Airline’s payment for lounge services not rent: Tax tribunal

MUMBAI: The Mumbai Income Tax Appellate Tribunal (ITAT), in its recent order, has held that payments made by Qantas Airways, an international airline, to another party for providing lounge and catering services was not rent. Thus the higher rate of tax to be deducted as determined by the tax authorities was not applicable.
Qantas won the appeal in respect of four consecutive years beginning from fiscal 2007-08 .

Most airlines provide for lounge facilities at airports for their premium passengers who are waiting for their flights. Qantas had entered into an agreement with Oberoi Flight Services (OFS) for providing lounge services, which included providing an assortment of snacks, alcoholic and non-alcoholic drinks to its first class and club class passengers.

The airline deducted tax at source at 2% as per 194-C of the Income tax (I-T ) Act, as it held such payments to be for catering services which were contractual in nature. The tax department , on the other hand, held these payments to be in the nature of rent.

The tax to be deducted at source against rental payments falls under section 194-I and the rate prescribed is 10%. The Mumbai ITAT held that the payments were not solely in the nature of rent – for provision of lounge space. It was a composite contract for which a single consideration was made by the airline.

Thus, the case was decided in favour of Qantas. The Mumbai ITAT also pointed out that the tax department had failed to notice that the rate of tax to be withheld even in case of rental payments had been reduced to 10% from October 1, 2009 and had applied the earlier rate of 20%.

Tax experts feel that this decision will go a long way in providing closure in respect of payments for lounge services.