By TIOL News Service

MUMBAI, MAR 19, 2013: THE appellant procured aircrafts for which they got equipment lease financing and for which payment was made by the appellant to various entities abroad, connected with lease finance. They also kept a deposit with the International Finance Corporation, lessor towards maintenance reserve.

The department was of the view that the appellant is liable to discharge Service Tax in respect of the above activities undertaken under the category of ‘Banking and Financial Services" namely, finance leasing. As regards the maintenance reserve, the department was of the view that they are liable to pay Service Tax under the category of "Management, Maintenance and Repairs".

Accordingly, a show-cause notice was issued and Service Tax demand of Rs.27.92 cores approximately was confirmed along with interest thereon apart from the penalties under Section 76, 77 and 78 of the Finance Act, 1994 by the Commissioner (TAR) Service Tax, Mumbai.

The appellant is, therefore, before the CESTAT.

The following are the submissions made for seeking a stay -

+ As far as the maintenance reserve kept abroad is concerned, maintenance/repairs of the aircraft is undertaken in India by DGCA approved authority. However, the maintenance reserve kept abroad with the lessor is only as a security deposit for repairs and maintenance of the aircrafts.

+ The activity of maintenance and repair takes place in India and, therefore, the amount kept in reserve is not for the payment of services rendered and hence, the same does not come within the ambit of Management, Maintenance or Repairs services.

+ As regards Financial Lease services, it is submitted that the aircraft has been delivered abroad and they have various branches situated abroad and hence, the services have been rendered abroad and, therefore, the same is not taxable as per the Indian law.

The Revenue representative submitted that since Air India Charters Ltd. has paid for the services rendered, they are the service recipients and, therefore, they are liable to discharge Service Tax liability under Reverse Charge Mechanism under the Section 66A of the Finance Act, 1994.

The Bench observed -

"5.1 As far as the demand on Management, Maintenance or Repairs services is concerned, the appellant's arguments have merit. If the appellant has to undertake the maintenance and repairs services in India by the DGCA approved authority on their own, it cannot be said that the services are rendered abroad and they are liable to pay Service Tax merely because they have kept a security deposit towards repair and maintenance of the aircraft with the lessor. As regards the demand of Service Tax on Finance Leasing, even though the aircrafts have been delivered abroad, Air India is in travel business and aircrafts are used for flying from Indian destinations to foreign destinations and vice-versa. This in any way does not affect the taxability of the Service. Inasmuch as they have paid the service charges to the foreign lessor, they are liable to pay Service Tax as a service recipient under Section 66A of the Act, and this liability squarely lies on them. Therefore, prima facie we are not satisfied that the appellant has made out a case for 100% waiver of the dues adjudged.

5.2 The learned Counsel for the appellant made an offer to make a deposit of Rs. 3 crores including the payment of Rs.1.6 crores already made, at this stage for hearing of the appeal and also pleads financial hardship."

Considering the offer made by the appellant as satisfactory and taking into account the financial condition of the appellant, the Bench directed the appellant to make a pre-deposit of the balance amount of Rs.1.5 crores and report compliance.

(See 2013-TIOL-470-CESTAT-MUM)