Division Bench upholds arbitration award partially, clarifies payment of service tax by airport licensee post amendment to Finance Act, while exempting pre-amendment period based on Delhi High Court’s ruling and CBEC circular
In a significant judgment dated August 28, 2026, the Division Bench of the Madras High Court, comprising Justices P. Velmurugan and G.K. Muthukumaar, delivered a nuanced verdict in the appeal filed by the Managing Director of M/s Karnataka Commercial and Industrial Corporation (P) Ltd. against the Airport Director of Airports Authority of India (AAI). The dispute arose from the imposition and recovery of service tax on license fees payable by the appellant under a contract to manage the sale of airport entry tickets at Chennai Airport.
The appellant had been awarded the license in March 2006 for a five-year term starting February 1, 2006. The license agreement required the licensee to pay all taxes as leviable by law, including service tax. Following the introduction of service tax on airport services, the AAI demanded service tax payment from the licensee, raising debit notes and retaining the licensee’s bank guarantee towards outstanding dues.
The licensee challenged the demand arguing reliance on Circular No. 80/10/2004-ST dated September 17, 2004, issued by the Central Board of Excise and Customs (CBEC), which expressly excluded rental/license fees collected by AAI for letting out premises from the ambit of service tax, since letting premises is not considered rendering a service. The appellant contended that service tax was not leviable on license fees prior to June 1, 2007, the date when the Finance Act, 1994 was amended to explicitly bring “renting of immovable property” under taxable services.
The licensee invoked arbitration as per the contract, and the arbitrator ruled that service tax was not payable prior to June 1, 2007, ordering withdrawal of debit notes and release of the bank guarantee. However, the single judge of the Madras High Court set aside the arbitral award, relying on the Supreme Court precedent in P.C. Paulose v. Commissioner of Central Excise & Customs (2011), which held that an authorized agent of AAI is liable to pay service tax on behalf of AAI. The appellant then preferred the present appeal.
Upon detailed examination, the Division Bench modified the single judge’s order. The Court affirmed the licensee’s liability to pay service tax from June 1, 2007, in line with the amendment to the Finance Act, which introduced “renting immovable property” as a taxable service. The Court noted that the licensee has already paid service tax from this date without protest.
Importantly, for the period before June 1, 2007, the Court held that the licensee is not liable to pay service tax, relying on the Division Bench judgment of the Delhi High Court dated July 17, 2012, which quashed service tax demands for that period based on the CBEC circular exempting rental/license fees from service tax. The Court observed that this Delhi High Court ruling has not been stayed by the Supreme Court and remains binding on the parties.
The Court clarified that while the Supreme Court in P.C. Paulose’s case held agents authorized by AAI liable to pay service tax on taxable services, the issue of non-liability before June 1, 2007 was a separate question decided by the Delhi High Court based on statutory notifications and circulars.
The judgment thus strikes a balance between these legal positions, holding that the licensee steps into the shoes of AAI for service tax liability from June 1, 2007 onwards but is exempt from service tax liability before that date. The parties are left free to pursue remedies in light of the pending Supreme Court appeal on related issues.
This verdict brings clarity on the scope of service tax liability for licensees operating under AAI contracts and the application of amendments to the Finance Act and government circulars concerning airport services.
Bottom Line:
Arbitration and Service Tax - Liability of a licensee to pay service tax as an authorized agent of the Airports Authority of India (AAI) - Appellant liable to pay service tax from 01.06.2007 due to amendment in Finance Act, 1994 - Liability for the period prior to 01.06.2007 quashed as per Delhi High Court judgment and circular issued by the Central Board of Excise and Customs.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 Section 34; Finance Act, 1994 Section 65(105)(zzm)
