The Supreme Court has held that an airline carrier cannot be penalised under Section 38(3) of the Finance Act, 1979, merely for depositing Foreign Travel Tax (FTT) after the prescribed deadline, drawing a clear distinction between ‘failure to pay’ and delayed payment.

 

A bench of Justice Ujjal Bhuyan and Justice J B Pardiwala, in a judgment delivered on September 1, allowed an appeal filed by Saudi Arabian Airlines and set aside a penalty of ₹71.29 lakh imposed on the airline for six instances of delayed payment of FTT.

 

The court held that Section 38(3), which provides for a penalty ranging from one-fifth to three times the amount of tax not paid, applies to cases of non-payment and cannot be extended to cases where the tax has been paid belatedly.

  

The dispute arose from six instances between 1994 and 1997 in which Saudi Arabian Airlines deposited FTT between one and 63 days late. In five of the six cases, the airline had purchased demand drafts through banks before the due dates, but the drafts were deposited into the government treasury later. The sixth instance involved a delay of 63 days.

 

The airline argued that the delays were not deliberate. It said security restrictions had caused the delay in depositing five of the drafts, while the employee responsible for the 63-day delay was on emergency leave.

 

The authorities, however, treated the delayed deposits as failures to pay FTT and imposed a penalty under Section 38(3). An initial order had imposed ₹12,000 in penalties for the six delayed payments. After the matter was remanded, the penalty was enhanced dramatically to ₹71,29,140. The appellate and revisional authorities, followed by the Bombay High Court, upheld the enhanced levy.

 

The Supreme Court disagreed with this approach.

 

Examining the language of Section 38(3), the court said the expressions “fails to pay” and “the amount of the tax not so paid” have to be understood together.

 

According to the bench, “failure to pay” means non-payment and cannot be equated with a delay in making payment. Had Parliament intended to cover delayed payment, it could have used different language, the court said.

 

The court also relied on its 2023 decision in US Technologies International Private Limited versus Commissioner of Income Tax, where it had held that mere belated remittance of tax deducted at source did not attract a penalty under the relevant provision of the Income Tax Act.

 

Importantly, the bench said delayed payment is instead addressed by Section 38(4), read with Rules 4 and 9 of the Foreign Travel Tax Rules, 1979. Rule 4 prescribes a 30-day period for depositing FTT collected during a month, while its proviso allows the Collector of Customs to grant additional time where sufficient cause is shown. Rule 9 similarly permits an extension for filing monthly returns.

 

The court held that these timelines are therefore not inflexible and that a breach does not automatically result in a penalty. Where the Collector condones the delay on sufficient cause being shown, no question of penalty for that delay arises.

 

The bench further clarified that Rule 12, which requires a show-cause notice and an opportunity of hearing before a penalty is imposed, also leaves room for the adjudicating authority to decide that a penalty is not warranted. If the explanation is found satisfactory, the officer may decline to impose the proposed penalty.

 

On the facts before it, the court concluded that no penalty was imposable on the airline for the six delayed deposits. It consequently quashed the Bombay High Court judgment, the revisional order, the appellate order and the de novo adjudication order insofar as they imposed a penalty for the delayed FTT payments.

 

The court also invoked the principle of no reformatio in peius that a litigant should not be placed in a worse position merely because it exercises its statutory right of appeal. It noted that Saudi Arabian Airlines’ penalty had risen from ₹12,000 to ₹71.29 lakh after it challenged the original order.

 

The Supreme Court directed the respondents to refund any amount paid by the airline towards the penalty, with interest at 9 per cent per annum, within three months. The bank guarantee furnished by the airline was also ordered to be discharged.