By TIOL News Service

BANGALORE, Mar 17, 2006 : OIL companies are in for a shock. The present case involves one refinery for a particular period and the duty involved was about Rs 5 Crores. Revenue attached so much importance to the case that it hired an advocate to plead the case.

This is how it all started.

MRPL has an oil refinery in Mangalore for refining of petroleum crude. They imported crude oil through the canalizing agency, Indian Oil Corporation Ltd., (IOC). IOC used to import petroleum crude in bulk on the basis of the requirement in each refinery of the country and apportion the same to the various refineries. The foreign supplier supplies crude as per the Bill of Lading quantity. IOC makes payment to the foreign supplier on the basis of the Bill of Lading quantity, even though, the quantity received in India may be less because of ocean loss. On the basis of the apportionment, IOC prepares derived Bill of Lading in respect of each refinery. MRPL makes the payment to IOC on the basis of the quantity shown in that derived Bill of Lading. Other refineries also follow the same practice. In terms of decided case laws and Board’s Circular, in respect of liquid bulk cargo, the quantity of goods imported is equivalent to the quantity received in shore tank. The ocean loss is proportionately shared by all the refineries concerned. The point at issue is the valuation of the crude imported by MRPL. According to Revenue, irrespective of the quantity of crude received by the appellant in the shore tanks, they have to pay duty on the basis of the amount paid to IOC. On the other hand, the appellants contend that duty is payable only on the value of the crude received in the shore tanks. In other words the appellants want to pay duty only on the actual quantity received in the shore tanks despite the fact that they had to make payment to IOC on the basis of the quantity shown in the derived Bill of Lading.

Another point is whether the actual freight paid to the shipping company or the freight in respect of the quantity received in the shore tank is to be taken for assessment purposes. According to Revenue, the actual freight paid should form the basis of assessment but the appellants contend that the fright attributable to the quantity received in the shore tank only should form the basis of assessment. The Commissioner of Customs in the impugned order confirmed a demand of Rs 4,91,49,959/- under Section 28 (1) of the Customs Act 1962. The appellants strongly challenge the findings of the Commissioner before the Tribunal for relief.

The payment made by the appellants is based on the Bill of Lading quantity, despite the fact that the quantity received in the shore tank is less than the Bill of Lading quantity. The difference is normally attributable to various losses which occur from the time of loading at the foreign port till their receipt in the shore tanks of MRPL. There is no reduction in the price payable for the petroleum crude because of the losses.

Suppose the Bill of Lading quantity is 1000 Metric Tones (MTs) and what is received in the shore tank is 999 MTs, MRPL has to make payment for the entire 1000 MTs of the product. Revenue contends that the duty has to be paid on the total payment made by the appellant irrespective of the quantity received. However, MRPL contends that they have received only 999 MTs and therefore they have to pay duty only on the proportionate value of 999 MTs. This is the dispute in this case.

The tribunal to start with made it clear that the dispute is purely on Customs Valuation. There is no dispute at all regarding the quantity of the product received in the shore tanks. MRPL’s advocate had cited a large number of judgments which hold that the quantity imported is the quantity received in the shore tanks. The Tribunal repeated that on this point there is no dispute at all and so there is no need to discuss the case laws on the subject.

Is the quantity important for deciding the value? When duty is based on some amount per metric tone, quantity received in shore tanks become relevant making provisions of Section 14 on Customs Valuation irrelevant in such cases. When the levy is on ad-valorem basis, Section 14 of the Customs Act comes into play. In the present case, the price actually paid or payable is on the basis of the Bill of Lading quantity. Because of the losses, MRPL is not entitled for any reduction in price. In that case, the amount paid or payable on the Bill of Lading quantity is the transaction value for the purposes of Customs duty irrespective of the fact that the quantity received in the shore tank is different from the Bill of Lading quantity. In a product like petroleum crude, due to various causes, losses occur. This is considered natural. That is the reason for not giving any reduction in the price payable. In these circumstances, there is absolutely no provision to reduce the value to that attributable to the quantity received in the shore tank.

What if the quantity received is more? It was argued that in certain cases, the quantity received is more and they are paying more duty. The Tribunal felt that even in those cases where the quantity received is more, it is enough if the appellants discharge duty liability on the actual amount paid on the basis of the Bill of Lading quantity. There is no legal sanction for collecting more duty when the levy is ad-valorem.

The Tribunal wanted to make it clear that it is not the question of demanding duty on goods not received. But it is the demand of duty on the transaction value. In spite of the ocean loss, the appellant has to make payment on the basis of the Bill of Lading quantity. Therefore this is the case where the transaction value arrived at based on the Bill of Lading quantity is payable as price for the quantity received in shore tank.

The Tribunal referred to the Board circular No. 6/2006 dated 12.1.2006, wherein it was clarified that in all cases where customs duty is leviable on ad-valorem basis, the assessment of bulk liquid cargo should be based on invoice price, which is the price paid or payable for the imported goods, ie., transaction value, irrespective of quantity ascertained through shore tank measurement or any other manner. Further in respect of delivery at more than one port, the value should be apportioned based on the quantity intended to be discharged at the relevant ports. However, wherever the customs duty is leviable at specific rate, the determination of quantity would be relevant for levy of customs duty.

Revenue’s advocate referred to a German Court’s order which the Tribunal found to have persuasive value. “It is quite a different matter when the parties, in their contract of sale have made express provision for the possibility of a discrepancy between the quantity of goods purchased and the quantity unloaded and the buyer has accepted that risk within the limits of an agreed allowance. In such a case, the price is not reduced and in commercial terms, the value of the consignment is unchanged. It is therefore consistent with the objectives of the community system of customs valuation to take the full price paid for payable as the basis for valuation."

The Tribunal referred to “Commentary on the GATT Customs Valuation Code" authored by Saul L. Sherman and Hinrich Glashoff and extracted the following comments, “Goods lost in transit to the country of importation never enter the country and no duty is properly payable. The same will apply if the goods are fully destroyed in transit. Any duty assessed or paid in the mistaken belief that the goods were received in good condition and full quantity should be remitted or refunded. If parts of the destroyed goods are still imported, these have to be valued as such. This is true even if the buyer has the risk of loss in transit (e.g. in FOB and even in CIF sales) and therefore must pay for the goods and seek reimbursement from his insurer or the carrier. In the European Communities the law requires that an apportionment be made taking into account the actual quantity and the condition of the goods which arrived and were imported”.

The Tribunal observed that Section 23 of the Customs Act provides for remission of duty on lost, destroyed or abandoned goods and the advocate wants to take advantage of this Section to urge the point that no duty can be collected on goods not received But the Tribunal made it clear that the Revenue in the present case is not demanding duty on goods not received but only on the transaction value which is a price paid or payable for the goods received by the appellant irrespective of the quantity received by them in the shore tanks.

Both the parties to the dispute pleaded that if their contentions are not accepted, the issue may be referred to a Larger Bench, but the Tribunal found no need for that.

So the appeal of MRPL is dismissed. However the case is remanded to the Commissioner for correct quantification of duty.

(See 2006-TIOL-325-CESTAT-BANG in 'Customs' + 2006-TIOL-325-CESTAT-BANG in 'Legal Corner')