Quick answer: In M/s Saudi Arabian Airlines v. Union of India & Ors., decided on 1 September 2026, the Supreme Court held that Section 38(3) of the Finance Act, 1979 — which penalises a carrier who “fails to pay” Foreign Travel Tax (FTT) collected from international passengers — applies only to non-payment, not to tax that is deposited late but before any show cause notice is issued. Delay of this kind falls, if anywhere, under Section 38(4), which governs breach of the timelines fixed by the Foreign Travel Tax Rules, 1979. The Court went further and held that penalty under any limb of Section 38 is never automatic merely because the provision uses the word “shall”: the customs officer adjudicating the penalty retains discretion, exercisable through the mandatory show-cause-and-hearing process under Rule 12, to decide that no penalty should be imposed at all. On the facts — six instances of late deposit, most for a single day, one for sixty-three days, with demand drafts purchased before the due date in five of them — the Court set aside a penalty of Rs. 71,29,140 and ordered a refund with interest.
Key Takeaways
- “Failure to pay” tax already collected is not the same as delayed deposit of that tax. Where a taxing provision penalises a person who “fails to pay,” and a companion provision separately addresses breach of prescribed timelines, the Supreme Court will not stretch the failure-to-pay limb to cover mere delay, reasoning by analogy to its own recent ruling on delayed TDS remittance under the Income Tax Act.
- A statutory “shall” does not make imposition of penalty automatic. Where the statute builds in a show-cause-notice-and-hearing process before any penalty order, that adjudicatory step would be rendered meaningless if the outcome were a foregone conclusion; the adjudicating officer retains discretion whether to impose penalty at all, and the prescribed minimum applies only once that threshold decision is made in the revenue’s favour.
- Absence of a mens rea requirement and automaticity of penalty are two distinct questions. A long line of authority holds that fiscal and economic penalties need not be preceded by proof of guilty intent; the Court held that this does not, by itself, convert every technical breach into a mandatory penalty.
- An appellant cannot be made worse off by using its own right of appeal. The Court reaffirmed, citing its own recent precedent, that a remand triggered by an assessee’s appeal cannot result in a penalty higher than what stood before the appeal was filed — here, an escalation from Rs. 12,000 to Rs. 71,29,140.
- Discretion built into the machinery — a Collector’s power to condone delay on sufficient cause — must actually be considered, not treated as a dead letter once a timeline has technically been missed.
1. Introduction
Every indirect tax statute that penalises non-compliance faces the same interpretive fork: does the penalty attach automatically the moment a deadline is missed, or does the adjudicating authority retain a genuine choice whether to impose it? The question recurs across customs, excise, service tax and now GST penalty litigation, and it recurred again in Saudi Arabian Airlines, decided by the Supreme Court on 1 September 2026, in the comparatively obscure setting of the Foreign Travel Tax levied under Chapter V of the Finance Act, 1979.
The appellant, an international carrier, had deposited FTT collected from departing passengers late on six occasions between 1994 and 1997 — five delays of a single day to eleven days, caused, on the appellant’s account, by security restrictions on depositing bank drafts, and one delay of sixty-three days, attributed to an employee’s emergency leave. What began as a penalty of Rs. 12,000 ballooned, after the appellant’s own appeal produced a remand, into a penalty of Rs. 71,29,140 — a figure the revenue’s own appellate and revisional authorities, and eventually the Bombay High Court, upheld on the footing that once a deposit deadline is missed, penalty follows automatically.
The Supreme Court disagreed on both the construction of the penalty provision and the premise of automaticity. This article works through the statutory scheme the Court had to reconstruct, the reasoning by which it separated “failure to pay” from “delay in paying,” the mens rea case law it had to reconcile with that conclusion, and the practical lessons for anyone litigating penalty provisions in the wider indirect tax landscape — provided the regime-specific limits of the analogy are kept firmly in view.
2. Case summary and background
2.1 The levy and the default
Foreign Travel Tax is levied under Section 35(1) of the Finance Act, 1979 on passengers embarking on international journeys, collected by the carrier on the Central Government’s behalf and paid into the government treasury under Section 35(2), in accordance with the Foreign Travel Tax Rules, 1979 (“the 1979 Rules”). Rule 4 requires the carrier to deposit tax collected in a month within thirty days of the month’s end, but its proviso empowers the Collector of Customs, on sufficient cause shown and having regard to the carrier’s accounting system, to allow a longer period. Rule 9 imposes a parallel thirty-day deadline for monthly returns, with an identical proviso for extension.
By the Finance Act, 1994 (Section 97), Parliament inserted Section 35A, imposing interest of 20 to 30 per cent per annum for default in payment of FTT, and substantially rewrote Section 38, the penalty provision, into three limbs: a new sub-section (3), penalising a carrier who “fails to pay” FTT with a penalty of not less than one-fifth but up to three times the unpaid amount; a new sub-section (4), penalising breach of any rule made under Chapter V — which necessarily includes the Rule 4 and Rule 9 timelines — with a penalty of Rs. 500 to Rs. 50,000, plus a continuing penalty for each day of ongoing breach; and a renumbered sub-section (5), carrying the adjudicatory mechanism forward with an express proviso that no penalty order may be passed without a hearing. Rule 11 assigns adjudication of penalty to customs officers, capping any individual officer’s authority at Rs. 5,000, and Rule 12 makes a written show cause notice, a written representation, and a personal hearing mandatory before any penalty order.
2.2 Procedural history
Fourteen separate show cause notices were issued to the appellant alleging short payment, delayed payment and delayed filing of returns. The adjudicating authority’s first order-in-original, dated 14 June 1999, confirmed a short-payment demand together with interest, and imposed a penalty of Rs. 12,000 in respect of the six instances of late payment of FTT (along with separate, smaller penalties for short payment and delayed returns). The appellant appealed that order; the appellate authority, by order dated 24 November 1999, remanded the matter for de novo adjudication so the appellant could produce further evidence.
On remand, the adjudicating authority’s de novo order-in-original, dated 8 August 2001, confirmed the earlier findings but re-fixed the penalty for the same six instances of late payment at Rs. 71,29,140 — describing the earlier Rs. 12,000 figure as an inadvertent failure to impose the statutory minimum. The Commissioner of Customs (Appeal) upheld the enhanced penalty on 9 January 2003, rejecting the appellant’s argument that it had been made worse off by exercising its right of appeal, and holding — as the adjudicating authority had — that once the deposit deadline is breached, penalty under Section 38(3) is automatic. A revision under Section 129 of the Customs Act, 1962 before the Central Government, disposed of on 29 October 2004, accepted a limitation objection in five instances (holding that the show cause notices for interest on those amounts were issued beyond the six-month period fixed by Rule 7) but rejected the penalty challenge outright.
The appellant’s writ petition against the revisional order, along with three connected petitions, was dismissed by the Bombay High Court on 9 August 2010. The High Court held that Section 38(3), as the parent statute, prevails over the Rs. 5,000 cap in the proviso to Rule 11; that no mens rea is required for a penalty that redresses breach of a civil obligation rather than a criminal wrong; that delayed payment is “equivalent to” non-payment for the purposes of Section 38(3); and that, since the earlier remand had not been expressly limited, the adjudicating authority was free to enhance the penalty on reconsideration. It was this judgment that the Supreme Court, in Civil Appeal No. 1052 of 2013, was asked to review.
3. Legal analysis
3.1 “Fails to pay” does not mean “pays late”
The Court’s starting point was close textual analysis of Section 38(3), which uses two linked expressions: a carrier who “fails to pay the foreign travel tax” is liable to penalty “of the amount of the tax not so paid.” Read together, both expressions denote non-payment — the tax never reaching the government’s account — rather than payment that is merely delayed. Invoking the established canon that a fiscal statute is not to be expanded by interpretive gloss beyond its actual language, the Court held that “failure to pay” cannot be equated with “delay in making payment,” and that had Parliament intended Section 38(3) to reach delayed payment, it would have used different language — as, in fact, it did, in the separately worded sub-section (4).
The Court reinforced this reading by analogy to its own recent decision in U.S. Technologies International Private Limited v. Commissioner of Income Tax (2023) 8 SCC 24, construing Section 271-C of the Income Tax Act, 1961, which penalises a person who “fails to deduct” tax at source. That decision held “fails to deduct” cannot be read to cover belated remittance of tax already deducted on time — a taxpayer who deducts TDS correctly but remits it late has not “failed to deduct.” The parallel, the Court held, is exact at the level of construction, though it drew no wider equivalence between TDS and FTT consequences: FTT collected on time but deposited late is not FTT the carrier “failed to pay”; the failure, if any, lies in the timing of deposit, addressed by the separately worded sub-section (4).
Applying that reading, the six admitted instances of delay in this case fell, at most, within Section 38(4) — breach of the Rule 4 and Rule 9 timelines — and not within Section 38(3) at all. The Court illustrated the line with a hypothetical: a carrier who deposits tax only after receiving a show cause notice has not “delayed” payment but has failed to pay it, since payment that follows detection is not payment made in the ordinary course; a carrier who deposits before any notice, even late, has at most delayed.
3.2 Discretion built into the Rules cannot be read out of the scheme
Having relocated the case within Section 38(4), the Court held that sub-section cannot be read apart from the Rules whose breach it penalises. Rule 4’s proviso lets the Collector of Customs, on sufficient cause and having regard to the carrier’s accounting system, permit deposit beyond thirty days; Rule 9’s proviso does the same for returns. Condonation under either proviso removes any “cause for imposition of penalty” in the first place. The thirty-day timelines are thus conditions capable of extension, not inflexible triggers — and the lower authorities never engaged with that discretion, treating the missed deadline as conclusive without asking whether the appellant’s explanations (bank-draft security restrictions; an employee’s emergency leave) met the “sufficient cause” the Rule itself invites.
3.3 A “shall” does not by itself make penalty automatic
The Court then addressed a broader proposition on which the Commissioner (Appeal), the revisional authority and the High Court had all converged: that once a timeline is breached, penalty under Section 38 follows automatically, the statutory minimum being non-negotiable. The Court rejected this, holding that whether “shall” is mandatory or discretionary “would have to be discerned from the context and the overall scheme of the provision.” Central to its reasoning was the adjudicatory machinery in Rule 12: no penalty order can be made without a written notice of the grounds, an opportunity to represent in writing, and a personal hearing. Treating the outcome of that process as predetermined — with the hearing serving only to fix quantum — would render it, in the Court’s words, “nugatory.” The power to impose penalty necessarily includes the power not to impose it; the prescribed minimum-to-maximum range applies only once the officer has first decided, on the material before it, that a penalty should be imposed at all.
3.4 Reconciling the mens rea line of authority
The revenue leaned heavily on authority holding that fiscal and economic penalties do not require proof of mens rea: the seven-judge bench in R.S. Joshi v. Ajit Mills Limited (1977) 4 SCC 98, on forfeiture of wrongfully collected sales tax; Gujarat Travancore Agency v. Commissioner of Income Tax (1989) 3 SCC 52, on penalty under Section 271(1)(a) of the Income Tax Act; and J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers (1996) 6 SCC 665, on strict liability under the Factories Act. The Court did not disturb these holdings, but treated them as answering a different question from the one before it: absence of a mens rea requirement says nothing about whether, once a breach is established, imposition of penalty is automatic.
For that question the Court turned to the three-judge bench in Hindustan Steel Ltd. v. State of Orissa — reported at (1972) 83 ITR 26 — holding that a penalty for breach of a statutory obligation, being quasi-criminal in character, “will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation,” and that even where a minimum penalty is prescribed, the authority may decline to impose any penalty for a technical or venial breach, or one flowing from a bona fide belief. The Court treated this as squarely applicable notwithstanding the mens rea cases, since it addresses discretion in imposing penalty, not the separate question of intent.
3.5 No worse off for having appealed
Independently of its finding that no penalty was imposable at all, the Court addressed the growth of the penalty from Rs. 12,000 to Rs. 71,29,140 purely as a consequence of the appellant’s own appeal producing an unrestricted remand. Citing the maxim reformatio in peius and its own recent decision in Nagarajan v. State of Tamil Nadu (2025) 8 SCC 331 — which endorsed the Bombay High Court’s earlier articulation of the principle in Jyoti Plastic Works Pvt. Ltd. v. Union of India, 2020 SCC OnLine Bom 2276 (authored by one of the two judges on this Bench while sitting on that High Court) — the Court reaffirmed that an appellant cannot be placed in a worse position purely for exercising a statutory right of appeal. The point was academic to the outcome here, but the reaffirmation matters for future cases where a remand results in an unfavourable, rather than eliminated, demand.
3.6 What survives, and the limits of the analogy
The Court’s final order is narrow in scope: it sets aside the penalty of Rs. 71,29,140 imposed for the six instances of late deposit of FTT, quashing the High Court’s judgment, the revisional order, the appellate order and the de novo order-in-original specifically to that extent, and directs a refund with interest at 9 per cent per annum within three months. The order does not appear to disturb the separate, smaller demand and penalties relating to short payment of FTT or delayed filing of returns, which were not the subject of the relief granted.
Readers should also note what this decision does not decide. FTT is a legacy levy under Chapter V of the Finance Act, 1979, administered through customs officers, and is textually distinct from the penalty provisions in the CGST Act, 2017 (for instance, Sections 122 and 125), the Central Excise Act, 1944, or the Customs Act’s own penalty provisions for goods. The holding on Section 38(3) and (4) does not itself resolve how any differently worded GST or customs penalty provision should be construed. What travels across regimes, resting as it does on general principles of construction rather than Section 38’s particular wording, is the method: read a “failure to X” trigger narrowly before assuming it covers mere delay; do not treat “shall” as foreclosing discretion where the statute builds in a mandatory hearing; and do not let an assessee’s own appeal produce a worse result than what it appealed against.
4. Practical significance
For carriers and other persons who collect FTT, and by extension for anyone administering a similarly structured collection-and-remittance obligation under customs-administered legislation, the immediate lesson is procedural: where a Rule expressly permits an officer to condone delay for “sufficient cause,” that submission should be pressed at the earliest adjudicatory stage, in writing, with the specific factual basis for the delay (here, bank security restrictions and staff unavailability) clearly particularised, rather than left to be raised only as a defence to penalty. The judgment confirms that such a condonation request is not a formality the officer may ignore; failure to engage with it at all is itself a ground of challenge.
More broadly, the judgment is a useful precedent — subject to the regime-specific caution above — for taxpayers resisting a revenue argument that a penalty follows automatically once a timeline is missed, wherever the relevant statute (i) uses a “fails to pay” or comparably worded default trigger alongside a separately worded delay or breach provision, and (ii) builds in a mandatory show-cause-notice-and-hearing process before any penalty order. Litigants should identify, in their own statutory scheme, whether an equivalent textual distinction exists between “failure” and “delay,” and whether the adjudicating authority’s own governing rules contemplate a discretionary threshold decision before quantum is even reached; where they do, the reasoning here — that a mandatory hearing process would be rendered nugatory if the outcome were preordained — supplies a transferable argument, even though the specific holding on Section 38 does not itself bind a GST or customs classification dispute.
The reaffirmation of the no-reformatio-in-peius principle also has practical bite beyond this case. Taxpayers who obtain a remand through their own appeal — a common outcome in indirect tax litigation, including under Section 107 of the CGST Act — should specifically flag, at the reconsideration stage, that any revised order cannot leave them worse off than the order originally appealed against, and should be prepared to invoke Jyoti Plastic Works and Nagarajan if an adjudicating authority attempts to use a fresh look at the record as an occasion to enhance liability the taxpayer itself never put in issue.
Finally, the decision is a reminder, in choosing between litigating quantum and litigating the head of demand itself, that a penalty imposed under the wrong statutory limb is vulnerable on that ground alone, independent of the underlying facts of delay or default; practitioners reviewing a penalty order should first ask which specific sub-section or clause has actually been invoked, and whether its own language, read on its own terms, covers the conduct alleged, before turning to arguments about quantum, mens rea or proportionality.
5. Conclusion
Saudi Arabian Airlines resolves a narrow textual question — whether “fails to pay” in Section 38(3) of the Finance Act, 1979 reaches delayed payment as well as non-payment — in favour of the taxpayer, and in doing so restates, in an indirect tax setting, two propositions of wider currency: that a statutory “shall” does not exhaust an adjudicating authority’s discretion where the statute itself builds in a hearing before penalty, and that an assessee’s own appeal cannot be allowed to leave it worse off than before. The judgment’s direct holding is confined to a legacy levy collected through the customs machinery, and does not itself settle how differently worded penalty provisions under the CGST Act or the Customs Act’s substantive provisions should be read. Its lasting value for indirect tax practice lies less in Foreign Travel Tax specifically than in the method it models: separate the statutory question of intent from the statutory question of automaticity, read a default-triggering phrase strictly against its own terms before assuming it covers a lesser wrong addressed elsewhere in the same statute, and treat a mandatory adjudicatory process as evidence that the legislature intended a real choice, not a formality, at its end.
Authorities
Applied by the Supreme Court
| Authority | Citation | Proposition |
|---|---|---|
| U.S. Technologies International Private Limited v. Commissioner of Income Tax | (2023) 8 SCC 24 | “Fails to deduct” TDS cannot be read to cover belated remittance of TDS actually deducted; no penalty for mere delay under Section 271-C of the Income Tax Act, 1961. Applied by analogy to construe “fails to pay” FTT. |
| Hindustan Steel Ltd. v. State of Orissa | (1972) 83 ITR 26 (three-judge bench) | Penalty for breach of a statutory obligation is quasi-criminal; it will not ordinarily be imposed for a technical or venial breach or bona fide belief, and the authority may decline to impose even a prescribed minimum penalty in such cases. |
| Jyoti Plastic Works Pvt. Ltd. v. Union of India | 2020 SCC OnLine Bom 2276 (Bombay High Court) | An appellant cannot be placed in a worse position as a result of filing an appeal (no reformatio in peius). |
| Nagarajan v. State of Tamil Nadu | (2025) 8 SCC 331 | Endorsed and applied the no-reformatio-in-peius principle from Jyoti Plastic Works. |
Considered but distinguished from automatic imposition of penalty
| Authority | Citation | Context |
|---|---|---|
| R.S. Joshi v. Ajit Mills Limited | (1977) 4 SCC 98 (seven-judge bench) | Held mens rea not required for forfeiture/penalty under fiscal and economic legislation; the Court held this does not establish that imposition of penalty is automatic once a breach is found. |
| Gujarat Travancore Agency v. Commissioner of Income Tax | (1989) 3 SCC 52 | Held mens rea not required for penalty under Section 271(1)(a) of the Income Tax Act, 1961; distinguished on the same basis. |
| J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers | (1996) 6 SCC 665 | Held breaches under the Factories Act, 1948 are strict-liability offences not requiring mens rea; distinguished on the same basis. |
Cited by counsel for the respondents, not the basis of the Court’s holding
| Authority | Citation | Context |
|---|---|---|
| Mathuram Agrawal v. State of Madhya Pradesh | (1999) 8 SCC 667 | Cited for strict, literal construction of fiscal statutes without room for equity. |
| Iran National Airlines v. Union of India | 2006 (202) ELT 588 (Bom.) | Cited in support of the revenue’s construction of Section 38 as penalising the carrier for civil breach without need for mens rea. |
| Combatta Aviation Ltd. v. Union of India | 2000 (115) ELT 622 (Del.) | Cited to the same effect as Iran National Airlines. |
| Jawal Neco Limited v. Commissioner of Customs | 2015 (322) ELT 561 | Referred to, in the discussion of reformatio in peius, alongside Madras High Court authority on the same point. |
Legislation considered
| Statute | Provisions | Source |
|---|---|---|
| Finance Act, 1979 | Chapter V, Sections 35, 35A, 37, 38, 38A, 40 (Sections 35A, 38(3)-(5), 38A inserted/substituted by Section 97 of the Finance Act, 1994) | https://www.indiacode.nic.in/ |
| Foreign Travel Tax Rules, 1979 | Rules 4, 7, 8, 9, 10, 11, 12, 13, 14, 15 | https://www.indiacode.nic.in/ |
| Customs Act, 1962 | Sections 3(c), 3(d), 129 | https://www.indiacode.nic.in/ |
| Income Tax Act, 1961 | Sections 271-C, 271(1)(a) | https://www.indiacode.nic.in/ |
Judgment
M/s Saudi Arabian Airlines v. Union of India & Ors., Civil Appeal No. 1052 of 2013, 2026 INSC 933, Supreme Court of India (J.B. Pardiwala and Ujjal Bhuyan, JJ.; opinion by Ujjal Bhuyan, J.), decided 1 September 2026, on appeal from the judgment of the Bombay High Court dated 9 August 2010 in Writ Petition No. 3269 of 2004 — https://indiankanoon.org/doc/112646229/
FAQ
Does this judgment mean penalty can never be imposed for late payment of a tax collected on behalf of the government? No. The Court held that penalty for delayed deposit of Foreign Travel Tax could, in principle, be imposed under Section 38(4) of the Finance Act, 1979 (as opposed to Section 38(3), which the Court held addresses only non-payment), and that the customs officer retains discretion whether to impose it. It did not hold that delay can never attract any penalty; it held that the specific penalty imposed here, under the wrong sub-section and without any discretionary consideration, could not stand.
Does this ruling apply to penalty provisions under the CGST Act or the Customs Act’s substantive penalty provisions? Not directly. The judgment construes the specific wording of Section 38 of the Finance Act, 1979, a legacy provision governing a different levy. Its value for GST, customs or excise penalty disputes lies in the general method it applies — reading a “failure to pay” trigger narrowly, and treating a mandatory hearing process as evidence against automatic penalty — not in any direct holding on differently worded provisions.
What is the reformatio in peius principle the Court discussed, and does it apply beyond this case? It is the principle that a person should not be placed in a worse position purely as a result of exercising a right of appeal. The Court treated its discussion here as not affecting the outcome, since it had already held no penalty was imposable on the merits, but it reaffirmed the principle by reference to its own 2025 decision in Nagarajan v. State of Tamil Nadu, making it available in future cases where a remand results in an increased, rather than eliminated, demand.
This article is not legal advice and does not create an attorney–client relationship. Readers should verify the certified copy of the judgment and any subsequent clarificatory orders before relying on it, and consult a qualified advocate on the facts of their matter.