2025 (6) TMI 1026 - HC - Customs

Foreign going vessel for the purposes of claiming exemption under Section 87 of the Customs Act 1961 or not - vessel Asean Explorer engaged by it in carrying out repairs of cables in the Indian Ocean - HELD THAT - The contention of the learned Assistant Solicitor General that on account of the agreement entered into between the respondent and the Cochin Port Trust committing to berth the vessel in Cochin Port for a specified number of days in a calendar year so as to obtain a concessional rate of berthing charges and in fact remaining within territorial waters for a good part of the calendar year the vessel will lose its status as a foreign going vessel cannot be accepted. The phrase engaged in has to be read in the backdrop of the SEAIOCM Agreement under which the engagement was effected. A reading of the terms of the agreement clearly showed that the obligation of the respondent under the time charter was to keep the vessel ready in all respects for carrying out the operations envisaged under the agreement and therefore during the period under which it was on a time charter the vessel had to be in a ready state to perform the obligations under the contract. Merely because the vessel was not actually engaged in repair activities on any one or more days during the time charter it could not be said that the vessel was not engaged in the activities contemplated under the agreement. So long as it was under an existing obligation by contract to carry out the activities the mere fact that on particular days it was not actually engaged in carrying out those repair activities was irrelevant. The submissions of the learned Assistant Solicitor General that the commitment with regard to berthing of the Ship in Cochin Port Trust for specified number of days in a calendar year would deprive the vessel of its status as a foreign going vessel also cannot be countenanced. The said arrangement between the Cochin Port Trust and the respondent was only with a view to get concessional rates of berthing charges and was wholly irrelevant for the purposes of determining its status as a foreign going vessel. Since the impugned order of the Tribunal to have correctly arrived at the finding with regard to the status of the vessel as a foreign going vessel we also deem it appropriate to affirm the further findings of the Tribunal with regard to the entitlement of the respondent to the benefit of exemption under Section 87 of the Customs Act. Conclusion - While it may be a fact that the terms of an exemption provision under the taxing Statute have to be strictly construed against an assessee and in favour of the Revenue we find the instant case to be one where the respondent vessel satisfies the definition of foreign going vessel even without any strained interpretation of the words used in the Statute. It is therefore a clear case where the respondent vessel comes within the ambit of the phrase foreign going vessel and therefore entitled to the benefit of exemption under Section 87 of the Customs Act. There are no reason to interfere with the well-reasoned order of the Tribunal - appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether the vessel in question qualifies as a "foreign going vessel" within the meaning of Section 2(21) of the Customs Act, 1962, thereby entitling it to exemption under Section 87 of the Customs Act in respect of spares and consumables carried on board.
• Whether the vessel's prolonged berthing within Indian territorial waters, specifically at Cochin Port for approximately 1750 days out of the relevant period, negates its status as a foreign going vessel.
• Whether the contractual arrangement with the Cochin Port Trust, whereby the vessel committed to berthing for a specified number of days to avail concessional rates, affects its classification as a foreign going vessel.
• The applicability and scope of exemption under Section 87 of the Customs Act, particularly concerning stores consumed while the vessel was operating within Indian territorial waters.
• Whether there was suppression of material facts by the respondent in relation to the agreement with Cochin Port Trust, attracting penal provisions under Sections 111 and 112 of the Customs Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of the Vessel as a Foreign Going Vessel under Section 2(21) of the Customs Act

Relevant legal framework and precedents: Section 2(21) of the Customs Act defines "foreign going vessel or aircraft" as any vessel engaged in carriage of goods or passengers between any port in India and any port outside India, and includes (ii) any vessel engaged in fishing or any other operations outside the territorial waters of India. The Court relied on precedents including the Gujarat High Court's interpretation in Natwarlal Tribhovandas, which elaborated on the term "engaged in" as signifying a continuing occupation or employment involving present obligation and continuity of action, and the Supreme Court's decision in Regional Provident Fund Commissioner, Bombay v. Shree Krishna Metal, which held that "engaged in" does not require exclusive engagement in the activity but a substantial connection thereto.

Court's interpretation and reasoning: The Court emphasized that the phrase "engaged in" must be read in the context of the underlying contractual obligations. The SEAIOCM Agreement obligated the vessel to be in a state of readiness to perform cable repair and maintenance activities across a vast area in the Indian Ocean, including outside Indian territorial waters. The vessel's contract was continuous and long-term, not limited to specific voyages or days of active operation. Mere non-engagement on certain days did not negate its engagement under the contract.

Key evidence and findings: The SEAIOCM Agreement was examined in detail, establishing the vessel's obligation to be available and ready for cable repair activities over a large geographic area, including beyond Indian territorial waters. The vessel undertook multiple cable repairs and exercises, mostly outside Indian waters, and was paid fixed and operational charges, underscoring continuous engagement.

Application of law to facts: Applying the legal principle that "engaged in" implies a continuing obligation and presence under contract, the Court found the vessel was indeed engaged in operations outside Indian territorial waters, qualifying it as a foreign going vessel under Section 2(21)(ii) of the Customs Act.

Treatment of competing arguments: The appellant's argument that the vessel's long berthing in Indian waters and limited actual excursions outside territorial waters disqualified it from being a foreign going vessel was rejected. The Court held that the contractual obligation and continuous readiness sufficed for engagement, and the statutory definition does not prescribe any minimum time or frequency of actual voyages beyond territorial waters.

Conclusion: The vessel qualifies as a foreign going vessel within the meaning of Section 2(21)(ii) of the Customs Act.

Issue 2: Effect of Prolonged Berthing within Indian Territorial Waters on the Vessel's Status

Relevant legal framework and precedents: The Court considered the Supreme Court's ruling in Aban Lyod Chiles Offshore Ltd., which clarified that although a vessel may be a foreign going vessel, stores consumed while the vessel operates within Indian territorial waters are liable to customs duty. The Maritime Zones Act, 1976 and UNCLOS, 1982 principles were also referenced regarding sovereign rights over territorial waters.

Court's interpretation and reasoning: The Court held that berthing or presence within Indian territorial waters for extended periods does not strip the vessel of its foreign going vessel status. However, the exemption under Section 87 applies only to stores consumed outside Indian territorial waters. Duty is payable on stores consumed during operations within Indian territorial waters.

Key evidence and findings: The vessel was berthed at Cochin Port for approximately 1750 days and on voyages for about 301 days during the relevant period. The respondent conceded duty liability for stores consumed during operations within Indian waters.

Application of law to facts: The Court endorsed the Tribunal's direction that duty on stores consumed in Indian territorial waters must be paid, but the vessel's status as a foreign going vessel remains intact for exemption purposes outside those waters.

Treatment of competing arguments: The appellant's contention that prolonged berthing negates foreign going vessel status was rejected. The Court found no merit in equating physical presence with loss of status.

Conclusion: Prolonged berthing in Indian waters does not negate foreign going vessel status, but duty is payable on stores consumed within Indian territorial waters.

Issue 3: Impact of Contractual Commitment to Berthing at Cochin Port on Vessel's Status

Relevant legal framework and precedents: The Court examined the contractual terms between the respondent and Cochin Port Trust, which included a commitment to berth the vessel for a specified number of days to avail concessional berthing charges.

Court's interpretation and reasoning: The Court found that such commercial arrangements are irrelevant to the statutory classification under the Customs Act. The commitment to berth at Cochin Port was a commercial convenience and did not affect the vessel's engagement or status as a foreign going vessel.

Key evidence and findings: The commitment to berth for 265 days per year was established by correspondence and the port agreement. The vessel's operational readiness and contractual obligations under SEAIOCM Agreement were independent of this arrangement.

Application of law to facts: The Court applied the principle that statutory definitions must be interpreted in their legal context and not distorted by extraneous commercial arrangements.

Treatment of competing arguments: The appellant's reliance on the berthing commitment to deny foreign going vessel status was rejected as irrelevant.

Conclusion: The berthing commitment for concessional charges does not affect the vessel's classification as a foreign going vessel.

Issue 4: Applicability and Scope of Exemption under Section 87 of the Customs Act

Relevant legal framework and precedents: Section 87 exempts stores of foreign going vessels from customs duty. The Court referred to the Supreme Court's ruling in Aban Lyod Chiles Offshore Ltd., which clarified that exemption applies only when stores are consumed outside Indian territorial waters.

Court's interpretation and reasoning: The Court upheld the Tribunal's finding that the exemption under Section 87 applies fully to the vessel's stores, except for those consumed during operations within Indian territorial waters, where customs duty is payable.

Key evidence and findings: The vessel's logbooks, correspondence, and operational records were to be examined to determine the exact duty liability for stores consumed within Indian waters.

Application of law to facts: The Court directed remand to adjudicating authority for computation of duty liability on stores consumed within Indian waters.

Treatment of competing arguments: The appellant's contention for denial of exemption due to prolonged presence in Indian waters was rejected, but the Court agreed that duty on stores consumed in Indian waters must be levied.

Conclusion: The vessel is entitled to exemption under Section 87 for stores consumed outside Indian territorial waters; duty is payable on stores consumed within Indian waters.

Issue 5: Alleged Suppression of Material Facts and Applicability of Penal Provisions

Relevant legal framework and precedents: Sections 111 and 112 of the Customs Act provide for penalties in cases of suppression of material facts or misdeclaration.

Court's interpretation and reasoning: The Court found no suppression of material facts by the respondent since the appellant was aware of the berthing arrangements with Cochin Port Trust. The vessel was under constant surveillance by Customs and Port authorities, and no evidence was placed on record showing concealment or misrepresentation.

Key evidence and findings: The vessel's berthing was known to Customs; multiple boardings and supervision of bonded stores were documented.

Application of law to facts: The Court held that no penal provisions could be invoked in the absence of proof of suppression or concealment.

Treatment of competing arguments: The appellant's claim of suppression was rejected as baseless.

Conclusion: No suppression of material facts was established; penal provisions under Sections 111 and 112 do not apply.

3. SIGNIFICANT HOLDINGS

"The expression 'engaged in' is a term of various meanings depending on the context it is used but ordinarily, it is intended to signify continuation occupation or employment; it involves the concept of continuity of action as well as physical participation. However, the term is often employed to denote a present obligation to devote time, attention and efforts to a particular activity."

"The impugned vessel ASEAN Explorer was a foreign going vessel in terms of inclusive definition contained in Section 2 (21) (ii) of the Customs Act, 1962. The engagement of the vessel in its entirety under the Agreement requires to be considered and not for a specific voyage or time period; the vessel is on a continuous engagement and the status of the vessel being thus a foreign going vessel cannot be decided on a piece meal basis."

"The berthing of the vessel for long periods at Cochin Port does not alter this position and accordingly, the appellants are eligible to avail the exemption contained under Section 87 of the Customs Act, 1962 on the ship stores."

"Duty on the ship stores consumed while the vessel was performing operations within Indian territorial waters requires to be paid by the appellants."

"The commitment to berth the vessel in Cochin Port for specified number of days in a calendar year to obtain concessional rates of berthing charges is wholly irrelevant for the purposes of determining its status as a foreign going vessel."

"No suppression of material facts was established as the Customs authorities were aware of the berthing arrangements and supervised the bonded stores; hence, penal provisions under Sections 111 and 112 of the Customs Act do not apply."

The Court dismissed the appeal filed by the Commissioner of Customs, affirming the Tribunal's order that the vessel qualifies as a foreign going vessel and is entitled to exemption under Section 87 of the Customs Act, subject to payment of duty on stores consumed within Indian territorial waters. The confiscation order, redemption fine, and penalties imposed on the vessel and its master were set aside accordingly.