Safiya Malik

The High Court of Kerala Division Bench of Justice Dr. A.K. Jayasankaran Nambiar and Justice P.M. Manoj dismissed an appeal filed by the Commissioner of Customs, challenging the Customs, Excise & Service Tax Appellate Tribunal's (CESTAT) final order that granted exemption to a vessel under Section 87 of the Customs Act, 1962. The Court affirmed that the vessel in question was indeed a "foreign going vessel" under Section 2(21)(ii) of the Act and held that its berthing at Cochin Port for extended periods did not alter this legal status. The High Court further directed that only stores consumed within Indian territorial waters would attract duty and remanded this aspect back for proper computation. The confiscation order and penalties were also set aside.

The appeal arose from a dispute over whether the vessel ASEAN Explorer, chartered to repair undersea telecommunications cables, qualified as a "foreign going vessel" under the Customs Act, thus exempting its onboard stores from customs duty.

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The vessel, registered in Singapore, was engaged in repairing cables in the Indian Ocean under a time charter agreement with Videsh Sanchar Nigam Ltd. (VSNL). The agreement, dated 13.05.2005, was executed under the South East Asia and Indian Ocean Cable Maintenance Agreement (SEAIOCM Agreement), requiring the vessel to be stationed at Cochin but ready to perform maintenance across international waters spanning 1.05 lakh kms, with only 256 kms within Indian territorial waters.

Between 11.07.2007 and 24.04.2012, the vessel was berthed at Cochin Port for approximately 1,750 days, and on operational voyages for about 301 days. A show cause notice dated 10.07.2012, followed by a corrigendum dated 14.08.2012, was issued to the vessel and its master. The Customs Department asserted that the vessel, due to its prolonged presence in Indian waters and its berthing arrangements with Cochin Port Trust (for concessional rates for 265 days per year), did not satisfy the criteria for a "foreign going vessel."

The Commissioner of Customs adjudicated that the vessel was not eligible for exemption, ordered its confiscation, and imposed duties, penalties, and interest. This decision was challenged before CESTAT, Bangalore, which, by its order dated 18.02.2020, reversed the Commissioner’s findings and held in favour of the respondent.

The Customs Department appealed this decision, contending that under Section 2(21) of the Customs Act, only vessels currently and actively engaged in operations outside territorial waters qualified as foreign going. The Department cited the vessel’s stationary status in Cochin and its engagement terms as proof that it was not operationally “engaged” as required.

The Department argued that “preparedness” to engage in foreign operations did not equate to actual engagement and claimed the respondent suppressed critical facts regarding berthing agreements with Cochin Port. The definition of “foreign going vessel,” it submitted, required strict interpretation in line with the taxing statute.

The respondent countered that under the SEAIOCM Agreement, the vessel was on continuous standby and readiness, and that such operational readiness constituted “engagement.” The vessel undertook 29 cable repairs and 7 working exercises during the contract, of which only one occurred within Indian territorial waters. The contractual obligation was to remain ready to operate within 24 hours of notice.

The respondent further contended that the definition under Section 2(21)(ii) did not impose a time-specific operational requirement, and cited precedents, including Commissioner of Income-Tax v. Natwarlal Tribhovandas and Regional Provident Fund Commissioner v. Shree Krishna Metal, which interpreted the phrase “engaged in” to include obligations arising from contractual readiness.

The Division Bench recorded: "We have considered the submissions advanced by either side and gone through the impugned order of the Appellate Tribunal. The only issue that arises for consideration is whether in the backdrop of the terms of engagement of the vessel under the SEAIOCM Agreement, the vessel can be categorized as a foreign going vessel for the purposes of claiming exemption under Section 87 of the Customs Act."

The High Court endorsed the Tribunal's findings: "We find ourselves in complete agreement with the findings of the Tribunal. We cannot accept the contention of the learned Assistant Solicitor General that on account of the agreement entered into between the respondent and the Cochin Port Trust... the vessel will lose its status as a 'foreign going vessel'."

The Court acknowledged that under the SEAIOCM Agreement: "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... the mere fact that on particular days, it was not actually engaged in carrying out those repair activities, was irrelevant."

On the statutory interpretation of Section 2(21): "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... could not be said to remove it from being 'engaged in' operations."

The Court further recorded: "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."

"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..."

The Division Bench held: "We see no reason to interfere with the well-reasoned order of the Tribunal. This Customs Appeal therefore fails, and is accordingly dismissed, but without any order as to costs."

The Court affirmed: "The vessel ASEAN Explorer is a foreign-going vessel, within the ambit of (ii) of Section 2(21) of the Customs Act, 1962, being engaged for performing repair/cable laying activities in the designated areas in terms of the Agreement with SEAIOCMA."

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On liability: "The appellants are eligible to avail the exemption contained under Section 87 of the Customs Act, 1962 on the ship stores. However, they are required to pay duty on the ship stores consumed only during the period the said vessel was performing its designated work in Indian territorial water, for the normal period."

Regarding the penalty and confiscation: "As the vessel is held to be a foreign-going vessel and that the exemption under Section 87 of the Customs Act, 1962 is available, the seizure of the vessel and consequent imposition of redemption fine in lieu of confiscation need to be set aside along with penalties imposed on both the appellants."

Advocates Representing the Parties:

For the Petitioners: Sri. N. Venkataraman, Additional Solicitor General of India; Smt. O.M. Shalina, Deputy Solicitor General of India; Sri. P. Vijayakumar, Advocate

For the Respondents: Sri. Rohan Shah (Senior Counsel); Smt. Stella Joseph, Sri. Yash Desai, Sri. Harikumar G. (Gopinathan Nair), Sri. Akhil Suresh, Smt. Jeslin Dolly Mathews, Sri. C. Dinesh (CGC), Sri. Desai Yash Khilen

Case Title: Commissioner of Customs v. M/s. ASEAN Cableship Pvt. Ltd.

Neutral Citation: 2025: KER:38131

Case Number: CUS. Appeal No. 1 of 2021

Bench: Justice Dr. A.K. Jayasankaran Nambiar, Justice P.M. Manoj

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