The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that airline ticket cancellation charges constitute compensation for failure to fulfil a contract and cannot be taxed as consideration for a separate service of “tolerating an act” under Section 66E(e) of the Finance Act, 1994.
The bench of Dr. Rachna Gupta (Officiating President) and P.V. Subba Rao (Technical Member) has observed that the airline’s earlier payment of service tax on cancellation charges after claiming abatement could not create a tax liability where no taxable service existed.
Buy Now: 80+ Judgements Indirect Tax – September 2026 E-Magazine
The appellant/assessee provides passenger air transport services and had been paying service tax on air tickets after availing the applicable abatement. When passengers cancelled their bookings or failed to turn up, the airline collected cancellation fees, refund fees, no-show fees and similar charges.
The airline had treated these receipts as connected with its air transport services and paid service tax on their abated value.
Following an investigation, the Directorate General of GST Intelligence took the view that these charges represented consideration for a distinct declared service under Section 66E(e). According to the department, the airline was tolerating passengers’ cancellation or failure to travel and was therefore required to pay service tax on the entire amount collected, without the abatement available for passenger air transport.
A show cause notice dated January 8, 2018 proposed recovery of ₹6,07,62,939, together with interest and penalties. The adjudicating authority confirmed ₹5,07,87,202 and dropped the remaining ₹99,75,737. Penalties were also imposed under Sections 78 and 77(1). The Revenue did not appeal against the portion of the demand that had been dropped.
The central issue was whether an airline’s collection of predetermined cancellation charges amounts to consideration for agreeing to tolerate an act, or merely compensates it for a passenger’s failure to perform the original travel contract.
Lufthansa argued that if cancellation charges were treated as falling outside passenger air transport services, they could not automatically become consideration for another service. The amounts were compensation for passengers reneging on their commitment to travel on a particular flight and date.
The airline relied on the Tribunal’s decisions in South Eastern Coalfields Ltd. v. Commissioner of Central Excise & Service Tax, Raipur and Deputy General Manager (Finance), Bharat Heavy Electricals Ltd. v. Commissioner of Customs & Central Excise, Bhopal.
Its submission was that Section 66E(e) applies where the agreement itself is intended to secure tolerance of an act. It does not apply merely because a contract to perform an activity also provides for compensation in the event of default.
The department maintained that the dispute concerned the availability of abatement on the compensation. It argued that cancellation charges were consideration for a separate declared service and therefore taxable at their full value. It also pointed out that passengers knew about the cancellation fee when booking their tickets.
The Tribunal examined the reciprocal promises underlying an airline booking. The airline promises to carry the passenger, while the passenger promises to pay the fare. These promises form consideration for each other.
It explained that a contract may specify in advance the amount payable if one party defaults. Such a provision fixes liquidated damages; it does not establish that the parties intended the default to occur.
Applying this reasoning, the Bench found that the purpose of purchasing an airline ticket is for the passenger to travel and for the airline to carry that passenger to the destination. The purpose is not for the passenger to cancel so that the airline can collect a fee.
Cancellation can leave the airline needing to find another passenger at short notice. The charges are intended to compensate it, at least partly, for that consequence.
The Tribunal accordingly held that the cancellation charges were compensation for failure of the travel contract. There was no separate agreement intended to produce a passenger’s default in exchange for payment to the airline.
The decision distinguishes a contractual provision dealing with the consequences of breach from an agreement whose object is to tolerate an act.
The existence of a cancellation clause, and the passenger’s knowledge of it, did not alter the essential purpose of the arrangement. The fee remained compensation arising from non-performance of the travel contract.
The Bench said this analysis followed its decision in South Eastern Coalfields, which had subsequently been followed in several cases. It also referred to a circular dated February 28, 2023 as accepting the interpretation concerning “tolerating an act”.
The Tribunal rejected the suggestion that the controversy could be confined to whether Lufthansa had correctly claimed abatement.
Once the receipts were found not to constitute consideration for a taxable service, the question of the taxable value became irrelevant. The airline’s earlier payment of service tax on an abated amount did not change the legal character of the receipts.
The Bench expressly characterised that earlier payment as erroneous and held that the demand on cancellation fees could not be sustained. It set aside the impugned orders and allowed both appeals with consequential relief. The operative order does not quantify any refund.
For the service tax dispute before it, the Tribunal treated the purpose of the underlying contract and the compensatory nature of the receipt as decisive. Its conclusion also establishes that an assessee’s earlier tax treatment cannot sustain a demand where the receipt is not legally chargeable to service tax.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
Read More: Common Purchase Orders Can’t Prove Father’s Firm Is Dummy Unit: CESTAT
