The Delhi High Court recently provided relief to InterGlobe Aviation, which operates IndiGo Airlines, by protecting it from immediate coercive actions linked to a ₹458 crore Goods and Services Tax (GST) demand. This development arose in the case InterGlobe Aviation Vs Additional Commissioner CGST.
A Division Bench comprising Justices Nitin Wasudeo Sambre and Ajay Digpaul issued the interim order. Their preliminary observation was that the financial compensation IndiGo received was more akin to ‘compensation’ rather than a taxable ‘supply’.
The central issue in this case revolves around whether compensation paid by a foreign aircraft engine supplier to IndiGo, due to engine malfunctions and the consequent grounding of aircraft, constitutes a taxable service under GST law. IndiGo challenged the ₹458 crore tax demand, arguing it was unauthorized since the compensation was for lost business rather than a payment for goods or services.
Representing IndiGo, Advocate V Lakshmikumaran highlighted that the airline had initially paid Integrated GST when importing aircraft and engines. However, engine malfunctions during 2018-19 and 2019-20 necessitated grounding aircraft for safety.
Consequently, IndiGo and the foreign supplier executed a supplementary agreement. This arrangement led the supplier to issue credit notes worth approximately ₹2,000 crore to compensate for lost flying hours and business operations. Contrary to this, the tax authorities viewed the compensation as a service fee, claiming IndiGo agreed to ‘tolerate’ the supplier’s non-performance, thus invoking the reverse charge mechanism for GST.
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IndiGo contested this perspective, citing Section 7 of the Central Goods and Services Tax Act, which defines ‘supply’. The airline further relied on an August 3, 2022 circular from the Central Board of Indirect Taxes and Customs (CBIC). This circular clarified that payments require an agreement to perform, abstain, or endure an act to be considered taxable supply.
The counsel underscored that financial transfers alone do not constitute a taxable supply. Payments such as liquidated damages are compensatory, not fees for tolerating a breach, they argued, referencing the CBIC circular. IndiGo contended that the Commissioner’s interpretation of the circular was flawed, as it expressly states that compensation for breach is not consideration for an independent activity.
IndiGo further posited that even if considered a service, it would qualify as an export since the other party was based abroad and payments were made in foreign currency, implying no GST was applicable.
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The High Court issued a notice to the tax department and advised their counsel to waive the notice. IndiGo also sought assurance against coercive measures. When queried about safeguarding the revenue’s interest, IndiGo affirmed its financial stability, noting its annual payments exceed ₹20,000 crore.
Consequently, the Court granted interim protection to the airline, stating, “In the meantime, there shall be no coercive action.” The hearing is scheduled to continue post the High Court’s vacation.
