The appeals were filed by the service tax authorities against orders of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which had held that the “User Development Fee” (UDF) collected by airport operators such as Delhi International Airport Ltd., Mumbai International Airport Pvt. Ltd., and Hyderabad International Airport Pvt. Ltd. was not liable to service tax under the Finance Act, 1994.

The assessees had entered into Operation, Management, and Development Agreements (OMDA) with the Airports Authority of India (AAI) under the Airports Authority of India Act, 1994, authorizing them to collect a “development fee” from passengers under Section 22A of the Act, with prior government approval. The Commissioner of Service Tax issued show cause notices demanding service tax on these collections, which were later confirmed. On appeal, CESTAT set aside the demand, holding that UDF was not a taxable service.

The Revenue argued before the Supreme Court that the UDF was a consideration for services provided at airports—such as maintenance, upgradation, and expansion of facilities—and therefore liable to service tax under Section 65(105)(zzm) as “airport services.”

The Supreme Court dismissed the Revenue’s appeals and upheld the CESTAT orders. The Court held that the development fee collected under Section 22A of the AAI Act, 1994 is a statutory levy in the nature of a cess or tax and not a fee for services rendered. It was collected for financing the upgradation, expansion, or development of airports and not in exchange for any service to passengers.

The Court observed that the levy was authorized by law, deposited in escrow accounts, and regulated by statutory rules. Since there was no contractual relationship or quid pro quo between the passengers paying the fee and the airport operators, the collections could not be treated as consideration for any service. Therefore, no service tax was chargeable on such collections under the Finance Act, 1994.

Accordingly, the Supreme Court upheld that User Development Fee (UDF) or Development Fee (DF) levied under Section 22A of the AAI Act is outside the ambit of “taxable services.