Tax Insights

(1)

1 PwC pwc.in

Tax Insights

20 April 2023

DFSs are outside the customs frontiers of India; levy of service tax on service provided to DFS is unconstitutional – Supreme Court

In brief

In a case¹, pertaining to service tax paid on charges levied by an airport operator, the Supreme Court upheld the ruling² of the Mumbai bench of the Customs Excise & Service Tax Appellate Tribunal (CESTAT) to hold that Duty Free Shops (DFSs) cannot be saddled with any indirect tax burden as they are outside the customs f rontiers of India. Also, any such levy would be unconstitutional considering Article 286 of the Constitution of India. The court f urther held that any tax levied cannot be retained, and the DFS will be entitled to refund of the service tax paid.

In detail

Facts

• The taxpayer is engaged in running DFS at both the arrival and departure terminals of Mumbai and Delhi airports and is registered under service tax laws.

• In addition to the procurement of indigenous goods, DFS procures various input services from domestic suppliers such as custom house agents and airport operators who provide license and maintenance services, and other legal and professional services.

• In line with Notification No. 41/2012-ST dated 29 June 2012, the taxpayer filed refund of service tax paid on charges levied by Mumbai International Airport Limited for the period from 1 October 2011 to 30 June 2017.

• The original adjudicating authority rejected the claim filed by the taxpayer on the ground that service tax has been rightly levied on renting of immovable property of the concerned DFS, and the same is not liable to be ref unded. The aggrieved taxpayer f iled an appeal before the Commissioner (Appeals), which was decided in f avour of the Revenue.

• Against the order of the Commissioner (Appeals) dated 25 September 2020, the taxpayer filed an appeal bef ore the Mumbai bench of the CESTAT which was decided in favour of the taxpayer and allowed ref und of the service tax paid. The key observations made by the CESTAT were as below.

1 Civil Appeal Diary No. 24336/2022

2 Service Tax Appeal No. 85046 of 2021

(2)

2 PwC Tax Insights

- DFS situated at international airports are a global market competing amongst themselves in a tax- exempt environment, and the levy of service tax will be bereft of the lawful authority.

- DFS at arrival and departure terminals are located beyond the customs frontiers outside the taxable territory of India. Taxable territory is not necessarily the same as the geographical reaches of India, nor is it limited to physical frontiers.

- The CESTAT placed reliance on a judgment of this court in the matter of ITDC Limited - Hotel Ashoka v. The Assistant Commissioner of Commercial Taxes and Anr³.

Supreme Court’s decision

The Supreme Court held that the taxpayer will be entitled to refund of service tax paid to the airport operator considering the levy was unconstitutional and had been borne by the taxpayer. The decision was based on the f ollowing observations.

• The court ref erred to the decisions of the Bombay High Court⁴ and Kerala High Court⁵ in respect of the issue, wherein it was held that DFS situated at international airports are deemed to be outside India or beyond the geographical area-territory of India, and therefore, for all purposes, they are treated to be outside India. The taxpayer, to substantiate its contention, referred to a decision of the Central

Government⁶ wherein revisional power was exercised as well as a decision of the Bombay High Court⁷, on an identical issue. The Supreme Court noted that in the aforesaid decisions, it was also observed that when any transaction takes place outside the customs frontiers of India, the transaction is technically said to have taken place outside India in accordance with the provisions of section 2(11) of the Customs Act, 1962 read with Article 286 of the Constitution of India, though the transaction might have taken place within India geographically. The court further observed that no appeal has been filed against the decisions which it had ref erred, and the decision of Sandeep Patil⁴ was accepted by the Union of India in the taxpayer’s case.

• The court held that the levy of tax is in violation of Article 286 of the Constitution of India which states that no tax can be levied on supply in the course of the import of the goods into, or export of the goods out of, the territory of India.

• It was held that DFSs cannot be saddled with any indirect tax burden, considering they are situated outside the customs frontiers of India and such levy is unconstitutional.

• The court also held that DFSs would be entitled to refund of service tax paid on services received without raising any technical objection including limitation.

The takeaways

The taxability of supplies to and supplies by DFS has been a long-debated issue in the pre-GST regime and now under the GST regime as well. This is an important decision holding that DFS is entitled to refund of service tax paid even if the claim is not filed within the timelines as prescribed. While taxpayers could get relief under the pre-GST regime based on the decision of the Supreme Court, the implications under GST would have to be independently analysed.

3 ITDC Limited - Hotel Ashoka v. The Assistant Commissioner of Commercial Taxes and Anr. [2012] 3 SCC 204

4 Sandeep Patil v. Union of India & Another [Crim. Public Interest Litigation St. No. 3 of 2019]

5 Cial Duty Free and Retail Services Limited (CDRSL) v. Union of India, The Assistant Commissioner, Central Tax and Central Excise, Aluva Division, State of Kerala and Flemingo Duty Free Shop Private Limited v. Union of India, State of Kerala, Airports Authority of India, Airport Director Calicut International Airport [WP(C).12274/2020, WP(C).6850/2018, WP(C).12278/2020, WP(C).12279/2020, WP(C).12280/2020, WP(C).12317/2020, WP(C).13237/2020]

6 Bearing No. 634/2018CUS(WZ)/ASRA/MUMBAI dated 31 August 2018

7 A1 Cuisines Private Limited v. Union of India, and State of Maharashtra [Writ Petition No. 8034 of 2018]

(3)

pwc.in

In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

Tax Insights

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 156 countries with over 295,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC ref ers to the PwC network and/or one or more of its member f irms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Follow us on

Facebook, LinkedIn, Twitter and YouTube.