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CASE NO.: Appeal (civil)  2342-2362 of 2001

PETITIONER: Commissioner of Customs, Calcutta etc. etc.  

RESPONDENT: M/s Indian Oil Corporation Ltd. & Anr.   

DATE OF JUDGMENT: 17/02/2004

BENCH: Ruma Pal

JUDGMENT: J U D G M E N T

RUMA PAL, J.

       Between 1994 and 1999, M/s Indian Oil Corporation  Ltd., the  respondent herein, imported various petroleum  products and crude oil into India.  These goods were  carried to different ports in India by vessels chartered for  this purpose.  Throughout this period, the respondent had  cleared the imported goods upon payment of customs  duty without protest by the custom authorities.         On 15th March 2000, the respondent received a  show cause notice sent by the Commissioner of Customs,  Calcutta, the appellant before us, alleging that the  respondent had wilfully misdeclared the value of the  goods while making entries under Section 46 of the  Customs Act, 1962 by deliberately suppressing that the  demurrage charges had been paid to the ship owners  under the charter party agreements. Since, according to  the show cause notice  payment for the demurrage had  been made through the negotiating bank, the bank  charges and the demurrage paid were includible in the  customs value of the goods.  On this basis, the  assessable value was alleged to be Rs.6026,05,71,604/-.   The respondent  was therefore asked to show cause why  extra duty to the tune of Rs.9,75,98,31,199/-  should not  be realised and why penalty should not be levied against  the respondent and its officers.              According to the respondent, the 17th to 20th  March 2000 were holidays.  On 21st March, the  respondent asked for time to file a written reply to the  show cause notice.  This was rejected by the appellant  and the demand was confirmed on 30th March 2000.   Penalty equivalent to the amount of the duty determined  was also levied.  In addition, interest @20 per cent per  annum was imposed.         The respondent filed appeals before the  Commissioner of Customs (Appeals).  The appeals were  rejected.  The respondent preferred a further appeal  before the  Customs Excise and Gold (Control) Appellate  Tribunal (CEGAT).  The Tribunal allowed the appeal of  the respondent on grounds which are briefly summarized: (1)     The Central Board of Excise and Customs (CBEC)  had issued a circular on 14th August 1991in which it  was said that the demurrage did not form part of the  assessable value of the goods imported; the circular  was binding on the Revenue and the Department  could not contend otherwise;

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(2)     The decision of this Court in Garden Silk Ltd. V.  Union of India 1999 (113) ELT 358 relied upon by  the Revenue was not an authority for the  proposition that demurrage payable on account of  delay in discharging goods from a vessel was  includible in the value of goods while assessing the  customs duty payable thereon.   (3)     Under Section 14 of the Customs Act, 1962 the  assessable value of the imported goods must be the  price at which the goods are ordinarily sold.  The  payment of demurrage was not an incident of an  ordinary sale.  An extraordinary expenditure, like  demurrage, could not be included in the assessable  value of the imported goods.

According to the appellant, the value of the imported  goods was assessable under Section 14 of the Act read  with the Customs Valuation (Determination of Price of  Imported Goods) Rules, 1988.  The Rules require that the  transaction value had to be accepted unless the  adjudicating authority has valid reasons to reject it.  In  that  event the value would have to be determined in  terms of Rule 5 to Rule 8 proceeding sequentially.   The  adjudicating authority had accepted the transaction value  which was inclusive of cost, insurance and freight (CIF).   The demurrage was a component of the cost of freight.   Second, it was submitted that although Section 14 of the  Customs Act provided for the valuation of goods for  purposes of assessment on  the price at which such or  like goods are ordinarily sold, the word ’ordinary’ meant   nothing more than that the seller and the buyer should  have conducted the transaction at  arms length.  The  appellant relied upon the decision of this Court in M/s  Eicher Tractors. Ltd. 2000 (122) ELT 321 to contend  that demurrage was not, in this sense,  an extraordinary  payment. It is paid in terms of the agreement between the  respondent and the vessel owner.   Third, it is submitted  that by virtue of Section 14 (1-A) read with Rule 9 (2)(a) of  the 1988 Rules the actual cost of freight was includible in  the assessable value of the imported goods.  It is  contended  that since the 1988 Valuation Rules   incorporated the GATT Valuation Principles, this country  should adopt the international understanding of the  concept of demurrage.  A decision of the European Court  indicated that the demurrage charges payable to a  transport company are part of the cost of transport.  In the  United States the courts had held that demurrage is only  an extended freight. (U.S. v. Attantic Refining Co., DCNJ,  112 F Supp 76,80) Fourth, it is submitted that the circular  issued in 1991 was not binding on the Revenue in view of  the decision of this Court in Garden Silk Mills Ltd.  (supra).  In fact the circular had been withdrawn with  effect from 2nd March 2001.  Finally, it was submitted that  the Tribunal had itself in the case of Panchmahal Steel  Ltd. V. Collector of Customs, Rajkot 1998 (101) ELT  399  held that demurrage charges were includible in the  assessable value of imported goods.  The judgment was  delivered on 4th December 1996 and "eclipsed" the 1991  circular.   The respondent has submitted that the circular had  been issued under Section 151A   of the Customs Act  which was in para materia with Section 37B of the Central  Excise Act and that it was well settled that the Revenue  was bound by the instructions issued by CBEC. It is  submitted that the Commissioner ought not to have raised

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or confirmed the demand in violation of the instructions of  the CBEC nor   was it  open to the Revenue to file an  appeal before this Court seeking relief contrary to the  circular.  On the merits, it is submitted that the 1988 Rules  were subject to the provisions of Section 14 which  provides that the assessable value had to be arrived on  the basis of the ordinary sale price at the price of  importation.  It is submitted that apart from the fact that   demurrage did not form part of the ordinary sale price,  even Rule 9(2)(a) did not include demurrage as a  component of the assessable value.  The decisions in  Garden Silk and Panchmahal as also the decision of the  European Court have been distinguished as inapplicable.   It was submitted that the order of the Commissioner was  passed with undue haste, with a closed mind and in  violation of the principles of natural justice.            Section 151-A of the Customs Act, 1961 in so far as  it is relevant provides: "Instructions to officers of customs. -  The  Board may, if it considers it necessary or  expedient so to do for the purpose of  uniformity in the classification of goods or with  respect to the levy of duty thereon, issue such  orders, instructions and directions to officers  of customs as it may deem fit and such  officers of Customs and all the other persons  employed in the execution of this Act shall  observe and follow such orders, instructions  and directions of the Board".    

              Materially identical provisions are contained in  Section 119 of the Income Tax Act, 1961 and Section 37B  of the Central Excise Act.   This Court has, in a series of decisions, held that  circulars issued under Section 119 of the Income Tax Act,  1961 and 37B of Central Excise Act are binding on the  Revenue .         The somewhat different approach in M/s.  Hindustan Aeroneutics V. Commissioner of Income  Tax, Karnataka, Bangalore 2000 (5) SCC 365 by two  learned Judges of this Court, apart from being contrary to  the stream of authority cannot be taken to have laid down  good law in view of the subsequent decision of the  Constitution Bench in Collector of Central Excise,  Vadodara V. Dhiren Chemical Industries.   After this  Court had construed an exemption notification in a  particular manner, it said: "We need to make it clear that, regardless of  the interpretation that we have placed on the  said phrase, if there are circulars which have  been issued by the Central Board of Excise  and Customs which place a different  interpretation upon the said phrase, that  interpretation will be binding upon the  Revenue".  

       Despite the categorical language of the clarification by  the Constitution Bench, the issue was again sought to be  raised before a Bench of three Judges in Central Board of  Central Excise, Vadodara v. Dhiren Chemicals Industries:  2002 (143) ELT 19  where the view of the Constitution Bench  regarding the binding nature of circulars issued under Section  37B of the Central Excise Act, 1944 was reiterated after it was  drawn to the attention of the Court by the Revenue that there

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were in fact circulars issued by the Central Board of Excise  and Customs which gave a different interpretation to the  phrase as interpreted by the Constitution Bench.  The same  view has also been taken in Simplex Castings Ltd. v.  Commissioner of Customs, Vishakhapatnam 2003 (5) SCC  528.         The principles laid down by all these decisions are : (1)     Although a circular is not binding on a Court or  an assessee, It is not open to the Revenue to  raise the contention that is contrary to a  binding circular by the Board. When a circular  remains in operation, the Revenue is bound  by it and cannot be allowed to plead that it is  not valid nor that it is contrary to the terms of  the statute.  (2)     Despite the decision of this Court, the  Department cannot be permitted to take a  stand contrary to the instructions issued by the  Board. (3)     A show cause notice and demand contrary to  existing circulars of the Board are ab initio   bad (4)     It is not open to the Revenue to advance an  argument or file an appeal contrary to the  circulars.         As we have noted the provisions of Section 151A are  in pari materia with the provisions of S. 119 of the Income  Tax Act 1961 and Section 37B of the Central Excise Act.  Parliament introduced Section 151A by an amendment to  the Customs Act, 1962 in 1995 but with effect from 27th  December, 1985 (Act 80 of 1995), when this Court had  already construed identical language in the manner  indicated.  It may be assumed that Parliament had  legislatively approved the construction by using the exact  words so construed again in the Customs Act.  There is,  therefore,  no reason why the principles enunciated by this  Court under the two earlier Acts should not also be  determinative of the construction put on the later in respect  of a materially similar statutory provision.  This was also  not argued by the appellant.            During the period in question, the following circular  had been issued by the Central Board of Excise and  Customs with regard, inter alia to demurrage charges: "Subject  : Demurrage charges and dispatch  money not to form part of the assessable value \026  Regarding.

The Kandla Custom House had raised the issue  relating to the inclusion of demurrage charges  and exclusion of dispatch money for computing  the assessable value ascertainable under  Section 14 of the Customs Act, 1962. Pursuant  to the decision taken in the Tariff Conference of  Collector held in August 1981, the issue was  further discussed in the Tariff Conference of  February 1989.  The Conference had desired  that the matter may be re-examined in its totality  especially in the context of current valuation  principles based on the GATT Valuation at Goa  on 4th and 5th April, 1991 examined the problem  posed in entirety.  The Conference came to the  conclusion that  in the past-despatch money and  demurrage would not constitute element of value  since it is not an element for the carriage.  These  moneys are in the nature of penalties or rewards

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by virtue of a contract of charter agreement  between the carrier and the charter  and this in  no way could be conceived as being part of the  freight or for that matter part of the price actually  paid or payable for the goods.                  Having regard to the above and  the fact  that in no other Custom House  there was a  practice to include or deduct such moneys, it has  been decided that ’demurrage’ and ’despatch’  money may not form a part of assessable value".  

       The Circular in no uncertain terms excludes demurrage  from the assessable value.  In the light of the judicial principles  enunciated earlier, it was not open to the appellant to either  issue the show cause notice or contend otherwise.  The  demand based on an assessable value inclusive of demurrage  cannot be sustained as long as the circular remained operative   and as long as the decisions cited earlier remain good law.         The submission of the appellant in this context is that the  respondent had not acted on the basis of the circular and  therefore the principle of promissory estoppel did not apply.   The submission is misconceived. The circulars issued by the  CBDT under the Income Tax Act, 1961 and the CBEC under  Section 37(B) of the Central Excise Act, 1944  have been held  to be binding primarily on the basis of the language of the  statutory provisions buttressed by the need of the adjudicating  officers to maintain uniformity in the levy of tax/duty throughout  the country.          It is then submitted that the CEGAT had itself held that  the demurrage charges were pre-landing charges and hence  includible in the assessable value in Panch Mahal v.  Collector of Customs Rajkot 1998 (101) ELT 399 .  It is  submitted that the law laid down by the Tribunal which became  final for want of appeal would have to be followed otherwise  there would be a chaotic situation.  Reliance has also been  made on the decision of this Court in Hindustan Aeronautics  (supra).           We have already noted that Hindustan Aeronautics  does not represent the correct law.  The submission of the  appellant is directly contradictory to the principles laid down by  the series of decisions noted earlier and the  attempt on the  part of the appellant to distinguish the long line of authority is  unacceptable.         The decision in Panch Mahal Steel  (supra) does not  allow an adjudicating officer to act in violation of the Circular  issued under Section 151A.  Incidentally the decision in Panch  Mahal  (supra) was an ex-parte one in the sense that the  importer was not represented when the matter was argued.  Its  failure to prefer an appeal could not in the circumstances mean  that the issue had become final as far as all other importers are  concerned.  Moreover, there was no reference to the Circular  nor any reason for coming to the conclusion that demurrage  was includible in the value of the imported goods.           We may mention here that the stand of the appellant that  this Court had taken the view that demurrage was includible in  Garden Silks (supra) both in the adjudication order and before  the Tribunal appears to have been abandoned, in our opinion  rightly, in the written notes of submission. Apart from the  decision of the Constitution Bench in Dhiren Chemicals  (supra),  Garden Silks (supra) was a decision on landing  charges.  It did not construe the 1988 Rules.  The circular on  the other hand was issued on a re-examination of the issue in  the light of the GATT Valuation principles as incorporated in  the 1988 Rules.

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       In this view it is not necessary for us to determine the  further issue whether in the absence of Board circulars,  demurrage would still be includible in the assessable value of  the imported goods.  For the purposes of these appeals, it is  sufficient to hold, as we do, that demurrage was wrongly  included by the adjudicating officer in the assessable value  contrary to the directive of the CBEC at a time when the  circular had not been withdrawn.         For the reasons aforesaid, the appeals are dismissed  with costs.