The Larger Bench of CESTAT has on 18 March 2021 held that the target-based incentives and the Central Reservation System (‘CRS’) commission received from airlines and CRS companies respectively, by the air travel agents, is not liable to service tax under the category of Business Auxiliary Services (‘BAS’).

The matter was before the Larger Bench on reference from the Division Bench which had expressed doubts on the proposition of law laid down in another Division Bench decision of the Tribunal in the case of D. Pauls Consumer Benefit Ltd. [2017 (52) STR 429 (Tri.-Del.)]

Air travel agent promoting own business and not that of airlines/CRS companies

Observing that the travel agent was only providing options to the passenger and it was the passenger who determined the airline for travel, the Larger Bench held that it cannot be said that the travel agent was promoting the services of any airline. Madras High Court decision in the case of Airlines Agents Association and Kerala High Court decision in the case of Shabeer Travels, were relied upon for the purpose.

Further, observing that a passenger was not aware of the CRS Company being utilized by the travel agent for booking the segment nor could a passenger influence a travel agent to avail the services of any particular CRS Company, the Larger Bench held that travel agents were not promoting business of CRS companies either. It noted that that for an activity to qualify as ‘promotional’, the person before whom the promotional activity is undertaken should be able to use the services, while in the present case the passenger could not directly use the CRS software provided by the company to book an airline ticket.

Taking note of the fact that the Department had not pointed out at any activity undertaken by an air travel agent that promoted the business of the CRS Company, the Larger Bench held that mere selection of software or exercising of a choice would not result in any promotional activity.

It was also held that the air travel agent was ensuring the promotion of its own business even though this may lead to incidental promotion of the business of the airlines/CRS Companies and hence the classification of the service would fall under ‘air travel agent services’ and not BAS.

Incentives paid for achieving targets not taxable

Relying on the Supreme Court decision in the case of Intercontinental Consultancy and Technocrats, the Larger Bench observed that incentives in the present case were based on general performance of the service provider and were not related to any particular transaction of service, while ‘consideration’, which is taxable under Section 67 of the Finance Act, 1994 should be transaction specific. Decision of the Federal Court of Australia in the case involving AP Group, was also relied upon by the Larger Bench.

Intervention before Larger Bench permissible

Applications to intervene from few other parties whose appeals on the same issues were pending before the Mumbai, Chandigarh and Delhi Benches of the CESTAT, were also allowed by the Larger Bench. It observed that any decision taken by the Larger Bench on these six issues that have been framed would necessarily have an impact on the appeals pending before the Division Benches. The Larger Bench held that Department’s plea that only some of the issues referred to the Larger Bench may be involved in the appeal cannot be a ground to reject the intervention application.

Similarly, Department’s plea that there is no procedure prescribed for intervention before a Larger Bench of the Tribunal, was also rejected. The Bench noted that Rule 41 of the Customs, Excise and Service Tax Appellate Tribunal (Procedure) Rules 1982 confers power on the Tribunal to make such orders or such direction as may be necessary to secure the ends of justice.

Another Larger Bench decision [Subhash Projects & Marketing Ltd.] which had disallowed the intervention application because the parties were not aggrieved parties, was distinguished by the LB in the present case.

Reference to Larger Bench when permissible

The Tribunal also rejected the Department’s plea that reference made to the Larger Bench was not maintainable for the reason that the Supreme Court had disposed of the appeal filed against the order of the Tribunal in D. Pauls. The LB was of the view that Doctrine of Merger will not apply since the appeal filed by D Pauls was remanded by the Supreme Court to the Appellate Tribunal for reconsideration of the order with regard to invocation of extended period of limitation and was not disposed on merits.