Rejecting the treatment of cancellation fees as a separate service of ‘tolerating an act’ under Section 66E(e) of the Finance Act, 1994, the New Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that prior payment of service tax with abatement cannot create tax liability where none exists. The Tribunal clarified that the parties intended passenger carriage, not cancellation, and the charges compensate the airline for the passenger’s failure to fulfil that arrangement.
The Tribunal said that a compensation clause is not a separate agreement to tolerate default and distinguishes compensation payable upon cancellation from consideration under an independent agreement intended to permit passenger default in return for payment. Hence, when the Department sought tax on the full cancellation charges as a declared service under Section 66E(e), the Tribunal rejected the demand.
The Tribunal also held that Lufthansa’s earlier payment of service tax after claiming abatement did not change the legal position. The absence of a taxable charge made the abatement dispute immaterial.
Briefly, Lufthansa German Airlines collected cancellation fees, refund fees and no-show charges from passengers and paid service tax on these amounts after claiming the abatement applicable to air passenger transport. The Department treated these charges as consideration for a separate declared service of ‘tolerating an act’ under Section 66E(e) of the Finance Act, 1994, and sought service tax on their full value, without abatement.
The adjudicating authority confirmed a demand of Rs. 5.07 crores and imposed penalties under Sections 78 and 77(1), while dropping a demand of Rs. 99.75 lakhs. The Revenue did not appeal against the dropped demand. Lufthansa challenged the demand, contending that the charges were compensation for passengers failing to honour their commitment to travel, rather than consideration for a separate service.
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The Division Bench comprising Dr. Mrs. Rachna Gupta (Officiating President) and P.V. Subba Rao (Technical Member) explained that the agreement’s purpose was for the airline to carry the passenger and for the passenger to pay the fare, not for the passenger to cancel the ticket so that the airline could receive compensation. A cancellation clause merely provides for compensation if the intended travel does not take place.
Cancellation charges compensate the airline, to some extent, for the consequences of cancellation, including having to find another passenger at short notice. The Tribunal found no separate agreement intended to permit passenger default in return for payment.
