No Service Tax Applicable on User Development Fee collected From Passengers by Delhi, Mumbai and Hyderabad International Airports: Supreme Court

The Supreme Court has ruled that “user development fee” (UDF) levied and collected by the airport operation, maintenance, and development entities from passengers departing the concerned airports, is a statutory levy, and thus, it is not subjected to levy of service tax under the provisions of the Finance Act, 1994.

The bench comprising Justices S. Ravindra Bhat and Dipankar Datta were hearing an appeal against the decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), who had ruled that the UDF levied and collected by the assesses- the Mumbai International Airport Pvt Ltd, Delhi International Airport Pvt Ltd, and Hyderabad International Airport Pvt Ltd- under Section 22A of the Airports Authority of India Act, 1994 (AAI Act), was not liable to service tax.

While holding that there is a distinction between the charges, fee and rent collected under Section 22 of the AAI Act and the UDF levied and collected under Section 22A of the AAI Act, the top court said that the UDF is in the form of a ‘tax or cess’ collected for financing the cost of future projects. The court said that there was no consideration for the services provided by the assessee-entities to the customers, visitors, passengers, and vendors, etc.

Noting that as a part of the Union’s economic policies, the upgradation and renovation of airports are funded through UDF, which is a statutory levy, the court remarked that the fact that the UDF amount is not deposited in a government treasury, per se, does not make it any less a statutory levy or compulsory exaction. Nor does its discretionary nature render it any less a statutory levy. The bench said that merely because the funds are kept in an escrow account, and their utilization is monitored separately, it does not undermine the public nature of the funds in any manner.

The assessees entered into joint venture arrangement/agreements with the Airports Authority of India (AAI), where they had agreed to undertake some activities enjoined upon the AAI by the AAI Act, for the purpose of operation, management and development of the airports (OMDA).

The assessees were authorised by various notifications issued by the Central Government under Section 22A of the AAI Act, to collect a “development fee” for every departing domestic and international passenger at the concerned airports for a period of 48 months.

The Commissioner of Service Tax issued show cause notices demanding payment of tax on the development fee collected by the assessees for various periods. The demand raised was thereafter confirmed. The appeal filed by the assessee before the CESTAT was allowed, who held that the development fee collected was not liable to service tax levy.

Against this, the revenue department filed an appeal before the Supreme Court.

The department argued that the in terms of the OMDA agreements, the assessees were responsible for the development, design, and upgradation of airport. It is for this purpose that they have been permitted to collect UDF from the passengers, which are to be used for extending or enhancing various services and facilities inside the airport.

The department contended that under Section 22A of the AAI Act, the AAI “may”, after the previous approval of the Central Government, “levy on, and collect from, the embarking passengers at, an airport, the Development Fees”.

The department claimed that such levy cannot be called a tax because it is discretionary and subject to the approval of the Central Government. Further, it is meant for funding or financing the costs of upgradation, expansion, or development of the airport, and establishment or development of a new Airport. It further argued that the amounts cannot be termed as levy, because they are not deposited with the government treasury.

The Supreme Court reckoned that in Consumer Online Foundation vs Union of India, (2011) 5 SCC 360, the top court was dealing with the issue regarding the validity of the development fees levied and collected from embarking passengers, by lessees of airports under the OMDAs. The court had held that there is a distinction between the charges, fees and rent collected under Section 22 and the development fees levied and collected under Section 22A of the AAI Act.

In Consumer Online Foundation (2011), the court had concluded that the levy under Section 22A, though described as fees, is really in the nature of a cess or a tax for generating revenue for the specific purposes mentioned in Section 22A (a), (b) and (c) of the AAI Act. Thus, Article 265 of the Constitution of India, which provides that no tax can be levied or collected except by authority of law, gets attracted.

In light of the observations made in Consumer Online Foundation (2011), the court said, “The observations and findings extracted above are decisive about the nature of development fee, collected under Section 22A; they are statutory exactions and not fees or tariffs, as was contended by the Union of India. In fact, the court even underlined that the “nature of the levy under Section 22A of the 2004 Act, in our considered opinion, is not charges or any other consideration for services for the facilities provided by the Airports Authority.”

The bench further observed that to attract levy of service tax, a taxable service has to be provided to a recipient by a service provider, for consideration. In the absence of any nexus to any service rendered, an amount charged, or value of service or goods provided without a consideration, would not be a taxing incident.

The court referred to the Airports Authority of India (Major Airports) Development Fees Rules, 2011, which came into force on 02.08.2011; Rule 3 of which authorises the collection of development fees. Further, by Rule 4 (1), an Escrow account has to be opened in respect of each airport into which the development fee collections are to be deposited; the AAI being empowered to monitor and regulate the receipts and utilization of the development fees under Rule 4 (2).

“Besides the rules, the assessee, in the case of DIAL, has placed on the record, a letter issued to it, by AAI which imposes controls on the utilization of amounts collected as development fee; apart from the fact that the amounts are deposited in an escrow, any plan for utilization has to be approved,” the court took note.

The court added: “The UDF collected by the assessee is to bridge the funding gap of project cost for the development of future establishment at the airports. There is nothing on record to show that any additional benefit has accrued to passengers, visitors, traders, airlines etc., upon levy of UDF during the period in question in the present case.”

The bench reiterated that there is a distinction between the charges, fee and rent, etc. collected under Section 22 of the AAI Act and the UDF levied and collected under Section 22A of the AAI Act. “It is that the UDF is in the form of 'tax or cess' collected for financing the cost of future projects and there was no consideration for services provided by the assessee to the customer, visitors, passengers, vendors etc. The aggregate of collections in the bank accounts do not form part of profit and loss account,” the court said.

The court also referred to a circular dated 18.12.2006, issued by the Central Board of Excise and Customs (CBEC), now the Central Board of Indirect Taxes and Customs (CBIC), where it was clarified that collection of amounts, by way of taxes, sovereign or statutory dues, by Public Authorities while performing statutory functions /duties under the provisions of a law, would not be subjected to service tax levy. It was stated that the fee collected by Public Authorities for performing such activities, is in the nature of compulsory levy. Therefore, such an activity performed by a sovereign/Public Authority under the provisions of law, would not constitute provision of taxable service to a person and, therefore, no service tax can be levied on such activities.

The court remarked that in the present case, there was neither any compulsion to levy development fee nor is the collection conditional upon its deposit in the government treasury. “However, the absence of these features in this court’s opinion, does not render UDF any less a statutory levy,” said the court.

“Firstly, the ruling in Consumer Online Foundation (Supra) is conclusive that UDF is a statutory levy. Secondly, the collection is not premised on rendering of any service. Thirdly, the amounts collected are deposited in an escrow account, not within the control of the assesses. Fourthly, the utilization of funds, is monitored and regulated by law,” the bench observed.

The court added: “In this regard, the fact that the amount is not deposited in a government treasury, per se, does not make it any less a statutory levy or compulsory exaction. Nor does its discretionary nature, (in the sense that it may not be necessarily levied always) render it any less a statutory levy.”

The court remarked that the Airport management has evolved, and it is no longer the monopoly of the government, with private participation being recognized. Further, the sector is now regulated through a new regulator, i.e., the Airports Economic Regulatory Authority of India. It observed that as part of the Union’s economic policies, the upgradation and renovation of airports are funded through UDF, which is a statutory levy.

“Instead of the conventional practise of ensuring that amounts collected are deposited with the Government, an entirely new regulatory regime has been envisioned, under the 2011 Rules, read with specific conditions imposed by the AAI on each assessee, which includes monitoring of amounts, nature of expenditure, submission of plans for expansion, renovation, their sanctioning etc. These rules and controls are in the public interest, and evidently intended to further efficiency in funding and swift taking up and completion of works, rather than funding through Finance Rules, which might entail delay, and cost overruns,” the court observed.

The bench said that the public nature of these funds does not get undermined in any manner, merely because they are kept in an escrow account, and their utilization is monitored separately.

The court, therefore, dismissed the appeal.

Case Title: Central GST Delhi – III vs Delhi International Airport Ltd

Dated: 19.05.2023

Citation : 2023 LiveLaw (SC) 457

Counsel for the Appellant: Mr. B. Krishna Prasad, AOR Mr. Sanjay Jain, A.S.G. Mr. Mukesh Kumar Maroria, AOR Ms. Nisha Bagchi, Adv. Mr. Arkaj Kumar, Adv. Mr. Padmesh Mishra, Adv. Mr. Digvijay Dam, Adv.

Counsel for the Respondent: Mr. Arvind Datar, Sr. Adv. Mr. Preetesh Kapur, Sr. Adv. Mrs. Vanita Bhargava, Adv. Mr. Ajay Bhargava, Adv. Mr. Shantanu Chaturvedi, Adv. Ms. Prerna Singh, Adv. M/S. Khaitan & Co., AOR Mr. Tarun Gulati, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Kishore Kunal, Adv. Mr. Shubham Kulshreshtha, Adv. Ms. Runjhun Pare, Adv. Mr. Kaustubh Singh, Adv. Mr. E. C. Agrawala, AOR Mr. Tarun Gulati, Sr. Adv. Ms. Richa Kapoor, AOR Mr. Kunal Anand, Adv. Mr. Kunal Kishor, Adv. Ms. Tusharika Sharma, Adv. Ms. Eesha Sharma, Adv.

Airports Authority of India Act, 1994 (AAI Act): Section 22A-

The Supreme Court has ruled that “user development fee” (UDF) levied and collected by the airport operation, maintenance, and development entities from passengers, is a statutory levy, and thus, it is not subjected to levy of service tax under the provisions of the Finance Act, 1994.

While holding that there is a distinction between the charges, fee and rent collected under Section 22 of the AAI Act and the UDF levied and collected under Section 22A of the AAI Act, the top court said that the UDF is in the form of a ‘tax or cess’ collected for financing the cost of future projects. The court said that there was no consideration for the services provided by the assessee-entities to the customer, visitors, passengers, vendors, etc.

Noting that as a part of the Union’s economic policies, the upgradation and renovation of airports are funded through UDF, which is a statutory levy, the court remarked that the fact that the UDF amount is not deposited in a government treasury, per se, does not make it any less a statutory levy or compulsory exaction. Nor does its discretionary nature render it any less a statutory levy. The bench said that merely because the funds are kept in an escrow account, and their utilization is monitored separately, it does not undermine the public nature of the funds in any manner.