Service Tax Not Payable on Outbound Tour Packages Performed Entirely Outside India: CESTAT Mumbai

Background of the Dispute

The matter before CESTAT Mumbai involved cross-appeals arising from a common Order-in-Original No. 36/ST/SB/2012-13 dated 19.11.2012.

  • The assessee: M/s Travel Corporation of India Limited, Mumbai (centrally registered for multiple service tax categories).
  • The department: Commissioner of Central Goods Service Tax & Central Excise, Mumbai South Commissionerate.

The Commissioner had:

  • Confirmed a service tax demand of ₹15,97,82,742 on receipts from outbound tour services for the period 01.04.2005 to 31.03.2010,
  • Ordered recovery of interest under Section 75 only up to 09.05.2008, and
  • Imposed penalties under Sections 76, 77 and 78 of the Finance Act, 1994.

Both sides appealed:

  • The assessee challenged the taxability of outbound tours, interest, and penalties.
  • The Revenue challenged:
    1. Restriction of interest only up to 09.05.2008 instead of till actual payment,
    2. Non-alignment of penalty under Section 76 with findings, and
    3. Typographical errors in penalty period.

The Tribunal also allowed miscellaneous applications from both sides for updating the designation of the departmental respondent due to change in CGST jurisdiction.

Nature of Services and Registration

The assessee was engaged in multiple taxable services:

  • Tour Operator service
  • Air Travel Agent service
  • Transport by Cruise Ship service
  • Cab Operators service
  • Rail Travel Agent service

It held centralized service tax registration (No. AAACT6856CST005) with Service Tax Division-II, Mumbai, having earlier maintained 15 separate registrations across cities like Mumbai, Goa, Ahmedabad, Baroda, Chennai, Cochin, Patna, Jaipur, Udaipur, Jodhpur, Delhi, Lucknow, Agra, Varanasi and Hyderabad.

During the process of centralized registration, the department noticed that service tax had not been paid on gross receipts from outbound tours. Based on data from ST-3 returns and other records, it concluded that:

  • Total receipts from outbound tours (01.04.2005 to 31.03.2010): ₹135,91,96,294
  • Service tax alleged as unpaid: ₹15,97,82,742

Accordingly, a Show Cause Notice dated 26.11.2010 was issued proposing:

  1. Demand and recovery of ₹15,97,82,742 under Section 73(1) read with Section 68 and Rule 6 of the Service Tax Rules, 1994.
  2. Interest under Section 75.
  3. Penalties under Sections 76, 77 and 78.

The Commissioner adjudicated the SCN and confirmed the demand, interest (restricted till 09.05.2008) and penalties, prompting the present appeals.

Assessee’s Business Model and Position

Segregation of Tour Activities

The assessee explained that its operations were divided into three broad categories:

  1. Domestic Tours

    • Tours within India for Indian residents.
    • Entirely performed in India.

  2. Inbound Tours

    • Tours conducted within India for foreign tourists.
    • The tour begins, is executed and ends in India.
    • Service tax was paid under “Tour Operator” service even though recipients were foreign tourists.

  3. Outbound Tours

    • Tours between destinations outside India meant for residents of India.
    • The tour commences at a foreign destination and concludes abroad; the entire journey and services are performed outside India.

The assessee argued:

  • Service tax was duly paid on domestic and inbound tours.
  • No service tax was paid on outbound tours, as the tour was wholly performed and consumed outside India.
  • For outbound tours, from 23.08.2007, service tax was nevertheless discharged on the non-air INR component.

Illustration of Outbound Tour Structure

For clarity, the assessee gave an example (recast here with changed names and amounts as per instructions):

  • Suppose Mr. Sharma books an outbound tour to Dubai for ₹2,50,000.
    • Foreign currency component for expenditure abroad: ₹1,90,000 (equivalent forex drawn from an authorised dealer for overseas hotel, meals, sightseeing etc.).
    • Airfare (India to Dubai and back) separately billed: ₹40,000.
    • Balance ₹20,000 treated as non-air INR component of the tour package.

Treatment claimed:

  • The foreign currency portion (₹1,90,000) related to services actually provided outside India and was not considered consideration for taxable services in India.
  • The airfare (₹40,000) was taxed separately as:
    • Service tax on air transport paid by the airline under the applicable passenger transport category, and
    • Service tax paid by the assessee on its commission under “Air Travel Agent service”, using the composition scheme under Rule 6(7) of the Service Tax Rules, 1994.
  • On the ₹20,000 non-air INR component, the assessee paid service tax under the “Tour Operator service” category and claimed abatement as per the relevant notification.

The assessee also emphasised:

  • Airfare for travel from India to the foreign destination was not embedded in the tour package; customers could buy tickets independently.
  • Where tickets were booked through the assessee, a separate invoice was issued for air travel.
  • Transportation services (road, rail, vessel, air) were each separately taxable categories and were not intended to be subsumed under “Tour Operator” service.

CENVAT and Abatement

Regarding abatement under the service tax regime:

  • Under Notification No. 40/97, tour operators could claim abatement subject to conditions, chiefly non-availment of CENVAT credit.
  • With effect from 01.03.2006, Notification No. 1/2006-S.T. gave 60% abatement, provided no CENVAT credit was taken on inputs, input services and capital goods used for tour operator services.