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Friday, May 15, 2015

Notification No.35/90 exempted coking coal having an ash content below 12% from basic customs duty that was in excess of 5%. In addition, notifications 36/90 and 23/91 exempted coking coal with ash content of less than 12% from the whole of auxiliary duty and additional duty of customs.


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                     CIVIL APPEAL NOS.7439-7440 OF 2004

M/S. TATA CHEMICALS LTD.                    …APPELLANT


(PREVENTIVE) JAMNAGAR                      ...RESPONDENT


                     CIVIL APPEAL NOS.7628-7629 OF 2004

                               J U D G M E N T

R.F. Nariman, J.

1.    The appellants were engaged in the manufacture of soda ash  and  Coke.
For the manufacture of Coke, they require coking coal which was imported  by
them. Notification No.35/90 exempted  coking  coal  having  an  ash  content
below 12% from basic customs duty that was in excess of  5%.   In  addition,
notifications 36/90 and 23/91 exempted coking coal with ash content of  less
than 12% from the whole of auxiliary duty and  additional duty of customs.

2.    On 4.2.1991,  the  appellants  had  entered  into  an  agreement  with
Philbro Energy Company (situated in the USA)  for  supply  of  30500  metric
tons, CIF, Okha of Low Ash Metallurgical Coal produced by  M/s  Kembla  Coal
and Coke, Australia.   The  contract  specifically  provided  that  the  ash
content was not to exceed 10.3% and that the sampling and  analysis  was  to
be done  by  an  independent  inspection  agency  of  international  repute,
namely, M/s Cargo Superintendents Company (Asia) Pty.  Limited  (CASCO),  at
the loading  port  and  that  CASCO  should  give  a  certificate  regarding
analysis of the coking coal. In accordance  with  the  aforesaid  agreement,
the appellants in Civil Appeal Nos.7439-7440  of  2004,  namely,  M/s.  Tata
Chemicals Limited imported 33462 metric tons and appellants in Civil  Appeal
Nos.7628-7629 of 2004, namely, M/s. B.L.A.  Coke  Private  Limited  imported
5000 metric tons of coking coal.  Detailed sampling was done by CASCO  while
the coal was being  loaded  on  to  the  ship  and  CASCO  had  meticulously
followed British Standards equivalent to IS standards  436  and  1350.   The
two consignments were divided into samples of  3000  metric  tons  each  and
from each sample CASCO  took  samples  weighing  470  kilograms  each.   The
primary  samples  were  passed  through  secondary  sampling,  crushing  and
tertiary treatment.  13 sample units were separately tested, their  analysis
report obtained and the average furnished in  the  form  of  a  consolidated
test report.  This report stated that the moisture content was 7.2% and  the
ash content of the said coking coal was 9.8%.

3.    When the aforesaid consignment arrived  at  Okha,  the  appellants  in
both the appeals filed bill of entry dated 15.3.1991 and  claimed  exemption
under the aforesaid  notifications.  Along  with  the  bill  of  entry,  the
appellants also submitted the certificate of  CASCO.   It  is  important  to
note that the Department at no stage stated that they have not accepted  the
CASCO report  or  that  the  CASCO  report  was  defective  in  any  manner.
However, the Customs  Inspector  at  Okha  apparently  drew  samples  of  20
kilograms each – one from the vessel and one from  the  shore  on  18.3.2001
and beat them with stones to crush them. The samples  were  then  made  into
powder form.

4.    The samples were not drawn in the presence  of  any  employee  of  the
appellants.  It was alleged by the Department that the Inspector  had  drawn
the samples in the presence of Shri K.M. Jani who was allegedly an  employee
of Bhagwati and Company, clearing agents appointed by  the  appellants.   It
is common ground that the sample so drawn had not been drawn  in  accordance
with IS 436.

5.    The samples so drawn, however, were sent to the Central Fuel  Research
Institute, Dhanbad, to be  analysed.   On  13.1.1992,  the  appellants  were
informed by the Superintendent of Customs that the test agency  stated  that
the ash content in the samples was more than 12%.  A copy of the report  was
subsequently furnished to  the  appellants  which  indicated  that  the  ash
content of  the  coal  belonging  to  Tata  Chemicals  was  13.8%  and  that
belonging to M/s. B.L.A. Coke  Private  Limited  was  12.6%.   On  objection
being made to the said report, the Superintendent Okha sent two  samples  to
the Chief Chemist, Central Revenue Control Laboratory (CRCL)  on  15.2.1992.
CRCL in turn submitted its report after  another  delay  of  10  months  and
reported that Tata Chemicals coal had an ash content of 12.21% and  that  of
B.L.A. 12.33%.

6.    As a result of the  ash  content  being  more  than  12%,  show  cause
notices dated 4.1.1993 was issued to both the  appellants  and  differential
duty was demanded from both of them.

7.    By an order dated  31.3.1995,  the  Assistant  Collector  demanded  an
amount  of  Rs.3,95,77,324/-  from  Tata  Chemicals   and   an   amount   of
Rs.59,136,771/- from M/s. B.L.A. Coke Private Limited.

8.    On an appeal  filed  to  the  Commissioner  (Appeals)  Ahmedabad,  the
Commissioner by an order dated  30.12.1997,  set  aside  the  order  of  the
Assistant Collector in the following terms:-

“10. In view of the above discussion and after going  through  the  comments
of the Assistant Commissioner, Customs, Jamnagar as discussed  in  para  5.3
supra, wherein he was asked to give his comments on the submission  made  by
the appellants during the course of personal hearing. It is  seen  that  the
Assistant Commissioner has accepted all the points raised by the  appellants
and he has not been able to controvert any of their submissions. I  come  to
the  conclusion  that  the  appellants  have  substantial  force  in   their
arguments  and  therefore  I  held  that  nothing  can  be  added  into  the
notification  and  when  notification  does  not  prescribe  the  method  of
analysis for ascertaining  the  ash  content  in  the  coal,  it  should  be
ascertained on as received basis. I rely upon the  ratio  of  the  decisions
cited by the appellants in this regard. The CFRI  and  CRCL  have  conducted
analysis to ascertain the ash content on gross air dried basis, in spite  of
clear instruction of the Asttt. Commissioner, Customs, Jamnagar to give  the
report on as received basis,  therefore,  these  reports  should  have  been
given on as received basis. I accept the plea of the appellants  that  these
results can be converted into as received basis, which fact  has  also  been
accepted by the Assistant Commissioner as discussed in para  5.3  above,  by
applying the formula  followed  internationally.  By  applying  the  formula
which is accepted all over the world and has been given  by  the  appellants
during the course of their submissions,  the  ash  content  on  as  received
basis would be 11.8% and 11.6% in the case of M/s. BLA Industries and  13.9%
and 11.4% in the case of M/s. Tata Chemicals Ltd. The  formula  for  working
out these results is as under:

100 – Mar     Mar: Moisture as received

100 – Mad    Mad: Moisture as dried.

It is seen that in case of M/s BLA Industries results of  both  laboratories
converted into as received basis gives ash content  below  12%  and  in  the
case of M/s Tata Chemicals Ltd. Though the  first  result  even  after  such
conversion crossed 12% marginally, but the  result  of  subsequent  analysis
conducted by CRCL after such conversion gives content of ash  content  below
12%. Therefore,  after  conversion  on  as  received  basis,  which  is  the
requirement of the law, the ash content in both the cases is below  12%  and
therefore both the appellants are entitled for partial concessional rate  of
Customs duty in excess of 5% as prescribed by Notification No.35/90”

 9.   Revenue appealed to CESTAT who by  the  impugned  judgment  and  order
dated 24.9.2004 allowed Revenue’s appeal and set  aside  the  order  of  the
Commissioner (Appeals) basically on the ground that even though the  samples
drawn by the Inspector were contrary to IS 436, yet since  a  representative
of the appellants was present, the  appellants  are  estopped  from  turning
around at a later stage inasmuch as they did not immediately object  to  the
drawing of samples contrary to law.

10.    Shri  S.K.  Bagaria,  learned  senior  advocate  on  behalf  of   the
appellants argued before us that the Australian  Company  from  whose  mines
the coking coal was sent, generally mined coal with an ash content  of  less
than 12%.  He referred to and relied  upon  a  great  deal  of  material  to
establish this fact.  Further, he went on to  state  that  CASCO,  the  test
agency,   was   internationally   renowned   and   had    given    a    test
report/certificate of quality which described  how  meticulously  they  have
taken samples in accordance with law and how  ultimately  the  samples  were
found to contain ash at only 9.8% following the gross air dried method.   He
also referred us to Section 18 of the Customs Act and stated that  since  no
fault had been found with CASCO’s certificate, the entire sampling  done  by
the customs authorities was invalid in law.  He further went on to refer  to
the cross-examination of the Inspector who drew the samples and stated  that
the samples were drawn in the afternoon of 18.3.1991, the  entire  operation
being completed by 1730 hours.  No panchnama was drawn.   20  kilograms  was
taken from the shore and 20 kilograms from the vessel contrary to a  minimum
of 75 kilograms for six  lots  to  be  taken  under  IS  436.   When  cross-
examined, the Inspector stated that he did not know  about  IS  436  and  he
further admitted that he put the samples in a plastic bucket which  did  not
have any lid.  He further went on  to  state  that  he  had  broken  up  the
sampled lumps with stones and then put the resultant powder  in  containers.
He further referred to the cross-examination of the Superintendent  who  had
deputed the Inspector to carry out the samples who was equally in  the  dark
about IS 436.  Above  all,  he  characterized  as  perverse  the  Tribunal’s
findings that the appellants were estopped because their representative  was
present when the sampling was done.  He stated  that  no  representative  of
either appellant was present.  One K.M. Jani alone was present who  admitted
in his cross-examination that he did not work for  the  appellants  Clearing
Agent, namely, M/s Bhagwati & Company.  Further the said Mr.  Jani  did  not
go together with the Inspector and no samples were  actually  drawn  in  his

11.   Shri Radhakrishnan, learned senior advocate  appearing  on  behalf  of
the  respondent  countered  the  submissions  of  Shri  Bagaria  by  reading
copiously from the order of the Assistant Collector and  the  order  of  the
Tribunal.  According to him, the samples taken by  the  Inspector  could  be
taken because statutory authority is given for the same  by  Section  18  of
the Customs Act. He went on to further state that even  though  the  samples
may not have been taken strictly in accordance with IS  436  nonetheless  as
Shri Jani was  present,  the  rule  of  estoppel  would  apply  against  the

12.   Having heard learned counsel for  the  parties,  it  is  important  to
first extract Section 18 of the Customs  Act.  Section  18  of  the  Customs
reads as under:-

“Section 18. Provisional assessment of duty

(1) Notwithstanding anything contained in this Act but without prejudice  to
the provisions contained in section 46-

(a) where the proper officer is satisfied that an importer  or  exporter  is
unable to produce any document or furnish any information necessary for  the
assessment of duty on the imported goods or the export goods,  as  tie  case
may be; or

(b) where the proper officer deems it  necessary  to  subject  any  imported
goods or export goods to any chemical or  other  test  for  the  purpose  of
assessment of duty thereon ; or

(c) where the importer or  the  exporter  has  produced  all  the  necessary
documents and furnished full information for the assessment of duty but  the
proper officer deems it necessary to make further enquiry for assessing  the
duty, the proper officer may direct that the duty  leviable  on  such  goods
may, pending  the  production  of  such  documents  or  furnishing  of  such
information  or  completion  of  such   test   or   enquiry,   be   assessed
provisionally if  the  importer  or  the  exporter,  as  the  case  may  be,
furnishes such security as the proper officer deems fit for the  payment  of
the deficiency, if any, between the  duty  finally  assessed  and  the  duty
provisionally assessed.

(2) When the duty leviable on such goods is assessed finally  in  accordance
with the provisions of this Act, then-

(a) in the case of goods cleared for home consumption  or  exportation,  the
amount paid shall be adjusted against the duty finally assessed and  if  the
amount so paid falls short of, or  is  in  excess  of  20[the  duty  finally
assessed,] the  importer  or  the  exporter  of  the  goods  shall  pay  the
deficiency or be entitled to a refund, as the case may be;

(b) in the case of warehoused goods, the proper officer may, where the  duty
finally assessed is in excess of the duty  provisionally  assessed,  require
the importer to execute a bond, binding himself in a sum equal to twice  the
amount of the excess duty.”

13.   The Revenue has grounded its case  in  Section  18(b)  which  provides
that imported goods can be subjected to chemical  or  other  tests  for  the
purpose of assessment of duty thereon where  the  proper  officer  deems  it
necessary to so subject the imported goods.

14.   In our opinion, the expression “deems it  necessary”  obviously  means
that the proper officer must have good reason to subject imported  goods  to
a chemical or other tests. And, on the facts of  the  present  case,  it  is
clear that where the importer has furnished all the necessary  documents  to
support the fact that the ash content in the coking coal  imported  is  less
than 12%, the proper officer must, when questioned, state that, at the  very
least, the documents produced do not inspire confidence for some good  prima
facie reason.  In the present case, as has been  noted  above,  the  Revenue
has never stated that CASCO’s certificate of quality ought  to  be  rejected
or is defective in any manner.  This being the case, it is  clear  that  the
entire chemical analysis of the imported goods done by  the  Department  was
ultra vires Section 18(b) of the Customs Act.

15.   Statutes often use expressions such as “deems it  necessary”,  “reason
to believe” etc. Suffice it to say that these  expressions  have  been  held
not to mean the subjective satisfaction  of  the  officer  concerned.   Such
power given to the concerned officer is not an arbitrary power  and  has  to
be exercised in accordance with the restraints imposed by law. That this  is
a well settled position of law is clear from the following judgments.   See:
 Rohtas Industries Ltd. v. S.D. Agarwal, (1969) 3 S.C.R.  108  at  129.   To
similar effect is the judgment in Sheo Nath  Singh  v.  Appellate  Assistant
Commissioner of Income Tax, Calcutta, (1972) 1 SCR  175  at  182.   In  that
case it was held as under:

“…There can be no manner  of  doubt  that  the  words  “reason  to  believe”
suggest that the belief must be that of  an  honest  and  reasonable  person
based upon reasonable grounds and that the Income Tax  Officer  may  act  on
direct or circumstantial evidence but  not  on  mere  suspicion,  gossip  or
rumour. The Income Tax Officer would be acting without jurisdiction  if  the
reason for his belief that the conditions are satisfied does  not  exist  or
is not material or relevant to the  belief  required  by  the  section.  The
Court can always examine this aspect though the declaration  or  sufficiency
of the reasons for the belief cannot be investigated by the Court.”

See also Bar Council of Maharashtra v. M.V. Dabholkar, [1976]  2  S.C.R.  48
at 51. N. Nagendra Rao & Co. v. State of A.P. (1994) 6 SCC 205 at 216.

16.   The admitted position on record is that the  samples  drawn  were  not
drawn in accordance with law and were drawn with no regard whatsoever to  IS
436.  That IS 436 would apply to the facts  of  the  present  case  is  made
clear by our judgment reported in Bombay Oil Industries (P)  Ltd.  v.  Union
of India, 1995 (77) E.L.T. 32 (S.C.), where this Court held following  Union
of India v. Delhi Cloth & General Mills Co. Ltd., 1963 Suppl. (1)  SCR  586,
that if the method of testing of any item of Central Excise  tariff  is  not
mentioned, then the Indian Standard Institution’s method should be  applied.
 That this would apply to the Customs Act as well.  IS 436 lays down:-


5.1 Sub-lots – For the purpose of sampling, the entire quantity of  coal  in
a ship shall be divided into a suitable number of sub-lots of  approximately
equal weight as specified in       Table 1.

5.1.1  A gross sample shall be drawn from each of the sub-lots and shall  be
kept separately so that there will be as many gross samples  as  the  number
of sub-lots into which the lot has been divided.

5.2.  Sampling  of  coal  from  ships  shall  be  carried  out,  as  far  as
practicable, when coal is in motion. If it  is  taken  on  a  conveyer,  the
gross sample shall be collected as per the procedure laid down in  Table  3.
If not, the gross samples may be drawn during loading or  unloading  of  the
ship. For this purpose, the number  of  increments  to  be  taken  shall  be
governed by the weight of the gross sample and the weight  of  increment  as
specified in Table 3 for various size groups of coal.”


                         ( Clauses and 3.1 )

Weight of the Lot            No. of sub-Lots/Gross Samples

(Metric Tonnes)

Upto 500                                                         2

501 to 1000                                                    3

1001 to 2000                                                  4

2001 to 3000                                                  5

Over 3000                                                       6.”

Then the IS 436 goes on to describe the procedure to reduce a  gross  sample
into a sample for a lab test etc. in great  detail,  and  speaks  about  the
minimum weight of a gross sample being 75 Kg so  far  as  “Coal,  small”  is

17.   Clearly the samples drawn by the Inspector in the present  case,  have
been drawn contrary to the express provisions of  IS  436.   On  this  count
also, the samples being drawn not  in  accordance  with  law,  test  reports
based on the same cannot be looked at.

The Tribunal’s judgment has proceeded on the  basis  that  even  though  the
samples were drawn  contrary  to  law,  the  appellants  would  be  estopped
because their representative was present when the  samples  were  drawn  and
they did not object immediately.  This  is  a  completely  perverse  finding
both on fact and law.  On fact, it has been more than amply proved  that  no
representative of the appellant was,  in  fact,  present  at  the  time  the
Customs Inspector took the  samples.   Shri  K.M.  Jani  who  was  allegedly
present not only stated that he did not represent the Clearing Agent of  the
appellants in that he was not their employee but also  stated  that  he  was
not present when the samples were taken.  In fact, therefore, there  was  no
representative of the appellants  when  the  samples  were  taken.   In  law
equally the Tribunal ought to have realized that there can  be  no  estoppel
against law.  If the law requires that something be  done  in  a  particular
manner, it must be done in that manner, and if not done in that  manner  has
no existence in the eye of law at all.   The  Customs  Authorities  are  not
absolved from following the law depending upon  the  acts  of  a  particular
assessee.  Something that is illegal cannot convert  itself  into  something
legal by the act of a third person.

18.   It is clear therefore that the Tribunal judgment has to be  set  aside
on all these counts. The appeals are, therefore, allowed with  no  order  as
to costs.

                                  (A.K. Sikri)

                                  (R.F. Nariman)
New Delhi;
May 14, 2015

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