By TIOL News Service

NEW DELHI, MAR 06, 2017: APPEALS have been filed by, both the appellant-assessee and the Revenue against the o-in-o passed by the CCE, Delhi .

The brief facts are -

In the year 2007, Air India Limited and Indian Air Lines Limited were merged to form AIL. The dispute in the present case pertains to service tax demanded for the period July 2003 to March 2007. During the said period, AIL had a 100% subsidiary in the name of Airline Allied Services Limited (AASL). AIL and AASL entered into a Memorandum of Understanding dated 29.03.1999 for managing the affairs of AASL. They also entered into three agreements namely, (i) Aircraft Lease Agreement (ii) Engineering and Maintenance Agreement, and (iii) Ground Traffic, other Support Services and Handling Agreement. The MOU and the three agreements were entered into with the objective of overall improvement in the work of AIL. The dispute pertains to the question whether service tax is payable by AIL on the activities performed by AIL for AASL under the said agreements.

SCN was issued on 24.10.2008 demanding service tax and the same was adjudicated.

The appellants have challenged the confirmation of tax demand of Rs.18.7croreson the ground that -

+ Additional DG, DGCEI does not have jurisdiction to issue the SCN [ MangaliImpex Limited vs. UOI = 2016-TIOL-877-HC-DEL-CUS relied upon]

+ Relationship between AIL and AASL cannot be considered to be one between the service provider and service recipient, because the latter is a 100% subsidiary unit of the former and the agreement by AIL was one of managing its affairs. [State of UP vs. Renusagar Power Company - AIR (1998) 4 SCC 59 .]

+ AIL was not able to recover all the expenses incurred by them for operating AASL and the money due from AASL was written-off and consequently, there cannot be any liability.

+ SCN is time-barred as the activities of AIL are in public domain.

The Revenue has challenged the dropping of the ST demand of Rs.103.57crores arguing that -

+ The adjudicating authority has wrongly dropped the demand for service tax on ‘Management, Maintenance and Repair Service' provided by AIL to AASL for the reason that no separate bill was raised for Management, Maintenance and Repair. It was billed as part of Lease charges only. Revenue has argued that as per the lease agreement, AIL had undertook the liability for Management, Maintenance and Repair of Aircrafts given on lease to AASL. Since the services under Management, Maintenance and Repair has been rendered, the service tax is liable to be paid and the onus is on AIL to provide the actual amount charged.

The Bench considered the submissions and observed -

Jurisdiction:

++ Case cited dealt with the powers of DRI as well as Commissioner of Customs (Preventive) for demanding customs duty under Section 28 of the Customs Act, 1975. In the present case, we are dealing with the show cause notice issued by ADG, DGCEI for demand of service tax under the Finance Act, 1994. We note that CBEC, vide Notification No. 3/2004 dated 11.03.2004 has appointed the ADG, DGCEI as proper officer in terms of Rule 3 of Service Tax Rules, 1994. Accordingly, we find no infirmity in the jurisdiction of ADG,DGCEI to issue the present show cause notice.

Ground Traffic and other Support Services:

++ Show cause notice as well as grounds of appeal allege that the practice of accounting between AIL and AASL was such that AIL collected the ticketing charges from passengers and credited the same to the account of AASL after deducting 4% charges payable to them by AASL. If this was a fact then AIL's claim that the consideration has not been received would have to be disregarded. However, the fact will need to be independently confirmed.

++ We note that even though AASL is a 100% subsidiary of AIL, the two companies are having distinct and separate identities and even registered separately under the Companies Act. Consequently, the two companies have maintained separate books of accounts and their profit and loss account were to be determined separately. Consequently, AASL cannot be considered as a branch or extended arm of AIL. The MOU and the various agreements have created a legal fiction that AASL is a separate entity from AIL and the services were rendered by AIL to AASL for a consideration of 4% commission which was to be retained by AIL. In view of the above, we are convinced that service tax is liable to be paid by AIL for the commission received from AASL in terms of the agreement. However, it has been claimed that the consideration has actually not been received by AIL from AASL. It is also contended that entire consideration is written off for the reason of loss incurred by AASL.

++ For this purpose, we remand the matter to the adjudicating authority for obtaining such certificate from the Chartered Accountant and to pass a de-novo order in the matter.

Limitation:

++ In the annual report 2003-04, it is mentioned "Non-charging of service tax on certain services". This implies that even where service tax has been collected the same was not deposited pending registration. It has also been recorded by the statutory auditors that service tax was payable on the services rendered by AIL to AASL. However, on the pretext that consideration has not been received (despite realization of the same from sale of tickets conducted on behalf of AASL) AIL has not discharged the service tax liability. In the light of the observations of the statutory auditors, we are not convinced with the argument taken by appellants that service tax was not paid on the basis of bonafide belief that service tax was not payable. Consequently, we are concluding that Revenue is entitled to invoke the extended period of limitation in this case.

Revenue appeal:

++ In terms of Aircraft Lease Agreement and the Aircraft Maintenance Agreement, AASL was liable to pay to AIL the Aircraft lease charges. It was also the responsibility of AIL to carry out the aircraft repair under the Aircraft Maintenance Agreement.

++ We have gone through the relevant clauses of the agreement. These clauses clearly show that lease charges were to include maintenance charges and AIL was under obligation to maintain and repair the aircrafts as part of the lease agreement. Thus this maintenance agreement cannot be considered as an independent and separate agreement. Accordingly, in the impugned order, it has been rightly concluded that the aircraft lease service cannot be subjected to service tax under the category of Management, Maintenance and Repair .

Conclusion:

(a) The grounds of jurisdiction as well as limitation raised by the appellant are dismissed.

(b) Service tax is liable to be paid on the consideration received by AIL from AASL in terms of Ground Traffic, Other support service and Handling service. However, to decide the quantum of service tax payable, the issue is remanded for de-novo decision after obtaining a certificate from an independent Chartered Accountant as to whether consideration has been received by AIL from AASL.

(c) Revenue's appeal stands dismissed.

(See 2017-TIOL-696-CESTAT-DEL)