Airport Service

India is a developing country with a growth rate of about 7 to 9%. Service Industry is developing rapidly than manufacturing sector and growth rate in agricultural sector is the lowest.

To increase the tax base and tape new areas for revenue, Government of India has started imposing Service Tax on designated services since 1994. Initially, a few services were taxed, but over the years, the list of taxable service is expanding and at present 105 services are under tax net.

This blog seeks to demystify the service tax on Airport Service.

1. Meaning and scope

1.1
As per section 65 (105)(zzm) of the Finance Act, 1994 (‘the Finance Act’), any service provided or to be provided to any person, by airports authority or any person authorised by it, in an airport or a civil enclave is liable for service tax.

1.2
As per section 65(3d) of the Finance Act, ‘airports authority’ means the Airports Authority of India (‘AAI’) constituted under section 3 of the Airports Authority of India Act, 1994 (‘the AAI Act’) and also includes any person having the charge of management of an airport or a civil enclave.

1.3
As per section 65(3c) of the Finance Act read with section 2(b) of the AAI Act, "airport" means a landing and taking off area for aircrafts, usually with runways and aircraft maintenance and passenger facilities and includes aerodrome. As per section 2(2) of the Aircraft Act, 1934 (‘the Aircraft Act’), "aerodrome" means any definite or limited ground or water area intended to be used, either wholly or in part, for the landing or departure of aircraft, and includes all buildings, sheds, vessels, piers, and other structures thereon or appertaining thereto.

1.4
As per section 65 (24a) of the Finance Act read with section 2(i) of the AAI Act, "civil enclave" means the area, if any, allotted at an airport belonging to any armed force of the Union, for use by persons availing of any air transport services from such airport or for the handling of baggage or cargo by such service, and includes land comprising of any building and structure on such area;

2. Key ingredients

• service should be provided by airports authority or any person authorised by it
• service should be provided in an airport or a civil enclave
• any service provided or to be provided is subject to service tax
• service may be provided to any person

3 Service should be provided by airports authority or by any authorised person

3.1
AAI was formed on 1st April 1995 by merging the International Airports Authority of India and the National Airports Authority with a view to accelerate the integrated development, expansion and modernization of the operational, terminal and cargo facilities at the airports in the country conforming to international standards. Most of the International Airport and Domestic Airports as well as Civil Enclaves are managed by AAI. However, Hindustan Aeronautics Ltd. (‘HAL’), Delhi International Airports Pvt. Ltd. (‘DIAL’), Mumbai International Airports Pvt. Ltd. (‘MIAL’) and Cochin International Airport Ltd. (‘CIAL’) manage Bangalore, Delhi, Mumbai and Cochin airports respectively. Therefore, AAI, HAL, DIAL, MIAL and CIAL are airport authorities (‘the AA’) for the purpose of service tax.

3.2
As per section 12 of the AAI Act, AAI is required to manage the airports and the civil enclaves. It is also required to provide air traffic service and air transport service at any airport and civil enclaves. It is also mandated to establish warehouses and cargo complexes at the airports for the storage or processing of goods, arrange for postal, money exchange, insurance and telephone facilities for the use of passengers and other persons at the airports and civil enclaves.

3.3
Airport service can be provided directly by the AA or by a person authorised by the AA. Authorised person can be an individual or a group of individual whether incorporated or not. An authorised person can provide only those services for which he has been granted permission. An airport service provided by an un-authorised person can not be taxed under the category of airport service. Similarly, a service provided by an authorised person, for which he has not been authorised by the AA also can not be taxed under the category of airport service.

4 Services should be provided in an airport or a civil enclave

4.1
Airport and civil enclave has been defined in the Finance Act. These are well defined enclosed area which include airstrip, parking bay, hangers for aircraft, maintenance area, passenger handling area, cargo handling area, air traffic control facilities, amenities, all buildings, shed and other open area inside the airport/civil enclave.

4.2
A service provided by the AA or an authorised person outside the airport or civil enclave is beyond the scope of airport service.

4.3
Further, airport and heliport are defined separately in the AAI Act. Section 2 (j) of the AAI Act defines "heliport" as an area, either at ground level or elevated on a structure, used or intended to be used for the landing and take-of of helicopters and includes any area for parking helicopters and all buildings and structures thereon or appertaining thereto. On the other hand, as aforesaid, airport has been defined under section 2(b) of the AAI Act, which usually has runways. Therefore, services provided at heliports do not fall within the scope of airport service.

5 Any service provided or to be provided is subject to service tax

5.1
The Finance Act seeks to tax all services provided inside the airport and civil enclave. No specific description of the service has been given in the Finance Act. As per section 22 of the AAI Act, AAI may (i) charge fees or rent (a) for the landing, housing or parking of aircraft or for any other service or facility offered in connection with aircraft operations (b) for providing air traffic services, ground safety services, aeronautical communications and navigational aids and meteorological services (c) for the amenities given to the passengers and visitors, and (ii) charge fees or rent from persons who are given by AAI any facility for carrying on any trade or business.

5.2
In view of the above, following services are usually provided inside the airport:
• facility for landing, housing or parking of aircraft
• air traffic services
• Ground safety services
• Aeronautical communications and navigational aids and meteorological services
• Repair and maintenance of aircraft
• Passenger scanning and frisking
• Baggage scanning
• Transportation of passengers and baggage from aircraft to terminals
• Import and export cargo handling, storage and delivery
• Warehousing
• Postal, telephone and telex service
• Ticketing, hotel booking, airport transfer
• Money exchange, insurance
• Catering of passenger in the airport lounge
• Duty free shopping, snack bar, book stall
• Entry in to airport and Viewers gallery
• Parking of vehicles, etc

5.3
As per explanation given in section 22(1)(a) of the AAI Act, "aircraft" does not include an aircraft belonging to any armed force of the Union and "aircraft operations" does not include operations of any aircraft belonging to the said force. Therefore, services given to an armed force aircraft does not fall within the ambit of taxable airport service.

5.4
Renting or leasing out of a part of an airport/ civil enclave or premises thereof is not deemed as rendering of service and therefore, will not be taxed . However, services rendered from therein will remain liable for service tax as the rented/leased property is still remains a part of airport/civil enclave and service will be rendered inside the airport/civil enclave. Telephone service, telex service, escort service, hotel booking service etc. provided by tenant/lease holder will fall within the mischief of airport service.

5.6
Sale of goods is not a service. Therefore, sale of goods/books/foods/snacks etc. by duty free shops, book stores, restaurants, kiosks, etc. are not subject to service tax. However, supply of food and beverage to the passengers by the restaurants/snack bar/kiosk inside airport against coupons issued by the Airlines may be considered as catering service subject to tax, for the reasons that (i) passengers get only those food and beverage which is decided by the Airlines and not as per their choice/menu card, (ii) payment is made by the Airlines to the restaurants/snack bar/kiosk and not by passengers themselves. On the other hand, if Airline purchases food and beverage from the restaurants/snack bar/kiosk situated inside airport and supply the same to passengers against coupons, it may not fall within the ambit of service tax, reason being that (i) for restaurants/snack bar/kiosk, it is a sell of goods to the Airline, and (ii) for Airline, it is a free service to the passengers. In this scenario, when supply of food and beverage to passengers is considered as service, it will be taxable under the category ‘airport service’ and not under ‘outdoor catering service’.

5.7
Supply of food packets to the Airlines by Air Caterers for in-flight catering of passengers falls within the ambit of port service and exigible to tax.

5.8
Cleaning, inspection, repair and maintenance of the aircraft are rendered inside airport; therefore these services are exigible to service tax under ‘airport service’.

5.9
AAI provides storage of the cargo in warehouses and charge rent for such storage. As these storage services are provided inside the airport, storage rent received by AAI or authorised persons is exigible to service tax under ‘airport service’.

5.10
It may be noted that any service includes each and every service rendered inside the airport or civil enclave, whether such service is otherwise taxable or not. It will also include all those service, which otherwise are exempted. Transportation charges paid on transportation of good for export are exempted from the levy of service tax. However, transportation charges paid on transportation of good for export inside the airport will be taxable under airport service without any exemption.

6 Service may be provided to any person

6.1
The Finance Act seeks to levy service tax on services provided by AA and persons authorised by AA to any person. Any person can be an individual or a firm or a company. Whether, any person will include AA incase it receives services from authorised person. To illustrate, AAI hires an agency for running of X-ray machine meant for scanning of passengers baggage. The agency charges a lump sum amount or amount calculated on the basis of scanned baggage. The question is whether agency is liable to pay service tax as service has been rendered inside airport. It appears that intend of the legislation is to levy service tax on services provided by AAI directly or indirectly through a authorised person, the agency being discharging the function of AAI, it cannot be subjected to tax under airport service. However, if such service, i.e. running of X-ray machine for a client, is otherwise taxable under a different heading, then agency has to pay service tax under that appropriate heading.

6.2
The Board has clarified that charges such as royalty, license fees etc. collected by AAI from other service providers at the airport such as ground handling, security, common user terminal services etc. are chargeable to service tax under ‘airport service’ . The above clarification appears to be at variance with the intention of the legislation. AAI receives security services for safety and security of the airport which is a legislative mandate to the AAI under the AAI Act. In this case AAI or authorised persons are not providing any airport service, therefore they do not appear to be exigible to service tax under ‘airport service’. However, they are exigible to service tax under ‘Security service’. On the other hand, if an authorised security agency is providing a security service to an airline, it will be exigible to service tax under ‘airport service’.

6.3
Generally airport service may be provided to the following persons:
• Airlines
• Passengers in terms of utilities like telephone, booking etc
• Importers and exporters of goods
• Aircraft owners

7 Who is liable to pay service tax?

7.1 In most of the cases, service provider, i.e., person who is providing taxable service is liable to pay service tax and, hence, AAI or authorised persons providing services is liable for service tax. However, in few cases, exceptions have been made and the service receiver is made to liable to pay service tax. By Finance Act, 1999 it has been provided that if a person providing service is non-resident and does not have address or place of business in India, service tax is payable by person receiving taxable service in India [Rule 2(1)(d)(iv)]. The amendment has come in effect from 11 May 1999. In such a case, person receiving the service will also have to register.

7.2 Repair and maintenance of an aircraft inside the hanger of an airport may be undertaken by Airbus or Boeing Company and they may not have any permanent address or place of business in India. In such case, service recipient is liable to pay service tax.

7.3 If a person pays service tax, which he was not liable to pay in the first place, he is entitled for a refund provided refund claim has been filed within the prescribed time .

8. Valuation

8.1 The value of any taxable service is determined as per the provisions of the Service Tax (Determination of Value) Rules, 2006 [‘the Valuation Rules’].
8.2 As per Rule 3 of the Valuation Rules, the value of taxable service, where the consideration received is not wholly or partly consisting of money, is determined by the service provider in the following manner :-

(a) the value of such taxable service is equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;
(b) where the value cannot be determined in accordance with clause (a), the service provider is required to determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

8.3 Further, as per Rule 5(1) of the Valuation Rules, where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs are includable in the value for the purpose of charging service tax on the said service.

8.4 However, as per Rule 5(2) of the Valuation Rules, the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, are excluded from the value of the taxable service if all the following conditions are satisfied,
(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
(iii) the recipient of service is liable to make payment to the third party;
(iv) the recipient of service authorises the service provider to make payment on his behalf;
(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

9. Service tax credit

9.1
IPR holder avails many input services in the course of providing intellectual property services to their client. A few examples are Advertising Services, Banking and Other Financial Services, Business Support Services, Chartered Accountants Services, Courier Services, Facsimile Services, Telephone Services and a lot other services which are taxed. IPR holder has to bear the incident if service tax charged on these input services.

9.2
The Cenvat Credit Rules, 2004 provides that intellectual property services provider can take credit of the service tax paid on input services and setoff the same on payment of service tax on output service namely intellectual property services

9.3
in case IPR holder is providing services other than intellectual property services which are not taxed and separate accounts are not maintained for taxable service and exempted service, then he can avail Cenvat credit only up to 20% of his tax liability.

9.4
Similarly, a manufacturer or a service provider can take credit of the service tax paid on intellectual property services and adjust same against his excise duty/ service tax liability.

10 Rate of Service Tax

Presently Rate of service tax is 12% and education cess @ 2% on service tax is also payable.

However, this rate of tax is up to 28 February 2007 only.

It is expected that rate of tax will be increased to 14% in the next budget.


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