The Supreme Court of India (SC) in M/s Tata Chemicals Ltd v Commissioner of Customs (Preventive) Jamnagar (Civil Appeal No. 7628-7629 of 2004) has held that the expression “deems it necessary” under Section 18 of the Customs Act, 1962 (Customs Act) is not subjective/arbitrary, and the exercise of power by the concerned customs officer should be based on reasonable grounds.

Section 18 of the Customs Act states inter alia that “…..where the proper officer deems it necessary to subject any imported goods or export goods to any chemical or other test for the purposes of assessment of duty thereon, 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….”  (Emphasis supplied).

Description of the SC’s order

M/s Tata Chemicals Ltd (TCL) imported a consignment of Low Ash Metallurgical Coal and claimed a concessional rate of customs duty. Metallurgical/coking coal that has ash content below 12% was eligible to a concessional rate of customs duty of 5%. TCL had specifically instructed that the coal should have less than 10.3% ash content and also stipulated for sampling and analysis by an independent inspection agency of international repute.

At the time of shipment, the inspection agency did detailed sampling as provided under the relevant British Standards which are equivalent to the standards under Bureau of Indian Standards (BIS). The analysis by the inspection agency reported moisture content of 7.2% and the ash content of 9.8%. At the port of import, the customs officer, without objecting to the correctness of the load port inspection report, drew its own samples by invoking its powers under section 18 of the Customs Act and got the samples tested by the Central Revenue Control Laboratory (CRCL). Further, at the time of sampling, the BIS sampling method was not followed. The examination showed different results on the basis of which the concessional rate of customs duty was denied.

The SC, while examining the actions of the customs officer in this case, held that expressions such as “deems it necessary”, “reason to believe” etc. does not mean subjective satisfaction of the concerned customs officer.  Such power given to the customs officer is not an arbitrary power and has to be exercised in accordance with the restraints imposed by law. The SC held that, the expression “deems it necessary” under Section 18 of the Customs Act means that the concerned customs officer must have good reason to subject imported goods to chemical tests and this decision cannot be a subjective one. The samples drawn by the customs officer in this case was incorrect in law as it had not followed the prescribed BIS sampling method and therefore the test reports could not be relied upon.

The SC further held that if the law requires that something be done in a particular manner, it must be done in that manner and not following the prescribed method will be considered illegal. The customs authorities are also not absolved from following the correct procedure in law based upon the acts of a particular assessee, because an illegal act cannot convert itself into legal act based on the actions of a third person by applying the principle of estoppel. Additionally, the SC held that if the testing method of any item is not provided in the Central Excise tariff, then the testing methods prescribed under BIS should be applied.

Khaitan Comment

This decision emphasizes that the actions of tax authorities have to be reasonable even if they are empowered under a widely worded clause like “deems it necessary”. It reaffirms the importance of procedures that are laid down in legislations and technical standards that are applied to determine customs duties. It also clarifies that international procedures equivalent to Indian standards can be adopted under the Customs Act without the matter being subjected to further investigation.