Aircraft importer wins appeal as dry lease arrangements don't violate exemption notification conditions under sections 112 and 140

CESTAT NEW DELHI allowed appeals challenging customs duty and penalty imposition under sections 112 and 140. The appellant imported aircraft under exemption notification for non-scheduled passenger/charter services but gave it on dry lease to other companies. The Commissioner held this violated notification conditions. However, CESTAT ruled the notification permits use for both passenger and charter services, and does not restrict leasing arrangements. The notification only requires aircraft use for specified services, not exclusive operation by importer. Consequently, penalty on directors and customs duty demand were set aside.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this matter are:

a) Whether the exemption notification dated 03.05.2007 permits the use of the imported aircraft exclusively for either Non-Scheduled (Passenger) Services or Non-Scheduled (Charter) Services, or whether both services can be provided under the exemption;

b) Whether the appellant's act of leasing the imported helicopter to other entities for operation violates the conditions of the exemption notification, particularly Condition No. 104 of Notification No. 21/2002-Cus dated 01.03.2002 as amended;

c) Whether the helicopter is liable to confiscation under sections 111(d) and 111(o) of the Customs Act, 1962 for breach of conditions attached to the exemption;

d) Whether customs duty along with penalty under section 112 read with section 140 of the Customs Act is payable due to alleged misuse of the exemption notification;

e) Whether the penalty imposed on the Director and Chief Executive Officer of the appellant under section 112(b) read with section 140 of the Customs Act is sustainable;

f) The interpretation and applicability of the Civil Aviation permits and their relationship with the customs exemption notification conditions.

2. ISSUE-WISE DETAILED ANALYSIS

a) Interpretation of the Exemption Notification (03.05.2007) and Condition No. 104

The relevant legal framework is Notification No. 21/2002-Cus dated 01.03.2002 as amended by Notification No. 61/2007-Cus dated 03.05.2007, which provides exemption from customs duty on aircraft imported for Non-Scheduled (Passenger) or Non-Scheduled (Charter) Services subject to Condition No. 104. Condition No. 104 requires that the importer must have approval from the Ministry of Civil Aviation and furnish an undertaking that the aircraft will be used only for the specified services and pay duty on demand if the conditions are violated.

The Commissioner interpreted Condition No. 104(ii)(a) to mean that the aircraft can be used for only one of the specified services, either Non-Scheduled (Passenger) or Non-Scheduled (Charter), but not both. This interpretation led to the conclusion that the appellant violated the condition by operating the helicopter for charter services despite having permit only for passenger services.

The Tribunal examined this interpretation in light of precedents, notably the Division Bench decision in Escorts Limited vs. Commissioner of Customs and the Larger Bench decision in M/s. V.R.L. Logistics vs. Commissioner of Customs, which held that the exemption is available for both Non-Scheduled (Passenger) and Non-Scheduled (Charter) Services and that a permit for Non-Scheduled (Passenger) Services can be used for charter purposes. The Tribunal relied on these authoritative decisions to conclude that the Commissioner's restrictive interpretation was incorrect.

The Tribunal further noted that the permit issued by the Directorate General of Civil Aviation to the appellant explicitly authorized operation of Non-Scheduled Air Transport Services (Passenger/Cargo/Charter), supporting the appellant's position that both passenger and charter services were permitted.

The Tribunal thus applied the established legal principle that the exemption notification and the Civil Aviation permits should be interpreted harmoniously, and the appellant's use of the aircraft for both services did not breach Condition No. 104.

b) Legality of Leasing the Aircraft and Compliance with Notification Conditions

The Commissioner found that the appellant did not operate the helicopter themselves but leased it to M/s Trans Bharat Aviation Pvt. Ltd. and M/s Prabhatam Aviation Pvt. Ltd. for charter operations. This was held to be a violation of the exemption condition, rendering the aircraft liable to confiscation and the appellant liable for penalty and duty recovery.

The Tribunal analyzed the Notification and found no express prohibition against leasing the aircraft. The exemption condition requires use of the aircraft for specified services but does not mandate that the importer must personally operate the aircraft. The Tribunal emphasized that the Customs Act and the exemption notification do not restrict the mode of operation, including leasing arrangements.

Therefore, the Tribunal concluded that the appellant's leasing of the helicopter did not constitute a breach of Condition No. 104 or the exemption notification.

c) Confiscation and Duty Demand under Customs Act

The Commissioner invoked sections 111(d) and 111(o) of the Customs Act for confiscation on grounds of breach of exemption conditions and imposed customs duty demand along with penalty under section 112 read with section 140.

The Tribunal, having found that the appellant did not violate the exemption conditions either by providing both services or by leasing the aircraft, held that the grounds for confiscation and duty demand were not sustainable. The Tribunal underscored that the exemption notification conditions were fulfilled and the appellant was entitled to the benefit of exemption.

d) Penalty Imposed on the Director and CEO

The penalty under section 112(b) read with section 140 was imposed on the Director and CEO for alleged willful misrepresentation and suppression of facts to evade customs duty.

The Tribunal found that since the appellant company did not violate the exemption conditions, the penalty imposed on the individuals could not be sustained. The Tribunal set aside the penalty orders accordingly.

e) Treatment of Competing Arguments

The appellant contended that the exemption notification and Civil Aviation permits allowed use of the aircraft for both passenger and charter services and that leasing was permissible. The department argued for a restrictive interpretation and alleged misuse of exemption.

The Tribunal carefully considered the statutory provisions, the terms of the exemption notification, the Civil Aviation permits, and relevant case law. It rejected the department's narrow interpretation and accepted the appellant's submissions supported by judicial precedents. The Tribunal also noted that the issuance of passenger tickets and the use of the helicopter for charter services by lessees did not violate the conditions.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Permit under NSOP (Passenger) can be used for charter purposes is no longer res integra and has been decided against the Revenue by the Larger Bench of the Tribunal... which has been affirmed by the Gujarat High Court... Following the decision of the Larger Bench... a series of decisions have been passed..."

"From the condition (ii) a, of the exemption notification it is quite clear that the notification allows the use of the aircraft either for providing Non Scheduled (passenger) services or Non Scheduled (charter) services as the case may be i.e. whichever service was chosen by the importer. It nowhere provides that the aircraft can be used for providing both the services." (Commissioner's view)

The Tribunal rejected this view and held that the exemption notification does not restrict the use to only one service and that both services are permissible.

"The said notification does not provide that it is the importer alone who has to use the Aircraft for Non-Scheduled (Passenger) Services or (Charter) Services and that it cannot be given on lease."

"The impugned order dated 19.05.2010 passed by the Commissioner is, accordingly, set aside."

The Tribunal established the core principles that:

• The exemption notification permits use of the aircraft for both Non-Scheduled (Passenger) and Non-Scheduled (Charter) Services;
• The importer may lease the aircraft without violating the exemption conditions;
• Confiscation and penalty under the Customs Act cannot be imposed if the exemption conditions are complied with;
• Judicial precedents and Civil Aviation permits must be harmoniously interpreted with customs notifications;
• Penalties on officers of the company cannot be sustained absent proven violation of conditions.

Accordingly, the Tribunal allowed all appeals, set aside the order of confiscation, demand of customs duty, and penalties imposed on the appellant and its officers.

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