Supreme Court Quashes ₹71-Lakh Penalty on Saudi Arabian Airlines for Delayed Foreign Travel Tax; Holds ‘Failure to Pay’ Means Non-Payment, Not Belated Payment
Supreme Court Allows Saudi Arabian Airlines’ Appeal Against Foreign Travel Tax Penalty; Holds Section 38(3) Covers Non-Payment, Not Mere Delay
Facts
Saudi Arabian Airlines, an international airline operating flights to and from India, was required under the Finance Act, 1979 and the Foreign Travel Tax Rules, 1979 to collect Foreign Travel Tax (“FTT”) from passengers and deposit it with the Central Government. The dispute concerned penalties imposed under Section 38(3) for delayed deposit of FTT.
There were six instances of delayed payment. Three involved delays of only one day, one involved three days, another eleven days, and one involved 63 days. In five of the six instances, the airline had purchased the relevant demand drafts before the due dates, but their actual deposit was delayed.
After an earlier adjudication and remand, the Deputy Commissioner of Customs imposed a penalty of ₹71,29,140 under Section 38(3) for the six instances of delayed FTT payment, apart from interest and other amounts.
The appellate and revisional authorities sustained the penalty, reasoning that once tax was deposited beyond the prescribed time, “delay” amounted to “failure to pay” and the statutory minimum penalty followed.
The Bombay High Court dismissed the airline’s writ petition. Saudi Arabian Airlines therefore approached the Supreme Court in Civil Appeal No. 1052 of 2013 challenging, principally, the penalty imposed for delayed payment of FTT.
Issues
The principal issues before the Supreme Court were:
- Whether delayed payment of FTT amounts to “failure to pay” FTT within the meaning of Section 38(3) of the Finance Act, 1979.
- Whether Section 38(3), which provides a substantial penalty for failure to pay FTT, applies where the tax was actually paid, though belatedly.
- Whether delayed payment is instead governed by the statutory provisions dealing specifically with delay, including Section 35A and Section 38(4) read with the 1979 Rules.
- Whether penalty under Section 38(3) could be imposed without wilful default or mens rea.
- Whether the adjudicating authority could substantially enhance the penalty after the airline itself had succeeded in obtaining a remand.
- Whether an appellant could be placed in a worse position merely because it exercised its right of appeal.
Petitioner’s/Appellant’s Arguments
Saudi Arabian Airlines argued that Section 38(3) was attracted only in cases of actual non-payment or failure to pay FTT, and not where payment was ultimately made after some delay.
The airline emphasised that five of the six delays were between one and eleven days and that the demand drafts in those cases had actually been purchased before the due dates. The delays were attributed to security restrictions. The 63-day delay was explained on the basis that the employee responsible for depositing the tax was on emergency leave.
It argued that Section 35A expressly deals with delayed payment by imposing interest and therefore demonstrates that Parliament itself distinguished between delay in payment and failure/non-payment.
The airline further contended that Section 38(4), read with the relevant Foreign Travel Tax Rules, governed breaches of the Rules, whereas Section 38(3) was intended for actual failure to pay the tax.
Reliance was placed particularly on U.S. Technologies International Pvt. Ltd. v. Commissioner of Income Tax, where the Supreme Court had distinguished belated remittance of TDS from failure to deduct TDS.
The airline also objected to the substantial enhancement of penalty after remand, contending that a party pursuing an appeal should not be placed in a worse position because it exercised its appellate remedy.
Respondent’s Arguments
The Union of India argued that Section 38(3) imposed a statutory liability whenever the carrier failed to credit FTT within the prescribed time.
According to the Revenue, “fails to pay” was sufficiently broad to include failure to pay within time, and therefore delayed payment was legally equivalent to non-payment for the period of default. It argued that Section 38(3) operated as a strict-liability fiscal provision and did not require mens rea or wilful default.
The Revenue further argued that the statutory consequences were threefold: payment of the tax itself, interest for the delayed period, and penalty for failure to pay.
Reliance was placed upon Mathuram Agrawal v. State of Madhya Pradesh for the proposition that fiscal statutes must be interpreted according to their plain language without importing considerations of equity. The Revenue also relied upon Iran National Airlines v. Union of India, Combatta Aviation Ltd. v. Union of India, J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers, R.S. Joshi v. Ajit Mills Ltd. and Gujarat Travancore Agency v. CIT.
Analysis of the Law
The Supreme Court undertook a textual and contextual interpretation of Section 38(3).
The provision uses two significant expressions: “fails to pay the foreign travel tax” and “the amount of the tax not so paid.”
Reading these expressions together, the Court concluded that Parliament intended Section 38(3) to apply to non-payment, rather than mere delay in making payment.
The Court expressly held that:
“Failure to pay” would mean “non-payment”.
It therefore rejected the Revenue’s attempt to equate delayed payment with non-payment. The Court reasoned that if Parliament intended Section 38(3) to cover delayed payments, it could have expressly used language to that effect. In a fiscal statute, courts cannot enlarge statutory language through interpretative expansion.
The Court consequently held that Section 38(3) does not cover a carrier merely charged with delayed payment of FTT.
This distinction was reinforced by the overall statutory framework. Section 35A specifically contemplates delayed payment and provides for interest during the period of delay, while Section 38(3) addresses the distinct situation of failure/non-payment.
Precedent Analysis
The most important precedent was U.S. Technologies International Pvt. Ltd. v. Commissioner of Income Tax, (2023) 8 SCC 24.
There, the Supreme Court considered Section 271-C of the Income Tax Act and distinguished between failure to deduct tax and belated remittance of tax already deducted. It held that mere delay in remitting TDS could not be artificially treated as failure to deduct TDS for imposing the statutory penalty.
The Court applied the same interpretative principle here: delay in performing a statutory obligation cannot automatically be equated with complete failure to perform it when the legislature has used distinct language.
The Revenue’s reliance on Mathuram Agrawal concerning strict construction of fiscal statutes ultimately supported the need to adhere to the actual statutory language rather than expand “fails to pay” to include delayed payment.
The judgment also dealt with the doctrine of reformatio in peius—that an appellant should not be placed in a worse position merely because it exercised the right of appeal. The Court referred to Jawal Neco Ltd. v. Commissioner of Customs and its recent decision in Nagarajan v. State of Tamil Nadu, (2025) 8 SCC 331, reiterating that an appellant cannot become worse off by reason of filing an appeal.
Court’s Reasoning
The Supreme Court’s reasoning rested on two important propositions.
First, delayed payment is legally distinct from non-payment under Section 38(3).
The Court refused to rewrite the expression “fails to pay” so as to include every belated payment. The accompanying phrase “amount of tax not so paid” further indicated that Section 38(3) contemplated tax remaining unpaid rather than tax which had already been deposited after some delay.
Accordingly, the ₹71,29,140 penalty imposed under Section 38(3) for the six instances of delayed payment lacked statutory foundation.
Second, the Court disapproved of the manner in which the airline’s position became substantially worse after it challenged the original adjudication. It reiterated that reformatio in peius is prohibited as a component of fair procedure and natural justice. An appellant should ordinarily not suffer a worse outcome merely because it exercised its appellate remedy.
The Court therefore concluded that the penalty imposed for delayed deposit of FTT could not be sustained.
Conclusion
The Supreme Court allowed Saudi Arabian Airlines’ appeal and set aside the penalty imposed for the six instances of delayed payment of FTT.
It consequently quashed, to that extent, the Bombay High Court’s judgment dated 9 August 2010, the revisional order dated 29 October 2004, the appellate order dated 9 January 2003 and the de novo adjudication order dated 8 August 2001.
Importantly, the Court directed that any amount already paid towards the penalty be refunded to Saudi Arabian Airlines with 9% interest within three months. The bank guarantee furnished by the airline was also discharged.
The central proposition emerging from the judgment is therefore:
For Section 38(3) of the Finance Act, 1979, “failure to pay” means non-payment of Foreign Travel Tax; mere delayed payment cannot be treated as non-payment for imposing the penalty prescribed under that provision.
Case Details
Case: M/s Saudi Arabian Airlines v. Union of India & Ors.
Court: Supreme Court of India, Civil Appellate Jurisdiction
Case Number: Civil Appeal No. 1052 of 2013
Judge: Justice J.B. Pardiwala and Justice Ujjal Bhuyan
Date: 1 September 2026
Result: Appeal allowed; penalty for six delayed FTT deposits set aside; penalty amount, if paid, directed to be refunded with 9% interest within three months; bank guarantee discharged.
