Delay in paying Foreign Travel Tax is not failure to pay, Supreme Court holds
A Supreme Court division bench held that delayed deposit of Foreign Travel Tax falls under Section 38(4), not Section 38(3), and penalty is never automatic under the Finance Act, 1979.
The Supreme Court has set aside a penalty imposed on Saudi Arabian Airlines for late deposit of Foreign Travel Tax, holding that delayed payment cannot be equated with failure to pay under Section 38(3) of the Finance Act, 1979. The judgment, delivered by Justice Ujjal Bhuyan for a bench that also comprised Justice J.B. Pardiwala, allowed the airline’s civil appeal against a Bombay High Court order of 9 August 2010.
The case turned on six instances of delay in depositing FTT collected from passengers. In five of these, the delay ranged from one to eleven days; in one, it was 63 days. The Court found that these belated payments fell within Section 38(4) read with the 1979 Rules, not the strict-liability language of Section 38(3), and that penalty under any limb of Section 38 is never automatic. The airline was directed a refund of any penalty paid, with interest.
How the dispute reached the Court
Saudi Arabian Airlines, licensed to operate flights to and from India, collected FTT from passengers going abroad and was required to deposit it into the Government treasury within 30 days under Rule 4 of the Foreign Travel Tax Rules, 1979.
For July 1995, December 1996 and November 1997 the delay was one day each. There was a three-day delay for August 1994 and an eleven-day delay for April 1996. For December 1995 the delay was 63 days. In five of the six cases, the demand drafts were purchased through banks before the due dates, but their deposit into the treasury was delayed.
Fourteen show cause notices were issued. The airline replied that the delays were not deliberate but due to technical reasons. The adjudicating authority, by an order-in-original of 14 June 1999, imposed penalties totalling a modest amount, including Rs. 12,000 for the six cases of late payment.
On appeal, the matter was remanded for de novo consideration. In the de novo order of 8 August 2001, the adjudicating authority raised the penalty for the six late-payment cases to Rs. 71,29,140, invoking Section 38(3). The appellate authority upheld this on 9 January 2003, reasoning that only the minimum statutory penalty had been imposed and that delay in payment amounts to failure to pay.
A revision under Section 129 of the Customs Act, 1962 partly succeeded on limitation for certain interest demands, but the penalty was sustained on the view that penalty under Section 38(3) is automatic once there is delay. The High Court dismissed the airline’s writ petition, holding that delayed payment is equivalent to non-payment and that no mens rea is needed for a penalty for breach of a civil obligation.
What the Court held on failure to pay versus delay
The Court focused on two expressions in Section 38(3): “fails to pay the foreign travel tax” at the start, and “the amount of the tax not so paid” at the end. Reading them together, it held that the provision contemplates non-payment, not delayed payment.
“Failure to pay would mean non-payment,” the Court said, adding that it cannot be equated with delay in making payment. Had the legislature intended to cover delayed payment, it would have used different language. In interpreting fiscal statutes, the Court held, meaning cannot be expanded beyond the words used.
The Court drew a working line: a deposit made after issuance of a show cause notice is non-payment, while any payment made before the notice is delayed payment. On that reasoning, Section 38(3) does not cover the airline’s delayed deposits.
The Court relied on U.S. Technologies International Private Limited v. Commissioner of Income Tax, where it had held that “fails to deduct” in Section 271-C of the Income Tax Act, 1961 cannot be read into failure to deposit tax deducted, and that mere belated remittance of TDS attracts no penalty under that provision.
Why penalty is not automatic
The Court held that delayed payment of FTT is governed by Section 38(4) read with Rules 4 and 9 of the 1979 Rules, which deal with breach of the deposit and return timelines. Those timelines, it observed, are not inflexible: the proviso to Rule 4 and the proviso to Rule 9 give the Collector of Customs discretion to condone delay on sufficient cause. Where delay is condoned, no occasion for penalty arises.
Examining the adjudicatory scheme, the Court held that penalty under Section 38, whether under sub-sections (2), (3) or (4), is not automatic despite the word “shall”. Rule 12 requires a show cause notice, a written representation and a hearing before any penalty. To treat penalty as a foregone conclusion would render that process nugatory. “The power to impose penalty includes power not to impose penalty,” the Court held.
It distinguished automatic imposition from the exclusion of mens rea. Drawing on Hindustan Steel Ltd. v. State of Orissa, the Court noted that even where a minimum penalty is prescribed, an authority may refuse to impose it for a technical or venial breach or where the default flows from a bona fide belief.
The Court surveyed R.S. Joshi v. Ajit Mills Ltd., Gujarat Travancore Agency v. Commissioner of Income Tax and J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers, which hold that certain statutory breaches attract penalty without proof of mens rea. It concluded that absence of mens rea and automatic imposition are separate questions, and that automatic imposition depends on the statute’s scheme and adjudicatory process.
On the conflict between Section 38(3) and the proviso to Rule 11, which caps penalty at Rs. 5,000, the Court declined to give a definitive ruling, since it had held the case fell outside Section 38(3) altogether.
The enhancement on appeal
The Court also addressed the increase of penalty from Rs. 12,000 to Rs. 71,29,140 after the airline’s own appeal led to a remand. It held that the appellate, revisional and High Court authorities erred in accepting this.
Invoking the maxim reformatio in peius, the Court held, following Jyoti Plastic Works Pvt. Ltd. v. Union of India and Nagarajan v. State of Tamil Nadu, that no appellant can be placed in a worse position by reason of filing an appeal.
Order
The Court held that penalty is not imposable on the airline. It set aside the penalty for late deposit of FTT in the six instances, and quashed the High Court order of 9 August 2010, the revisional order of 29 October 2004, the order-in-appeal of 9 January 2003, and the de novo order-in-original of 8 August 2001 to the extent they imposed the penalty.
Any amount paid as this penalty is to be refunded with interest at 9 percent per annum within three months. The bank guarantee furnished by the airline stands discharged. The appeal was allowed with no order as to costs.