In a significant ruling, the division bench of Delhi High Court ruled that, Operations, Management and Development Agreement (OMDA) for Airport Management does not constitute a “Franchise” in terms of Section 65(47) of the Finance Act and the transaction between the Delhi International Airport Ltd (DIAL) and AAI does not constitute a taxable service in terms of section 65(105) (zze) of the Finance Act.
The verdict came in response to writ petition filed by Delhi International Airport Ltd (DIAL) and Mumbai International Airport Ltd (MIAL).
While considering the questions, whether the OMDA constitutes a franchise and if so, whether any service is being provided by AAI to the petitioners?, the division bench comprising of Justice Badar Durrez Ahmed and Justice Sancheev Sachdeva observed that, “For OMDA to constitute a franchise, it would have to satisfy the requirements of Section 65(47) of the Finance Act, which inter alia requires that the franchisees (Petitioners) should have been granted representational right by franchisor (AAI)”.
“Merely because, by an agreement, a right is conferred on a party to sell or manufacture goods or provide services or undertake a process, would not ipso facto bring the agreement within the ambit of a franchise. What is also required is to establish that the right conferred is a ‘representational right’”.
The Petitioners, under the OMDA, had to develop, operate and manage the Airports. AAI handed over the demised premises (under the lease deeds) at the Airports to the Petitioners. The Petitioners have spent their own money for designing, developing, constructing, upgrading, modernizing, financing etc., of the airports. The airports are being operated, maintained and developed by the Petitioners in their own right and in their own name. The Petitioners have been granted “exclusive right and authority” to undertake the functions mentioned in agreement and particularly those relating to operation, maintenance, development, design, construction, upgradation, modernization, finance and management of the airport and to perform services and activities constituting aeronautical services and non aeronautical services at the airport.
The Court also observed that, “Petitioners do not undertake any process identified with AAI. The Petitioners run their own operations using their own processes, policies, methods, design, techniques etc. The sole responsibility and liability for performances of the services is that of the petitioners. AAI has completely divested its rights (other than reserved activities) to build operate and maintain the airport. Once the functions of AAI have been completely divested by it and assigned to the Petitioners, there is no question of the petitioners representing AAI in performance of those functions. There is no representation right that has been assigned to the petitioners by AAI”.
“Further, the taxable service is not mere granting of a franchise but is where the franchisor provides service to a franchisee. For the transaction to be taxable, it is necessary that the service should be provided by the AAI to the Petitioners. It is not pointed out by the Revenue as to how and in what form service is being provided by AAI to the Petitioners. The Annual Fees paid is not because of any service rendered by AAI to the Petitioner. AAI has entrusted the petitioners with some of its functions under Section 12 of the Airports Authority of India Act and no service is being rendered by the AAI to the petitioners in performance of those functions. Perusal of clauses of OMDA clearly shows that AAI does not render any service to the petitioners”.
“Clearly, as there is no representational right conferred by AAI on the petitioners, the OMDA cannot constitute a franchise in terms of Section 65(47) of the Finance Act. Further as no service is being provided by AAI to the petitioners, there cannot be said to be any taxable service in terms of section 65(105) (zze)”, the bench added.
Read the full text of the Judgment below.