exclusive basis, contract to
provide the aircraft for this purpose and pay for the flying time consumed.
 It is settled law declared by the Hon’ble Supreme Court that a tax can only be
levied in terms of the clear language used by the Legislature in a taxing entry.
There can be no imposition of tax by implication or conjecture. A transaction is
either directly the subject matter of the tax sought to be imposed by the taxing
entry, or failing that cannot be taxed under the particular taxing entry. Once the
true nature of the transaction in question has been determined, a transaction can
only be taxed if it falls within the four corners of the provisions of the taxing
statute. In this regard, reference can be made to the following decisions:
- CCE v/s Acer India Limited 2004 (172) ELT 289 (SC)
- I.T.C. LTD. Vs. Union OF India 1991 (53) E.L.T. 234 (Cal.)
- A V Fernandes vs. The State of Kerala (AIR 1957 SC 657).
Page 23 of 37
15.3
They have further submitted that any service provided or to be provided to any
passenger, by an aircraft operator, in relation to non-scheduled air transport of such passenger
embarking in India for international journey is already covered under the taxing entry as laid
down under Section 65(105)(zzzo). Therefore, the Circular Dy.No 20/Comm (ST)/2009
dated 02.09.2009 can be interpreted only to mean that only the act of giving the right to use
the aircraft by such non-schedule aircraft operator can be brought within the purview of
“Supply of Tangible Goods Service” and not an activity of transportation.
15.4
The contract entered into by them with the clients is essentially a contract of
carriage (transportation) and not a supply of goods and hence more appropriately classified
under the category of “Transportation of Passengers Embarking in India for International
Journey by Air Service” and not under “Supply of Tangible Goods Service”. A typical
characteristic of “schedule air transport services” is that flights are operated as per
predetermined time tables and the flights are open to use by members of the public. In
contradistinction, a non-schedule air transport which does not operate according to the public
time table and which is not open to members of the public would fall within the scope of the
term “non-scheduled air transport”. The taxing entry for ““Transportation of Passengers
Embarking in India for International Journey by Air Service” clearly covers both scheduled
air transport and non-scheduled air transport. The Legislature, therefore, has clearly
contemplated a contract of transportation by a non-scheduled air transport as being taxable
under a taxing entry related to transport viz., the taxing entry for “Transportation of
Passengers Embarking in India for International Journey by Air Service”. The Legislature,
has however, in its wisdom restricted the levy whether on scheduled transport services or
non-scheduled air transport services only to an “international journey”.
15.5
The services provided by them are essentially transportation services, which
clearly fall within the scope of the aforesaid taxing entry defined under Section 65(105)
(zzzo) keeping in mind the fact that Non-Scheduled air transport of passengers for
international journey, there is a liability to Service tax under the taxing entry of
Transportation of Passenger by Air Service and the fact that the same journey is undertaken
domestically would not change the true nature and essence of the activity, which is
transportation of passengers.
15.6
They have satisfied the following conditions:
Condition
Applicability in the present case
The services are provided by an They provide services related to transport
Aircraft operator
of passengers by aircraft and hence, falls
within the definition of an “aircraft
operator”
The services are provided to any The services are provided to the Customer
person boarding, at any customs who would be boarding, at any customs
airport, an aircraft for performing airport, the aircraft. The liability will arise
an international journey
when the journey is an international
journey
The services are in relation to The services provided by the Noticee in
scheduled or non-scheduled air the present case is in relation to nontransport service of such Passenger scheduled air transport service of
Passengers
Services are provided to a The Noticee is not providing services to
passenger embarking in India for the passengers in relation to international
international journey, in any class journey. Consequently, the question of
other than economy class
payment of Service tax does not arise.
-
For the above contentions they have relied on the following circulars and cases:
TRU Circular No. D.O. F. No.334/1/2008-TRU dated 29.2.2008
Page 24 of 37
-
M/s Navin Chemicals Mfg. & Trading Co. Ltd. v. Collector of Customs,
(1993) 4 SCC 320.
M/s C.K.P. Mandal v. Commissioner of Central Excise, Mumbai, 2006(4)
STR 183 (Bom.)
decision of the Hon’ble High Court in Indian National Shipowners’
Association v. Union of India 2009[14]S.T.R.289
judgement of the Hon’ble High Court in Somnath Rath v. Bikram Deshari
Arukh (AIR 1999 Orr 110)
Dr. Lal Path Lab (P.) Ltd v. CCE [2006] 5 STT 171 (CESTAT)
Chartered Housing and Bhoruka Finance Corporation v. Appropriate
Authority and Ors [2001] 250 ITR 1 (KAR),
Ralliwolf Ltd. v. Union of India1992 (59) E.L.T. 220 (Bom.)
Collector of Central Excise v. Best and Crompton Engg. Ltd. 1995 (61)
ECR 646 (Tri.-Chennai)
15.7
With effect from 1st July 2010, the above definition of taxable service defined
in Section 65(105)(zzzo) has been substituted by Finance Act, 2010 which provides that
taxable service means “any service provided or to be 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”. Finance Act, 2006, earlier
levied service tax on international journey provided by an aircraft operator, in relation to
scheduled or non-scheduled air transport of passengers embarking in India for international
journey, in any class other than economy class. By Finance Act, 2010, taxable service has
been expanded by including domestic journey in addition to international journey. They
placed reliance on the following:
a) Board of Control For Cricket in India v. C.S.T. 2007 (7) S.T.R. 384 (T)
b) Jet Airways (I) Ltd Vs CST 2008 (11) STR 654 (T)
c) Spandrel Vs C.C.Ex 2010 (20) STR 129 (T).
15.8
The Department’s understanding of the taxing entry of “Supply of Tangible
Goods Service” is based upon the flawed assumption that the issuance of a ticket to a
Passenger is determinative of whether the Noticee is covered under the taxing entry of
“Transportation of Passengers Embarking in India for International Journey by Air Service”.
Clause 9.7 of the Civil Aviation Requirements Section 3 Series ‘C’ Part III and Part I to
Chapter II of Second Schedule to the Carriage by Air Act, 1972 makes it clear that that issue
of a ticket is not an essential requirement for undertaking ‘a contract of carriage’. The
‘contract of carriage exists irrespective of the ticket. The ticket does not define that there is a
‘contract of carriage’. The contract entered into between the Noticee and their clients is in
itself a ‘contract of carriage’.
15.9
The contract entered into with the Group Company or the Third party is
irrelevant in determining whether the services are for transportation or not. A Company may
enter into a contract even with a scheduled airline (as in the case of Corporate Agreements)
for transportation of its employees. This would not change the true nature and essence of the
contract, which is the transportation of the individuals. If such an interpretation is taken, then
that would imply that there would be no service tax levied under this taxing entry if a
Company books the tickets on behalf of a passenger. In such cases also the service of
transportation of passengers is provided to the passengers themselves although the payment is
made by third parties. Clearly the intention of the Legislature would not be to keep such
transactions outside the purview of taxing entry, for an assessees can clearly route their
transactions through a Company / third party, thereby easily avoiding any Service tax
payment
ISSUE RELATING TO “BANKING AND OTHER FINANCIAL SERVICES”:
5.10
On being pointing out by the Department, the Noticees consulted their
consultants and immediately deposited the amount of service tax along with interest. They
have vide letter dated 22nd June, 2010 informed to the Revenue Department that since they
Page 25 of 37
have paid amount of service tax alongwith interest, they may not be issued Show Cause
Notice as per Circular No. 137/167/2006-CE dated 3-10-2007 read with Section 73(3) of the
said Act.
CHARTERED AIRCRAFT FROM M/S. KELLETT & SINGLETON AVIATION :
15.11
They received the services from Kellett for transportation of their customers
from Ahmedabad to Moscow and Moscow to Ahmedabad on 24-10-2009 and 28-10-2009
respectively. For this purpose, they paid Euro 162500 to Kellett. Accrodingly, they were
liable to pay service tax under the category of “Transportation of Passengers embarks in India
for International journey by Air services” classified under Section 65(105)(zzzo) and not
under the category of “Supply of Tangible goods service” classified under Section
65(105)(zzzzj) of the said Act.
The taxable service classifiable under the category of 65(105)(zzzo) is out of purview
from the said Import Rules. Rule 3(iii) of the said Import Rules expressly excludes taxable
service 65(105)(zzzo) and therefore, they were are not liable for service tax. Even if the
services provided by them were categorised under “Supply Of Tangible Goods Service”, they
used the services received from Kellett outside India and did not fall under the proviso to
Rule 3 (iii), thus, are not liable for service tax.
HIRED ENGINE FROM M/S. JET AVIATION, DUBAI, LLC
15.12
They hired an Engine from Jet Aviation Dubai LLC during the financial year
2009-10. The Noticees paid Rs.41,18,511/- towards hiring of Engine. During the tenure of
hiring of Engine, the effective control and possession of engine was with Karnavati Aviation
Private Limited. M/s. Jet Aviation did not have control and possession over the Engine. Thus,
the vital ingredient to fall under the taxable entry of “Supply of Tangible Goods Services”
that is to say supply of machinery, goods or appliances must be without transferring
right of possession and effective control of items was missing in the present case and
accordingly the transaction in dispute is not liable under service tax net.
MANAGEMENT, MAINTENANCE OR REPAIR SERVICES:
15.13
They entered into agreement with M/s. Honeywell International Inc. for
maintenance of Hawker 850 XP Aircraft. As per agreement, they had to pay fixed amount to
Honeywell towards maintenance services which include the cost of materials and services.
As per the agreement, the said services were to be performed anywhere in the world where
ever the Aircraft was required to be repaired. They were under bonafide impression that since
there was a composite contract for supply of parts and repair and were required to be
performed anywhere in the world, there was not required to pay service tax. On being query
raised by the Department, they approached to the Consultants and based on the advise, they
immediately paid service tax alongwith interest.
CENVAT CREDIT ON EXEMPTED SERVICE
15.14
During the disputed period (18th June, 2008 to 31st August, 2009), the Noticees
availed total Cenvat Credit of Rs.36,88,476/- out of which, Cenvat Credit amount of
Rs.31,62,827 was in relation to services which fall under the category of Rule 6(5) of Cenvat
Credit Rules. 2004. The balance amount of Rs.6,38,480 has been reversed along with interest
for the period 18th June, 2008 to 31st August, 2009 irrespective of usage of the said services
in exempted or taxable services in view of the following decisions :
a) C.C.Ex Vs Maize Products 2009 (234) ELT 431 (Guj)
b) Dr. Writer’s Food Products Pvt Ltd Vs C.C.Ex 2009 (247) ELT 391 (T)
c) Tuticorin Alkali Chemicals & Fertilizers Ltd Vs C.C.Ex 2009 (248) ELT 514
(T)
Page 26 of 37
DEMAND BARRED BY LIMITATION :
15.15
Part of the period covered under the captioned Show Cause Notice issued by
the Department is time barred by limitation. The extended period of limitation can be
invoked only where an evasion of tax has been occasioned by the suppression, omission or
failure to disclose wholly or truly all material facts required for verification of assessment by
the assessee or the when the assessee had an intention to evade the payment of tax. The
extended period of limitation can be invoked only on those grounds which are specifically
provided under the Statute. If the Department seeks to invoke the extended period of
limitation on grounds other than those mentioned in the Statute, then such an invocation of
extended period of limitation is bad in law. There was no deliberate intention on their part to
either not to disclose correct information or to evade the payment of any tax. There is no
positive act on their part to evade the payment of any Service tax nor has any proof towards
this end been adduced by the Revenue. A mere omission will not constitute suppression of
facts and as the Noticees were of the bona fide belief that transactions in dispute were not
liable to be taxed under the said Act, the longer period of limitation cannot be invoked in the
facts of the present case. They have placed reliance on the following decisions :
- Mahakoshal Beverages Pvt. Ltd. vs. Commissioner of Central Excise, Belgaum reported
in 2007 (6) STR 148
- Pahwa Chemicals Private Limited vs. Commissioner of C. Ex., Delhi reported in 2005
(189) E.L.T. 257 (S.C.)
- Anand NishiKawa Co. Ltd. vs. Commissioner of Central Excise Appeal, Meerut reported
in 2005(188) E.L.T. 149(SC)
15.16
The Revenue Department is not clear whether the service provided by the
Noticees is liable to be taxed under the said Act or not. On one hand, it is alleged that the
Noticees are liable to pay service tax under the category of “supply of tangible goods
services” and on the other hand, the service undertaken by them are considered as exempted
service and the Noticees have been asked by the captioned Show Cause Notice to pay amount
of Rs.92,75,894 in terms of Rule 6(3) of Cenvat Credit Rules, 2004 read with Section 73(1)
of the said Act along with interest and penalties as the Noticee have not maintained separate
accounts for exempted and taxable service in terms of Rule 6(2) of Cenvat Credit Rules,
2004. The Noticees say and submit that when there is a doubt on taxability of service and the
Noticees have chosen not to pay service tax as there was no liability, the Revenue cannot
invoke larger period without adducing any evidences showing ill intention of the Noticees
not to pay service tax deliberately.
INTEREST/ PENALTY UNDER SECTION 75, 76 OR 77 OF THE ACT
15.17
The entire demand is unsustainable, since the Noticee is not engaged in
rendering any taxable service and hence the demand for penalty and interest therefore cannot
sustained. They have relied upon the following judgments:
- Hon'ble Supreme Court in CCE vs. HMM Ltd. reported in [1995 (76) ELT 497 (SC)]
- Hon’ble Supreme Court Tamil Nadu Housing Board vs. CCE reported in [1994 (74)
ELT 9 (SC)]
- Hon'ble Supreme Court in Hindustan Steel Ltd v. State of Orissa reported in [1978
(2) ELT 159 (SC)]
- M/s Hindustan Lever V/s CCE, Lucknow reported in 2009-TIOL-1795-CESTATDEL.
- Hon’ble Tribunal in AEON’S Construction Products Ltd. vs. Commissioner of
C.Ex., Chennai reported in 2005 (180) E.L.T. 209 (Tri. Chennai)
- Case of ETA Engineering Ltd. vs. Commr. Of C.Ex reported in 2006 (3) S.T.R 429
15.18
They have further submitted that Section 80 of the Act provides that "no
penalty shall be imposed…" under Sections 76, 77, 78 or 79, if there was a reasonable cause
for the failure of the assessee in complying with the relevant provisions. The said provision
being constructed by the use of the word 'shall' is mandatory, and hence binding on the
adjudicating authority to consider the same.
Page 27 of 37
15.19
They requested for personal hearing.
15.20
A personal hearing in the matter was held on 13.12.2011 which was attended
by Shri Hardik Modh, Advocate on behalf of M/s KAPL. He explained the case in brief and
reiterated the reply already filed in the case. He further stated that both the penalties under
section 76 and 78 cannot be imposed as both are mutually exclusive.
DISCUSSION & FINDINGS:
16.
I have carefully gone through the Show Cause Notice, the defence reply filed by M/s
KAPL, the submissions made during the course of personal hearing and records available
with this office.
17.
The issues to be decided in this case are:
i) Whether, the service of charter operation provided by M/s KAPL is classifiable under
the taxable category of “Supply of tangible goods services” as defined under Section 65
(105)(zzzzj) of the Finance Act, 1994 or under the taxable category of “Air transport of
passengers service” as defined under Section 65 (105)(zzzo) of the Finance Act, 1994.
ii) Whether, M/s KAPL who have paid “commission / fee/ commercial charges” to
Export Development Canada located at 151 O’Connor Street, Ottawa, Canada for availing
facility of ECB (External Commercial Borrowings) are liable to pay service tax under
reverse charge mechanism as per Rule 2(1)(d)(iv) of Service Tax Rules, 1994 read with
Section 66A of the Finance Act,1994 as the said service falls under the taxable category
of “Banking and other Financial services” as defined under Section 65 (105)(zm) of the
Finance Act, 1994.
iii) Whether, an amount of Rs. 1,38,41,162/- paid by M/s KAPL to M/s Honeywell
International Inc. and Jet Aviation Dubai LLC is for availing the taxable services of
“management, maintenance or repair services” as defined under Section 65 (105)(zzg) of
the Finance Act, 1994 and whether, M/s KAPL being recipient of these services are
liable to pay service tax under reverse charge mechanism as per Rule 2(1)(d)(iv) of
Service Tax Rules, 1994 read with Section 66A of the Finance Act,1994.
iv) Whether, hiring of charter Aircraft and hiring of engine on rental basis from outside
India is liable to service tax under the category of “Supply of tangible goods services” as
defined under Section 65 (105)(zzzzj) of the Finance Act, 1994 1994 and whether, M/s
KAPL being recipient of these services are liable to pay service tax under reverse charge
mechanism as per Rule 2(1)(d)(iv) of Service Tax Rules, 1994 read with Section 66A of
the Finance Act,1994.
v) Whether, M/s KAPL are liable to pay an amount of Rs.92,75,894/- as per Rule 6(3(i)
of Cenvat Credit Rules, 2004 as alleged in the show cause notice.
18.
I take up the above issues sequentially.
18.1 Taxable service of “Supply of tangible goods services” has been defined under Section
65 (105) (zzzzj) of the Finance Act, 1994 as “Taxable service” means any service provided
or to be provided to any person, by any other person in relation to supply of tangible goods
including machinery, equipment and appliances for use, without transferring right of
possession and effective control of such machinery, equipment and appliances.
18.2 On plain reading of the above definition, I find that a service would become taxable
under the said category when the following ingredients are satisfied:
a) The service is provided in relation to supply of tangible goods.
b) The supply is without transferring right of possession and effective control of
goods.
c) The service may be provided by any person to any other person.
Page 28 of 37
18.3 Accordingly, I proceed to decide whether, the above ingredients are fully satisfied or
otherwise in the case before me.
18.4 I observe that goods in question in the case before me are the aircrafts and there
cannot be any argument that the same are not tangible goods. The term “tangible goods” has
not been defined under the Finance Act and therefore, I refer other sources for the same. The
term “Goods” has been defined in section 65(50) of Finance Act, 1994 to mean the same as
in section 2(7) of Sale of Goods Act, 1930. “Goods” has been defined under the Sale of
Goods Act to mean every kind of movable property other than actionable claims and money.
As per Random House Webster’s Unabridged Dictionary, tangible means capable of being
touched or discernible by the touch. The goods being supplied should be tangible goods i.e.
having physical existence and form, in order to attract liability under this category. The
contention of M/s KAPL is with regard to it’s “supply”. It is the contention of M/s KAPL
that since the essence of the contract is for undertaking a journey or transportation of
passengers and not for supply of aircraft, the services provided by them do not fall under the
ambit of “Supply of tangible goods services” but under the category of “Air transport of
passengers service”. I find that whenever, any ‘tangible goods’ is hired it is definitely to
achieve some specific purpose which in the present case is transportation of passengers from
one destination to another. However, achievement of the said purpose is first preceded by the
supply of a ‘tangible goods’ which in the present case is an aircraft. ‘Supply’ of ‘tangible
goods’ and achievement of a specific purpose cannot be linked to determine the classification
and taxability under the category of “Supply of tangible goods services”. This service
category envisages use of goods by the recipient of service and the expression “use” would
mean the physical exploitation of the said goods by the recipient of service who has become
capable of exploitation of the said goods, but without having legal rights of possession and
effective control. The purpose for which a ‘tangible goods’ is intended to be put to use
cannot be a determinative factor for classification under the category of “Supply of tangible
goods services”. If the interpretation of M/s KAPL is to be followed, it would lead to an
absurd situation as a ‘tangible goods’ may be used by different service recipients in different
manners. Since, in the instant case, the ‘tangible goods’ is incidentally an aircraft which can
not be put to use other than transportation of passengers from one destination to another, M/s
KAPL is trying to bring in the argument of ultimate use of ‘tangible goods’ as a
determinative factor for classification which is not acceptable. Had, transportation of
passengers been the essence of the contract and a determinative factor for classification as
contended by M/s KAPL, the contract would have been passenger specific whereas in the
present case the clients are required to pay the mutually agreed upon amount to M/s KAPL
irrespective of the number of passengers actually carried in the aircraft. The payment made to
M/s KAPL is determined on the basis of duration of flying time or on the basis of distance of
destination. Thus, there remains no doubt in my mind that the essence of the contract is
“Supply” and transportation of passengers is inbuilt in it. Therefore, I conclude that service
is provided in relation to supply of tangible goods.
18.5 I find that with regard to chartering of aircraft, the service would become taxable as
supply of tangible goods service when the supply is without transferring the right of
possession and effective control of goods. In the case before me there is no dispute to the fact
that M/s KAPL has not transferred the right of possession. The other criteria that is required
to be now determined is whether in the case before me, effective control is transferred or not.
I find from para 4.9 of the show cause notice listing out the terms and conditions of the
agreement titled as “Aircraft Charter Hire & Use Agreement” entered between M/s KAPL
and M/s Mundra Port & SEZ Ltd/ Adani Power Ltd that M/s KAPL would provide pilots,
aviation staff and other licensed crew for operation of the aircraft as well as qualified
maintenance crew for servicing of the aircraft. Therefore, in the present case neither the
possession nor the effective control is parted with by M/s KAPL thus satisfying both the
essential criteria of the definition of taxable service of “Supply of tangible goods services”
under Section 65 (105)(zzzzj) of the Finance Act, 1994. My determination with regard to
transfer of effective control is also fortified by the CBEC Circular Dy.No 20/Comm
(ST)/2009 dated 2.9.2009 where in it has been clarified that where the crew is also provided
Page 29 of 37
by the owners of the aircraft as in a wet lease of aircraft effective control is not transferred.
Thus supply of tangible goods is without transferring right of possession and effective control
of said goods.
18.6 I observe that Circulars issued by the Board are binding on the departmental officers
as has been held by the Hon’ble Supreme Court in the case of Ranadey Micronutrients Vs
1996(87)ELT19(SC) and Paper Products Ltd Vs CCE 1996(112)ELT 765(SC).
18.7 The above said service is provided by any person i.e M/s KAPL to any other person i.e
it’s various clients such as M/s Mundra Port & SEZ Ltd and Adani Power Ltd.
18.8 In view of the above, I find that all the three ingredients of the taxable service of
“Supply of tangible goods services” as defined under Section 65 (105) (zzzzj) of the Finance
Act, 1994 are fully satisfied. I also observe that as per section 65A, the sub-clause which
provides the most specific description shall be preferred to sub-clauses providing a more
general description. Therefore, the classification under the said category is in accordance
with Section 65(A) of the Act. I also place reliance on the judgment in the case of Indian
National Ship Owner’s Association v. Union of India (2009) 14 STR 289 (Bombay), wherein,
it was held that providing vessels on time charter basis without giving effective control was
covered under Section 65(105)(zzzzj) of the Act. I also observe that Commissioner of Central
Excise, Madurai has issued Trade Notice No. 42/2008, Service Tax No. 15/2008, dated
September 11, 2008, and while examining the issue of utilization of Cenvat credit of CVD on
imported goods, (an aircraft) towards payment of Service tax when it was given on hire it is
mentioned that when the imported aircraft was let out on hire without transferring the right of
possession and effective control, it would attract service tax under the category of “Supply of
tangible goods services”.
18.9 In view of the above discussions, I find that an amount of Rs. 27,25,81,075/- received
by M/s KAPL from various clients as detailed in Annexure-A to the show cause notice, is the
taxable value under the category of “Supply of tangible goods services” as defined under
Section 65 (105) (zzzzj) of the Finance Act, 1994 and differential service tax of Rs.
1,73,92,144/- on the said taxable value is recoverable from them under proviso to Section
73(1) of the Finance Act, 1994 along with interest under Section 75 ibid.
19.
Now, I come to the second issue. I find that the show cause notice demands
service tax on the “commission / fee/ commercial charges” paid by M/s KAPL to Export
Development Canada for arranging the facility of ECB (External Commercial Borrowings).
19.1
On a plain reading of Section 66A of the Finance Act,1994, I observe that a
service shall be taxable under the provisions of Section 66A, when the following two criteria
are met:
a) Provider of service is based outside India.
b) Recipient of service is based in India.
The liability to pay service tax is on the recipient of service, as per the
provisions of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 read with Section 66A of the
Finance Act,1994 if the above two criteria are met.
19.2
I proceed to examine whether the aforesaid two criteria are satisfied in the case
before me so as to make the “commission / fee/ commercial charges” paid by M/s KAPL to
Export Development Canada chargeable to service tax.
a) I find that the “commission / fee/ commercial charges” have been remitted by M/s KAPL
to Export Development Canada. M/s KAPL have also not disputed this fact.
b) I find that the said services have been received by M/s KAPL who are having their place
of business, fixed establishment, permanent address or usual place of residence in India.
Page 30 of 37
19.3 Thus, I find that both the criteria are squarely met to make the “commission / fee/
commercial charges” paid by M/s KAPL to Export Development Canada chargeable to
service tax.
19.4. Further, the said service should be covered under Taxation of Services (Provided from
Outside India and Received in India) Rules, 2006 to qualify as import under the said rules.
19.5 I find that the Banking and Financial Services defined under Section 65(105)(zm) of
the Finance Act, 1994 are covered under Rule 3(iii) of the Taxation of Services (Provided
from Outside India and Received in India) Rules, 2006. Therefore, the said services qualify
as import of service under the said rules.
19.6. M/s KAPL submitted that on being pointed out by the department, they confirmed the
correct position of the law from their legal advisors/consultants and immediately made
payment of service tax along with interest and informed the department about the payment
vide letter dated 22.6.2010. Therefore, no show cause notice should have been issued to them
in terms of section 73(3) read with section 73(4) of the Act. I find that service tax has been
demanded in the show cause notice by alleging suppression of facts thereby invoking the
extended period under proviso to Section 73(1) of the Finance Act, 1994. Therefore, the
provisions of Section 73(3) of the said Act can not be applied in this case in view of section
73(4) of the Finance Act, 1994. I also find that service tax of Rs. 5,24,537/- on “commission /
fee/ commercial charges” has been paid by M/s KAPL on 18.6.2010 only after the
investigations were initiated against them on 31.5.2010 and not on their own as argued by
them.
19.7 I find that as per proviso to Section 66A if the provider of service has his business
establishment both in the country from where service is provided and elsewhere, the country,
where the establishment of the provider of service directly concerned with the provision of
service is located, shall be treated as the country from which the service is provided or to be
provided. I further find that sub-section (2) of Section 66A provides that where a person is
carrying on a business through a permanent establishment in India and through another
permanent establishment in a country other than India, such permanent establishment shall be
treated as separate persons for the purposes of this section.
19.8
I observe that with the introduction of Section 66A and Taxation of Services
(Provided from Outside India and Received in India) Rules, 2006, accountability to pay
service tax is on the importer under reverse charge. The provisions under Section 66A state
that in case service is provided from abroad and received by a person who has his place of
business, fixed establishment, permanent address or usual place of residence in India, such
taxable service shall be treated as if the recipient had himself provided the services in India.
Section 66A has created a legal fiction to deem import of service as provision of service
within India.
19.9.
Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, as substituted by Notification
No. 10/2006-ST, dated 19.4.2006 is reproduced below:
“person liable for paying service tax means, in relation to any taxable service
provided or to be provided by any person from a country other than India and received by
any person in India under Section 66A of the Act, the recipient of such service.”
19.10 I find that in such cases of import of services, service recipient is liable to pay service
tax under reverse charge mechanism. Therefore, in the present case M/s KAPL being the
recipient of imported service are liable to pay service tax.
Page 31 of 37
19.11 In view of the above, amount of Rs. 50,92,591/- as detailed in Annexure-C-1 to the
show cause notice, paid by M/s KAPL as “commission / fee/ commercial charges” is the
taxable value under the category of “Banking and other Financial Services”. Therefore,
service tax ( including Education Cess and Higher education cess ) of Rs. 5,24,537/- is
recoverable from M/s KAPL under proviso to Section 73(1) of the Finance Act,1994 along
with interest under Section 75 of the Act ibid under the category of “Banking and other
Financial Services”. The said amount of service tax and interest of Rs. 23,427/- already paid
by M/s KAPL shall be appropriated against the recovery of the above amount as well as
interest thereon.
20
As regards, the short payment of service tax of Rs. 15,85,009/- under the category of
“Management, maintenance or repair service” defined under Section 65(105)(zzg), I find that
M/s KAPL had accepted their liability under reverse charge mechanism and paid service tax
along with interest after the investigations were initiated against them by DGCEI. Therefore,
I donot find it necessary to discuss the issue.
20.1 In view of the above, amount of Rs. 2,30,47,897/- as detailed in Annexure-C-2 to the
show cause notice, paid by M/s KAPL to M/s Honeywell International Inc. and Jet Aviation
Dubai LLC is the taxable value under the category of “Management, maintenance or repair
service”. Therefore, service tax ( including Education Cess and Higher education cess ) of
Rs. 15,85,009/- is recoverable from M/s KAPL under proviso to Section 73(1) of the
Finance Act,1994 along with interest under Section 75 of the Act ibid under the category of
“Management, maintenance or repair service”. The said amount of service tax and interest of
Rs. 2,70,322/- already paid by M/s KAPL shall be appropriated against the recovery of the
above amount as well as interest thereon.
21.
Now, I come to the allegation of taxability under reverse charge mechanism on the
payment made to M/s Kellett & Singleton Aviation located outside India for hiring of aircraft
and to M/s Jet Aviation Dubai LLC for hiring of aircraft engine. I find that it is alleged in the
show cause notice that the said amounts of Rs.1,13,90,031/- and Rs. 41,18,511/- are the
taxable value under the category of “Supply of tangible goods services” as defined under
Section 65 (105) (zzzzj) of the Finance Act, 1994.
21.1 As regards the demand of service tax on the amount paid for hiring of aircraft from
M/s Kellett & Singleton Aviation location outside India, I observe that I have already
discussed and given my findings on the issue of classification and taxability of hiring of
aircraft under the category of “Supply of tangible goods services” as defined under Section
65 (105) (zzzzj) of the Finance Act, 1994. Therefore, I do not find it necessary to repeat the
same. The only issue to be decided is whether the said services are excluded as per Rule 3(iii)
of the Taxation of Services (Provided from outside India and Received in India) Rules, 2006
as contended by M/s KAPL. The relevant portion below Rule 3(iii) ibid is reproduced
hereunder:
“provided that where the taxable service referred to in sub-clause (zzzzj) of Clause 105 of
Section 65 of the Act is received by a recipient located in India, then such taxable service
shall be treated as taxable service provided from Outside India and received in India subject
to the condition that the tangible goods supplied for use are located in India during the
period of use of such tangible goods by such recipient.”
21.2 I find that the aircraft has been hired from M/s Kellett & Singleton Aviation location
outside India under an agreement dated 22.10.2009 to operate between Ahmedabad-MoscowAhmedabad. The contention of M/s KAPL that since the aircraft was not located in India,
they are not liable to pay service tax in view of the above exclusion is not acceptable as the
aircraft has been supplied by the service provider located outside India to a service recipient
in India. The latter is free to exploit the physical use of the aircraft. The tangible goods i.e.
Page 32 of 37
the aircraft in the instant case is not located outside India, it is on a journey from Ahmedabad
to Moscow and back to Ahmedabad. Aircraft has been supplied by the service provider in
India and will be received back from India after the expiry of the Agreement. It is as simple
as that.
21.3 In view of the above, amount of Rs.1,13,90,031/- as detailed in Annexure-C-3 to the
show cause notice, paid by M/s KAPL to M/s Kellett & Singleton Aviation located outside
India is the taxable value under the category of “Supply of tangible goods services”.
Therefore, service tax ( including Education Cess and Higher education cess ) of Rs.
11,73,173/- is recoverable from M/s KAPL under proviso to Section 73(1) of the Finance
Act,1994 along with interest under Section 75 of the Act ibid under the category of “Supply
of tangible goods services”.
21.4 As regards the hiring of aircraft engine from M/s Jet Aviation Dubai LLC, service tax
is demanded in the show cause notice on the following grounds:
a)
right of possession is not transferred and M/s Jet Aviation Dubai LLC remained
owners of the said aircraft engine.
b)
after usage the aircraft engine was returned to the owner.
c)
M/s KAPL did not pay any sales tax/VAT in the said transaction.
d)
amount of Rs. 41,18,511/- is shown paid as rental charges in ledger account of M/s
KAPL for the year 2009-10.
21.5 I have already discussed above in detail that any service to be made taxable under the
category of “Supply of tangible goods services” as defined under Section 65 (105) (zzzzj) of
the Finance Act, 1994 must fully satisfy the ingredients of the said definition. The term
“possession” means “actual holding or occupancy, either with or without rights of
ownership”. Therefore ownership of the engine is not a determinative factor for taxability
under the said category. I further find that no evidence is brought out in the show cause
notice to establish that effective control of the said aircraft engine was with M/s Jet Aviation
Dubai LLC. In absence of any evidence in this regard, I come to the conclusion that both
right of possession without legal rights of ownership as well as effective control over the
aircraft craft engine was transferred to the user i.e. M/s KAPL. I find that demand under the
said category can not be sustained simply because an amount of Rs. 41,18,511/- is shown
paid as rental charges in ledger account of M/s KAPL for the year 2009-10 or sales tax/VAT
has not been paid.
21.6 In view of the above, amount of Rs. 41,18,511/- as detailed in Annexure-C-3 to the
show cause notice, paid by M/s KAPL to M/s Jet Aviation Dubai LLC as rental charges
cannot be treated as the taxable value under the category of “Supply of tangible goods
services”. Therefore, demand of service tax ( including Education Cess and
Higher
education cess ) of Rs. 4,24,207/- is not sustainable. Consequently, the proposals for interest
and penalty also do not survive to this extent.
22.
As regards the recovery of an amount of Rs.92,75,894/- as per Rule 6(3(i) of Cenvat
Credit Rules, 2004, I find that since the differential demand of Rs. 1,73,92,144/- has
sustained under the category of “Supply of tangible goods services” as defined under Section
65 (105) (zzzzj) of the Finance Act, 1994, the charge of recovery of an amount of
Rs.92,75,894/- automatically falls.
23.
I observe that so far as ‘suppression of facts’ is concerned, the phrase implies that
withholding of information is suppression of facts. P. Ramanatha Aiyar’s Concise Law
Dictionary [1997 Edition Reprint 2003 – page 822] defines the phrase lucidly and accurately
as – Where there is an obligation to speak, a failure to speak will constitute the “suppression
of fact” but where there is no obligation to speak, silence cannot be termed “suppression”.
It is manifestly clear from this that intention to evade payment of duty is implied in the
suppression of facts. Since M/s KAPL were liable to self assess the liability to pay service
Page 33 of 37
tax, they had an obligation to furnish the correct and complete information and the value of
services whether taxable or otherwise.
23.1 It is needless to recapitulate that the present show cause notice has arisen out of the
investigation conducted by the Ahmedabad Zonal unit of the Directorate General of Central
Excise Intellegence. Had they not taken up investigations in the case, the evasion of service
tax would have remained unnoticed. Therefore, this is a case of improper assessment
amounting to deliberate non-declaration and suppression of vital information with a willful
intention to evade payment of service tax. Accordingly, the invoking of extended period
under proviso to Section 73(1) of the Act in the case before me is fully justified.
23.2 I find that in the present system of self-assessment, documents like invoices and other
transaction details are not supplied to the Department. Moreover, M/s KAPL did not furnish
the required details of receipt and payment of “Hiring charges of the aircraft”, payment of
“commission / fee/ commercial charges”, “rental charges” either in the ST-3 returns or in any
other way to the Department. Since, they even did not consult the Department in case of any
doubt, the intention will have to be believed as that of evasion. Once the details are not
submitted to the Department, mis-declaration or suppression is rightly invoked. I, therefore,
conclude that the element of suppression with intent to evade payment of service tax is
conspicuous by the peculiar facts and circumstances of the case as discussed above and,
therefore, the extended period of limitation under Section 73(1) of the Finance Act, 1994 is
rightly invokable for recovery of service tax demanded in the impugned show cause notice.
In view of the above discussion and findings, the ratio of cases relied upon by M/s KAPL can
not be applied in the case before me.
24.
the Act.
I now take up the issue of imposition of penalty under section 76, 77 and 78 of
25.
I therefore hold that M/s KAPL have suppressed the facts with intention to
evade payment of service tax. Thus penalty under Section 78 is mandatorily imposable as has
been held by the Apex court in the case of Dharmendra Textile Mills Ltd-2008 (231) ELT 3
(SC) and Rajasthan Spinning & Weaving Mills Ltd-2009 (238) ELT 3 (SC). Therefore,
penalty is imposable on M/s KAPL under Section 78 of the Finance Act, 1994. In view of the
above discussion the ratio of the judgments relied upon by M/s KAPL can not be applied in
this case.
25.1
As regards the issue of imposition of penalty under Section 76 of the Finance
Act, 1994, I observe that penalty under Section 76 and 78 of the Finance Act, 1994 are
mutually exclusive w.e.f 10.5.2008 and once penalty under Section 78 is imposed, no penalty
under Section 76 can be imposed in terms of the proviso inserted in Section 78 w.e.f
10.5.2008 in this regard. Therefore, no penalty under Section 76 is imposable for the period
from 10.5.2008 onwards. In the case before me, the demand of service tax is for the period
from 18.6.2008 to 31.3.2010. Therefore, I hold that penalty under Section 76 of the said Act
is not imposable on M/s KAPL.
25.2.
As regards imposition of penalty under section 77 of the Finance Act, 1994, I
observe that as discussed above M/s KAPL were liable to pay service tax under the category
of “Supply of tangible goods services” under Section 65 (105)(zzzzj) of the Finance Act,
1994 both as provider of service and as recipient of service, but they failed to obtain
registration as required under section 69 of the Finance Act, 1994 read with Rule 4 of the
Service Tax Rules, 1994. M/s KAPL had received “Banking and other Financial Services”
prior to obtaining the service tax registration in the said category and also they late paid the
tax under the said category. The said contraventions have made M/s KAPL liable to penalty
under section 77(1) (a) of the Finance Act, 1994.
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25.3.
As regards their contention for invoking Section 80 of the Finance Act, 1994
for waiver of penalty, I find that M/s KAPL have not produced any reasonable cause for the
failure to pay service tax except that it was their bonafide belief that service tax was not
payable by them and it was an interpretational issue. I have already discussed the issue of
classification and taxability under the category of “Supply of tangible goods services”,
“Banking and other Financial Services” and “Management, maintenance or repair service”. I
have already discussed that whatever payment of service tax has been made by M/s KAPL it
has mostly been after proceedings initiated by DGCEI which does not establish the
contention of bonafide belief raised by M/s KAPL. I observe that if M/s KAPL had any doubt
with regard to classification or taxability, then they should have approached the service tax
authorities for clarification of doubt to ascertain the taxability of the service received by them
and payment of service tax under reverse charge mechanism. Therefore, I consider it
appropriate to hold M/s KAPL liable to penalty under Section 77 and 78 of the Finance Act,
1994. In view of the above discussion and findings, the ratio of cases relied upon by M/s
KAPL can not be applied in the case before me.
26.
In view of the foregoing discussion, I pass the following order:
ORDER
(i)
The service of “hiring of charter aircraft” provided as well as received by M/s
KAPL is appropriately classifiable under the taxable category of “Supply of
tangible goods services” under Section 65 (105)(zzzzj) of the Finance Act, 1994;
(ii)
I confirm the demand of service tax of Rs. 1,73,92,144/- (Rupees One crore
seventy three lakh ninety two thousand one hundred forty four only ), (including
Education Cess and Secondary and Higher Education Cess) for the years 2008-09
and 2009-10, as detailed in Annexure – A to the show cause notice under the
category of “Supply of tangible goods services” under Section 73(2) of the Finance
Act, 1994 and order to recover the same from M/s KAPL under proviso to Section
73(1) of the Finance Act, 1994;
(iii)
I order to recover interest on the above confirmed demand of Rs. 1,73,92,144/(Rupees One crore seventy three lakh ninety two thousand one hundred forty four
only ) at the prescribed rate from M/s KAPL under Section 75 of the Finance Act,
1994;
(iv)
I confirm the demand of service tax of Rs. 5,24,537/- (Rupees Five lakh twenty
four thousand five hundred thirty seven only ) (including Education Cess and
Secondary and Higher Education Cess) on the “commission / fee/ commercial
charges” paid by M/s KAPL to Export Development Canada not having office in
India, as detailed in Annexure C-1 to the show cause notice under the category of
“Banking and other Financial services” under Section 73(2) of the Finance Act,
1994 and order to recover the same from M/s KAPL under proviso to Section
73(1) of the Finance Act, 1994;
(v)
I order appropriation of the amount of service tax of Rs. 5,24,537/- (Rupees Five
lakh twenty four thousand five hundred thirty seven only ) already paid by M/s
KAPL against the above confirmed demand under the category of “Banking and
other Financial services”
(vi)
I order to recover interest on the above confirmed demand of Rs. 5,24,537/(Rupees Five lakh twenty four thousand five hundred thirty seven only ) at the
prescribed rate from M/s KAPL under Section 75 of the Finance Act, 1994;
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(vii)
I order appropriation of the amount of interest of Rs. 23,427/- (Rupees Twenty
three thousand four hundred twenty seven only ) already paid by M/s KAPL
against the above recovery of interest;
(viii) I confirm the demand of service tax of Rs. 15,85,009/- (Rupees Fifteen lakh eighty
five thousand and nine only ) (including Education Cess and Secondary and
Higher Education Cess) on the amount paid by M/s KAPL to M/s Honeywell
International Inc. and Jet Aviation Dubai LLC not having office in India, as
detailed in Annexure C-2 to the show cause notice under the category of
“Management, maintenance or repair service” under Section 73(2) of the Finance
Act, 1994 and order to recover the same from M/s KAPL under proviso to Section
73(1) of the Finance Act, 1994;
(ix)
I order appropriation of the amount of service tax of Rs. 15,85,009/- (Rupees
Fifteen lakh eighty five thousand and nine only ) already paid by M/s KAPL
against the above confirmed demand under the category of “Management,
maintenance or repair service”;
(x)
I order to recover interest on the above confirmed demand of Rs. 15,85,009/(Rupees Fifteen lakh eighty five thousand and nine only ) at the prescribed rate
from M/s KAPL under Section 75 of the Finance Act, 1994;
(xi)
I order appropriation of the amount of interest of Rs. 2,70,322/- (Rupees Two lakh
seventy thousand three hundred twenty two only ) already paid by M/s KAPL
against the above recovery of interest.
(xii)
I confirm the demand of service tax of Rs. 11,73,173/- (Rupees Eleven lakh
seventy three thousand one hundred seventy three only ) (including Education
Cess and Secondary and Higher Education Cess) on the amount paid by M/s
KAPL to M/s Kellett & Singleton Aviation not having office in India, as detailed
in Annexure C-3 to the show cause notice under the category of “Supply of
tangible goods services” under Section 73(2) of the Finance Act, 1994 and order to
recover the same from M/s KAPL under proviso to Section 73(1) of the Finance
Act, 1994;
(xiii) I order to recover interest on the above confirmed demand of Rs. 11,73,173/(Rupees Eleven lakh seventy three thousand one hundred seventy three only ) at
the prescribed rate from M/s KAPL under Section 75 of the Finance Act, 1994;
(xiv) I drop the demand of service tax of Rs. 4,24,207/- (Rupees Four lakh twenty four
thousand two hundred seven only ) (including Education Cess and Secondary and
Higher Education Cess) on the amount of Rs. 41,18,511/- paid as rental charges by
M/s KAPL to M/s Jet Aviation Dubai LLC not having office in India, as detailed in
Annexure C-3 to the show cause notice under the category of “Supply of tangible
goods services”;
(xv)
I drop the demand of recovery of Cenvat Credit of Rs.92,75,894/- (Rupees Ninety
two lakh seventy five thousand eight hundred and ninety four only) made in the
show cause notice in terms of Rule 6(3)(i) of Cenvat Credit Rules, 2004;
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(xvi)
I impose penalty of Rs. 2,06,74,863/- [Rs. 1,73,92,144/- + Rs. 5,24,537/- + Rs.
15,85,009/- + Rs. 11,73,173/- ] (Rupees Two crore six lakh seventy four thousand
eight hundred and sixty three only) on M/s KAPL under section 78 of the Finance
Act, 1994. In the event of M/s KAPL opting to pay the amount of service tax
along with all other dues as confirmed and ordered to be recovered, within thirty
days from the date of communication of this order, the amount of penalty liable to
be paid by them under Section 78 of the Finance Act, 1994 shall be 25% of the
said amount. However, the benefit of reduced penalty shall be available only if the
amount of penalty is also paid within the period of thirty days from the
communication of this order, otherwise full penalty shall be paid as imposed in the
above order.
-SD/- 13.1.2012
( A.K.Gupta )
Commissioner,
Service Tax,
Ahmedabad
BY R.P.A.D.
F. No. STC/4-123/O&A/DGCEI/2011
Date:13-01-2012
To
M/s. Karnavati Aviation Pvt. Ltd.,
Shikhar, Ground Floor,
Near Railway Crossing,
Navrangpura,
Ahmedabad – 380 009.
Copy to:
1.
2.
3.
4.
5.
The Chief Commissioner, Central Excise and Service Tax,
Ahmedabad Zone, Ahmedabad.
The Additional Director General, DGCEI, Ahmedabad Zonal Unit, 1st
Floor, Preema Chambers, Mithakhali Six Roads, Navrangpura,
Ahmedabad.
The Assistant Commissioner, Service Tax, Division-II, Ahmedabad.
The Superintendent of Service Tax, Range- X, Division-II, Ahmedabad.
Guard File.
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