Fuel surcharge not to be added for determining basic fare as commission paid on air fare only

Kafila Hospitality & Travels Pvt. Ltd. Vs Commissioner of Service Tax (CESTAT Delhi)

CESTAT Delhi held that demand of service tax under rule 6(7) of the Service Tax Rules, 1994 by adding the amount of fuel surcharge to the air fare for the purpose of determining the ^‘basic fare’ unsustainable as commission was paid on air fare only and not on air fare plus fuel surcharge.

Facts-

Kafila Hospitality & Travels Pvt. Ltd., an approved International Air Ticketing Association  agent registered with the Service Tax Commissionerate, Delhi under the category of ^„air travel agent service‟, has filed this appeal to assail the order passed by the Commissioner of Service Tax, Delhi-I. The order confirms the proposed demand of service tax under rule 6(7) of the Service Tax Rules, 1994 by adding the amount of fuel surcharge to the air fare for the purpose of determining the ^‘basic fare’, which as per Explanation to rule 6(7) of the 1994 Rules, is that part of the air fare on which the commission is normally paid by the airlines.

Conclusion-

The term ^‘basic fare’, in view of the definition contained in rule 6(7) of the 1994 Rules, is not the gross value including fuel surcharge, but is that part of the gross air fare on which the concerned airlines normally pays commission to the air travel agents.

Held that the Billing Settlement Plan (BSP) statements, on which reliance has been placed by the Commissioner, clearly show that the fuel surcharge is not added to the air fare for the purpose of determining the commission amount. The Commissioner was also obliged, in terms of rule 6(7) of the 1994 Rules and the observations made by the Tribunal in its earlier order dated 14.10.2014, to determine that part of the air fare on which commission is normally paid by the airlines. The appellant had produced the BSP statements which conclusively show that the commission was received only on the air fare and not on air fare plus fuel surcharge. The finding recorded by the Commissioner that commission was paid on the air fare plus fuel surcharge cannot, therefore, be sustained and is set aside.

FULL TEXT OF THE CESTAT DELHI ORDER

Kafila Hospitality & Travels Pvt. Ltd.¹, an approved International Air Ticketing Association ² agent registered with the Service Tax Commissionerate, Delhi under the category of ^„air travel agent service‟, has filed this appeal to assail the order dated 30.01.2017 passed by the Commissioner of Service Tax, Delhi-I ³. The order confirms the proposed demand of service tax under rule 6(7) of the Service Tax Rules, 1994⁴ by adding the amount of fuel surcharge to the air fare for the purpose of determining the ^„basic fare‟, which as per Explanation to rule 6(7) of the 1994 Rules, is that part of the air fare on which the commission is normally paid by the airlines.

2. The appellant contends that since the volume of sale of tickets and collection of payments from number travel agents worldwide is a difficult task, all the airlines place the stock of their tickets with IATA through the Global Distribution System linked with IATA platform. IATA sells the tickets to its member travel agents, collects payment from them, makes payment to the airlines and issues a fortnightly statement titled as ^„Billing Settlement Plan⁵ to its members specifying the following details:-

(a) Cost of tickets purchased;

(b) Charges levied by the airlines;

(c) Fuel surcharge charged to cover price fluctuation of Aviation Turbine Fuel;

(d) Rate of commission paid by the airlines and the amount on which commission is paid;

(e) Amount payable to the airlines, after adjusting advance, if any; and

(f) Balance advance.

3. The appellant also contends that the format used by IATA is universally applicable to all the member travel agents and the appellant or the other IATA members similarly placed do not have any say nor any control over the functioning of IATA or the manner in which it provides information to its members. The appellant, being a member of IATA, purchases tickets from IATA and makes payment to IATA and, thereafter receives the fortnightly BSP statement based on which the service tax liability is discharged.

4. The appellant has to exercise one out of the two options under rule 6(7) of the Service Tax Rules, 1994 ⁶ to discharge service tax liability:-

(a) At full rate on the commission received from the air lines; or

(b) At the rate of 0.6% on basic fare in case of domestic air ticket and @ 1.20% on basic fare in case of international journey.

5. The department gathered intelligence that since some of the airlines were paying commission on air fare and fuel surcharge with effect from 2008-09, the basic fare should include the fuel surcharge. An audit for the period 2005-06 to 2009-10 was conducted and the appellant was asked to provide details of fuel surcharge against tickets issued for the financial year 2008-09. During the course of audit, the appellant provided copies of the fortnightly BSP statements issued by IATA containing the ticket wise detail information i.e., Airline Code, purchased through cash or credit, basic fare, fuel surcharge – YQ taxes, other charges charged by the airlines, rate of commission, commission paid, TDS, amount adjusted against advance paid to airlines and the balance amount receivable and pointed out that commission was paid on the fare alone and not after fuel surcharge to the fare. The appellant also pointed out that it had no contract with the airlines and all the transactions, even with the Global Distribution System, were taking place through IATA. The appellant also pointed out that the format of BSP Statement is followed uniformly all over the world and the appellant cannot influence IATA.

6. However, a show cause notice dated 05.07.2012 was issued to the appellant proposing demand of service tax under the following heads:

(i) Non-payment of service tax in terms of rule 6(7) of the 1994 Rules on gross value on which commission is paid by airlines; and

(ii) Inadmissible CENVAT credit availed on the input service invoices against unregistered premises.

7. The appellant filed a reply to the show cause notice and denied the allegations.

8. However, by an order dated 20.05.2013, the Commissioner confirmed the demand that was proposed and the relevant portions of the order passed by the Commissioner are reproduced below:

“15. At the very outset I find that the basic issues involved in the instant case are:

Whether denial of option to pay service tax in terms of Rule 6(7) of the Rules, for nonpayment of service tax on gross value including Fuel surcharges on which commission has been pain to the assessee by the Airlines, is justified and if so whether demand of service tax at full applicable rate of service tax on total receipts of commission is sustainable under service tax law.

Wrong availment of Cenvat Credit on the input service invoices issued at unregistered premises.

xxxxxxxxx

16.5. I find from the records that the information required by the department had not been provided by the assessee. However, during the course of adjudication proceeding they have admitted sample copy of AITA BSP Agent Billing statement for the billing period 16.12.2008 to 31.12.2008 and on these basis has contended that IATA is giving commission on the amount of fare only an no commission has been paid to them on the amount of fuel surcharge. I have carefully gone through the sample documents submitted by the assessee claimed as commission statement of the AITA and find that these documents/statements do not show each and every element of the fare which are recovered from the passengers. It has been shown therein that for what element the word ^„cash‟ has been shown therein, on which commission has been calculated in the said statements. Further, it is a fact on record that the assessee has admitted that basic fare includes fuel surcharge but has contented that their software is not able to bifurcate the element of the fuel surcharges etc, including therein. Further, there is no evidence on record that is to how the Airlines are arriving at the amount on which commission has been calculated and said to the assessee. The assessee has also not provided year wise details of the commission received in respect of different Airlines as well as the amounts on which such commission has been worked out as required by the department. Therefore, in the absence of the aforesaid vital information/ details and necessary evidence, I am not convinced with the contention of the assessee at all that IATA is giving commission on the amount of the fare only and I reject the same accordingly.

xxxxxxxxxxxxx

17.6. I find that in the instant case the proposal for denial of cenvat credit has been made on the sole ground that the relevant invoices contain address of the assessee’s Mumbai office and that the said address has not been intimated to the Department for incorporation in their ST-2registration certificate. Therefore, I observe that the said documents on which credit has been availed is not in dispute except the issue of the address. I further observe that there is no dispute regarding rest of the entries of the invoice and specifically on the issue that the goods or services covered by the said documents have been received and accounted for in the books of account of the receiver i.e. the assessee. In view of these facts and the aforesaid statutory provisions of the cenvat law, the assessee is duly entitled for the benefits of proviso of Rule 9(2) of the Cenvat Credit Rules, 2004 in the instant case and so the demand of Rs. 140735/- on this account raised through instant SCN is not sustainable and merits to be dropped and I hold it accordingly.

(emphasis supplied)

9. This order passed by the Commissioner was challenged by the appellant before the Tribunal in Service Tax Appeal No. 59715 of 2014. The Tribunal, by a decision dated 14.10.2014, remanded the matter for a fresh decision with a further direction to the Commissioner to consider the documents produced by the appellant in support of the contention that it had paid service tax on that part of the air fare on which commission is normally paid by the airlines. The relevant portion of the order passed by the Tribunal is reproduced below:

“7.      xxxxxxxxxxxx. The word, “basic fare” is defined in the sub-rule as the part of the airfare on which the commission is normally paid to the Air Travel Agent by the Airlines. The explanation to Rule 6 (7) defining the term “basic fare” clearly indicates that the basic fare for the purpose of this sub-rule is not the gross fare but is the part of the gross airfare charged from the passengers on which the Airlines normally pay commission to the Air Travel Agent. The expression “air fare on which the commission is normally paid” means the portion of air fare, whether 100% or a lesser percentage, on which most of the Airlines pay the commission ignoring the stray cases in which commission is paid on a different part of air fare. The assessee’s plea is that they have discharged service tax liability under Rule 6 (7), only on that part of the gross airfare on which the commission was paid to them by the Airlines and most of the Airlines pay commission only on that portion of fare. In other words, the assessee plea is that they have paid service tax on the basic fare as defined in the sub-rule. The department’s contention, however, is that since the assessee have not given the break-up of the gross fare into basic fare and the fuel surcharge to enable the department to determine the basic fare component for the purpose of Rule 6 (7), they would not be eligible for the facility of discharge of service tax under Rule 6 (7) of the Service Tax Rules and accordingly, the department has determined the service tax liability on the basis of the gross commission.

In our view, the term “basic fare”, in terms of its definition in Rule 6 (7) is not the gross fare including fuel surcharge, but is that part of the gross airfare on which the concerned Airlines normally pay the commission to the Air Travel Agent. Therefore, what is relevant for the purpose of Section 6 (7) is as to on which part of the airfare, the commission was being normally paid by the Airlines to the Air Travel Agent’s.

According to the appellant, they have evidence to prove that they have discharged the service tax liability under Rule 6(7) only on that part of the fare on which the commission was being paid, but this plea has not been considered by the Commissioner. In view of this, the impugned order is set aside and the matter is remanded to the Commissioner for de novo decision after considering the Appellant’s plea and also our observations in this order. Misc. application for additional evidence is also allowed. In course of de novo proceedings, the Commissioner shall consider the documents produced by the appellant in support of their plea that they have paid service tax on that part of the airfare on which the commission is normally paid by the Airlines. The appeal, stay application as well as misc. application stand disposed of as above.”

(emphasis supplied)

10. The matter was, thereafter again heard by the Commissioner and by an order dated 30.01.2017 the demand was confirmed after invoking the extended period of limitation. The relevant findings of the Commissioner recorded in the order dated 30.01.2017 are reproduced below:

“4.2 The issue for decision before me is as to whether the fuel charges need to be included in the basic fare or not.

*****

4.5  ***** In context of the above, I observe that it is necessary to ascertain as to whether the assessee received commission on the basic fare which included fuel surcharge.

The assesse has submitted copies of the IATA BSP summary statements for the period [months of October 2008, July 2009 and April 2010] as asked to them during the course of personal hearing on 04.01.2017 and it has been contended by them that the periodical commission statement of the IATA shows clearly the amount of fare, the amount of taxes on fare and the commission paid on fare and that it is clear from the said statements that IATA is giving commission on the amount of fare only and nowhere shows that the commissions has been paid to them on the amount of fuel surcharge.

*****

4.8 Now coming to the issue of ascertaining the correct taxable value in terms of the provision under Rule 6(7) of the Rules, I find that assessee has provided IATA BSP Summary for the months of October 2008, July 2009 and April 2010. From the BSP statements submitted by the assessee, it is seen that percentage of commission when calculated only on that part of fare which is shown as Basic fare (Transaction/cash) in the summary, varies from ticket to ticket in case of same airline also. When fuel surcharge (YQ) is added to the amount shown as Basic fare (Transaction/cash) in the BSP statement for the calculation of commission, a fixed trend of rate of commission @3% is observed. I also find that in cases where the basic fare (Transaction/cash) or fuel surcharge portion is zero, the standard commission is calculated at 3% of the fuel surcharge or basic fare (Transaction/cash) as the case may be. The sample entries for ready reference from IATA BSP statement showing % of commission are given below:

S. No.	Invoice No.	Bill Period	Airline Code	Document No.	Issue date	Cash (Basic Fare)	YQ (Fuel Surcharge)	Std. commission		**
								Rate	Amount (Received)	%
1.	1436467 -090702	16 to 31 July‟ 09	90	4797032616	23.07.09	50	2050	128	64	3
2.			90	4797032624	23.07.09	1050	2100	9.05	95	*
3.			90	4797032630	23.07.09	200	3100	49.5	99	*
4.			90	4797037716	24.07.09	9	2350	788.89	71	*
5.			90	4797037717	24.07.09	3200	2550	5.41	173	*
6.			90	4797037719	24.07.09	0	3350	3	101	*
7.	1436494 -100402	16 to 30 April‟ 10	589	9768476799	17.04.10	451	1600	13.75	62	*
8.			589	9768476809	17.04.10	801	2200	11.24	90	*
9.			589	9768524856	19.04.10	201	1600	26.87	54	*
10.			589	9768574586	20.04.10	1450	1850	6.9	100	*
11.	1436497 -090701	1  to  15 July‟09	589	3605022852	13.07.09	50	2350	146	73	3
12.			90	3605022872	13.07.09	5500	2350	4.29	236	*
13.			58	3605022886	13.07.09	1265	2350	8.62	109	*
14.			58	3605022887	13.07.09	1595	5450	13.29	212	*
15.			90	3605022888	13.07.09	150	2350	50.67	76	*
16.			58	3605022922	14.07.09	315	2350	25.4	80	*
17.	1436494 -100402	16 to 30 April‟10	90	9768620536	20.04.10	3870	0	3	116	*
18.			90	9768620537	20.04.10	2020	3200	7.77	157	*
19.			589	9768620538	20.04.10	1900	1850	5.95	113	*
20.			90	9768620559	20.04.10	200	1600	27	54	*
21.			589	9768620560	20.04.10	2500	2700	6.24	156	*
22.			90	9768620561	20.04.10	550	1850	13.27	73	3
23.	1436494 -100402	16 to 30 April‟10	90	9740800941	20.04.10	5420	0	3	163	*
24.			90	9740800944	20.04.10	6520	0	3	196	*

I find from the above tabulations based on the BSP statements submitted by the assessee that the rate of commission as shown under the column ‘Rate’ (Col no.9) shows huge variation; however it is uniform [3%] when the commission amount is calculated on the basis of Basic fare and fuel surcharge reflected in the individual ticket particulars. In a normal trade practice, the amount of commission is generally a fixed percentage and cannot vary from 3% to 788.89% during the course of fortnight and that too for the same Airline as being reflected in the IATA BSP statement of tickets tabulated above. This factual position on the basis of evidence on record leads me to the conclusion that the airlines were indeed paying commission to the Air Travel Agent(s) on the amount collected and shown as basic fare as well as fuel surcharge and therefore the contention of the assessee that they were receiving commission only on the basic fare for the purpose of calculation of taxable values under Rule 6(7) of the Service Tax Rules does not seem to be correct and I reject the same.

4.9. I find that the assessee has not provided year-wise details of the basic fare as well as fuel surcharge for the purpose of calculation of their service tax liability under Rule 6(7) of the Service Tax Rules, 1994. As discussed supra, I find that the noticee while paying Service Tax under the provisions of Rule 6(7) of the Rules ibid, did not include in the assessable value that part of the air fare which was collected as fuel surcharge on which commission was also paid by the airlines. I also note that the assessee had earlier admitted that basic fare includes fuel surcharge but had also submitted that their software was not able to bifurcate the element of fuel surcharge included therein. I also find that the assessee has not provided yearwise details of the commission received in respect of different Airlines as well as the amounts on which such commission was worked out. I also find that the noticee did not provide copies of agreements with airlines showing the terms and conditions for payment of commission. I therefore find no merits in their arguments that they had discharged their service tax liability correctly in terms of Rule 6(7) of Service Tax Rules, 1994 and reject the same.”

(emphasis supplied)

11. Ms. Madhumita Singh, learned counsel for the appellant assisted by the Shri Sameer Sood submitted that:

(i) The Commissioner, after remand, completely failed to appreciate the issue that was required to be decided;

(ii) It was for the department to place on record evidence that some airlines had paid commission on air fare and fuel surcharge but this was not done;

(iii) The Commissioner committed an error in assuming, on the basis of an arithmetical calculation, that the commission at a flat rate of 3% was paid on air fare and fuel surcharge by the airlines;

(iv) All that was required to be examined by the Commissioner was whether the appellant had paid commission on the air fare alone, or fuel surcharge was also included;

(v) The Commissioner failed to appreciate the provision of rule 6(7) of the 1994 Rules;

(vi) The BSP statement are followed worldwide uniformly and the air fare on which commission is paid, rate of commission and amount of commission is clearly mentioned in the BSP statement ticket wise;

(vii) All transactions are carried out by the airlines through the Global Distribution System linked with IATA platform and the rates of tickets keep on changing frequently and, therefore, there are bound to be variations in both the air fare as well as the rate of commission; and

(viii) The Commissioner committed an illegality in holding that the extended period of limitation was correctly invoked.

12. Dr. Radhe Tallo, learned authorized representative appearing for the department, however, supported the impugned order.

13. The submissions advanced by the learned counsel for the appellant and the learned authorized representative appearing for the department have been considered.

14. In order to appreciate the issue involved, it will be appropriate to reproduce rule 6(7) of the 1994 Rules as it stood at the relevant time and it is as follows:

“Rule 6(7) The person liable for paying the service tax in relation to the services of booking of tickets for travel by air provided by an air travel agent, shall have the option, to pay an amount calculated at the rate of 0.6% of the basic fare in the case of domestic bookings, and at the rate of 1.2% of the basic fare in the case of international bookings of passage for travel by air, during any calendar month or quarter, as the case may be, towards the discharge of his service tax liability instead of paying service tax at the rate specified in section 66B of Chapter V of the Act and the option, once exercised, shall apply uniformly in respect of all the bookings of passage for travel by air made by him and shall not be changed during a financial year under any circumstances.

Explanation: For the purposes of this sub-rule, the expression ^„basic fare‟ means that part of the air fare on which commission is normally paid to the air travel agent by the airline.”

15. A perusal of the order passed by the Tribunal on 14.10.2014 in the first round of litigation initiated by the appellant to assail the order dated 20.05.2013 passed by the Commissioner indicates that the Commissioner on remand was required to consider the plea of the appellant that it had paid service tax on that part of the air fare on which commission is normally paid by the airlines after examination of the documents produced by the appellant and the observations made by the Tribunal. The Tribunal, in the said order, had observed that the term ^„basic fare‟ in terms of the definition of rule 6(7) of the 1994 Rules is not the gross fare including fuel surcharge, but is that part of the gross fare on which the concerned airlines normally pay commission to the air travel agents. The Tribunal, therefore, held that what is relevant for the purpose of rule 6(7) of the 1994 Rules is to determine on which part of the air fare, commission is normally paid by the airlines to the air travel agents.

16. The Commissioner, after remand, proceeded ^„to ascertain as to whether the assessee had received commission on the basic fare which included fuel surcharge‟. The Commissioner, therefore, presumed that the basic fare would include fuel surcharge even though the Tribunal in its order dated 14.10.2014, while remanding the matter to the Commissioner, had specifically observed that the term ^„basic fare‟, in view of the definition contained in rule 6(7) of the 1994 Rules, is not the gross value including fuel surcharge, but is that part of the gross air fare on which the concerned airlines normally pays commission to the air travel agents.

17. To support the plea that the airlines were paying commission on the amount of air fare only and not on the amount of fuel surcharge plus air fare, the appellant had provided copies of the IATA BSP summary statements. After noting that the appellant had opted to discharge service tax liabililty under rule 6(7) of the 1994 Rules, the Commissioner examined the BSP statements submitted by the appellant. The Commissioner noticed that the percentage of commission when calculated only on air fare varied from ticket to ticket even in case of the same airline, but when the fuel surcharge was added to the air fare for calculating the commission, there was a fixed trend of rate of commission at the rate of 3 percent. The Commissioner, therefore, concluded that the airlines were paying commission to the air travel agents on the amount collected and shown as air fare and fuel surcharge and the contention of the appellant that it received commission only on the air fare for the purpose of calculating the service tax payable under rule 6(7) of the 1994 Rules was not correct.

18. The aforesaid finding of the Commissioner is based on the premise that the rate of commission paid by the airlines to the air travel agents is uniform and cannot vary. This finding is apparently not based on any evidence available on the record for even the department had not led any evidence to substantiate this finding of the Commissioner. Infact, the department had not led any evidence to even substantiate its claim that some of the airlines were adding fuel surcharge to the air fare for the purpose of payment of commission.

19. Some of the figures from the chart contained in paragraph 4.8 of the order passed by the Commissioner need to be examined to find out whether this finding recorded by the Commissioner is correct. In respect of serial no. 1, it is seen from the BSP statement provided by the appellant that the air fare is Rs. 50 and the commission rate is 128 percent. The commission amount would, therefore, come to Rs. 64, which is exactly the amount shown in the chart. Likewise, the air fare against serial no. 11 is Rs. 50 and the rate of commission is 146 percent. The commission amount would, therefore, come to Rs. 73, which is also the exact amount indicated in the statement. In regard to serial no. 23, the air fare is Rs. 5420 and the commission rate is 3 percent. The amount of commission comes to Rs. 163, which is also the amount contained in the statement. The Commissioner has, in his anxiety to hold that only a fixed commission rate can be offered by the airlines, added the fuel surcharge to the air fare and then tried to determine whether a fixed commission percentage was charged. This type calculation undertaken by the Commissioner is based merely on an assumption that the rate of commission should be uniform.

20. The Commissioner was required to record a finding based on the evidence. The BSP statements, on which reliance has been placed by the Commissioner, clearly show that the fuel surcharge is not added to the air fare for the purpose of determining the commission amount. The Commissioner was also obliged, in terms of rule 6(7) of the 1994 Rules and the observations made by the Tribunal in its earlier order dated 14.10.2014, to determine that part of the air fare on which commission is normally paid by the airlines. The appellant had produced the BSP statements which conclusively show that the commission was received only on the air fare and not on air fare plus fuel surcharge. The finding recorded by the Commissioner that commission was paid on the air fare plus fuel surcharge cannot, therefore, be sustained and is set aside.

21. It would, therefore, not be necessary to examine whether the extended period of limitation was correctly invoked by the Commissioner.

22. In the result, the order dated 30.01.2017 passed by the Commissioner cannot be sustained. It is, accordingly, set aside and the appeal is allowed.

(Order Pronounced on 30.10.2023)

Notes: 

1. the appellant

2. IATA

3. the Commissioner

4. 1994 Rules

5. BSP

6. 1994 Rules