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Tax trouble into Rs400 crore
June, 24th 2009

The Directorate General of Central Excise Intelligence or DGCEI, the agency responsible for monitoring evasion of excise and service tax, has issued a show-cause notice to Jet Airways (India) Ltd, the countrys second largest private carrier, relating to a potential service tax liability of at least Rs400 crore, according to two agency officials familiar with the development.

The service tax liability pertains to the import of services by Jet over the past five years.

The two officials asked not to be named because they are not the official spokespersons for DGCEI.

A show-cause notice is not an indictment, and only requires a companyJet Airways, in this caseto explain its position.

In an email statement, a Jet Airways spokesperson said: Jet Airways shall respond to the authorities concerned after examining the legal position. She did not divulge further details.

Mint has reviewed a copy of the show-cause notice.

According to the DGCEI officials, the show-cause notice, issued in April, covers tax liability of 23 services that were imported. The officials declined to disclose the nature of services availed of by the carrier.

Typically, a company is given a month to respond to such notices but it can always ask for an extension. Jet Airways is yet to respond to the notice.

Jet Airways has been served the notice under the so-called reverse charge mechanism. Under this, it is the recipient of services, and not the provider, that needs to pay tax.

The reverse charge mechanism, which was introduced in 2002, stipulates that in case a non-resident Indian who does not have a business establishment in India offers such a service, the recipient of such services will have to pay the tax.

Subsequently, this rule was expanded and the concept of import of services was introduced to cover services provided to an India-based entity by an entity based outside the country.

In 2006, the government defined what it meant by the import of a service and started treating the recipient of such service as a deemed service provider, liable to pay tax.

According to service tax norms, there are three categories of imported services.

Under the first, services of an overseas architect, interior decorator, dredger and a few others are considered as imported when they are related to immovable properties located in India.

Similarly, services of an overseas stockbroker, tour operator, chartered accountant, aircraft operator, etc. are considered as imported if they are partly or wholly performed in India.

The third category lists 28 services that include advertising, asset management and technical consultancy. These services are considered imported if the recipient of services is based in India.

While most airlines operating services to locations outside India are likely to have used some of these imported services, Mint couldnt immediately ascertain whether all of them had been served or would be served show cause notices.
Earlier, domestic shipping companies had faced similar issues with the tax authority. The ship-owners lobby, Indian

National Shipowners Association or Insa, had subsequently fought and secured exemption for shipping firms.

Indian shipping companies avail of certain services such as ship repair, dry docking and catering abroad.

A tax consultant who advises companies in the logistics business said service tax issues are usually a matter of interpretation.

In this case, I am not sure about the services included by tax authorities. On the same issue, the tax authorities have slapped notices on several hospitality companies. Its all about clarifying and convincing the authorities, the consultant, who did not want to be identified, added

The services availed of by Jet Airways, according to this person, could be repair, maintenance, overhaul of aircraft and catering.

According to an equity analyst with a domestic brokerage, if Jet Airways fails to convince the tax authorities, it will have to reflect the tax liability in its books of account for the current fiscal ending March 2010 and this will impact its profitability.

He did not want to be identified as he is not authorised to speak to media.

Jet Airways posted a stand-alone net profit of Rs52.99 crore for the quarter ended 31 March. For the year ended March, the stand-alone net loss for Jet Airways was Rs402.34 crore against Rs253.06 crore in the previous year. Revenue for the fiscal year rose 27.84% to Rs11,083.43 crore from Rs8,669.28 crore in 2007-08.

The airline is also currently in litigation brought by Sahara India Commercial Corp. Ltd, or SICCL, from which it bought Air Sahara in April 2007. Air Sahara has since been renamed JetLite.

Jet Airways and SICCL, which ran the erstwhile Air Sahara, are currently locked in a legal battle over the pricing of the acquisition. The Bombay high court is expected to deliver its judgment soon.

On 26 March 2009, SICCL filed an application with the high court claiming that Jet Airways had defaulted on payments towards the purchase of Air Sahara, and sought permission to seize Jets assets. SICCL was demanding the original price of Rs2,000 crore for the airline it had sold to Jet, instead of the re-negotiated price of Rs1,450 crore.

Jet said it had paid SICCL money in instalments after making deductions for liabilities from before the completion of the acquisition.

Shares of Jet Airways rose 5.95% to Rs231.25 on BSE on Tuesday, on a day the Sensex ended down 2.21 points at 14,324.01.

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