Supreme Court says that collected user development fees by Airport development entities is not liable to service tax

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On May 19, 2023, the Supreme Court of India heard the matter Central GST Delhi - III vs. Delhi International Airport Ltd. where the validity of service tax on user development fees was questioned. The top Court stated that no service tax was leviable on user development fees that was collected by the Mumbai International Airport and Hyderabad Airport. The matter was presented before a two-judge bench consisting of Justice Dipankar Datta and Justice S. Ravindra Bhat. In this case, all the assessees had entered into joint venture arrangements/agreements with the Airports Authority of India. The assessees were authorized, by various notifications issued by the Central Government to collect a “development fee” @ Rs. 100 for every departing domestic passenger. The assessees were also directed to collect Rs. 600 for every departing international passenger at the concerned airports for a period of 48 months.  The Commissioner of Service Tax, through various show cause notices, demanded payment of tax on the development fee collected for various periods which were adjudicated and confirmed. The CESTAT remanded the matter to the original authority requiring fresh adjudication. The original authority disposed of all show cause notices by confirming demands, and also levying penalties under the Act. The adjudicating authority accorded the benefit of “cum-tax” valuation. These orders were challenged before the CESTAT, which, by the orders impugned, allowed the assessees’ appeals, holding that the development fee collected was not liable to service tax levy. The matter was then mentioned before the Supreme Court where Advocate Richa Kapoor appeared for the Respondent and Advocate Mukesh Kumar Maroria appeared for the Respondent. 

The top Court said that “By virtue of Section 67 of the Finance Act, the basis of charge is the value of taxable service.” The bench mentioned that the UDF collected by the assessee was to bridge the funding gap of project cost for the development of future establishment at the airports. The top Court added, “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.” There was a distinction between the charges, fees, rent, etc. collected under Section 22 of the AAI Act and the UDF levied and collected under Section 22A of the AAI Act. The top Court added, the UDF was 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. Moreover, the aggregate of collections in the bank accounts does not form part of the profit and loss account. The Supreme Court observed “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 bench opined that the upgradation and renovation of airports were funded through UDF, which was a statutory levy. Instead of the conventional practice of ensuring that amounts collected were deposited with the Government, an entirely new regulatory regime was envisioned. The bench added, “The public nature of these funds does not in any manner get undermined, merely because they are kept in an escrow account, and their utilization is monitored separately.” The top Court stated that the impugned orders could not be faulted and the appeals were dismissed.