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The Cancellation Conundrum

 

APRIL 16, 2018

By Sadhvi Gupta & Akash Mittal

WHILE the members of travelling public are smart enough to reserve their air travel tickets in advance, if a customer cancels a pre-booked ticket, he is charged with hefty amounts of 'cancellation charges'. In this article, we have made an attempt to analyze GST implications on aforementioned cancellation charges imposed by airlines.

In view of the above transaction, two fundamental questions arise-

1. As the air transportation service was not provided, was there any supply involved in the present case? If yes, whether the activity performed in relation to cancellation of an airline ticket constitutes to be 'supply'?

2. If the above qualifies as 'supply', will the same constitute to be an independent supply exigible to tax or part of the original transaction of booking of an airline ticket?

IS THERE ANY SUPPLY MADE BY THE AIRLINES?

One might wonder since the essence and sole purpose of undertaking this transaction was to avail an air transportation service and the same did not occur, was there even a supply made in this scenario? Was this transaction only limited to provide an actual air travel journey? Or was it a conditional promise to provide an air journey? The possibility to miss out such a transaction from outspread wings of the GST net is quite low.

Under the GST regime, supply is a taxable event that attracts the levy of GST. In terms of Section 7 of the Central Goods and Services Tax Act (hereinafter referred as "CGST Act"), a transaction will qualify as 'supply' if there is a 'supply of goods/ services' made or agreed to be made 'for' a 'consideration' by a person 'in the course or furtherance of business'.

In an airline ticket arrangement, a customer books an airline ticket by paying a suitable fee as consideration. In return of the consideration, the airline promises to provide transportation by air wherein it agrees to carry the passenger and its baggage on a particular flight. When an airline ticket is issued, the terms and conditions of the ticket are accepted by the customer wherein it is agreed that a particular amount (called as cancellation charges) will be charged in the event of cancellation and such understanding is part of contract of air travel arrangement.

Reference may be made to GST Ruling 2009/3 by the Australian Government wherein it has been explained that in the said air travel ticket arrangement, the airline agrees to make two supplies-

1. Intended Supply (the actual transportation of the passenger on the flight).

2. Facilitation Supply (In order to effectuate the intended supply, the airline perform various functions like checking the availability of seats on flights, informing the customer available seats, making a reservation of ticket, holding payment, cancellation of ticket, processing of refund or making any other administrative arrangements)

Now, if the tickets are cancelled by a customer, such customer is charged a cancellation fee and offered a refund of the balance ticket fare. It is important to understand that under the said arrangement, even if a customer fails to show up or cancels a ticket, the supplier at his end still makes a facilitation supply, although the intended supply is not made. Therefore, it is difficult to put forward an argument that no supply was made if the intended supply did not eventuate.

The above view is consistent with landmark decision given by High Court of Australia in Commissioner of Taxation vs Qantas Airways Ltd (2012-HCA 41) where it was held that payments received from prospective customer for flights booked but not taken constitutes as consideration for a taxable supply. The majority decided as follows-

"The Qantas conditions...did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. This was a ?taxable supply„ for which the consideration, being the fare, was received."

Thus, it may be said that cancellation charges is the consideration received by the airlines against the facilitation supply to customers. Hence, the activity of cancellation of airline ticket constitutes to be 'supply' in accordance with Section 7 of the CGST Act and shall be exigible to tax.

NATURE OF SUPPLY- INDEPENDENT OR PART OF ORIGINAL TRANSACTION?

As discussed earlier, under an airline arrangement the consideration received by the airlines is not just for the intended supply (actual transportation service), but also for implied facilitation supplies (like cancellation supply etc.) which are agreed to be made by the airlines.

Now the question that may arise is whether such cancellation supply is independent of intended supply or forms part of the intended supply? If it is a part of the intended supply, whether both supplies together constitute to be a composite supply? What tax will be charged on such cancellation supply?

Section 2(30) of the CGST Act defines composite supply as a supply comprising of two or more taxable supplies that are naturally bundled and are supplied in conjunction with each other in ordinary course of business. Amongst the said supplies, supply that forms the predominant element of composite supply is known as principal supply and other supply is ancillary to the principal supply.

The airlines provide a bouquet of services to customers that comprises of the elements of transportation service (intended supply) and other facilitation supplies that are naturally bundled in the ordinary course of business. Further, it is pertinent to note that it is impossible to provide such facilitative supply in absence of the intended supply.

Therefore, the air transportation service gives essential character to the complete transaction and the cancellation supply is incidental to such booking. The principal supply is that of air passenger transportation service and cancellation services is ancillary to the principal supply and together constitute as a composite supply.

Section 8 of the CGST Act provides that the composite supply shall attract the tax treatment as that of principal supply. Thus, the tax treatment of cancellation supply would be that of the air transportation service.

Reliance can be placed on Sectoral FAQs issued by Central Board of Indirect taxes &Customs in relation to transportation and logistics. The relevant part of the FAQ has been reproduced below:

"Question 18: Does the GST treatment on fees for ancillary services in relation to air transport follow that of the underlying air transport service?

Answer: Yes, ancillary services are part of the service of transporting a passenger by air and do not constitute a separate supply of service. In this respect, ancillary services include services that are incidental to the transport of passengers by air (e.g., excess baggage charges, date change charges, un-accompanied minor fees, preferred seat charges, cancellation fees etc.)"

Also, similar understanding can be derived from the Draft circular F. No. 354/146/2012- TRU dated 27th September, 2012 issued in the Service Tax regime, wherein it has been clarified as follows:

"Issue (c): When a passenger puts a ticket for refund, whether full rate of 12% will apply to cancellation fee, refund fee, no show fee, since the passenger is not availing air transportation service?

Clarification: In terms of section 66B of the Finance Act. 1994, service tax is leviable on service provided or agreed to be provided. Thus service tax becomes payable when a booking is made, i.e. when the service is agreed to be provided, the subsequent cancellation of the ticket does not take it outside the purview of tax absolutely. ·

However, Rule 6(3) of the Service Tax Rules, 1994 provides that where an assessee has issued an invoice, or received any payment against a service to be provided which is not so provided by him either wholly or partially for any reason, the assessee may take credit of such excess service tax paid by him if the assessee,--

(a) has refunded the payment or part thereof, so received for the service provided to the person from whom it was received; or

{b) has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.

Thus the amount retained by the airlines in the event of cancellation of ticket, out of the original fare will remain liable to be taxed as originally taxed and hence is entitled to abatement applicable in this regard. However, if the ticketed amount is fully refunded to the passenger but no-show (late cancellation charges) or cancellation fee is separately collected through an invoice or bill, abatement will not be applicable. Here, cancellation fee takes the nature of administrative charge."

CONCLUSION

In the event of cancellation of pre-booked airline tickets, there is no separate transaction taking place between the customer and airlines. The cancellation supply (ancillary supply) is part and parcel of the main transaction of supply of passenger air transportation services (principal supply). Therefore, the tax treatment attracted to the cancellation charges would be same as that attracted to air transportation supply.

However, only time will tell whether such dissection of the transaction into intended and facilitative supply is proper or not. In view of such ambiguity, a divergent view could also be taken that the cancellation charges imposed on customer constitutes to be an independent supply of "tolerating an act/situation" taxable as per Entry 5(e) of Schedule 2 to the CGST Act. This cancellation conundrum needs to be solved soon to provide respite to the airlines industry.

(The views expressed are strictly personal.)

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

 


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