Use Of An Aircraft For Personal Service Without Any Remuneration Does Not Qualify As Providing ‘Air Transport Service'

The Division Bench of the Hon'ble Delhi High Court ("Delhi HC") comprising of the Hon'ble Mr. Justice Vibhu Bakhru and Hon'ble Mr. Justice Amit Mahajan in the case of East India Hotels Ltd. v. Commissioner of Customs, Central Excise And Central GST, New Delhi¹ gave its observations on whether non-revenue flights, operated by a company for transporting its officials, would fall within the scope of providing 'non-scheduled (passenger) services' or 'non-scheduled (charter) services' as understood within the meaning of the Customs Notification No. 21/2002-CUS dated March 1, 2002, as amended by Customs Notification 61/2007-CUS ("Notification") dated May 3, 2007.

The Delhi HC, after analysing various provisions of applicable laws, observed that use of an aircraft for personal service without any remuneration whatsoever, either from the passengers transported by it or from any other person, would not qualify as providing 'air transport service' within the meaning of Rule 3(9) of the Aircraft Rules, 1937 ("Aircraft Rules").

While dissenting from the analysis and reasons given by the Custom, Excise and Service Tax Appellate Tribunal ("Tribunal") in the impugned Order dated January 14, 2020, the Delhi HC upheld the conclusion of the Tribunal that the East India Hotels Ltd. ("Appellant") has not complied with the condition no. 104 of the Notification and thus is not entitled for exemption from payment of duty on its aircraft as granted under the Notification.

BRIEF FACTS

1. The Appellant had obtained a permit to operate the aircraft for providing non-scheduled (passenger) services from the Director General of Civil Aviation ("'DGCA"). Thereafter, the Appellant was granted a no objection certificate by the Ministry of Civil Aviation for importing Hawker 850 XP ("Aircraft"), as a replacement of an earlier aircraft. On May 21, 2007, the Appellant, imported the Aircraft and filed a Bill of Entry for the same.
2. In terms of condition no. 104 of the Notification, importers of aircrafts are required to furnish an undertaking to the Deputy Commissioner of Customs/Assistant Commissioner of Customs, committing that the aircraft must be used only for providing non-scheduled (passenger) services or non-scheduled (charter) services. On failure to comply with the condition to use the Aircraft for the aforementioned services, the importer would be required to pay an amount equivalent to the duty payable on the said Aircraft. The said condition no. 104 of the Notification is reproduced herein below:-
   "104. (i) the aircraft are imported by an operator who has been granted approval by the competent authority in the Ministry of Civil Aviation to import aircraft for providing non-scheduled (passenger) services or non- scheduled (charter) services; and
   (ii) the importer furnishes an undertaking to the Deputy Commissioner of Customs or Assistant Commissioner of Customs, as the case may be, at the time of importation that:-
   a. the said aircraft shall be used only for providing non- scheduled (passenger) services or non-scheduled(charter) services, as the case may be; and
   b. he shall pay on demand, in the event of his failure to use the imported aircraft for the specified purpose, an amount equal to the duty payable on the said aircraft but for the exemption under this notification.
   Explanation-for the purposes of this entry,-
   (a) 'operator' means a person, organization, or enterprise engaged in or offering to engage in aircraft operation;
   (b) 'non-scheduled (passenger) services' means air transport services other than Scheduled (passenger) air transport services as defined in rule 3 of the Aircraft Rules 1937.
   (c) non-scheduled (charter) services' mean services provided by a 'non-scheduled (charter) air transport operator', for charter or hire of an aircraft to any person, with published tariff, and who is registered with and approved by Directorate General of Civil Aviation for such purposes, and who conforms to the civil aviation requirement under the provision of rule 133A of the Aircraft Rules 1937:
   Provided that such Air charter operator is a dedicated company or partnership firm for the above purposes."
3. In terms of the Notification, on May 22, 2007, the Appellant submitted an undertaking to the Assistant Commissioner of Customs, stating that it would be using the Aircraft only for providing non-scheduled (passenger) services and that, in the event of failure to do so, it would be liable to pay the requisite duty amounting to approximately INR 13,92,00,000 (Indian Rupees thirteen crore ninety two lakh). Pursuant thereto, DGCA issued a Certificate of Registration for the Aircraft in accordance with the Convention on International Civil Aviation dated December 7, 1994, read with the Aircraft Act, 1934.
4. While the Aircraft was being used by the officials and the board of directors of the Appellant for travelling to various destinations, Appellant received a show cause notice dated June 27, 2008 from the Commissioner of Customs ("Appeal"), Central Excise and Central GST, New Delhi ("Respondent") inter alia alleging that Appellant had wilfully misrepresented and suppressed the facts to import the Aircraft for its own private use and thus, evaded payment of customs duty amounting to INR 13,92,00,000 (Indian Rupees thirteen crore ninety two lakh).
5. In response, Appellant disputed the allegations regarding violation of the Notification and submitted that it had duly obtained a non-scheduled operators permit ("NSOP") from the DGCA. Appellant argued that non-revenue flights i.e., flights operated without generating revenue were also covered under the broad definition of 'non-scheduled (passenger) services'. Therefore the Appellant had met the necessary conditions for duty exemption under the Notification.
6. On July 27, 2010, the Respondent passed an Order ("CCA Order") whereunder Respondent confiscated the Aircraft under Section 111(o) of the Customs Act, 1962 ("Customs Act"), on the ground that the Appellant had violated the conditions of the undertaking dated May 22, 2007 and the terms of the Notification, read with the provisions of the Customs Act.
7. The Appellant filed an appeal against the CCA Order, in which the Tribunal passed the final Order on January 14, 2020 being No. C/A/ 50094/ 2020 CU [DB] ("the Impugned Order") and dismissed the Appeal on the following grounds:-
   
   1. The Appellant had wrongly availed the exemption under the Notification by furnishing a false undertaking in order to evade customs duty and had used the NSOP Aircraft for its private use.
   2. The Appellant had failed to comply with the conditions for exemption as set out in the Notification.
   3. The Aircraft imported by the Appellant was used for private purposes and not for providing 'non-scheduled (passenger) services' or 'non-scheduled (charter) services'. Thus, the condition no. 104 of the Notification was violated.
   4. A 'non-scheduled (passenger) services' is one which is open to public and for a published tariff, thus it was necessary for the Appellant to publish the tariff for use of the aircraft and make available the services to public.

ANALYSIS BY THE DELHI HC

1. The Delhi HC noted that the key question to be addressed is whether 'non-revenue flights', operated by a company for transporting its officials, would fall within the scope of providing 'non-scheduled (passenger) services' or 'non-scheduled (charter) services' as defined under condition no. 104 of the Notification.
2. To understand the scope of the condition no. 104 of the Notification, the following terms were analysed:-
   
   1. As per Explanation (b) to condition no. 104 of the Notification, the term 'non-scheduled (passenger) services' is defined to mean air transport service other than 'scheduled (passenger) air transport service' as defined in Rule 3 of the Aircraft Rules, 1937.
   2. Rule 3(49) of the Aircraft Rules defines the 'scheduled air transport service' as an air transport service undertaken between the same 2 (two) or more places and operated according to a published timetable or with flights so regular or frequent that they constitute a recognisably systematic series, each flight being open to use by members of the public;"
   3. 'Non-scheduled (passenger) services' would accordingly mean 'air transport service' other than the air transport service falling within the aforementioned definition. However, it is essential that the aircraft is used for 'air transport service.'
   4. As per Rule 3(9) of Aircraft Rules, 'air transport service' means a service for the transport by air of persons, mails or any other thing, animate or inanimate, for any kind of remuneration whatsoever, whether such service consists of a single flight or series of flights;
   5. Civil Aviation Requirement ("CAR"), Section 3, Air Transport Series 'C' Part-III issue II, dated June 1, 2010 issued by the DGCA provides that a non-scheduled operator is also allowed to operate revenue charter flights for a company within its group companies, subsidiary companies, sister concern, associated companies, own employees, including chairman and members of the board of directors of the company and their family members, provided it is operated for remuneration, whether such service consists of a single flight or series of flights over any period of time.
3. On basis of the above analysis, the Delhi HC observed that:-
   
   1. Admittedly, the flights operated by the Appellant's chairman and officials were 'non-revenue flights'.
   2. A plain reading of Rule 3(9) of the Aircraft Rules indicates that the term 'air transport service' is defined in wide terms and would cover transport by air of humans, animals, mails or any other things, animate or inanimate. However, it is necessary that the said service be provided for 'remuneration'.
   3. For a service to fall within the meaning of 'air transport service' in Rule 3(9), it is essential that the same is provided for some kind of remuneration.
   4. Clearly, flight service for no remuneration at all would not qualify to be considered as air transport service within the meaning of Rule 3(9) of the Aircraft Rules.
   5. Clause 2.5 of the CAR also indicates that the term 'non-scheduled air transport service' entails air transport service for any kind of remuneration.

Accordingly, Delhi HC observed that although it does not agree with the view taken by the Ld. Tribunal that it was necessary for the Appellant to publish the tariff for use of the Aircraft and make available the services to public, 'we concur that the conditions of exemption under the Notification have not been complied with as the appellant has not used the aircraft for rendering any 'air transport service' within the meaning of Rule 3(9) of the Aircraft Rules.'

DIVERGENT VIEWS TAKEN IN THE TWO APPEALS

1. In the first Appeal against the CCA Order, the Ld. Tribunal had proceeded to hold that it is essential that 'non-scheduled (passenger) services' be open to public and for a published tariff.
2. The Delhi HC took a divert view from this position and held that such a requirement cannot be read into the meaning of the expression "non-scheduled (passenger) services" as defined under Explanation (b) of condition no. 104 of the Notification. The Delhi HC observed that:
   
   1. Rule 135(1) and (2) of the Aircraft Rules requires every 'air transport undertaking' operating in accordance with Rule 134(1) or (2) (i.e., Scheduled Air Transport Services) to establish a tariff based on all relevant factors and publish the same on its website and two daily newspapers.
   2. Rule 134(1) and (2) of the Aircraft Rules relate to provision of 'scheduled air transport service' and not 'non-scheduled air passenger service'.
   3. A corollary to the above is that an 'air transport undertaking' providing 'non-scheduled air passenger service' is not obligated to establish or publish a tariff under Rule 135 of the Aircraft Rules.

EXEMPTION FROM DUTY ON AIRCRAFT UNDER THE CUSTOMS ACT

1. The Appellant had argued that it was not open for the customs authorities to question whether the Aircraft was used for 'non-scheduled air transport service', as that question was required to be addressed only by the DGCA. Further, the customs department was not empowered to examine the validity of any permissions granted by the DGCA. Since the DGCA had not found any irregularity in the use of the Aircraft, the benefit of the Notification could not be denied to the Appellant.
2. In this regard, Delhi HC has observed that the Notification is under the Customs Act 1962. Therefore, the customs authorities are required to examine whether the conditions for availing exemption under the Notification are satisfied. It is in terms of the Notification only that the Appellant has furnished the undertaking to the customs authorities. Thus, the Authorities are entitled to examine whether the said undertaking has been complied with.
3. The Delhi HC also held that the customs authorities are not required to examine whether the conditions of the permit NSOP issued by DGCA have been violated or not. However, that does not mean that they are disabled in any manner in examining whether the conditions for availing the benefit under the Notification are satisfied.

JSA Comment

While distancing itself from any other issue, the Delhi HC observed that the only question that this court is concerned with is whether the Appellant has complied with the conditions as set out in the Notification and is entitled to duty exemption in terms of the Notification in respect of the import of the aircraft?

In view of the fact that the Appellant has not used the aircraft for providing air transport service for remuneration of any kind, the Delhi HC found that the Appellant has not complied with the condition of using the aircraft solely for providing non-scheduled (passenger) services and accordingly, disposed of the appeal in these terms.

Footnote

1. CUSAA 5/2020, dated January 31, 2023 reported as 2023/DHC/000670.

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