By TIOL News Service

NEW DELHI, FEB 28, 2017: THE petitioners inter alia seek a writ of prohibition, prohibiting the respondent department from charging and collecting Service Tax on the Annual Fee payable by the Petitioners {DIAL &MIAL}to the Respondent Airports Authority of India {AAI}.

Petitioners also seek quashing and setting aside of the adjudication orderdated 26.03.2014, to the extent it holds that benefit of CENVAT Credit is not available to the service recipient and confirms the demand of tax u/s 65 (47) of the FA, 1994 under the entry "Franchise service".

Restrain is also sought against the Respondents from levying and recovering Service Tax under Renting of Immovable Property Service and/or Franchise Services on the annual fees or any interest and/or penalty consequential thereto.

The consortium led by the GMR Group was selected by the AAI as the successful bidder to design, construct, operate, maintain, upgrade, modernize, finance, manage and develop the Delhi airport and the consortium led by the GVK Group was selected by the AAI as the successful bidder to design, construct, operate, maintain, upgrade, modernize, finance, manage and develop the Mumbai airport.

As per the policy decision of the Government of India and in terms of the respective Operations, Management and Development Agreements {OMDAs}, both dated 04.04.2006, executed between the AAI and the Petitioners, the Petitioners have been granted the exclusive right and authority to undertake some of the functions of the AAI being the functions of operation, maintenance, development, design, construction up gradation, modernization, finance and management of the respective Airports.

The Petitioners provide various Aeronautical Services and Non-Aeronautical Services as mentioned in Schedule 5 and Schedule 6 of the OMDA respectively to various consumers. For the services provided, the Petitioners charge from the users of the services.

Under Article 11.1 of the OMDA, in consideration of the Grant of Rights granted under Article 2.1.1 of the OMDA, the Petitioners have to, inter alia, pay an Annual Fee to AAI. The Annual Fees payable to AAI is @ 45.99% in the case of DIAL & @ 38.7% in the case of MIAL , of the projected Revenue to be received by the Petitioners.

The revenue share payable to AAI is paid through an escrow bank account. Under the escrow mechanism, all receipts from various sources received by the Petitioners are deposited into a Receivable Account from which they are transferred to a Proceeds Account. From the Proceeds Account, payments are first made towards statutory dues and out of the balance, AAI is paid the Annual Fees and any other amounts due to it under the OMDA. The balance is transferred to a Surplus Account, which comes to the Petitioners as their respective share of the revenue.

In terms of the provisions of OMDA, Respondent No.4 entered into Lease Deeds (dated 25.04.2006 in case of DIAL & 26.04.2006 in case of MIAL), whereby the AAI has leased out to the Petitioners all the land (along with any buildings, constructions or immovable assets, if any, thereon) described in Schedule - 1 of the respective Lease Deeds.

It is contended by the petitioners that the OMDA was executed for the grant of various rights to the Petitioner for better operation and management of the Airport and the Lease Deed was executed separately for the grant of lease. Under the OMDA, the Annual Fee is a consideration payable for the grant of rights by AAI to the Petitioners and is not a consideration for renting of immovable property .

It is contended by the petitioner that in the year 2007, AAI, informed the Petitioner that the Annual Fee payable under the OMDA is subject to Service Tax under the said taxing entry as being a consideration for the leasing of Immovable property to the Petitioner. Accordingly, AAI stated that Service Tax should be added to the Annual Fee with effect from the enactment of the Finance Bill, 2007.

AAI by its letter dated 24.09.2007 asked the respective escrow bankers of the petitioners, under OMDA, to block the sum of Rs.14,44,18,348/- in the case of DIAL and Rs.13,28,10,338/- in the case of MIAL, on account of balance dues towards Service Tax on Annual Fee payable under OMDA.

The Petitioners protested on the ground that AAI does not render any service to the Petitioners and no Service Tax could be charged on the Annual Fee. It pointed out to AAI that it was not liable to pay Service Tax on the Annual Fees. The petitioner contended that, the liability of Service Tax could not be charged from the Petitioner and if the same was payable, AAI had to discharge the same from its own revenue share.

Respondent Revenue Department has taken a stand that the Annual Fee payable by the Petitioner to the AAI is exigible to service tax under the taxable entry relating to "Franchise Service" and not under the taxable entry of "Renting of Immovable property Service".

By the Order-in-Original dated 26.03.2014, the Commissioner of Service Tax adjudicated the show cause notices issued to AAI. It is to be noted that as the notices were issued to AAI, no notice was issued to the petitioners.

By the impugned order-in-original it has been held that the services of undertaking statutory functions of the AAI under OMDA are the services provided by AAI to the petitioners under the taxable category of "Franchise Service" specified and defined under Section 65 (105) (zze) and Section 65 (47) read with Section 65 (48) of the Act.

Aggrieved by the aforesaid adjudication order to the extent it confirmed the demand of tax under the head "Franchise service" and adversely affected the Petitioners, the Petitioners have challenged the same.

The stand of the respondent Revenue is that the Upfront Fee and Annual fee is exigible under the taxing entry "Franchise Services" and not under the taxing entry "Renting of Immovable Property Services".

After considering the elaborate submissions made by both sides, the High Court gave its observations thus -

Merits:

+ To constitute a franchise, an agreement has to satisfy the following conditions:

(i) the franchisee must be granted a representational right to:

(a) sell or manufacture goods, or

(b) provide services, or

(c) undertake any process identified with franchisor,

(ii) whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved.

+ For a service to be taxable, it should be a service provided or to be provided by the franchisor to the franchisee in relation to the franchise. As per the Revenue, AAI is the franchisor and Petitioners are the franchisees and AAI is providing service to the Petitioners.

+ For OMDA to constitute a franchise, it would have to satisfy the requirements of Section 65(47) of the Finance Act, which inter alia requires that the franchisees (Petitioners) should have been granted representational right by franchisor (AAI).

+ Merely because, by an agreement, a right is conferred on a party to sell or manufacture goods or provide services or undertake a process, would not ipso facto bring the agreement within the ambit of a franchise. What is also required is to establish that the right conferred is a "representational right".

+ The term "representational right" would necessarily qualify all the three possibilities i.e., (i) to sell or manufacture goods, (ii) to provide service and (iii) undertake any process identified with the franchisor.

+ A representational right would mean that a right is available with the franchisee to represent the franchisor. When the Franchisee represents the franchisor, for all practical purposes, the franchisee loses its individual identity and would be known by the identity of the franchisor. The individual identity of the franchisee is subsumed in the identity of the franchisor. In the case of a franchise, anyone dealing with the franchisee would get an impression as if he were dealing with the franchisor.

+ From the perusal of the terms and conditions of OMDA, it is clear that no representational right has been granted by AAI to the petitioners.

+ The Joint Venture agreement (OMDA) has been entered into by AAI so that the functions entrusted to AAI under the Airports Authority of India Act can be effectively carried out. AAI has 26% equity stake in the Joint Ventures, (i.e. the petitioners).

+ The Petitioners, under the OMDA, had to develop, operate and manage the Airports. AAI handed over the demised premises (under the lease deeds) at the Airports to the Petitioners. The Petitioners have spent their own money for designing, developing, constructing, upgrading, modernizing, financing etc., of the airports. The airports are being operated, maintained and developed by the Petitioners in their own right and in their own name. The Petitioners have been granted "exclusive right and authority" to undertake the functions mentioned in para 2.1.1 and particularly those relating to operation, maintenance, development, design, construction, upgradation, modernization, finance and management of the airport and to perform services and activities constituting aeronautical services and non-aeronautical services at the airport.

+ It is clear that the Petitioners do not undertake any process identified with AAI. The Petitioners run their own operations using their own processes, policies, methods, design, techniques etc. The sole responsibility and liability for performances of the services is that of the petitioners. AAI has completely divested its rights (other than reserved activities) to build, operate and maintain the airport. Once the functions of AAI have been completely divested by it and assigned to the Petitioners, there is no question of the petitioners representing AAI in performance of those functions. There is no representation right that has been assigned to the petitioners by AAI.

+ Further, the taxable service is not mere granting of a franchise but is where the franchisor provides service to a franchisee. For the transaction to be taxable, it is necessary that the service should be provided by the AAI to the Petitioners. It is not pointed out by the Revenue as to how and in what form service is being provided by AAI to the Petitioners. The Annual Fees paid is not because of any service rendered by AAI to the Petitioner. AAI has entrusted the petitioners with some of its functions under Section 12 of the Airports Authority of India Act and no service is being rendered by the AAI to the petitioners in performance of those functions. Perusal of clauses of OMDA clearly shows that AAI does not render any service to the petitioners.

+ Clearly, as there is no representational right conferred by AAI on the petitioners, the OMDA cannot constitute a franchise in terms of Section 65(47) of the Finance Act. Further as no service is being provided by AAI to the petitioners, there cannot be said to be any taxable service in terms of section 65(105) (zze).

+ The requirement of the taxing entry of conferment of a representational right and provision of service by AAI to the Petitioners is absent in the present transaction, thus it does not fall within the taxing entry "Franchise Service".

Blocking bank accounts:

++ AAI had sought to block the escrow account of the Petitioners on the ground that the transaction is exigible to tax under the taxing entry "Renting of Immovable Property Services". Since the categorical stand of the Revenue is that, the transaction is not exigible under the taxing entry "Renting of Immovable Property Services" and further as we have held that the transaction does not fall within the taxing entry "Franchise Service", the action of the AAI in blocking the Escrow account cannot be sustained.

The Writ Petitions were disposed of by holding that -

++ OMDA does not constitute a "Franchise" in terms of Section 65(47) of the Finance Act and the transaction between the Petitioners and AAI does not constitute a taxable service in terms of section 65(105) (zze) of the Finance Act.

++ Action of the AAI in blocking the Escrow Account of the petitioners is quashed.

(See 2017-TIOL-394-HC-DEL-ST)