The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that commercial charter flights operated without a valid approval from the Directorate General of Civil Aviation (DGCA) cannot qualify as “non-scheduled charter services” for the purpose of claiming customs duty exemption on an imported aircraft.

The Bench of  Dr. Rachna Gupta (Officiating President) and P.V. Subba Rao (Technical Member) upheld the confiscation of an aircraft along with a redemption fine of ₹2.50 crore and penalties imposed on the company and its senior officials. However, the Tribunal partly allowed the company’s appeal by directing the Customs Commissioner to recalculate the duty using the actual transportation and transit insurance costs instead of notional amounts.

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The appellant/assessee had imported an aircraft under Bill of Entry and claimed full exemption from customs duty under Serial No. 347B of Notification No. 21/2002-Customs dated March 1, 2002.

The exemption was subject to Condition No. 104, which required the aircraft to be imported by an operator approved by the competent authority in the Ministry of Civil Aviation for providing non-scheduled passenger or charter services. The importer was also required to undertake that the aircraft would be used only for the specified services and that duty would be paid on demand if this condition was violated.

The importer submitted a no-objection certificate for import issued by the DGCA and an approval issued by the Ministry of Civil Aviation for operating non-scheduled charter services. On the strength of these documents and the undertaking furnished by the company, Customs cleared the aircraft without payment of duty.

Subsequent investigation by the Customs Preventive Commissionerate revealed that the company had allegedly begun commercially operating the aircraft after its permission to conduct non-scheduled charter services had expired.

The Ministry of Civil Aviation had initially issued permission on September 23, 2005. Its validity was extended for a further period, but the extension came to an end in September 2007, with the Ministry indicating that no further extension would be considered.

Despite the absence of a subsisting approval, the company began commercial operations on December 29, 2007. According to the statements recorded during the investigation, the aircraft was commercially flown for more than 100 hours, invoices were raised through agents and payments were received by cheque.

The company’s chief executive officer stated that the aircraft had been operated on charter flights to meet its fixed expenses while approval was awaited. Its managing director similarly acknowledged that commercial flights had been conducted in anticipation of receiving the necessary permission.

During the investigation, the company deposited ₹2.36 crore approximately through seven challans between September 2008 and February 2009, though the payments were made under protest.

The department subsequently issued a show-cause notice proposing recovery of customs duty, interest, confiscation of the aircraft and imposition of penalties. The Commissioner confiscated the aircraft, valued at ₹11.29 crore, under Section 111(o) of the Customs Act, 1962, while permitting its redemption on payment of a fine of ₹2.50 crore.

A customs duty demand of ₹2,86,96,309 was confirmed, and the amount already deposited by the company was ordered to be appropriated against the demand. The Commissioner imposed a penalty of ₹30 lakh on the company under Section 112(a), besides penalties of ₹10 lakh each on its managing director, Kunal Lalani, and CEO, Anil Kumar Soni, under Section 112(b).

The company argued before the Tribunal that Customs authorities did not have jurisdiction to determine whether the conditions governing operation of the aircraft had been violated. According to it, such questions could be examined only by the DGCA or the Ministry of Civil Aviation.

It was also argued that the exemption notification merely required the aircraft to be used for non-scheduled charter services and did not independently require possession of a non-scheduled operator’s permit. The company maintained that it had, in fact, used the aircraft for charter services and that the absence of approval amounted at most to a procedural irregularity.

Rejecting these arguments, the Tribunal observed that the definition incorporated into Condition No. 104 expressly contemplated services provided by a non-scheduled charter operator registered with and approved by the DGCA.

“Clearly, approval of DGCA is essential for the flight to be considered as NSOP (charter) services under the condition of the notification,” the Tribunal said.

It added that charter flights conducted without such approval could not be regarded as eligible non-scheduled charter services. Consequently, the commercial flights undertaken by the company for over 100 hours without DGCA approval fell outside the permitted use contemplated by the exemption notification.

The Tribunal distinguished the Larger Bench decision in VRL Logistics Ltd. v. Commissioner of Customs. It explained that where a valid licence or permit exists, questions concerning its interpretation, scope or violation may have to be determined by the issuing civil aviation authority.

In the present case, however, there was no licence or permit authorising non-scheduled charter operations during the relevant period. The company had also failed to produce any material showing that retrospective approval was subsequently granted.

The Bench further rejected the contention that only the DGCA or Ministry of Civil Aviation could examine the breach. It held that granting or denying the benefit of a customs exemption notification forms part of the customs assessment process. If duty becomes recoverable because the conditions of an exemption were not fulfilled, the recovery must necessarily be undertaken by Customs.

The position could have been different if Customs had sought to interpret or question the scope of a licence issued by the civil aviation authorities. In this case, however, there was no operative licence covering the commercial flights in question.

The Tribunal found that the company had consciously conducted commercial operations without authorisation to meet its overhead expenses. This was not a minor or technical infraction that could be condoned by the proper officer under Section 111(o).

The Bench explained that Section 111(o) empowers the proper officer to sanction the non-observance of certain conditions attached to an exemption. Such power may be exercised in cases involving minor lapses, such as a slight delay in producing an installation certificate or deficiencies in supporting documents.

However, the present case did not involve flights undertaken because of an unavoidable necessity such as repairs or refuelling. The aircraft was deliberately operated commercially for more than 100 hours without authorisation.

“It is clear as crystal that Condition No. 104 of the exemption notification was violated,” the Tribunal observed while holding that the aircraft was correctly confiscated under Section 111(o).

The company also argued that the duty demand was barred by limitation because the show-cause notice had been issued beyond the normal limitation period under Section 28 of the Customs Act.

The Tribunal rejected this objection after noting that the Commissioner had ultimately confirmed the duty liability under Section 125(2), rather than Section 28.

Relying on the Supreme Court judgments in Commissioner of Customs v. Jagdish Cancer & Research Centre and Commissioner of Customs v. C.T. Scan Research Centre (P) Ltd., the Bench held that violation of post-import conditions makes the imported goods liable to confiscation under Section 111(o).

Where confiscated goods are allowed to be redeemed on payment of a fine, Section 125(2) additionally requires payment of the applicable duty and charges. Such duty liability is part of the confiscation and redemption proceedings and is not governed by the limitation periods prescribed under Section 28.

Accordingly, neither the normal nor the extended limitation period under Section 28 applied to the duty payable in the present case. Since the demand was not confirmed under Section 28, the Commissioner had also correctly declined to demand interest under Section 28AB.

The Tribunal found no reason to interfere with the ₹2.50 crore redemption fine. The aircraft was valued at ₹11,29,92,819, and the fine was less than 25% of its value. The Bench considered the amount reasonable in the circumstances.

It also upheld the penalties imposed on the importer and its two senior officials. The Tribunal observed that the managing director and CEO had taken the decisions that led to the aircraft being commercially operated in violation of the exemption condition. Their actions had consequently rendered the aircraft liable to confiscation.

Mega Corporation, however, succeeded on the limited issue of customs valuation. The company contended that Customs had wrongly added transportation charges at a notional rate of 20% of the aircraft’s FOB value under Rule 9(2) of the Customs Valuation Rules, 1988.

It submitted that the aircraft was itself flown into India and had not been transported as conventional cargo. The actual ferry cost was stated to be USD 23,000, while transit insurance was claimed to be only ₹52,500.

The Commissioner had refused to consider the actual figures on the ground that the original assessment had not been challenged. The Tribunal disagreed, observing that the assessment had effectively been reopened by the department through the show-cause notice.

When actual transportation and insurance costs were available, the authorities could not mechanically adopt notional figures. The use of notional values despite the availability of actual figures was described as a clerical and arithmetical error that ought to have been corrected.

The Tribunal, therefore, remanded importer’s case to the Commissioner solely for recalculating the duty by adopting the actual cost of transporting and insuring the aircraft. All other parts of the Commissioner’s order against the company were upheld.

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