Mumbai: India’s second largest private carrier by passengers carried, Kingfisher Airlines Ltd, had wrongly availed of Rs120 crore in Central-value added tax (Cenvat), credit on certain non-eligible services, the service tax department in Mumbai has found.

In dispute: A Kingfisher Airlines plane at the Bangalore airport. Hemant Mishra/Mint

Airline operators pay service tax to vendors for services such as maintenance and repairs of aircraft. To avoid double taxation, the government allows domestic airlines to avail Cenvat credit on service tax incurred for procuring goods and services that are extended to customers.

According to the audit report prepared by the agency, Kingfisher Airlines had wrongly availed Cenvat credit on certain input services that were used to provide non-taxable services. Cenvat credit is allowed only on those input services that are used for taxable services. “Following the audit, the firm has paid Rs31.7 crore to the department," said Atul Saxena, joint commissioner, service tax department. This has reduced Kingfisher Airlines’ prospective liability to Rs88.3 crore.

Mint has reviewed a copy of the planning cell report that has details on the Cenvat credit availed by Kingfisher. The report was approved by the service tax commissioner, Mumbai, on 11 November.

Prakash Mirpuri, vice-president of corporate communications, UB Group, which owns Kingfisher Airlines, denied the firm has raised a tax liability of Rs120 crore—it is “wrong and absolutely incorrect"—or paid about Rs30 crore to the service tax department. “While we confirm that a routine audit was conducted recently by the service tax department, we have received no communication from the department after the audit was completed nor have we received any intimation or demand," Mirpuri said.

Explaining the audit process, the unnamed service tax official quoted in the beginning of this story said the inspector and superintendent of service tax, who conducts an audit under the supervision of an assistant commissioner, first prepares a draft audit report. The draft report is then sent to the planning cell of the department, which compiles all reports for the agency’s monitoring committee.

The monitoring committee then prepares a case brief and presents it before the service tax commissioner for approval. The department issues show-cause notices to firms after the commissioner’s approval.

“In this particular case, the commissioner has given his approval and the concerned division will soon issue a show-cause notice to the company," the official said.

The airline claimed a market share of 20.7% in October. According to a statement by the ministry of civil aviation on 19 November, Kingfisher Airlines had made maximum losses of Rs1,602 crore among private airlines for the year 2007-08.

“If true, the latest tax claim by (the) service department will add pressure to its current liquidity," said a senior analyst with a domestic brokerage who tracks airlines stocks. He did not want to be identified since he is not authorised to speak to the media.

Kingfisher Airlines and Bharat Petroleum Corp. Ltd are now locked in a legal battle on non-payment of fuel charges worth about Rs300 crore.

Kingfisher Airlines shares fell 0.35% on the Bombay Stock Exchange on Wednesday to close at Rs56.15, even as the exchange’s benchmark index, Sensex, dropped 0.16% to close at 17,169.91 points.