Judicial clarity on exemption to Foreign Going Vessel stationed temporarily within territorial waters for maritime operations

Under Section 12 of the Customs Act, 1962 (“the Act”), customs duty is leviable on goods imported into or exported from India. The definition of the term ‘goods’ under Section 2(22) of the Act includes vessels. Thus, import of vessels is also liable to be subjected to customs duty at the specified rate, and those undertaking such transactions are required to file a Bill of Entry under Section 46 of the Act.

The term ‘conveyance’ also includes vessels.  Courts have held that a vessel ceases to be imported goods after customs clearance and hence, on subsequent arrival into India, they will be considered as a conveyance.

There are various categories of vessels, such as, Indian Flag Vessel, Foreign Going Vessel, and Coastal Run Vessel. This article specifically deals with Foreign Going Vessel.

The term ‘Foreign Going Vessel’ is defined under Section 2(21) of the Act, which includes any vessel engaged in fishing or any other operations outside the territorial waters of India. The Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 provides the limit of territorial waters at a distance of twelve nautical miles from the nearest point of the appropriate baseline.  

Time and again, disputes are raised by the department on the status of Foreign Going Vessels and the eligibility of exemption for the stores of such vessels under Section 87 of the Act.

In a recent judgment, the Kerala High Court examined the status of the Foreign Going Vessel which was exclusively engaged in carrying out the repairs of cables in Indian Ocean, stationed at Cochin Port for operating the zones connecting India, different Asian and West Asian Countries and Australia and its eligibility to claim exemption on spares and consumables under Section 87 of the Act.

The assessee had awarded a contract for a sub-marine cable into the Indian Ocean. The engagement required the vessel to be readily available for carrying out the operations as and when required. For this purpose, the vessel would be berthed at the Cochin Port, from where it would progress to commence the operations outside the territorial waters. While carrying out the operations, the vessel would also move across different ports in India and beyond the territorial waters and would carry spares, bunkers, crew, and technical staff on board during such a voyage.  

It was the understanding of the company that since the vessel was a Foreign Going Vessel in terms of Section 2(21) of the Act, the spares and consumables in the vessel would not attract any duty in terms of Section 87 of the Act.

The Revenue issued a show cause notice alleging that the vessel was berthed at Cochin Port for 1,750 days during the contractual period of five years, whereas the time spent on the voyage is only 301 days. Thus, it could not be categorized as a Foreign Going Vessel and is liable to pay duty on different spares and consumables in the vessel. It also proposed confiscation and the imposition of a penalty. The proposals in the show cause notice stood confirmed by the Adjudication Order.

In an appeal filed by the assessee, CESTAT has held that the vessel would qualify to be a Foreign Going Vessel under Section 2(21) of the Act by observing following:

a) The agreement and obligations agreed thereto have to be considered in their entirety rather than focusing on the day-to-day activities carried out by the vessel.

b) The operator was bound to ensure that the vessel is operated in such a manner to enable the vessel to be put to sea without undue delay and within 24 hours of the receipt of the notification requiring the repair or maintenance services.

c) The term “engaged in” in the definition of Foreign Going Vessel is inclusive and is intended to signify continuity of action and not restricting it to a particular activity.

Noting that the vessel in the present case was under a continuous engagement in terms of the contract, the status and identity of the vessel as a Foreign Going Vessel would have to be considered in entirety and hence the spares and consumables kept in stores of such vessel, would be entitled to exemption under Section 87 of the Act.

The High Court has affirmed the said view of the CESTAT by holding that the term “engaged in” has to be read in light of the contract detailing its obligations and mere non-engagement of the vessel on few days for repair services outside the territorial waters would not take away from it the designation of Foreign Going Vessel.

The instant decision is quite welcoming and supports the position that the intention of an agreement plays an important role in interpreting provisions of law and claiming an exemption. Placing reliance on the contractual agreement, it was held that even a Stationed Vessel at the port with an underlying contractual obligation would not lose its status of a Foreign Going Vessel in Maritime Operations. The Hon’ble Court emphasized the practical requirements of having vessels berthed at ports for instant availability. Upholding that the exemption under Section 87 of the Act would be eligible to the stores on a Foreign Going Vessel would increase economic viability to such international operators and hence is beneficial for the marine, offshore oil and gas and international trade sector. 

The judgment will also be beneficial for notifications which grant exemptions upon satisfying the “intended use."

About the authors: Ratan Jain is an Executive Partner and Shruti Khanna is a Senior Associate at Lakshmikumaran and Sridharan attorneys.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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