Landmark Supreme Court Ruling on Aircraft Re-Import: A Game Changer for Indias Aviation Sector and Global Tax Discourse

2025 (7) TMI 1276 - SC Order

In a transformative decision for India's aviation industry, the Hon’ble Supreme Court of India on July 14, 2025, dismissed the appeal filed by the Customs Department that sought to retrospectively impose IGST on aircraft and aircraft parts sent abroad for repairs and subsequently re-imported. This case, estimated to involve nearly Rs. 100 crore in tax claims, marks a significant win for Indian airlines like IndiGo and SpiceJet and sets a precedent against overreach in retrospective tax demands.

Background of the Dispute

Before the introduction of GST, airlines paid Basic Customs Duty (BCD) and Countervailing Duty (CVD) only on the repair cost, insurance, and freight, not on the full value of re-imported aircraft parts. With the implementation of GST from 1 July 2017, Notification No. 45/2017-Customs continued this framework, requiring customs duty only on the cost of repair—but crucially made no explicit reference to IGST.

However, Customs authorities argued that under the GST regime, the term “duty of customs” implicitly included IGST, thereby triggering tax demands from August 2017 onward. Airlines challenged these interpretations, arguing that the notification did not authorize such retrospective levies.

Tribunal and Supreme Court’s Observations

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) in 2020 and again in 2024 held in favor of the airlines, ruling that IGST was not payable since it was not clearly mentioned in the 2017 notification.

Despite the 2021 amendment through Notification No. 36/2021-Customs, which retrospectively included IGST and attempted to “clarify” the original intent, the Supreme Court flatly rejected such retrospective interpretation.

Quoting the bench headed by Justices B.V. Nagarathna and K.V. Viswanathan:

“You can’t do it by a retrospective amendment… If the 2017 notification did not cover IGST, you cannot use the 2021 notification to impose it retrospectively.”

With this, the civil appeal was dismissed, cementing the CESTAT ruling and affirming the doctrine that ambiguity in tax statutes must be interpreted in favor of the assessee.

Taxing Principles at Stake

1. Doctrine Against Retrospective Taxation: The Court’s dismissal reinforces the principle that retrospective tax impositions without clear legislative mandate are arbitrary.
2. Notification Clarity: The case highlights how ambiguous language (“duty of customs”) in a notification can open floodgates of litigation.
3. Input Tax Credit (ITC) Dilemma: If airlines are forced to pay IGST on re-imported parts, they risk losing eligibility for ITC due to the concessional 5% GST rate on air travel, thereby significantly increasing their effective tax cost.

Global Best Practice – EU’s BTI + Returned Goods Relief (RGR)

The European Union has handled similar scenarios with much more precision and predictability:

1. Binding Tariff Information (BTI) provides legal certainty in advance.
2. Returned Goods Relief (RGR) exempts goods temporarily exported for repairs from customs duties and VAT, as long as ownership is retained.

Example: In BTI BEBTI2021-000152, the EU ruled that re-imported engine parts after servicing abroad were entitled to RGR treatment without valuation as new goods.

India’s Advance Ruling system lacks such binding force and uniformity. Different field formations often reinterpret the same issue, exposing businesses to retrospective demands and uncertainty.

Grey Zones in GATT: The Need to Revisit Service Elements in Goods Valuation

The dispute also uncovers a broader issue in global trade regulation: the inadequacy of the GATT Valuation framework in dealing with service-laden goods.

1. GATT Article VII deals with the valuation of goods, but not services.
2. Rule 10 of India’s Customs Valuation Rules (2007) is similarly silent on service-linked transactions.

In this case, airlines contended that they were being taxed as though they were importing brand new goods, even though these were their own parts, temporarily exported for servicing. If IGST was paid, they would be unable to claim ITC without losing the benefit of the concessional 5% rate on outward services.

This dichotomy, treating re-imports as goods for BCD but as services for IGST, highlights a conceptual vacuum in customs valuation.

Need for GATT Evolution & ICC Endorsement

Organizations like the International Chamber of Commerce (ICC) and experts such as Shermon have stressed the need for trade laws to reflect economic substance over form:

• ICC Guidelines emphasize neutrality and certainty in trade.
• Shermon’s Commentaries recommend that valuation methods must account for services linked to goods in international commerce.

This judgment shows why it is time for the WTO and WCO to consider amendments to the GATT Valuation Agreement to specifically cover goods temporarily exported for repair and re-imported without transfer of ownership.

Final Takeaway

This Supreme Court ruling is not merely a relief for airlines—it is a judicial directive against ambiguity, retrospective tax misuse, and poor implementation. It urges policymakers to align India’s trade practices with international best standards, enhance the Advance Ruling framework, and bring clarity to hybrid goods-services transactions.

For a sector like aviation, where downtime, servicing, and regulatory complexity are mission-critical, predictability in tax treatment is non-negotiable.

It is hoped that this judgment not only ends the tax trauma for airlines but sparks long-overdue reforms in India's trade taxation framework.

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By: Dr. Joshua Ebenezer