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Valuation of remnant ATF - CESTAT LB gives wings to Airlines

JUNE 07, 2021

By Sonam Yadav, Associate & Jyoti Pal, Joint Partner, Lakshmikumaran and Sridharan Attorneys

EVERY aircraft operating on international routes, after conversion from a domestic flight to an international flight is filled with Aviation Turbine Fuel (ATF), which is consumed during the course of such flight outside India. Similarly, ATF is filled at the airport of the foreign destination to be consumed on the return journey. At the time of arrival of such international flight into India, the aircraft may be converted for a domestic run from their foreign run. At such instance, the airlines are required to discharge customs duty on the ATF that is left unconsumed in the fuel tank and would be used for the domestic run. This is also called as remnant ATF by the airlines.

The airlines have been discharging applicable customs duty on remnant ATF by taking into consideration the prices charged by domestic suppliers like Indian Oil Corporation Limited (IOCL) without any further addition for cost of transportation. Initially, the Customs Authority was also in agreement with this pricing methodology adopted across the aviation industry. However, a divergent view was taken by the Revenue by contending that in view of Rule 10(2) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 (CVR), 'cost of transport of the remnant ATF' shall be added to the assessable value and since the same cannot be ascertained, proviso to Rule 10(2) shall be invoked and transportation cost shall be taken to be 20% of the free on board (FOB) value of the remnant ATF.

This contention of the revenue found favor with the CESTAT Mumbai in the case of Jet Airways 1. However, in view of conflicting judgments of the concurrent benches, reference was made to the Larger Bench ('LB'). The LB in the case of Jet Airways (India) Limited vs. Commissioner of Customs (Import), Airport, Mumbai 2 has put quietus to the dispute concerning valuation of remnant ATF holding that no notional freight is required to be included in the assessable value of remnant ATF.

The LB has discussed the concepts of valuation of goods, addition of cost of transportation under Section 14 of the Customs Act, 1962 (Act) read with Rule 10(2) of the CVR in the following manner:

Valuation of goods for the purpose of computation of the duty payable is done in terms Section 14 of the Act. It states that customs duty is leviable on the transaction value of the imported goods. Transaction value of imported goods has been explained to mean the price paid or payable for goods when sold for export to India for delivery at the time and place of importation. First proviso to Section 14 provides for inclusion of amount paid or payable for costs and services including cost of transportation to the place of importation.

Rule 10 of the CVR, inter alia, provides that the cost of transportation incurred in respect of the imported goods is to be added to the value of the imported goods. Proviso (i) to Rule 10(2) provides that where such cost is not ascertainable, such cost shall be 20% of the FOB value of the imported goods. The Hon'ble LB has held that where no cost is incurred, it cannot be considered as 'not ascertainable' and in such situation, notional freight @ 20% cannot be added.

The LB examined the includability of the notional amount in the transaction value. Revenue's case was premised on the use of word 'payable' in Section 14 and accordingly it was their view that notional freight cost is required to be included, even if it is not 'paid'. Discrediting the contention of the Revenue, the LB noted that for the purpose of addition of any amount to the transaction value of imported goods, the amount should actually be agreed/contracted, same should have been incurred by the importer and it should not already form part of the value of the imported goods. The Court relied on decision of Supreme Court in  the case of Eicher Tractors Ltd. vs. Commissioner of Customs, Mumbai 3 and Purolator India Ltd. vs. Commissioner of Central Excise 4 to hold that the includable amount should actually be agreed/ contracted to be paid, for which a liability is created irrespective of actual payment. Thus, the meaning of the phrase 'payable' in Section 14 cannot include an amount which is not agreed or contracted to be paid at all. It may cover situation where the payment is deferred but not a situation where there is no liability per se.

The LB held that where transportation of goods is involved and cost has actually been incurred or is liable to be incurred, only then cost can be added to the transaction value. However, where there is no transportation of goods nor there is any liability to incur the cost of such transport, the first proviso to section 14(1) of the Act and Rule 10(2) CVR would not be attracted.

The LB delved into the question if there was any transport of ATF in the present case. Answering the question in negative, the LB has held that the airlines are not transporting ATF. ATF which is filled in the fuel tank of the aircraft is actually required to fly the aircraft and is a consumable for the airlines. An interesting distinction between import of remnant fuel in the instant case and a situation where ATF is imported in large quantity as 'goods' or 'cargo', by the oil companies was made to clarify that only in the latter case, the cost of transportation for import of ATF would have to be included in the transaction value.

Lastly, the LB determined whether the airlines have actually paid any amount or are liable to pay any amount towards freight. The LB noted, if no cost of transportation has actually been incurred/suffered by the airlines then the cost of transportation ought not be added to the value of the remnant ATF. There must be a contractual liability in the first place on the importer to pay an amount towards the cost of transportation. Relying on the Supreme Court Case of Wipro Ltd. vs. Asst. Collector of Customs 5, the LB took a view that only an amount that is actually 'paid' or 'payable' towards the cost of transportation can be added to the transaction value and that any other view would run ultra vires to Section 14 of the Act. It is in this context, difference between 'cost' and 'value' rendered in the Central Excise has been made applicable to customs valuation to lay emphasis that the 'cost' is cost actually 'incurred by the assessee' 6 in furtherance of a contract and the same cannot cover 'imputed cost' (cost which is not paid but derived as if it has been paid), being contrary to the provision of Section 14 of the Act.

Furthermore, it has been held that only when the amount paid or payable is not ascertainable, notional addition @ 20% under Rule 10(2) is permissible. In the instant case, the cost of transportation is not 'unascertainable' but is not incurred at all and thus, is nil.

The LB held that the remnant ATF is neither being transported nor any cost has been incurred by the airlines and therefore, no amount towards alleged transportation cost is required to be included in the value of remnant ATF.

This judgment of the LB, in the view of the authors, lays down the correct position of law, which is in line with Section 14 of the Act read with Rule 10(2) of the CVR. This judgment sure can be viewed as a breather for the aviation sector in these distress times of ongoing Covid-19 pandemic. Though the judgment has been rendered in the context of aviation industry, the ratio that the term 'paid or payable' requires a contractual liability and that Rule 10(2) can be invoked only where cost is actually incurred, will provide relief across all sectors.

[The views expressed are strictly personal.]

1 2019-TIOL-2192-CESTAT-MUM

2 2021-TIOL-293-CESTAT-MUM-LB

3 2002-TIOL-06-SC-CUS

4 2015-TIOL-193-SC-CX.

5 2015-TIOL-79-SC-CUS

6 Hindustan Polymers vs. Collector of C. EX   2002-TIOL-287-SC-CX-LB

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