Valuation- Demurrage not includible – Explanation to Valuation Rule 10(2) is bad

Tata Steel Ltd. & another Vs Union of India & others (Orissa High Court)

Observing that the provisions in the Customs Act were silent about demurrage, the High Court held that it is beyond the legislative powers to include demurrage charges in the rules for Customs valuation. Supreme Court judgements in Wipro ltd, Essar Steel Ltd. and Mangalore Refinery and Petrochemicals Ltd. were relied on.

It is well-settled principle of the statute that while interpreting a statute, one has to go by the scope and object of the principal Act. Under the principal Act, while amending it on 10^th October, 2007, proviso has included the costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the Rules. The demurrage has not been included as a part of cost envisaged by the legislation. Further, it is a kind of penalty. Therefore, it could not have been envisaged by the legislation to be included in the definition of Section 14 of the Act. However, in view of the clarifications by way of judgments of the Hon’ble Supreme Court, more particularly in the cases of Wipro Ltd. (supra), Essar Steel Ltd. (supra) and Mangalore Refinery & Petrochemicals Ltd. (supra), it is made clear that demurrage cannot be included for the purpose of valuation under the Customs Act, 1962. In that view of the matter, we are of the considered opinion that the contentions raised by the petitioner that the relevant provisions in the Principal Act is silent about the ‘demurrage’; thus, it was beyond the the legislative power to include it in the Rules is accepted and thus the explanation to Sub Rule-(2) of Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 is held to be bad and hence declared ultra vires the Constitution/ provision of Section 14 of the Customs Act, 1962, and hence the same is struck down.

FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT

By way of this writ petition, the petitioners have approached the Court challenging the “Explanation” to Sub-rule (2) of Rule 10 of the Customs Valuation (Determination of Price Imported Goods) Rules, 2007 and prayed to declare it to be ultra vires the provisions of Section 14 of the Customs Act 1962 (for short, ‘the Act’).

2. Fact of the case is that the petitioner herein being a Company registered under Companies Act, 1956, imports certain machineries and other items to be used for manufacture of iron and steel products at its plants at Jamshedpur in Jharkhand. The Petitioner imports raw materials in bulk quantities by chartered vessels through the Paradeep Port located in the district of Jagatsinghpur, Odisha and Haldia Port in West Bengal. Such import into the country is assessed to Duty of Customs under Section 14 of the Act.

3. In exercise of powers conferred under Section 156 of the Act read with Section 14 thereof, the Government of India, Ministry of Finance-opposite party No.1, promulgated the Customs Valuation (Determination of Value of Imported Goods) Rules, 1988 (for short, “Rules, 988”), which was notified vide Notification No.51/1988-Cus (N.T.) dated 18.07.1988.

3.1 While Section 14 of the Act and the Rules, 1988 were in force, the Ministry of Finance-opposite party No.1, clarified vide its Circular F.No.467/21/89-Cus.V dated 14.8.1991 (Annexure-1) that post-dispatch money would not constitute elements of value since element for the carriage. ‘Demurrage’ and ‘dispatch’ money being in the nature of penalties or rewards by virtue of a contracted charterer agreement between the carrier and charterer 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. Hence, ‘demurrage’ and ‘dispatch money’ may not form a part of freight or for that matter part of the price paid or payable for the goods and assessable under Section 14 of the Customs Act, 1962.

 3.2 While the issue regarding inclusion of ‘demurrage’ and ‘dispatch’ money as a part of assessable value under Section 14 of the Act was being agitated in different forums and was pending resolution by the Hon’ble Supreme Court, the Ministry of Finance, Opposite party No.1, vide its Circular No.14/2001-Cus dated 02.03.2001 (Annexure-2), withdrawn the Circular dated 14.08.199 1, under Annexure-1 and clarified that by virtue of Rule 9(2) of the Rules, 1988, ship demurrage charges paid are required to be included in the assessable value of goods under Section 14 of the Act. The aforesaid clarification is not in consonance with the provisions of Section 14 of the Act and Rule 9 of the Rules, 1988 and the same was evidently issued in an arbitrary attempt of the Ministry of Finance, Opposite party No.1 to change its view and illegally directed for inclusion of demurrage charges in the cost of transportation to form part of the assessable value.

4. The issue regarding inclusion of demurrage charges to the assessable value of imported goods was decided by the Larger Bench of the Customs Excise and Service Tax Appellate Tribunal (CESTAT) (for short, ‘the Tribunal’) in the case of Indian Oil Corporation Limited vrs. Commissioner of Customs, Calcutta, reported in 2000 (122) ELT. 615 (Tri-LB) by holding that if demurrage charges would form a part of the assessable value, the goods covered by the same contract would be assessed to duty at different assessable values and such a situation is not envisaged in the provisions of Section 14 of the Act. The Union of India, Opposite Party No.1 challenged the aforesaid decision of the Tribunal in appeal before the Hon’ble Supreme Court and the appeal was dismissed as reported in 2004 (165) ELT 257 (SC) and the decision of the Tribunal, as above, was upheld.

4.1 A review petition filed by the Union of India-Opposite party No.1 against the said decision of the Hon’ble Supreme Court, which was also dismissed both on the grounds of limitation as well as on merits, as reported in (2005) ELT A 119 (SC). Consequent upon dismissal of aforesaid review petition, the Ministry of Finance issued Circular No.5/ 2006-Cus. dated 12.01.2006 clarifying therein that demurrage charges are not included as a part of assessable value under Section 14 of the Customs Act, 1962, for imports prior to 02.03.200 1, i.e., the date of issue of circular vide Annexure-2.

4.2 Subsequently, Ministry of Finance-Opposite party No.1, vide Circular No. 26/2006-Cus., dated 26.09.2006 (Annexure-4) clarified that pending assessments after 02.03.200 1 should be finalized by including ship demurrage charges in the assessable value of the imported goods.

5. Under Section 14 of the Act, as was in force till 09.10.2007, duty of customs was chargeable on the ‘deemed price’ of the imported goods. As against above provision in the Act, the Rules, 1988 as was in force during the above period, provided that the value of the imported goods for assessment to duty shall be “transaction value”. In order to overcome the practical difficulties faced due to inherent contradiction between ‘deemed price’ in Section 14 of the Act and ‘transaction value’ as referred to in the Rules, 1988, Section 14 of the Act was amended by the Finance Act, 2007, with effect from 10.10.2007. Simultaneously, with effect from the same date, i.e., 10.10.2007, the Ministry of Finance, Government of India, Opposite party No.1 rescinded the Rules, 1988 and formulated in its place a new Valuation Rules, 2007.

5.1 Even though the Rules, 1988 was substituted, Rule 9 of the said Rules, 1988 and Rule 10 of the new Valuation Rules, 2007 which deals with the inclusion of “Cost and Services” to the assessable value of imported goods remained mutates-mutandis the same, except for explanation added to sub-Rules (2) of Rule 10 of the Valuation Rules, 2007, wherein it was provided that demurrage charges shall be included in the cost of transport, so as to form a part of assessable value of imported goods.

5.2 Section 14 of the Act, 1962, as amended by the Finance Act, 2007 with effect from 10.10.2007 provided that the transaction value in the case of imported goods shall inter alia include ‘cost of transportation to the place of importation’ without any reference to the inclusion of demurrage charges as sought to be included by way of incorporation of the Explanation to sub-Rule (2) of Rule 10 of the Valuation Rules, 2007.

5.3 It will be evident from the provisions of Section 14 of the Act, 1962 that, either prior to or after amendment thereof, with effect from 10.10.2007, the said Section 14 does not authorize inclusion of demurrage charges to the value of imported goods for assessment to duty of customs either directly or by implication.

6. The petitioner imports its raw materials in bulk quantities by chartered vessels through the Paradeep Port from various overseas vendors/suppliers. For such imports, the petitioner places bulk orders for quantities like 5 lakh MTs which is supplied by the Overseas Supplier in smaller lots according to the capacity of the chartered vessels under separate invoices for such smaller lots. Upon arrival of each vessel at the port of importation, the petitioner files bills of entry and other relevant documents for clearance of the imported goods through Customs. Such bills of entries filed by the petitioner are ‘provisionally assessed’ by the Deputy Commissioner of Customs, Paradeep Port-Opposite party No.3 for want of ship demurrage details at the time of clearance of the imported goods through Customs and directs the petitioner to submit the ship demurrage details for final assessment of the bills of entries.

6.1 In compliance of such directions of Opposite Party No.3, the Petitioner confirms with the overseas supplier/charterer about the ship demurrage charges, as applicable to the respective vessels and thereafter submit such details to the Deputy Commissioner of Customs, Paradeep Port-Opposite Party No.3, who then finalizes the provisional assessment of the respective bills of entries by including ship demurrage charges to the transaction values of the respective consignment for computation of duties of customs payable thereon, but without granting any benefit/concession in valuation of the consignment in respect of which the Petitioner- Company earns ‘dispatch money’ as reward/incentives.

7. Under the above circumstances, such goods imported by the petitioner under one purchase order, delivered by the suppliers through a number of vessels over a period of time, got assessed to duties of customs computed on different assessable values purely on account of inclusion of demurrage charges which varies from vessel to vessel contingent upon detention of the vessels either in the port of importation or on the high seas for various reasons such as congestion, non-availability of berth, poor discharge rate, delay in unloading the goods etc., which are beyond the control of the petitioner.

7.1 Hence, this leads to discriminatory assessment of same goods imported by the petitioner under the same purchase order. Indeed, the Larger Bench of the Tribunal in its decision rendered in the case of Indian Oil Corporation Limited (supra) held that demurrage charges are not includible in the assessable value precisely for the aforesaid discriminatory effect thereof.

8. For finalization of the provisional assessment of the bills of entries, the Deputy Commissioner of Customs, Paradeep Port- Opposite Party No.3 has now directed the petitioner to pay the differential duty which has been arrived at by including ship demurrage charges to the transaction values of the respective consignments. The aforesaid demands vide Annexure-12 series have been raised on the petitioner in only those cases where the petitioner incurred ship demurrage charges.

 8.1 But in case, where the petitioner does not pay any ship demurrage charges and instead, earns ‘Dispatch Money’ as an incentive/reward for having completed unloading of cargo at Paradeep Port within a shorter period of time. Such ‘Dispatch Money’ is never excluded by the Deputy Commissioner of Customs, Paradeep Port-Opposite Party No.3, from the cost of transport for computing the assessable value of the imported goods. Thus, the goods imported by the petitioner are invariably assessed to duties of customs by including the demurrage charges whenever incurred by the petitioner, but no benefit whatsoever is allowed to the petitioner-Company in respect of those cases, where the petitioner earned dispatch money as a reward/incentive.

9. Learned counsel for the petitioner produced a comparative table of Section 14 of the Customs Act, 1962 before and after its amendment, which is reproduced below for ready reference.

Section 14 of the Customs Act, 1962

9.1 Subsequent to amendment of the Customs Act, 1962, corresponding Rules also amended. Petitioner also provided a comparative chart of amendment of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 vis-à-vis Rules of 2007, which is quoted below.

10. Learned counsel for the petitioner has mainly contended that the provisions of principal Act does not include the cost of demurrage charges in the cost of transportation. However, by subsequent Rules framed thereunder, has travelled beyond the scope of the Act. Therefore, the same is required to be declared ultra vires. In this regard, learned counsel for the petitioner has relied upon Section-156 of the Customs Act, 1962, as well as some case laws, which are quoted below for ready reference.

“SECTION 156 .General power to make rules.—

(1) Without prejudice to any power to make rules contained elsewhere in this Act, the Central Government may make rules consistent with this Act generally to carry out the purposes of this Act.

(2) In particular and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:—

(a) the manner of determining the transaction value of the imported goods and export goods under sub-­section (1) of section 14;

(b) the conditions subject to which accessories of and spare parts and maintenance and repairing implements for, any article shall be chargeable at the same rate of duty as that article;

(c)      xx                    xx                           xx

(d) the detention and confiscation of goods the importation of which is prohibited and the conditions, if any, to be fulfilled before such detention and confiscation and the information, notices and security to be given and the evidence requisite for the purposes of such detention or confiscation and the mode of verification of such evidence;

(e) the reimbursement by an informant to any public officer of all expenses and damages incurred in respect of any detention of any goods made on his information and of any proceedings consequent on such detention;

(f) the information required in respect of any goods mentioned in a shipping bill or bill of export which are not exported or which are exported and are afterwards re-landed;

(g) the publication, subject to such conditions as may be specified therein, of names and other particulars of persons who have been found guilty of contravention of any of the provisions of this Act or the rules.

(h) the amount to be paid 3 [for compounding and the manner of compounding] under sub-section (3) of section 137.”

10.1 Hon’ble Supreme Court in the case of Rasiklal Kantilal & Co. Vs. Board of Trustees of Port of Bombay, reported in 2017 (348) ELT 3 (SC), held as under:-

“24. The dispute in this case centres around demurrage. Therefore, we deem it appropriate to examine the meaning of the expression “demurrage” . The expression “demurrage” is not defined under the Act. Strictly speaking, the expression demurrage in the world of shipping meant-

“DEMURRAGE in its strict meaning, is a sum agreed by the charterer to be paid as  liquidated damages for delay beyond a stipulated or reasonable time for loading or unloading, generally referred to as the lay-days or lay- time. Where the sum is only to be paid for a fixed number of days, and a further delay takes place, the shipowner’s remedy is to recover unliquidated “damages for detention” for the period of the delay. The phrase “demurrage” is sometimes loosely used to cover both these meanings.”

The circumstances in which and the nature of demurrage payable in a given circumstance has been the subject matter of considerable legal literature. However, in India, the expression “demurrage” appears to have acquired a different connotation.

Under the Madras Port Trust Act, 1905, certain bye-laws were framed by the Port Trust in exercise of the statutory powers under which “Scale of Rates” payable at the Port of Madras were framed. Chapter IV thereof was headed “Demurrage”. Under the said Chapter, it was stipulated that “demurrage is chargeable on all goods left in Board’s transit sheds or yards beyond the expiry of the free days.

25. In Trustees of the Port of Madras v. Aminchand Pyarelal & Others, (1976) 3 SCC 167, this Court had an occasion to consider the true meaning of “demurrage” occurring in the above mentioned context and opined that the “Board has used the expression “demurrage” not in the strict mercantile sense but merely to signify a charge which may be levied on goods after the expiration of free days.

26. Regulation 2(g) of the International Airports Authority (Storage and Processing of Goods) Regulation, 1980 made under the provisions of the International Airports Authority Act, 1971, defined the expression ‘demurrage’ to mean, the rate or amount payable to the airport by a shipper or consignee or carrier, for not removing the cargo within the time allowed.”

10.2 In the case of C.C.E., Mangalore Vs. Mangalore Refinery & Petrochemicals Ltd., reported in 2015 (325) E.L.T. 214 (S.C.), the Hon’ble Supreme Court observed as follows:-

“2 The assessee in these appeals Is M/s. Mangalore Refinery and Petrochemicals Limited. It had imported 94204.425 MTs (ullage quantity measurement of vessel) of Crude Oil vide Bill of Entry No. 0924, dated May 23,200 1 and warehoused the same into their shore tanks. The same was cleared under provisional assessment by executing P.D. Bond, pending production of original documents by the assessee and reply to further queries by the Department. The provisional assessment was taken up for finalization based on this Court’s decision which upheld the order passed by the CEGAT in the case of M/s. HPCL and M/s. NOCIL, wherein it was held that customs duty should be levied on the quantity that is pumped into the shore tanks in terms of Board’s Circular No. 96/2002, dated December 27, 2002. The shore tank quantity of Crude Oil is considered as the relevant quantity for the purpose of assessment. On scrutiny of the documents filed by the assessee, it was found that Bill of Lading quantity was taken as the Cost & Freight (FOB) component of the relevant value for assessment as per Section 14 of the Customs Act, 1962. Therefore, irrespective of the fact whether there is shortage in the quantity received compared with the Bill of Lading quantity or not, the importer has to pay the duty on transaction value, i.e. the full value paid for the Bill of Lading quantity. On that basis, the customs authorities took the view that the declared shore tank quantity is to be corrected, which worked out to 93756.154 Mts.

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4. Insofar as issue involved in these appeals is concerned, we may point out that during this period the goods could not be cleared and it was observed that the assessee had paid demurrage charges of Rs.6,48,094.93 among other fees/charges. As per the Revenue/appellant, these demurrage charges were also to be included in the assessable value for the purpose of levy of duty of customs. Show-cause notice dated June 9,2003 was issued in this behalf, which resulted in passing of order dated March 7, 2005 confirming the demand raised in the show-cause notice. The assessee filed appeal against the order of the Adjudicating Authority before the Commissioner of Customs (Appeals) , which was however dismissed. The assessee, thereafter, approached the Customs, Excise and Service Tax Appellate Tribunal (for short, ‘CESTAT’) and the CESTAT has passed order dated February 6,2006 [2006 (205) E.L.T. 753 (Tri.-Bang.) holding that the assessee should discharge duty liability on the transaction value which is actually the amount paid on the Bill of Lading quantity. However, insofar as demurrage is concerned, it has held that the same is includible in the transaction value. In forming this opinion, the Tribunal relied upon its earlier order in the case of this very assessee, which is reported as 2002 (141) E.L.T. 247 (Tri.-Bang.).”

10.3 In the case of Commissioner of Customs Vs. Essar Steel Ltd., reported in 2015 (319) ELT 202 (SC), it has been held as under:-

7. We have heard learned counsel for the parties. Section 14 of the Customs Act, 1962 as it stood at the relevant time is as follows:

“14. Valuation of goods for purposes of assessment.-(1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force whereunder a duty of customs is chargeable on any goods by reference to their value, the value of such goods shall be deemed to be the price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation or exportation, as the case may be, in the course of international trade, where-

(a) the seller and the buyer have no interest in the business of each other; or

(b) one of them has no interest in the business of the other, and the price is the sole consideration for the sale or offer for sale:

Provided that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under Section 46, or a shipping bill or bill of export, as the case may be, is presented under Section 50.

(1-A) Subject to the provisions of sub-section (1), the price referred to in that sub-section in respect of imported goods shall be determined in accordance with the rules made in this behalf.

(2) Notwithstanding anything contained in sub-section (1) or sub- section (1-A), if the Board is satisfied that it is necessary or expedient so to do, it may, by notification in the Official Gazette, fix tariff values for any class of imported goods or export goods, having regard to the trend of value of such or like goods, and where any such tariff values are fixed, the duty shall be chargeable with reference to such tariff value.

(3) For the purposes of this section-

(a) ‘rate of exchange’ means the rate of exchange-

(i) determined by the Board, or

(ii) ascertained in such manner as the Board may direct, for the conversion of Indian currency into foreign currency or foreign currency into Indian currency;

(b) “foreign currency” and “Indian currency” have the meanings respectively assigned to them in clause (m) and clause (q) of Section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).”

A cursory reading of the Section makes it clear that customs duty is chargeable on goods by reference to their value at a price at which such goods or like goods are ordinarily sold or offered for sale at the time and place of importation in the course of international trade. This would mean that any amount that is referable to the imported goods post-importation has necessarily to be excluded. It is with this basic principle in mind that the rules made under sub-clause 1(A) have been framed and have to be interpreted.

8. Under the Customs Valuation (Determination of Price of Imported Goods) Rules of 1988, Rule 2(f) defines “transaction value” as the value determined in accordance with Rule 4 of these Rules. Rule 4(1) in turn states that the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of these Rules. Rule 9 of the Rules is set out hereinbelow:-

“9. Cost and services. – (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, –

a) The following cost and services, to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

i) Commissions and brokerage, except buying commissions;

ii) The cost of containers which are treated as being one for customs purposes with the goods in question;

iii) The cost of packing whether for labour or materials;

b) The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:-

i) Materials, components, parts and similar items incorporated in the imported goods;

ii) Tools, dies, moulds and similar items used in the production of the imported goods;

iii) materials consumed in the production of the imported goods;

iv) Engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;

c) Royalties and licence fees related to the imported goods that the buyer s required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.

(d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller;

(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

9(2)        xx                 xxx

9(3) Additions to the price actually paid or payable shall be made under this on the basis of objective and quantifiable data.

9(4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule.”

A reading of Rule 4 and Rule 9 makes it clear that only those costs and services that are actually paid or payable for imported goods pre- import are to be added for the purpose of determining the value of the imported goods. In the present appeal, arguments have veered around the applicability of Rule 9(1)(e). In this appeal, we are concerned only with the first part of Rule 9(1)(e). The narrow question that arises before us is whether the payment made for the technical services agreement is to be added to the value of the plant that is imported inasmuch as such payment has been made as a condition of sale of the imported plant.”

10.4 In the case of Wipro Ltd. vs. Assistant Collector of Customs, reported in 2015 (319) ELT 177 (SC), Hon’ble Supreme Court observed as under:-

“20. This provision was amended in the year 2007. Though, we are not concerned with this amended provision, we are taking note of the same in order to examine as to whether any change, in principle, is brought about or not. The amended provision reads as follows:

“14. Valuation of goods.- (1) For the purposes of the the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf:

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf:

Provided further that the rules made in this behalf may provide for,-

the circumstances in which the buyer and the seller shall be deemed to be related;

(ii) the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case;

(iii) the manner of acceptance or rejection of value declared by the importer or exporter, as the case may be, where the proper officer has reason to doubt the truth or accuracy of such value, and determination of value for the purposes of this section:

Provided also that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under section 46, or a shipping bill of export, as the case may be, is presented under section 50.

(2) Notwithstanding anything contained in sub­section (1), if the Board is satisfied that it is necessary or expedient so to do, it may, by notification in the Official Gazette, fix tariff values for any class of imported goods or export goods, having regard to the trend of value of such or like goods, and where any such tariff values are fixed, the duty shall be chargeable with reference to such tariff value.”

21) A reading of the unamended provision would show that the earlier/old principle was to find the valuation of goods “by reference to their value”. It introduced a deeming/fictional provision by stipulating that the value of the goods would be the price at which such or like goods are “ordinarily sold, or offered for sale”. Under the new provision, however, the valuation is based on the transaction price namely, the price “actually paid or payable for the goods”. Even when the old provision provided the formula of the price at which the goods are ordinarily sold or offered for sale, at that time also if the goods in question were sold for a particular price, that could be taken into consideration for arriving at the valuation of goods. The very expression “ordinarily sold, or offered for sale” would indicate that the price at which these goods are actually sold would be the price at which they are ordinarily sold or offered for sale. Of course, under the old provision, under certain circumstances, the authorities could discard the price mentioned in the invoice. However, that is only when it is found that the price mentioned in the invoice is not the reflection of the price at which these are ordinarily sold or offered for sale. To put it otherwise, the reason for discarding the price mentioned in the invoice could be only when the said price appeared to be suppressed one. In such a case, the authorities could say that generally such goods are ordinarily sold or offered for sale at a different price and take that price into consideration for the purpose of levying the duty. It could, however, be done only if there was evidence to show that ordinarily the price at which these goods are ordinarily sold or offered for sale is higher than the price mentioned in the invoice. In fact, this fundamental concept is retained even now while introducing the concept of “transaction value” under the amended provision. More importantly, the rules viz. Valuation Rules, 1988 had incorporated this very principle of “transaction value” even under the old provision. No doubt, as per this provision existing today generally the price mentioned is to be accepted as it is the transaction value. However, this very provision stipulates the circumstances under which that price can be discarded. In any case, having regard to the question with which we are concerned in the present appeals, such a change in the provision may not have much effect.

xx                 xx                            xx

24) In contrast, in the unamended Section 14, we had provision like sub- section (1A) which stipulated that the price referred to in sub-section (1) in respect of imported goods shall be determined in accordance with rules made in this behalf. Therefore, rules can be made in determining the price. However, these rules have to be subject to the provisions of sub- section (1), the underline principle whereof, as stated above, is to taken into consideration actual price of the goods unless it is impermissible because of certain circumstances stipulated therein. Keeping in mind this fundamental aspect, we have to examine the scheme of the Valuation Rules, 1988.”

11. In respect of the explanation, which travels beyond the scope of the Act, learned counsel for the petitioner relied upon decision of the Hon’ble Supreme Court in the case of Agricultural Market Committee Vs. Shalimar Chemical Works Ltd., reported in (1997) 5 SCC 516, wherein the Hon’ble Court in paragraphs-26 and 28 observed as under:-

“26. The principle which, therefore, emerges out is that the essential legislative function consists of the determination of the legislative policy and the Legislature cannot abdicate essential legislative function in favour of another. Power to make subsidiary legislation may be entrusted by the Legislature to another body of its choice but the Legislature should, before delegating, enunciate either expressly or by implication, the policy and the principles for the guidance of the delegates. These principles also apply to Taxing Statutes. The effect of these principles is that the delegate which has been authorised to make subsidiary Rules and Regulations has to work within the scope of its authority and cannot widen or constrict the scope of the Act or the policy laid down thereunder. It cannot, in the garb of making Rules, legislate on the field covered by the Act and has to restrict itself to the mode of implementation of the policy and purpose of the Act.

xx                  xx                           xx

28. The Government to whom the power to make Rules was given under Section, 33 and the Committee to whom power to make Bye-laws was given under Section 34 widened the scope of “presumption” by providing further that if a notified agricultural produce is weighed, measured or counted within the notified area, it shall be deemed to have been sold or purchased in that area. The creation of legal fiction is thus beyond the legislative policy. Such legal fiction could be created only by the Legislature and not by a delegate in exercise of the rule making power. We are, therefore, in full agreement with the High Court that Rule 74(2) and Bye-law 24(5) are beyond the scope of the Act and, therefore ultra vires. The reliance placed by the Assessing Authority as also by the appellate and revisional authority on these provisions was wholly misplaced and they are not justified in holding, merely on the basis of weighment of “Copra” within the notified area committee that the transaction of sale took place in that market area.”

Therefore, he contended that the explanation added to the Rules, 2007 travelling beyond the scope of the Act is bad in law and hence deserves to be declared as ultra vires.

12. Learned counsel for the opposite parties tried to justify the amended provisions on the ground that the amended provisions emphasized the words “imported goods shall include in addition to the price” as under:

“Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf:”

 12.1 In this regard, judgment of the Hon’ble Supreme Court in the case of Garden Silk Mills Ltd. Vs. Union of India, reported in 1999 (113) E.L.T. 358 (SC) was relied, wherein it has been observed as under:

“15. The question as to whether the import is completed when the goods entered the territorial waters and it is the value at that point of time which is to be taken into consideration is no longer res integra. This contention was raised in Union of India Vs. Apar Industries Limited, 1999 (5) J.T. 160. In that case the day when the goods entered the territorial waters, the rate of duty was nil but when they were removed from the warehouse, the duty had become leviable. The contention which was sought to be raised was that what is material is the day when the goods had entered the territorial waters because by virtue of Section 2(23) read with Section 2(27) the import into India had taken place when the goods entered the territorial waters. Following the decision of this Court in Bharat Surfactants (M/s) (Private) Ltd. and Another Vs. Union of India and Another, 1989(4) SCC 21 and Dhiraj Lal H. Vohra and Others Vs. Union of India and Others, 1993 (Supp. 3) SCC 453, this Court came to the conclusion in Apars Private Limited case that the duty has to be paid with reference to the relevant date as mentioned in Section 15 of the Act.

16. It was further submitted that in the case of Apars Private Limited this Court was concerned with Sections 14 and 15 but here we have to construe the word imported occurring in Section 12 and this can only mean that the moment goods have entered the territorial waters, the import is We do not agree with the submission. This Court in its opinion in Re. The Bill to Amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the Central Excises and Salt Act, 1944, 1964 (3) SCR 787 at page 823 observed as follows:

Truly speaking, the imposition of an import duty, by and large, results in a condition which must be fulfilled before the goods can be brought inside the customs barriers i.e. before they form part of the mass of goods within the country.

It would appear to us that the import of goods into India would commence when the same cross into the territorial waters but continues and is completed when the goods become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the customs barriers and the bill of entry for home consumption is filed.

17. It was submitted by the learned counsel for the appellants that in actual effect in the case of CIF contracts like the present, it is the shipper who pays the landing charges and the Indian importer does not incur these expenses in addition to what he has paid on the basis of the CIF contract. In other words the submission was that the landing charges are already included in the CIF value of the goods as they form part of the freight paid to the steamer agent and the said charges are recovered by the Port Trust authorities directly from the steamer agents and, therefore, a second inclusion of such landing charges by loading a flat percentage of the CIF value is uncalled for. In this connection, reliance was placed on clause 15 of the terms and conditions of a sample of a Bill of Lading which deals with loading, discharge and delivery and reads as under:

any expenses, costs, dues and other charges which incur before loading and after discharge of the goods shall be borne by the Merchant.

Learned Additional Solicitor General is correct in submitting that the aforesaid clause 15 does not in any way indicate that the CIF value includes therein the charges levied by the Port Trust Authorities after the discharge of the goods. It is difficult to imagine that at the time when the contract is entered into, and the CIF price is fixed, as to how the parties could envisage as to what the port charges at the destination are likely to be. It does appear that any expense which is incurred with regard to the loading or un-loading of the goods to and from the ship would be included in the CIF price paid by the importer. But there is nothing on record to show that in actual effect landing charges were collected by the Port Trust Authorities from the shipper. No document in this regard showing the discharge of such a liability by the shipper to the Port Trust Authorities has been produced. There can be little doubt that if the importer is able to establish that the obligation to pay the landing charges was on the seller or by the shipping agent, and not by the buyer, and the said charges have in fact been paid to the Port Trust Authorities not by or on behalf of the importer, then the importer can claim that the landing charges should not once again be added to the price because in such an event, where payment is made of landing charges by the seller or the shipper, the CIF price must be regarded as including the said landing charges. There is however, in these cases, no factual basis for contending that the landing charges were included in the CIF price and, consequently the said obligation was discharged not by the importer or by its agent but by the seller or the shipper.”

13. We have heard learned counsel for the parties. It is well-settled principle of the statute that while interpreting a statute, one has to go by the scope and object of the principal Act. Under the principal Act, while amending it on 10^th October, 2007, proviso has included the costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the Rules. The demurrage has not been included as a part of cost envisaged by the legislation. Further, it is a kind of penalty. Therefore, it could not have been envisaged by the legislation to be included in the definition of Section 14 of the Act. However, in view of the clarifications by way of judgments of the Hon’ble Supreme Court, more particularly in the cases of Wipro Ltd. (supra), Essar Steel Ltd. (supra) and Mangalore Refinery & Petrochemicals Ltd. (supra), it is made clear that demurrage cannot be included for the purpose of valuation under the Customs Act, 1962. In that view of the matter, we are of the considered opinion that the contentions raised by the petitioner that the relevant provisions in the Principal Act is silent about the ‘demurrage’; thus, it was beyond the the legislative power to include it in the Rules is accepted and thus the explanation to Sub Rule-(2) of Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 is held to be bad and hence declared ultra vires the Constitution/ provision of Section 14 of the Customs Act, 1962, and hence the same is struck down.