No Service Tax Exemption Where Overriding Commission Is Received In INR: Madras High Court

The Madras High Court held that travel agents acting as General Sales Agents (GSAs) for foreign airlines cannot claim service tax exemption as an export of services when their overriding commission is received in Indian Rupees rather than convertible foreign exchange, even if the services are provided to foreign principals.

A Division Bench of Justice Anita Sumanth and Justice Mummineni Sudheer Kumar held that exemption notifications are to be strictly construed, and the condition requiring receipt in foreign exchange is mandatory.

The judges noted:

“Both the Circular and Notification, make it clear that receipts from services specified in Section 65(105) of the Act would be exempt, upon condition that the payment for those services was received in India in convertible foreign exchange. It is a settled position that a pre-condition under a Notification granting the benefit of exemption, must be strictly construed.”

The decision arose from appeals filed by Translanka Air Travels Pvt. Ltd. and ETA Travel Agency Pvt. Ltd., appointed as GSAs by Srilankan Airlines and Malaysian Airlines, respectively. The appellants promoted passenger and cargo traffic in India and earned an overriding commission for these services.

Although registered and paying service tax under the category of Air Travel Agency Service, the Department, following an investigation, contended that the services were classifiable as Business Auxiliary Services and that the appellants were not entitled to exemption, as the commission was received in Indian Rupees via credit notes issued by the airlines' Indian offices.

The appellants sought exemption under Notification No. 21/2003-ST, relying on the Supreme Court's judgment in J.B. Boda & Co. Pvt. Ltd. v. Central Board of Direct Taxes [(1997) 223 ITR 271], arguing that receipt in INR should still qualify as export of services.

The Revenue contended that the exemption notification required strict compliance and mandated receipt of consideration in convertible foreign exchange—a condition which the appellants had admittedly failed to satisfy for the relevant periods.

The Bench observed that the services to Srilankan Airlines were delivered outside India and utilised in business outside India, with payment received by Translanka in convertible foreign exchange. However, it distinguished the J.B. Boda case, noting that in that instance, the entire transaction was expressed and routed in foreign currency through the Reserve Bank of India. In contrast, in the present cases, the overriding commission was received in Indian Rupees and freely retrievable in India. The Court stated:

“In the case of J.B. Boda, the remittances had been in forex and the procedure followed was thus found to be in compliance with the statutory condition, whereas, in the present case, it has been received by the appellants in India, in INR, being a violation of the pre-condition under Notification 21/2003 dated 22.11.2003. The judgment in J.B. Boda thus, in our view, has no application to the facts of the present case.”

On the issue of limitation, the Court upheld the invocation of the extended period, observing that the appellants were fully aware of the service tax implications, had obtained adverse legal opinions, and were in correspondence with the airlines exploring ways to avoid tax liability. The Bench noted:

“They have been in repeated communications with the officials of the foreign airlines, discussing options as to how the liability could be saved or managed, such as, either receiving the ORC by way of inward remittances in forex, or, if in INR, offering the same to service tax. In such circumstances, we are of the considered view that there is nothing untoward in the revenue having invoked the larger period of limitation.”

Accordingly, the Bench confirmed the service tax demands along with penalties and dismissed the appeal filed by ETA Travel Agency.

For Appellant: Advocates, Radhika Chandrasekar and K.Vaitheeswaran

For Respondent: Senior Standing Counsel, M. Santhanaraman