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Power to impose penalty also involves power not to impose the same and remand back proceedings should not put the taxpayer to worse situation as compared to the original order in original.

Civil Appeal No.:1052 of 2013

Hon’ble Court: Supreme Court

Case Title: M/s Saudi Arabian Airlines v. Union of India & Ors.

Outcome:Appeal was allowed

Judgement Date: 01.09.2026

BRIEF FACTS OF THE CASE:

M/s Saudi Arabian Airlines (appellant) was issued a Show Cause Notices proposing recovery of short payment of FTT (Foreign travel tax (FTT) ) to the government exchequer as per the Foreign Travel Tax Rules, 1979 along with interest and penalty under Section 38 of the Finance Act. There were various incidents of delays in payment of the same pertaining to various periods. However, in 5 out of 6 delays the demand drafts were purchased by the appellant before the due dates of the payment. In the sixth case, relating to December 1995, the delay was 63 days. The appellant explained that the employee who was entrusted with the responsibility of depositing the demand draft was on emergency leave. Thus, according to the appellant, the delays were not deliberate. However, demand was confirmed by the adjudicating authority for which the appellant filed the appeal with the appellate authority. Thereafter, appellate remanded the matter back to the adjudicating authority for passing a fresh order.
On remand, the adjudicating authority passed the de novo Order-in-Original, wherein the penalty for the six cases of delayed payment of FTT was enhanced drastically by around 600 times from the original demand confirmed in the Order in Original.
Being aggrieved by the de novo order, appellant preferred appeal before the Commissioner of Customs (Appeals) which upheld the demand of interest and penalty. The appellant thereafter filed a revision application before the Government of India under Section 129 of the Customs Act, 1962. The revisional authority accepted the appellant's contention regarding limitation in respect of interest in five cases and set aside the corresponding interest demand. However, it rejected the challenge to the penalty and held that the minimum penalty prescribed under Section 38(3) was a statutory compulsion and that penalty followed automatically from the delay in payment. Further, revisional authority remanded back the matter before the adjudicating authority for the limited purpose of ascertaining whether the show cause notice for demanding interest on delayed payment of FTT were issued within the prescribed time limit as per Rule 7 of 1979 Rules. The appellant then approached the Bombay High Court with its principal grievances was that the penalty had been enhanced substantially in the de novo proceedings, thereby placing the appellant in a worse position after pursuing its statutory appeal. The High Court, however, dismissed the writ petition holding that provisions of the Finance Act will prevail over the 1979 Rules. Further , in respect of mens rea, the High Court held that there is no need to establish proof of criminal motive or any mens rea on the part of the defaulter. It is not an essential element for imposing penalty under the Finance Act and the 1979 Rules. In continuation to this, the High Court further held that ‘delayed payment’ is equivalent to non-payment i.e. ‘failure to pay the tax’. Once there is a default, penalty is attracted. Lastly, it was held that it was not a limited remand, therefore, it was open for the adjudicating authority to enhance the amount of penalty thereby leading the appellant to approach the Supreme Court.

QUESTION BEFORE HON’BLE COURT:

Whether delayed payment of FTT, where the tax was ultimately deposited, could be treated as “failure to pay” under Section 38(3) of the Finance Act, 1979 so as to attract the substantial penalty?
Whether any penalty is liable under Section 38(3) of the Finance Act when there is no wilful failure to pay or any wilful default or wilful delayed payment?
Whether the quantum of penalty liable to be paid for violation of Section 35(2) of Finance Act should be exclusively as per Section 38(3) of the said Act or is in conjunction with the provisions of Rule 1979?

BRIEF ARGUMENTS BY APPELLANT:
Appellant submitted following contentions: -
Legislature consciously did not amend Rule 11 of the 1979 Rules:
That sub-sections (3) and (4) of the Section 38 were introduced by way of amendment in 1994 only, hence, there was no amendment to the Rule 11 of the 1979 Rules. Hence, whenever, there was violation of 1979 Rules, Section 38(4) would be attracted. Further, that penalty can be imposed only in accordance with Section 38(4) of the Finance Act and not as per Section 38(3). Along with that, the legislature consciously/knowingly did not omit Rule 11 as per which the maximum penalty is 5000/-.
Delayed Payment of tax cannot be equated with Absolute Non- Payment of Tax
Appellant contended that Section 38(3) deals with situation where there is absolute non-payment of tax. Tax paid even though belatedly but before issuance of Show cause notice cannot be treated equivalent to non-payment.
There were genuine reasons behind the delay and the delay were insubstantial:

In respect of 5 cases out of 6, the DD were issued by the respective banks before the due dates, however, same could be deposited into the Government treasury for delays ranging from 1 day to 11 days and only in respect of one case, there is delay of 63 days in depositing the tax. Hence, with respect to 5 instances, the delay in depositing was because of security restrictions and in the single case of 63 days, the concerned employee who was dedicated to the role of depositing the tax was on emergency leave.

Section 35A has limit of quantum of interest:

Adverting to Rule 35A of Finance Act, aforesaid provision deals with a situation such as the instant case. Section 35A provides for levy of interest for default in payment of FTT. For such default minimum interest rate is 20 percent and the maximum is 30 percent p.a.

Penalty can be imposed only where there is non-payment:

A penalty can only be imposed in the case of absolute non-payment or wilful default and not where there is mere delay in paying the tax or depositing the bank draft. For this reliance was placed upon the judgement of this court in the case of U.S. Technologies International Private Limited v. Commissioner of Income tax.[ Civil Appeal No. 7934 of 2011]

Revisional authority failed to apply Rule 7 in case of delayed payment of tax:

Appellant further argued that the revisional authority considered the question of limitation in the case of short payment of tax but did not apply Rule 7 in the case of delayed payment of tax leading to imposition of the penalty,
Not only authorities below, but the High Court also erred in upholding the penalty imposed on the appellant. Further submits that the same cannot be sustained and is liable to be set aside.

Therefore, impugned order should be set aside.

BRIEF ARGUMENTS BY REVENUE DEPARTMENT:

Revenue Department contended that:
Appellant has himself admitted the fact that there were 6 instances of delayed payment of tax:

Department contended that present civil appeal is concerned with the delayed crediting of FTT and the fact of contravention by delayed payment has been accepted by appellant himself.

Provisions of Section 38 were referred:

Finance act and 1979 rules were referred along with the amendment brought into effect from 1994 to the sub-section (3) fo the Section 38 based on which it was contended that when there is a default in payment of FTT, imposition of penalty becomes mandatory. The minimum penalty cannot be less than one-fifth of the amount of tax not paid, though the quantum of penalty may extend to three times the amount of tax not paid.

Rule 7 cannot be invoked in the case where the proceedings are not governed by it:

Appellant has sought to invoke the limitation as per Rule 7 of 1979 Rules, whereas the present proceedings are not governed by Rule 7 at all. Proceedings in question are purely penal in nature and are governed by Rule 12. Rule 12 deals with the issuance of SCN and compliance with the principles of natural justice regarding imposition of penalty.
In continuation of above, Rule 7 applies to the case where tax has not been paid/short paid/ or erroneously refunded and provides a limitation period for issuance of notice in such recovery proceedings whereas rule 12 operates in a completely different field which governs penalty proceedings and mandates that no penalty shall be imposed without issuance of SCN and grant of an opportunity of hearing.
Rule 7 pertains to recovery of tax dues and carries a limitation period whereas Rule 12 pertains to imposition of penalty and is guided solely by the principles of natural justice. The proceedings in the instant case, relate to the imposition of penalty under Rule 38(3), hence, the instant case squarely falls within the ambit of Rule 12. Therefore, the submission of the appellant in this regard is not sustainable.

Rule 38(3) creates a statutory liability for imposition of penalty in cases where carrier fails to pay FTT within stipulated time:- Minor delays not Carved Out

Along with that, it was submitted that the Section 38(3) creates a statutory liability for imposition of penalty in cases where a carrier fails to pay the FTT within the prescribed time limit. The expression used in the statute is ‘fails to pay’ which has wide implication and does not requires proof of intention/wilful default. Further, that the said provision is structured as a strict liability clause. The scheme of Finance Act clearly demonstrates a three fold consequence in cases of non-compliance, liability to pay tax, interest for the period for which the tax was not paid and liability to pay penalty for failure to pay the tax. The legislative intent is clear, delay or non payment should not be treated leniently. Along with that, delay in payment of tax is equivalent to non-payment of tax.
Along with that reliance has been placed upon the decision in the case of Mathuram Agarwal v. State of Madhya Pradesh [AIR 2000 SUPREME COURT 109] in which it was held that statute must be governed strictly and in fiscal matters, adherence to timelines is of paramount importance.
Further, contended that High court has correctly held that penalty imposed under Section 38 is a penalty in case of default or failure of statutory obligation. For this reliance was placed upon the judgement in the case of J.K. Industries Ltd. V. Chief Inspector of Factories & Boilers;
On the basis of the above referred judgements, it can be held that certain statutory provisions for violation or breach of which penalty is attracted for which proof of mens rea is not required.

FINDINGS & JUDGEMENT:
Following are the findings of the Court in the instant case:
After making detailed analysis of the various provisions of the Foreign Travel Tax Rules, 1979 and Finance Act, the Court made the detailed analysis which is as follows:
Delayed Payment of tax cannot be equated with Non-Payment in accordance with Section 38(3)

Section 38 was referred which deals with penalties. However, it was noticed that both sub-section (1) and (2) deals with situation where there is non-payment of FTT by the passenger. Hence, sub section (3) is applicable where carrier or other person fails to pay the FTT to the government. Hence, FTT along with applicable interest and penalty shall be payable. The minimum quantum of penalty shall be one-fifth which may extend to three times of the amount of the tax not so paid to the government exchequer.
Further, that there are two crucial expressions in the Section 38 – ‘fails to pay the foreign travel tax’ and ‘the amount of tax not so paid’. Hence, it was held that failure to pay would mean non-payment and is not alike to delay in making the payment. The legislature has carefully chosen the word ‘fails to pay the foreign travel tax’. If the legislature intended to penalise delay, it would have used appropriate words to that effect. Further, the Court held that when it comes to interpretation, we are not to import further meaning(s) to the expression used by the legislature by our own interpretative expansion which is not permissible. Therefore, sub-section (3) of Section 38 would not cover a situation where a carrier or other person is charged for delayed payment of FTT.

Reliance was placed upon the US Technologies International Private Limited and it was observed that ‘fails to deduct’ is not equivalent to ‘failure to deposit the tax deducted’ and mere delay in remitting tax does not attracts penalty.
Payment made before the SCN = delayed payment; payment made after the SCN = non-payment, not delayed payment.
Sub-section (4) of Section 38 of the Finance Act read with Rules 4 and 9 of the 1979 Rules deals with a situation of delayed payment of FTT into the Government treasury. As already discussed above, delayed payment of FTT into the Government treasury cannot be equated with non-payment of FTT into the Government treasury. In such cases, it is to be clarified that any deposit made after issuance of the show cause notice cannot clothe the default as an instance of delayed payment. It will be a case of non-payment. Conversely, any payment made prior to issuance of show cause notice would be construed to be a case of delayed payment.

Delay may be condoned on discretion conferred upon the Collector of Customs.

Furthermore, as Rule 4 provides a timeline of 30 days for depositing FTT collected to the government exchequer. In continuation of above, it was observed that proviso to the above rules, gives the power to Collector of Customs to condone the delay in filing of return. Once condonation is granted, no penalty can be imposed later on. Hence, the view of the High court that once the timeline for depositing FTT or filing of return is surpassed, penalty gets imposed automatically is invalid.

In case of dispute between parent statute and the subordinate legislation, parent statute shall prevail

Rule 11 of the 1979 rules was referred which specifically deals with adjudication of penalties. Rule 11 is not specific to any sub section of Section 38. In every case, in which a person is liable to penalty under the said section. Such penalty may be adjudged by an officer of customs as mentioned in Section 3(c) or Section 3(d). However, proviso puts maximum limit to penalty which exceeds 5000/-. Hence, there exists conflict between Rule 11 and sub section (3) of 38 regarding quantum of penalty. It was held that, whenever there is conflict between parent statute and the subordinate legislation, in such case, the provisions of the parent statute shall prevail. However, as the instant case, does not falls within the purview of section 38(3).

Show Cause Notice and Personal Hearing are Mandatory Before Penalty
Rule 12 of the 1979 Rules mandates issuance of a show cause notice before imposition of penalty and must be read with Rule 11 and the proviso to Section 38(5), which safeguard the principles of natural justice. The notice must clearly state the grounds for proposed penalty, provide reasonable time for a written representation, and afford the affected person a reasonable opportunity of personal hearing. Thus, penalty cannot be imposed mechanically. If the noticee satisfactorily establishes that the alleged grounds are not justified or that penalty is not warranted, the adjudicating officer may drop the proposed penalty. However, if the officer is not satisfied with the explanation, penalty may be imposed, but it must remain within the statutory limits prescribed under Sections 38(2), (3) and (4), as applicable.

Timeline for depositing tax is flexible and not rigid:

Based on above observation, it was held that the timeline fixed for deposit of FTT by the carrier into the government treasury as well as for submission of return is not inflexible based on the above observation that condonation may be granted. Further, in sub section (2),(3) and (4) of 38 is not automatic. Merely, the word “shall” is appearing in a provision does not renders the same to be mandatory. A provision is mandatory or discretionary in nature is based on the overall scheme of the provision. It was held that based on the nature of the provisions of the Rule 4 and Rule 9 along with provisions contained in sub sections (2), (3), (4), it cannot be said that the imposition of penalty is mandatory. An officer can decide not to impose penalty where the same is unwarranted. However, the quantum of the same would be governed by provisions contained in the statute.

Penalty to be imposed depends upon the deliberate action of assessee:

In continuation of above, reliance was placed upon the judgement in the case of Hindustan Steel Ltd. v. State of Orissa[Orissa [1978 2 ELT J 159 (Supreme Court)], and it was held that an order imposing penalty for failure to carry out a statutory obligation is a result of a quasi-criminal proceeding and that the penalty will not ordinarly be imposed unless the taxpayer has acted deliberately contradictory to the law or was guilty of misconduct. Further, that it is at discretion of the authority that whether penalty to be imposed for failure to perform a statutory obligation.
Reliance was placed upon various judicial pronouncements, and it was held that there are certain statutory provisions for violation or breach of which penalty is attracted for which proof of mens rea is not required. The most important question is that the penalty imposition is automatic or not. This question is answered by the statutory process and scheme of statute for imposition of penalty. The power to impose penalty also includes power to not to impose. Reliance was placed upon the judgement in the case of Hindustan Steel ltd. in which it was held that mere because the statute provides a minimum penalty, it does not renders the same to be automatic.

Authorities and High court erred in treating the imposition of penalty to be automatic in nature:

It was observed that out of 6 instances of delayed payment, there were 5 instances in which demand draft could not be submitted to the exchequer due to security reasons and in the 6^th instance, DD was deposited by a dealy of 63 days due to the dedicated employee was on leave. Penalty imposed on appellant for late deposit of FTT is set aside. It was held that appellate authority, the revisional authority and High court have erred in imposing the penalty due to the fact that the instant case is covered under Section 38(4) and does not falls within the ambit of Section 38(3). For non-payment of FTT, sub-section (3) of Section 38 is attracted and for delay in deposit of payment of FTT, sub-section (4) of Section 38 would come into play. Secondly, there is provision in Rule 4 for condonation which was overlooked by the authorities and court. If the appellant’s reasons were genuine, then, condonation would have been granted and there would be no imposition of penalty. Furthermore, discretion for imposing penalty lies with the concerned officer.

A person can not be placed in a worse position as a result of filing appeal

Further, reliance was placed upon the decision in the case of Jyoti Plastic Works Pvt. Ltd. Vs. Union of India[ 2020 SCC OnLine Bom 2276] in which legal maxim prohibition of reformatio in peius was re-enforced and it was held that person should not be placed in a worse situation as a result of filing an appeal. Reliance was placed on several other judgements also.

Consequently, the revisional order, HC order and de novo order in original were brushed aside. Further, it was directed that any penalty paid by the appellant stands to be refunded along with interest @9% p.a within 3 months.

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GST update /2026-27/0080

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