OCTOBER 11, 2014

By C Julian Andrews

THIS article is written in the backdrop of the CESTAT decision reported as 2014-TIOL-1157-CESTAT-BANG

1. There is a lot of commotion created around the import of steam coal after the introduction of customs duty concession to steam coal imported by thermal power producers of the country, by raising hair splitting arguments. This article is about certain facts involved in this issue, and is intended to enlighten any reader interested in knowing the issue and it is not against the importers or against the interest of the department. The issue of calculation of moist, mineral matter basis calorific value is being written separately.

2. The Indian customs tariff was aligned to international system from 1975 onwards by following the Brussels Tariff Nomenclature till 1986. From the year 1986, the Indian Customs Tariff was aligned to the HSN (Harmonized System of Nomenclature). The harmonized system follows classification up to 6 digits. The tariff follows a system of single – and double-- (dash) classification. The scope of single – and double - in classification is explained in the explanatory notes to rule 6 of the general rules for interpretation of the HSN. But in our tariff it is given separately after the interpretative rules as general explanatory notes.

3. In the year 2003, the customs tariff was amended through an ordinance and purpose of the amendment is stated in the Press Release issued by the PIB. The press release is reproduced below for easy reference -

PIB Press release dated 20th January, 2003-Ordinance to Amend Customs Tariff Act.

An ordinance amending the Customs Tariff Act, 1975 was promulgated to adopt a common commodity classification code to be used by Customs, Directorate General foreign trade and Directorate General central Intelligence and Services. The said Code consists of eight digits with an additional about 10,000 more items with a provision for future additional capacity and is based on international standards with a view to integrate Indian economy with world economy and simplify various import procedures. The said ordinance will come into effect from February 1, 2003.

PIB Press Release dated 20th January, 2003 -President Promulgates to Amend Customs Tariff Act.

The President has promulgated an Ordinance amending the Customs Tariff Act, 1975 with prospective effect from February 1, 2003 to enable the trade, commerce and industry to ready themselves to the emerging new commodity classification code. The Act was last amended in 1985.

Numbered as Ordinance No. 1 of the year 2003, it seeks to amend the Customs Tariff Act, 1975 to adopt a common commodity classification to be used by Customs. Directorate General Foreign Trade and Directorate General Central Intelligence and Services. The code has been prepared in consultation with the Ministry of Commerce, trade, industry and other users as part of Government's ongoing efforts for simplification of procedures to facilitate imports.

The Code is based on internationally adopted six digit harmonized system of nomenclature evolved by World Customs Organization and individual countries to expand and to accommodate domestic needs and concerns. The present Code of six digit which has about 6000 items has been expanded into eight digits with an additional about 10,000 more items with a provision to add more such items in future as well.

The Ordinance seeks to integrate Indian economy with the global economy to evolve procedures adopting global needs. This will also avoid disputes relating to classification arising out of multiplication of classification code adopted by different agencies thereby reducing transaction costs thus improving competence of Indian Industry to facilitate collection, compilation, analysis and exchange of trade statics and standard units of measurements based on international trade practices incorporated against commodities.

No change in the rates of duties has been provided.

The Ordinance follows the long felt demands of all Industries Associations and Export Promotions Board for a common Code. This also follows the recommendations of Kelkar Committee so that a Code is in position ahead of schedule.

The expanded code takes into account specific needs of the country and will be helpful in international trade negotiations.

4. The main purpose of the tariff amendment in introducing 8 digit classifications is to avoid classification dispute, besides integration of our economy to global economy as stated in the press release. The above legislative intent of avoiding disputes in classification and also integrating Indian economy with global economy has not achieved the desired objective at least with reference to classification of various types of coal in chapter 27 of our tariff. The reason for the ambiguity is the imperfect sub division of tariff heading and the introduction of tariff items based on the end use in the 2003 customs tariff amendment through an ordinance. This is evident from the ongoing dispute between the revenue department and coal importers about steam coal, wherein for the steam coal falling under the bituminous category based on the calorific value on M, MMF basis (moist, mineral matter free), the department is denying benefit of exemption. The major use of the bituminous coal is as metallurgical coal or as thermal coal/ steam coal, besides other minor uses. The metallurgical coal is mostly used as raw material while the thermal coal is used as fuel.

5. The revenue department is denying benefit for the steam coal falling under the bituminous category based on M,MMF basis calorific value, on the ground that the classification indicated, in the exemption notification is CTH 27011920which covers only coal having calorific value on M,MMF basis below 5833 kcal/kg.The coal having calorific value more than 5833 kcal/kg on moist, mineral matter free basis, is classifiable as bituminous coal under CTH 27011200. The reason for this imbroglio is the imperfect division of tariff heading earlier based on physical and chemical properties, by introducing end use based classification without proper supplementary notes in chapter 27, as in the case of CTH, 2710, covering mineral oils.

6. Prior to the ordinance amending the tariff, the customs classification of coal in the tariff as well as in HSN, are synchronous and was based on physical and chemical properties alone as anthracite, bituminous coal and other coal (equivalent to sub-bituminous) based on volatile matter content of coal on dry mineral matter free basis and calorific value on moist, mineral matter free basis. As per sub-heading notes, the coal having volatile matter on dry mineral matter free basis less than 14% is considered as anthracite. The coal having volatile matter content on dry mineral matter free basis more than 14% and a moist, mineral matter free calorific value equal to or more than 5833 kcal/kg is considered as bituminous coal. The bituminous coal mainly used as coking coal and as steam coal, besides some other minor uses. The other coal mentioned in our tariff is equivalent to the sub-bituminous coal as per the ranking in ASTM Standards and cannot be used as coking coal because it lacks agglomeration property. In the ASTM ranking, the agglomeration property is used to distinguish between adjacent groups. For example coal having M, MMF calorific value between 10500 Btu to 11500 Btu (6389 kcal/kg) lacking agglomeration properties is ranked as sub-bituminous in contrast to our tariff provisions. Agglomeration is the property of softening when heated to above about 400 degree Celsius in a non-oxidizing atmosphere and then appearing as coherent mass after cooling to room temperature.

For ease of reference the tariff structure before amendment and after amendment is reproduced below,

7. In the tariff amendment introducing 8 digit classification, the sub-heading 270119, alone was sub-divided based on the end use of the coal, as coking coal and steam coal giving an impression that coking coal and steam coal are different from bituminous coal. The sub-division carried out is contrary to scientific fact that only bituminous coal can be used as coking coal and bituminous coal not suitable for coking, other coal (sub-bituminous coal) and lignite can be used for steam generation in thermal power stations. There are no supplementary notes to explain the scope of steam coal. It is not out of context to mention that coking coal will have GCV above 5833 k.cal/kg but this does not pose any problem in extending the benefit of notification 12/2012 because the definition given in the notification does not dwell on the mischievous calorific value but on certain other parameters. On the contrary in the same ordinance the heading 2710, covering bituminous oils was also sub divided into 8 digit tariff items based on end use. For these sub divisions suitable supplementary notes were given in the chapter 27. These supplementary notes were the same as the explanation given in earlier exemption notifications. For example in the earlier exemption notification any hydrocarbon oil ordinarily used for lubrication having flash point not below 93.3 degree Celsius is considered as lubricating oil. The same is appearing in supplementary notes to chapter 27. Hence an error was committed by the revenue in the sub-division of coal.

8. Even in the absence any suitable explanation also, the steam coal of bituminous category should be classified under CTH, 27011920 as it is a heading specifically created by the legislation in 2003. However based on the sub heading notes and the general explanatory notes in the schedule the department is denying the exemption by classifying the steam coal as bituminous based on calorific value on M,MMF basis. This sort of contrived interpretation of department makes the heading steam coal restrictive only to steam coal other than the bituminous category, besides making the heading coking coal in CTH 27011912 redundant, because only certain types of bituminous coal alone can be used as coking coal. It is a settled principle that any interpretation which renders some portion of the statute redundant is not a sound and well founded one. Luckily the importers of coking coal never faced this kind of problem because the classification indicated in the same notification is only up to 4 digit level as 2701. This is due to the fact that the exemption to coking coal had been in force for a long time from 1994 onwards, wherein only 4 digits were indicated. For the coking coal, in the exemption notification it is defined that coking coal "means coal having mean reflectance of more than 0.60 and swelling index or crucible swelling number 1 or above". Hence the department do not test M,MMF calorific value and if it is tested for calorific value it will higher than 5833 kcal/kg, is a scientific fact. But for the steam coal the exemption was introduced for the first time in 2012 and the department indicated in the notification, the newly introduced CTH as appearing in the tariff. This gives the impression that the steam coal and bituminous coal are different. Thus it is an inartistic drafting in indicating 4 digits for coking coal and 8digits for steam coal in the exemption notification is creating an artificial distinction giving rise to avoidable disputes.

9. Basically the above, the division of sub heading 270119, to include steam coal and coking coal in our tariff is contrary to the tariff provisions of countries like US, Canada, UK, and Russia etc. the customs tariff of this countries do not have separate classification for steam/thermal coal in their tariff because the bituminous coal, sub bituminous coal (other coal in our tariff) and lignite can be used as steam coal. In all the other countries the tariff item coking coal also known as metallurgical coal, is only shown as sub-division of bituminous coal because the property of agglomeration is essential for coking coal. Such, type of coal always have calorific value over 5833 Kcal/kg, on moist, mineral matter free basis. Thus the sub-division is carried out is against international practices and the object of integrating our economy with international economy is defeated by these improper tariff entries not in harmony with international system of classification and contrary to scientific facts. The heading coking coal 27011912 is thus redundant because only the bituminous coal can be used as coking coal.

10. A feeble attempt is made to prove that the heading coking coal is not redundant by referring to IEA (international energy agency) classification of coal, stating that as per their classification coal having moist ash free calorific value more than 5700 kcal/kg are coking coal and accordingly the heading coking coal is not redundant. The term moist, ash free and moist mineral matter free are one and the same. But the fact is that in the IEA system of classification, the coals having calorific value on moist ash free basis above 5700 kcal/kg is considered as hard coal and not as bituminous coal. In the IEA system of classification, the hard coal is in turn divided into anthracite, coking coal and other bituminous coal. The IEA is an autonomous organization which works to ensure reliable, affordable and clean energy for its 29 member countries and beyond. The IEA's four main areas of focus are: energy security, economic development, environmental awareness, and engagement worldwide. It is an undisputable scientific fact that only coal having agglomeration fact can only be used as coking coal and hence the heading 27011912 covering coking coal is redundant.

11. In other countries, tariff whenever is end use based classification, there are suitable additional notes. For example in the US customs tariff provisions, there are additional notes as follows.

Additional U.S. Rules of Interpretation

1. In the absence of special language or context which otherwise requires-

(a) a tariff classification controlled by use (other than actual use) is to be determined in accordance with the use in the United States at, or immediately prior to, the date of importation, of goods of that class or kind to which the imported goods belong, and the controlling use is the principal use;

(b) a tariff classification controlled by the actual use to which the imported goods are put in the United States is satisfied only if such use is intended at the time of importation, the goods are so used and proof thereof is furnished within 3 years after the date the goods are entered;

(c) a provision for parts of an article covers products solely or principally used as a part of such articles but a provision for "parts" or "parts and accessories" shall not prevail over a specific provision for such part or accessory; and

(d) the principles of section XI regarding mixtures of two or more textile materials shall apply to the classification of goods in any provision in which a textile material is named."

The writer cites this to prove the point that the introduction of end use based tariff items was done in haste.

12. In the budget proposal for the year 2012-2013, the Hon. Finance Minister announced in the parliament as follows:

"183. In the realm of infrastructure my proposals address some weaknesses in the troika of power, coal and railways.

184. Domestic producers of thermal power have been under stress because of high prices of coal. I propose to ease the situation by providing full exemption from basic customs duty and a concessional CVD of 1 percent to steam coal for a period of two years till March 31, 2014.etc"

13. From the above speech of the FM it is clear that the exemption is meant for steam coal in general used by thermal power producers. Prior to the introduction of exemption notification the thermal power producers were importing coal having calorific of equal to or more than 5833 kcal/kg as well as coal having calorific value below 5833 kcal/kg for use as steam coal in their thermal power plants. The legislative intention is to grant relief to coal used for steam generation by thermal power producers. While implementing the legislative intention in the finance bill a mistake has crept in (an unforced error in tennis terms) by inartistic drafting of the notification in indicating 8 digit classification codes in the exemption notification, restricting the exemption only to steam coal having calorific value less than 5833 kcal/kg on, and moist mineral matter free basis. Thus the exemption is denied to major portion of steam coal imported. But the revenue department interpretation of tariff provisions is contrary to the Apex court decision discussed below.

14. In the case of Oswal Agro Mills, the Apex court - 2002-TIOL-465-SC-CX has observed as follows.

"Therefore, one has to gather its meaning in the legal setting to discover the object which the Act seeks to serve and the purpose of the amendment brought about. The task of interpretation of the statute is not a mechanical one. It is more than mere reading of mathematical formula. It is an attempt to discover the intention of the legislature from the language used by it, keeping always in mind, that the language is at best an imperfect instrument for the expression of actual human thoughts. It is also idle to expect that the draftsman drafted it with divine prescience and perfect and unequivocal clarity. Therefore, court would endeavor to eschew literal construction if it produces manifest absurdity or unjust result.

In Manmohan Das v. Bishun Das : (1967) 1 SCR 836, a Constitution Bench held as follows :

"…The ordinary rule of construction is that a provision of a statute must be construed in accordance with the language used therein unless there are compelling reasons, such as, where a literal construction would reduce the provision to absurdity or prevent manifest intention of the legislature from being carried out."

In the case of Maestro motors specifically held by the Hon. Apex court that " if the wording of the notification show an item is specifically exempted, the exemption will apply to that item even though for the purpose of classification it may considered as something else" and based on this is the ratio of the decision the exemption to bituminous category of steam coal is also s applicable and there is no scope for dispute regarding the classification.

15. Article 141 of the Indian Constitution states that, "the law declared by the SC shall be binding on all courts within the territory of India". If it is binding on all courts as law of the land, the same is binding on department also. The Supreme Court judgments as between the litigants are decisions, as to the nation, they are declaratory of law. Hence the as per the principles of binding precedence and ratio decidendi the decisions are to be scrupulously followed and any failure would amount to judicial indiscipline.

16.In the case of Swaroop Fibre vs CCE (1990 (48) E.L.T. 118 Tri.) the CESTAT has departed from following usual principles of classification and held that construction attributing redundancy to legislation is not acceptable. Based on this principle the bench has classified the vulcanized fiber in the heading which may not be relevant, because the heading introduced would become irrelevant and redundant otherwise.

17. Whenever an exemption is issued to any commodity in budget, usually the revenue loss because of the exemption is always taken into consideration in the budget making exercise. If the revenue loss projected is known it is easier to understand the scope of the exemption as to whether all types of steam coal is eligible for exemption or it is restricted to only steam coal having less than 5833 kcal/kg.

18.From the above discussions it appears that the entire exercise by the department reflect its overzealous attitude for collecting revenue by restricting the exemption through contrived interpretation of the legal provisions is only making mockery of legislative intention by resorting to classification against the principles laid down by the Apex court. The whole dispute can be resolved by retrospective amendment of tariff entries in consonance with the international practices adopted by other countries as explained earlier.

19. In the alternative the classification should be restricted to 4 digit entry as in the case of coking coal, which escapes the mischief of the sub-heading notes. The best way appears to be following the Apex court ruling or correct the sub-division retrospectively.