2003 (11) TMI 376 - AT - Customs

Classification - Items purchased by the appellant and sold along with drilling rigs - Whether classifiable as such drilling rigs or independently on them? - Commissioner found that the imported goods form part of such articles of travelling blocks etc. which were classifiable in Heading 84.31 HELD THAT - It is clear that the importer has in fact taken a stand before the Commissioner of Customs which is contrary to the stand now being taken before us. That stand has been found to be incorrect by the Commissioner who has denied the benefit of the exemption and imposed a penalty. Commissioner has concluded that the benefit of the exemption in any event cannot be granted because the machine in the manufacture of which the articles were to be used would not be drilling rig falling in Heading 84.30 but in a special purpose vehicle (i.e. mounted on a vehicle specially adopted vehicle classifiable in Heading 84.05 and this heading also not specified in the table to the notification. If therefore the pipes and other articles were not manufactured by the appellant but purchased by them from other manufacturers their cost would not form part of the value of the drilling rigs in conjunction with the use. So far as pipes are concerned the position is clear. Appellant cited from the explanatory notes to show that such items tools also could not form part of the rigs. Clearly tools meant for repair to and maintenance of a rig could not be classifiable as parts of such rigs. The same conclusion that we have arrived at with regard to pipes would apply to such tools. As contended that the appellant manufactured crown block travelling block (double sheave or single sheave) mast hoist plug sandreel drum mud pump hoist drum some slips spider base drill head chuck water swivel bits imported delivery hose stand pipe suction hose drill collar drill pipe and drag bits subs bits spider bush spider slips Kelly drive bush elevators fishing tools rotary chain tongs and wrenches. The appellant cited copy of ISI specification (IS 78206 (part I - 1986) specifying general requirement of direct requirement for motor drilling. Among the items it shows are parts of a rig are a mast. The cost of these mast therefore would be included. However the delivery hose stand pipe suction hose bush those goods which are classifiable as parts of rig falling in chapter Heading 84.31 the cost of the goods could be included in the value of the rigs unless the appellant were able to show that they were supplied not incorporated in the rig but as spare parts the value of such was not included in the price of the rig. The price of the goods which are clearly not required for the manufacture of the rig would not be included. We think it appropriate that the precise determination of the value of the rigs can be carried out by the adjudicating authority by applying the principles that we have set out above to various items in question. The matter is remanded to the Commissioner for this purpose.

Summary

1. The core legal questions considered by the Tribunal were: whether various items purchased by the appellant and sold along with drilling rigs are to be classified as integral parts of the drilling rigs or as independent equipment; whether the cost of such items should be included in the assessable value of the drilling rigs for customs duty purposes; and whether the appellant can adopt a stance contrary to the one previously taken before Customs authorities regarding classification and exemption claims.

2. Issue-wise detailed analysis:

Classification and Inclusion of Cost of Items Sold with Drilling Rigs

The legal framework primarily involved the Customs Tariff classification under the Harmonised System of Nomenclature (HSN), specifically Headings 84.30 and 84.31, and the applicability of Notification 155/86 granting exemption for parts used in manufacture. The Tribunal relied heavily on the precedent set in the decision of the Tribunal in Ingersoll Rand (I) Ltd. v. CCE, which was subsequently upheld by the Supreme Court. The Ingersoll Rand case clarified that items such as drill bits, drill rods, and pipes, although used in conjunction with drilling rigs, do not constitute parts of the drilling rig itself and are classifiable separately under Heading 84.31 rather than 84.30.

The Court examined the Explanatory Notes to Headings 84.30 and 84.31, noting that Heading 84.30 covers drilling machines, while Heading 84.31 covers parts suitable solely or principally for these machines. However, certain items commonly used with drilling rigs-such as drill bits, rods, pipes, and similar tools-are expressly excluded from Heading 84.31 as parts of the machine and are instead classifiable independently. The Tribunal emphasized that these items are complete in themselves and their requirement varies according to user needs, distinguishing them from integral parts of the rig.

Applying this reasoning, the Court concluded that only the drilling rig itself and its genuine parts and components (such as swivel kellies, Kelly drive bushings, tool-joints, drill collars, subs, drill pipe guides, stop-collars, spider bowls, split bushing slips, beams, swivel sockets, and drilling jars) fall under Heading 84.30 or 84.31 and should be considered part of the rig's value. Items like drill bits, pipes, and tools for repair or maintenance are to be classified separately and their cost should not be included in the value of the drilling rigs for customs valuation.

Stance Previously Taken Before Customs Authorities and Estoppel

The departmental representative argued that the appellant had previously taken a contrary position before the Customs authorities in Mumbai, claiming exemption under Notification 155/86 for imported parts as components of drilling rigs, and therefore cannot now adopt a different stance. The Tribunal examined the facts that the appellant had indeed claimed exemption for various imported items as parts of drilling rigs, which was denied by the Commissioner on the ground that these items were classifiable under Heading 84.31 and not covered by the exemption notification.

The Commissioner also held that the machine being manufactured was not a drilling rig under Heading 84.30 but a special purpose vehicle under Heading 84.05, which was not covered by the exemption. This finding negated the appellant's claim for exemption and formed the basis for imposing penalty.

The Tribunal noted that the appellant's earlier stand was found incorrect by the Commissioner and that the appellant cannot now take a contrary position before the Tribunal. However, the Tribunal did not treat this as an absolute estoppel but rather as a relevant factor in determining classification and valuation.

Inclusion of Cost of Items in the Value of Drilling Rigs

The appellant contended that several items such as crown block, travelling block, mast, hoist plug, mud pump, drill collar, drill pipe, and others were parts of the rig and their cost should be included in the rig's value. The appellant relied on ISI specifications (IS : 78206 (part I - 1986)) that identify certain items like the mast as parts of the rig.

The Tribunal accepted that the cost of genuine parts like the mast, which are integral to the rig, should be included in the value. However, for items such as delivery hose, stand pipe, suction hose, and tools not incorporated in the rig but supplied as spares, their cost should not be included unless they form part of the rig's assembly. The Tribunal emphasized that the price of goods clearly not required for the manufacture of the rig cannot be included in the rig's value.

The Tribunal remanded the matter to the adjudicating authority for precise determination of the value of the rigs by applying the principles laid down, with specific reference to the classification and inclusion or exclusion of various items in the value computation.

3. Significant holdings:

"It is evident that even though drilling rigs have necessarily to be used in conjunction with items such as drill rods, pipes and bits, these items do not constitute parts of such machine which are complete items in themselves."

"Only the drilling rig itself would fall for classification under Heading 84.30 and its parts and components in Heading 84.31. Such items as drill bits, pipes, which are used in conjunction with drilling rigs for sinking a bore or to extract water from the bore would be classifiable on merits."

"Tools meant for repair to, and maintenance of a rig could not be classifiable as parts of such rigs."

"The cost of the goods which are clearly not required for the manufacture of the rig would not be included."

The Tribunal established the core principle that classification and valuation for customs duty purposes must distinguish between integral parts of a machine and items merely used in conjunction with it. It affirmed that only those components that form part of the rig's assembly should be included in the assessable value, excluding separately classifiable equipment and consumables.

On the issue of prior inconsistent stance, the Tribunal recognized the importance of consistency in claims made before Customs authorities but allowed re-examination of classification and valuation on merits, subject to the findings of the adjudicating authority.

Ultimately, the Tribunal allowed the appeal, set aside the impugned order, and remanded the matter for fresh valuation determination in accordance with the articulated legal principles.