IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.7439-7440 OF 2004

M/S. TATA CHEMICALS LTD. …APPELLANT

VERSUS

COMMISSIONER OF CUSTOMS

(PREVENTIVE) JAMNAGAR ...RESPONDENT

WITH

CIVIL APPEAL NOS.7628-7629 OF 2004

J U D G M E N T

R.F. Nariman, J.

1. The appellants were engaged in the manufacture of soda ash and Coke.

For the manufacture of Coke, they require coking coal which was imported by

them. Notification No.35/90 exempted coking coal having an ash content

below 12% from basic customs duty that was in excess of 5%. In addition,

notifications 36/90 and 23/91 exempted coking coal with ash content of less

than 12% from the whole of auxiliary duty and additional duty of customs.

2. On 4.2.1991, the appellants had entered into an agreement with

Philbro Energy Company (situated in the USA) for supply of 30500 metric

tons, CIF, Okha of Low Ash Metallurgical Coal produced by M/s Kembla Coal

and Coke, Australia. The contract specifically provided that the ash

content was not to exceed 10.3% and that the sampling and analysis was to

be done by an independent inspection agency of international repute,

namely, M/s Cargo Superintendents Company (Asia) Pty. Limited (CASCO), at

the loading port and that CASCO should give a certificate regarding

analysis of the coking coal. In accordance with the aforesaid agreement,

the appellants in Civil Appeal Nos.7439-7440 of 2004, namely, M/s. Tata

Chemicals Limited imported 33462 metric tons and appellants in Civil Appeal

Nos.7628-7629 of 2004, namely, M/s. B.L.A. Coke Private Limited imported

5000 metric tons of coking coal. Detailed sampling was done by CASCO while

the coal was being loaded on to the ship and CASCO had meticulously

followed British Standards equivalent to IS standards 436 and 1350. The

two consignments were divided into samples of 3000 metric tons each and

from each sample CASCO took samples weighing 470 kilograms each. The

primary samples were passed through secondary sampling, crushing and

tertiary treatment. 13 sample units were separately tested, their analysis

report obtained and the average furnished in the form of a consolidated

test report. This report stated that the moisture content was 7.2% and the

ash content of the said coking coal was 9.8%.

3. When the aforesaid consignment arrived at Okha, the appellants in

both the appeals filed bill of entry dated 15.3.1991 and claimed exemption

under the aforesaid notifications. Along with the bill of entry, the

appellants also submitted the certificate of CASCO. It is important to

note that the Department at no stage stated that they have not accepted the

CASCO report or that the CASCO report was defective in any manner.

However, the Customs Inspector at Okha apparently drew samples of 20

kilograms each – one from the vessel and one from the shore on 18.3.2001

and beat them with stones to crush them. The samples were then made into

powder form.

4. The samples were not drawn in the presence of any employee of the

appellants. It was alleged by the Department that the Inspector had drawn

the samples in the presence of Shri K.M. Jani who was allegedly an employee

of Bhagwati and Company, clearing agents appointed by the appellants. It

is common ground that the sample so drawn had not been drawn in accordance

with IS 436.

5. The samples so drawn, however, were sent to the Central Fuel Research

Institute, Dhanbad, to be analysed. On 13.1.1992, the appellants were

informed by the Superintendent of Customs that the test agency stated that

the ash content in the samples was more than 12%. A copy of the report was

subsequently furnished to the appellants which indicated that the ash

content of the coal belonging to Tata Chemicals was 13.8% and that

belonging to M/s. B.L.A. Coke Private Limited was 12.6%. On objection

being made to the said report, the Superintendent Okha sent two samples to

the Chief Chemist, Central Revenue Control Laboratory (CRCL) on 15.2.1992.

CRCL in turn submitted its report after another delay of 10 months and

reported that Tata Chemicals coal had an ash content of 12.21% and that of

B.L.A. 12.33%.

6. As a result of the ash content being more than 12%, show cause

notices dated 4.1.1993 was issued to both the appellants and differential

duty was demanded from both of them.

7. By an order dated 31.3.1995, the Assistant Collector demanded an

amount of Rs.3,95,77,324/- from Tata Chemicals and an amount of

Rs.59,136,771/- from M/s. B.L.A. Coke Private Limited.

8. On an appeal filed to the Commissioner (Appeals) Ahmedabad, the

Commissioner by an order dated 30.12.1997, set aside the order of the

Assistant Collector in the following terms:-

“10. In view of the above discussion and after going through the comments

of the Assistant Commissioner, Customs, Jamnagar as discussed in para 5.3

supra, wherein he was asked to give his comments on the submission made by

the appellants during the course of personal hearing. It is seen that the

Assistant Commissioner has accepted all the points raised by the appellants

and he has not been able to controvert any of their submissions. I come to

the conclusion that the appellants have substantial force in their

arguments and therefore I held that nothing can be added into the

notification and when notification does not prescribe the method of

analysis for ascertaining the ash content in the coal, it should be

ascertained on as received basis. I rely upon the ratio of the decisions

cited by the appellants in this regard. The CFRI and CRCL have conducted

analysis to ascertain the ash content on gross air dried basis, in spite of

clear instruction of the Asttt. Commissioner, Customs, Jamnagar to give the

report on as received basis, therefore, these reports should have been

given on as received basis. I accept the plea of the appellants that these

results can be converted into as received basis, which fact has also been

accepted by the Assistant Commissioner as discussed in para 5.3 above, by

applying the formula followed internationally. By applying the formula

which is accepted all over the world and has been given by the appellants

during the course of their submissions, the ash content on as received

basis would be 11.8% and 11.6% in the case of M/s. BLA Industries and 13.9%

and 11.4% in the case of M/s. Tata Chemicals Ltd. The formula for working

out these results is as under:

100 – Mar Mar: Moisture as received

100 – Mad Mad: Moisture as dried.

It is seen that in case of M/s BLA Industries results of both laboratories

converted into as received basis gives ash content below 12% and in the

case of M/s Tata Chemicals Ltd. Though the first result even after such

conversion crossed 12% marginally, but the result of subsequent analysis

conducted by CRCL after such conversion gives content of ash content below

12%. Therefore, after conversion on as received basis, which is the

requirement of the law, the ash content in both the cases is below 12% and

therefore both the appellants are entitled for partial concessional rate of

Customs duty in excess of 5% as prescribed by Notification No.35/90”

9. Revenue appealed to CESTAT who by the impugned judgment and order

dated 24.9.2004 allowed Revenue’s appeal and set aside the order of the

Commissioner (Appeals) basically on the ground that even though the samples

drawn by the Inspector were contrary to IS 436, yet since a representative

of the appellants was present, the appellants are estopped from turning

around at a later stage inasmuch as they did not immediately object to the

drawing of samples contrary to law.

10. Shri S.K. Bagaria, learned senior advocate on behalf of the

appellants argued before us that the Australian Company from whose mines

the coking coal was sent, generally mined coal with an ash content of less

than 12%. He referred to and relied upon a great deal of material to

establish this fact. Further, he went on to state that CASCO, the test

agency, was internationally renowned and had given a test

report/certificate of quality which described how meticulously they have

taken samples in accordance with law and how ultimately the samples were

found to contain ash at only 9.8% following the gross air dried method. He

also referred us to Section 18 of the Customs Act and stated that since no

fault had been found with CASCO’s certificate, the entire sampling done by

the customs authorities was invalid in law. He further went on to refer to

the cross-examination of the Inspector who drew the samples and stated that

the samples were drawn in the afternoon of 18.3.1991, the entire operation

being completed by 1730 hours. No panchnama was drawn. 20 kilograms was

taken from the shore and 20 kilograms from the vessel contrary to a minimum

of 75 kilograms for six lots to be taken under IS 436. When cross-

examined, the Inspector stated that he did not know about IS 436 and he

further admitted that he put the samples in a plastic bucket which did not

have any lid. He further went on to state that he had broken up the

sampled lumps with stones and then put the resultant powder in containers.

He further referred to the cross-examination of the Superintendent who had

deputed the Inspector to carry out the samples who was equally in the dark

about IS 436. Above all, he characterized as perverse the Tribunal’s

findings that the appellants were estopped because their representative was

present when the sampling was done. He stated that no representative of

either appellant was present. One K.M. Jani alone was present who admitted

in his cross-examination that he did not work for the appellants Clearing

Agent, namely, M/s Bhagwati & Company. Further the said Mr. Jani did not

go together with the Inspector and no samples were actually drawn in his

presence.

11. Shri Radhakrishnan, learned senior advocate appearing on behalf of

the respondent countered the submissions of Shri Bagaria by reading

copiously from the order of the Assistant Collector and the order of the

Tribunal. According to him, the samples taken by the Inspector could be

taken because statutory authority is given for the same by Section 18 of

the Customs Act. He went on to further state that even though the samples

may not have been taken strictly in accordance with IS 436 nonetheless as

Shri Jani was present, the rule of estoppel would apply against the

appellants.

12. Having heard learned counsel for the parties, it is important to

first extract Section 18 of the Customs Act. Section 18 of the Customs

reads as under:-

“Section 18. Provisional assessment of duty

(1) Notwithstanding anything contained in this Act but without prejudice to

the provisions contained in section 46-

(a) where the proper officer is satisfied that an importer or exporter is

unable to produce any document or furnish any information necessary for the

assessment of duty on the imported goods or the export goods, as tie case

may be; or

(b) where the proper officer deems it necessary to subject any imported

goods or export goods to any chemical or other test for the purpose of

assessment of duty thereon ; or

documents and furnished full information for the assessment of duty but the

proper officer deems it necessary to make further enquiry for assessing the

duty, the proper officer may direct that the duty leviable on such goods

may, pending the production of such documents or furnishing of such

information or completion of such test or enquiry, be assessed

provisionally if the importer or the exporter, as the case may be,

furnishes such security as the proper officer deems fit for the payment of

the deficiency, if any, between the duty finally assessed and the duty

provisionally assessed.

(2) When the duty leviable on such goods is assessed finally in accordance

with the provisions of this Act, then-

(a) in the case of goods cleared for home consumption or exportation, the

amount paid shall be adjusted against the duty finally assessed and if the

amount so paid falls short of, or is in excess of 20[the duty finally

assessed,] the importer or the exporter of the goods shall pay the

deficiency or be entitled to a refund, as the case may be;

(b) in the case of warehoused goods, the proper officer may, where the duty

finally assessed is in excess of the duty provisionally assessed, require

the importer to execute a bond, binding himself in a sum equal to twice the

amount of the excess duty.”

13. The Revenue has grounded its case in Section 18(b) which provides

that imported goods can be subjected to chemical or other tests for the

purpose of assessment of duty thereon where the proper officer deems it

necessary to so subject the imported goods.

14. In our opinion, the expression “deems it necessary” obviously means

that the proper officer must have good reason to subject imported goods to

a chemical or other tests. And, on the facts of the present case, it is

clear that where the importer has furnished all the necessary documents to

support the fact that the ash content in the coking coal imported is less

than 12%, the proper officer must, when questioned, state that, at the very

least, the documents produced do not inspire confidence for some good prima

facie reason. In the present case, as has been noted above, the Revenue

has never stated that CASCO’s certificate of quality ought to be rejected

or is defective in any manner. This being the case, it is clear that the

entire chemical analysis of the imported goods done by the Department was

ultra vires Section 18(b) of the Customs Act.

15. Statutes often use expressions such as “deems it necessary”, “reason

to believe” etc. Suffice it to say that these expressions have been held

not to mean the subjective satisfaction of the officer concerned. Such

power given to the concerned officer is not an arbitrary power and has to

be exercised in accordance with the restraints imposed by law. That this is

a well settled position of law is clear from the following judgments. See:

Rohtas Industries Ltd. v. S.D. Agarwal, (1969) 3 S.C.R. 108 at 129. To

similar effect is the judgment in Sheo Nath Singh v. Appellate Assistant

Commissioner of Income Tax, Calcutta, (1972) 1 SCR 175 at 182. In that

case it was held as under:

“…There can be no manner of doubt that the words “reason to believe”

suggest that the belief must be that of an honest and reasonable person

based upon reasonable grounds and that the Income Tax Officer may act on

direct or circumstantial evidence but not on mere suspicion, gossip or

rumour. The Income Tax Officer would be acting without jurisdiction if the

reason for his belief that the conditions are satisfied does not exist or

is not material or relevant to the belief required by the section. The

Court can always examine this aspect though the declaration or sufficiency

of the reasons for the belief cannot be investigated by the Court.”

See also Bar Council of Maharashtra v. M.V. Dabholkar, [1976] 2 S.C.R. 48

at 51. N. Nagendra Rao & Co. v. State of A.P. (1994) 6 SCC 205 at 216.

16. The admitted position on record is that the samples drawn were not

drawn in accordance with law and were drawn with no regard whatsoever to IS

436. That IS 436 would apply to the facts of the present case is made

clear by our judgment reported in Bombay Oil Industries (P) Ltd. v. Union

of India, 1995 (77) E.L.T. 32 (S.C.), where this Court held following Union

of India v. Delhi Cloth & General Mills Co. Ltd., 1963 Suppl. (1) SCR 586,

that if the method of testing of any item of Central Excise tariff is not

mentioned, then the Indian Standard Institution’s method should be applied.

That this would apply to the Customs Act as well. IS 436 lays down:-

““5. SAMPLING FROM SHIPS DURING LOADING OR UNLOADING

5.1 Sub-lots – For the purpose of sampling, the entire quantity of coal in

a ship shall be divided into a suitable number of sub-lots of approximately

equal weight as specified in Table 1.

5.1.1 A gross sample shall be drawn from each of the sub-lots and shall be

kept separately so that there will be as many gross samples as the number

of sub-lots into which the lot has been divided.

5.2. Sampling of coal from ships shall be carried out, as far as

practicable, when coal is in motion. If it is taken on a conveyer, the

gross sample shall be collected as per the procedure laid down in Table 3.

If not, the gross samples may be drawn during loading or unloading of the

ship. For this purpose, the number of increments to be taken shall be

governed by the weight of the gross sample and the weight of increment as

specified in Table 3 for various size groups of coal.”

TABLE 1 NUMBER OF SUB-LOTS/GROSS SAMPLES

( Clauses 0.3.4.1 and 3.1 )

Weight of the Lot No. of sub-Lots/Gross Samples

(Metric Tonnes)

Upto 500 2

501 to 1000 3

1001 to 2000 4

2001 to 3000 5

Over 3000 6.”

Then the IS 436 goes on to describe the procedure to reduce a gross sample

into a sample for a lab test etc. in great detail, and speaks about the

minimum weight of a gross sample being 75 Kg so far as “Coal, small” is

concerned.

17. Clearly the samples drawn by the Inspector in the present case, have

been drawn contrary to the express provisions of IS 436. On this count

also, the samples being drawn not in accordance with law, test reports

based on the same cannot be looked at.

The Tribunal’s judgment has proceeded on the basis that even though the

samples were drawn contrary to law, the appellants would be estopped

because their representative was present when the samples were drawn and

they did not object immediately. This is a completely perverse finding

both on fact and law. On fact, it has been more than amply proved that no

representative of the appellant was, in fact, present at the time the

Customs Inspector took the samples. Shri K.M. Jani who was allegedly

present not only stated that he did not represent the Clearing Agent of the

appellants in that he was not their employee but also stated that he was

not present when the samples were taken. In fact, therefore, there was no

representative of the appellants when the samples were taken. In law

equally the Tribunal ought to have realized that there can be no estoppel

against law. If the law requires that something be done in a particular

manner, it must be done in that manner, and if not done in that manner has

no existence in the eye of law at all. The Customs Authorities are not

absolved from following the law depending upon the acts of a particular

assessee. Something that is illegal cannot convert itself into something

legal by the act of a third person.

18. It is clear therefore that the Tribunal judgment has to be set aside

on all these counts. The appeals are, therefore, allowed with no order as

to costs.

……………………….J.

(A.K. Sikri)

……………………….J.

(R.F. Nariman)

New Delhi;

May 14, 2015