A tax tribunal has ruled that service tax will apply on the proposed GMR-led joint venture in Special Economic Zone to provide maintenance, repair and overhauling (MRO) facilities to domestic and foreign airlines.

The ruling was given by the Authority of Advance Rulings (AAR) on an application filed by the MAS-GMR Aerospace Engineering Company, a joint venture of GMR, Hyderabad International Airport Limited, Hyderabad and Malaysian Aerospace Engineering, SDN-BHD, Malaysia.

The venture company, which proposed to set up MRO facility at an SEZ in Hyderabad, wanted to know whether the service tax would apply on services provided by the entity.

MAS-GMR Aerospace Engineering Company company had argued that since the MRO services are provided in a SEZ, which technically is outside the country, no service tax should be levied.

AAR said SEZs are deemed to be outside the customs territory of India only for undertaking authorised operations.

"The MRO services would therefore be performed within the territory of India...The services provided by the applicant would be taxable (under Finance Act, 1994)", the ruling said.

The company has obtained a registration as co-developer of an aviation specific SEZ adjacent to the Hyderabad Airport. It plans either through itself, or its subsidiary, or by a Special Purpose Vehicle (SPV) to set up a unit within the SEZ.

MAS-GMR proposes to provide MRO facilities to domestic as well as foreign aviation entities. The applicant proposes to enter into a contract with an overseas entity located in Singapore who will procure contracts for MRO services from domestic and foreign airlines.

Besides, it also plans to enter into direct contracts with domestic and foreign airlines for giving the services.

The AAR also ruled that MRO services rendered to overseas entity cannot be termed as export of services.