TMI Blog2003 (6) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... or any areas of the exclusive economic zone designated under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 to which the provisions of the Customs Act, 1962 (hereafter the Act) have been made applicable. In April, 2000, the rig was required by the hirer to enter one of such designated areas. On the belief that such entry would constitute import under the Act, Pride Foramer filed a bill of entry in May 2000 for the rig, declaring the c.i.f. value of the rig to be Rs. 783,439,838. The bill of entry was accompanied by an invoice showing details of the value of fixed and loose equipment, spares and consumables on the rig for a total c.i.f. value of U.S. $ 17,682,690. The invoice was issued by the project office in Mumbai of Pride Foramer, and signed by Jean Paul Rabier, its manager in India. The rig was permitted to be cleared on payment of duty at the declared value. 2.Subsequent investigation by the department led it to conclude that the value of the price was underdeclared and that the true value of the rig ought to be Rs. 1966,950,295. The rig was placed under seizure in September 2001 and ordered to be released provisionall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rules provide that the transaction value is not to be rejected solely on the ground of relationship and unless it is shown that the relationship between the parties has influenced the price, transaction value has to be accepted even when the party to the sale and purchase are related. Oil rigs are not traded frequently, the number of oil rigs available at a given time is limited. The majority of the oil rigs are owned by companies such as the appellant who lease them out for oil exploration. The number of owners of such rigs is limited. Such leases require the deployment of a rig with its crew onboard. Oil well drilling is a specialised task requiring considerable skill and experience and this is why companies undertaking oil exploration or exploitation venture do not themselves engage upon drilling but hire the rigs with their crew who are competent to do so. In addition, number of owners of rigs are limited, addition to the existing fleet of rigs also takes time and involves expenses. The rigs are hired out by their owners on the basis of the daily rent referred to as the dayrate. Whenever oil prices go up due to any reason, there is increase in exploitation of existing oil re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicability of the extended period of limitation, on the ground that the importer had failed to disclose that the purchase was from a related person and defends the Commissioner's order imposing penalty on Bureau Veritas. Written submissions were filed at the conclusion of the hearing. 7.As we have noted the rig was purchased by the appellant to bring to the waters of India in order to fulfil its contract that it had entered into, two months earlier, with the Oil Natural Gas Commission. Both sides are agreed that this price is the transaction value. Both sides are also agreed that the seller of the rig and its purchaser were related. What is therefore to be determined is whether the transaction value is to be accepted and if not by what method the value for assessment of the rig has to be determined. 8.Rule 4(2) of the Valuation Rules, 1988 provides that the transaction value of goods shall be accepted, except in cases specified in the proviso under that sub-rule. Clause (d) of the proviso under that sub-rule provides that where a buyer and seller are related, the transaction value is acceptable for Customs purposes under the provisions of sub-rule (3). Sub-rule (3) re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dec.1995 Dec.1996 Dec.1997 Dec.1998 Mar.1999 Jack-Ups built after 1980 300 feet ind cant N. Sea 25 30 30 45-50 80-90 55 40 300 feet ind cant inter-national 18 25 25 45 70 45 35-40 250 feet ind cantilever 12-15 20 20 30 50 30 16-18 200 feet met slot 1 8-9 8-9 16-18 25 13 10 200 feet mat cantilever 6 14 14 22 30 18 14-15 150 feet in cantilever 3 10 10 22 29 15 10-12 Semi Submersibles Aker H-3 North Sea 5 8 25 75 90 50 40 3rd gen North Sea 40 35 70 120 150 100 90 4th generation 90 60 110 160-180 180-200 180-190 160-180 The values shown are levels at which we believe there is a reasonable chance of a unit selling. They are based on our outlook with poten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Glomar Adriatic II MLT 116-C 62 32 Pride Pensylvannia LET 53-A 30 20 Semi Submersibles Ocean Princess Bethlehem KB100 60 25 Ocean Princess AKER H-3 75 30 Glomer Arctic I F GL 907 (T) 150 30 South Sea Driller AKER H-3 75 30 14.These figures again may not necessarily be the actual values at which sales may take place, since they are figures appraised by an equity research company. However, these figures bear out the contention that rig prices do fluctuate violently and registered a steep fall between 1997 and 1999. 15.The reasons for fluctuations in the prices of rigs are attributed to fluctuations in the prices of oil. The material that has been produced before us, consisting of the extracts from the publications all indicate that there was a sharp drop in the prices of oil, from 1997 leading to the lowest prices in the Century in 1999. The importer has furnished a chart showing the monthly average prices of Brent crude oil. Brent crude is the name by which the crude oil produced in the North Sea is referred to and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng considerable technical knowledge and experience. The oil rig owners are specialized in this field. In the main, oil companies hire rigs from their owners along with crew on board, for purposes of drilling. Therefore, changes in demand and supply of oil are more magnified in this industry than would be the case in an industry, in which there are greater units available for sale, and a large number of buyers and sellers. The owner of a rig earns only through the charges that are paid for its hire by the oil company who hires it. These charges are computed on a daily basis, referred to in the industry as dayrate. At the time of increasing demand for drilling, the dayrates increase and when there is no demand, the dayrates fall. In other words, correlation between the price of a rig and the price of oil can be established through the dayrates. Rigs do not often change hands, sometimes stay with the owners as long as 20 to 25 years. 17.The Bassoe Offshore Monthly has published, in the issue of March, 2000, two graphs for the period from the first quarter of 1993 to the last quarter of 1998 of the dayrates of jackups and oil prices. It is seen that these two graphs more or less foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oil rigs between independent parties. 44.3 It is a matter of common knowledge that economic viability is a basic concept involved in the analysis of consumer behaviour and demand, utility is a subjective concept and depends on the intensity of want. In principle, the value of a commodity has two aspects, namely, the "value in use" and "value in exchange". The value in use refers to the utility of the commodity and the value in exchange implies the rate of exchangeability of a commodity. Goods having value in use need not command the price whereas the goods having value in exchange commands the price. In economic sense, the term value refers to the value in exchange. A commodity which has high value in exchange may not have value in use. Therefore, in the absence of any real transaction, the valuation reflected in the published journals are more than that of the "utility value" rather than of exchange value during an independent transaction between a willing buyer and a willing seller." 19.The Departmental Representative reiterates these arguments. He emphasizes that there was not a single sale of jackup rigs during the last 5 years, when the oil prices were low. He contends th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her details relating to specialized field such as oil well drilling would, in the normal course be referred to only in specialized journals which may be well known within that field but are not well known outside it. It is also to be noted that these publications deal with the industry as a whole, and the contemporary figures and information published in them cannot be said to have been so manipulated as to serve the interests of a particular party. The case study on treatment of motor vehicles published by the Technical Committee on Customs Valuation of the World Customs Organisation validates reference to prices of used motor vehicles in determining their valuation. Reference must also be made in this regard to the affidavit of Gavin M.J. Strachan, Vice President - Research and Publisher of ODS-Petrodata Ltd., Edinburgh. In this affidavit, Strachan says that he is the founder and explains that he has been Director of Bassoe Offshore Consultants, which, in August 2002, merged with ODS-Petrodata, which is the largest consultancy in the World, dealing in offshore drilling market. He has cited his qualifications. Apart from working from 1974 to 1992 in the Oil Drilling Industry, he c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. Of this, the number of jack-up rigs is 257. The number of 300 ft jack-ups accounted for 103 out of this number. The rig under consideration was thus one of just 103. They also show that prices of rigs of different kinds dropped by 50% or more between 1997 and 1999. The explanation offered by the appellant for the 50% drop in prices therefore merits acceptance, in our view. 21.Two more factors are to be considered. The rig after its purchase in 1997 was insured for $ 18 million. It was contended before the Commissioner that this establishes the correctness of the transaction value. The Commissioner has declined to consider this. While we would be hesitant to determine value baser exclusively upon the insured value of any goods, we are of the opinion that in facts of this case, the fact that the value for insurance was little over 110% of the purchase price supports the appellant's case. Offshore rigs often operate in areas subject to such dangerous conditions as storms and cyclones. If the true value of the rigs were $ 35 million, the appellant in insuring it for $ 18 million, would have stood to lose $ 17 million (or about Rs. 73 crores) in the event of its total loss. It is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation Rules, the basis for establishing customs value is the actual price made in the sale giving rise to the importation, the time at which the transaction took place being immaterial. "In this connection the expression 'when sold...' in Paragraph 1 of Article I is not to be regarded as giving any indication of the time to be taken into consideration when deciding whether a price is valid for the purposes of Article I; it merely indicates the type of transaction involved, namely one in which the goods were sold for export to the country of importation. Consequently, provide that the conditions prescribed in Article I are fulfilled, the transaction value of imported goods should be accepted irrespective of the time at which the sale contract has been concluded and hence, irrespective of any market fluctuations after the date when the contract was concluded." The sale price of US $ 17 million therefore will constitute FOB value. The cif value, after addition of towing charges from Singapore of $ 500,000, and addition of 1.125% of $ 17,500,000 will come to $ 17696875 against the declared value of $ 17682690.50. 25.The Department's appeal relates to value additions made to the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction value were not acceptable, the method of valuation applied by the Commissioner cannot be accepted. 27.The Commissioner has imposed a penalty on Bureau Veritas on the ground that it was careless in making the reports of valuation that it furnished of the rig, since it has not taken into account the fact of earlier sale of the rig in 1997 at a higher price and did not consider the relationship between the parties. The contention of its counsel that lack of care, even if established, cannot justify imposition of penalty under Section 112, has to be accepted. The penalty has been imposed under Clause (b) of Section 112, on the ground that Bureau Veritas vetted this declaration of the value by the importer. The lack of care that the Commissioner assigns on his part fall short of the requirement of abetment, implying a conscious awareness of the act or omission of an abettor, that is required for penalty to be imposed under this clause. It would also follow from our earlier discussions on the appeal of the importer that the price of a rig depends upon the industry plays of number of factors. In view of the background, it is difficult to imagine that Bureau Veritas would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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