The Hindu Business Line : What is tougher than finding oil in deep sea?

A THREE-LETTER word that is almost as important as food is oil. In All's Well That Ends Well, the Kings says, "Let me not live after my flame lacks oil, to be the snuff of younger spirits, whose apprehensive senses all but new things disdain." So, in search of oil, we go far and wide and deep, as did Oil and Natural Gas Corporation Ltd (ONGC).

The company is engaged in the business of exploration and exploitation of oil and gas, both on-shore and offshore. As part of exploration, it carries out seismic survey, through contractors. "It conducted 3-Dimensional Seismic Surveys in Heera, South Heera and Neelam areas of the international waters of the West Coast of India in course of exploration for oil," notes the apex court judgment dated October 28, in Commissioner of Customs (Imports), Mumbai vs Tullow India Operations Ltd.

Tullow too conducted such surveys in the Gulf of Kutch. "The processes consisted of creating shock wave by means of controlled explosions which travel through the waters of the sea and the land mass beneath. The response to these waves indicates the probability of the presence of oil or gas deposits," explains the text of the verdict, narrating the facts. These responses got recorded on magnetic tapes and converted to digital form to be thereafter processed at the Processing Centre using software applications named Seismos.

"Seismology (from the Greek seismos = earthquake; and logos = word) is the scientific study of earthquakes and the movement of waves through the Earth. The field also includes studies of variants such as seaquakes, volcanoes and tectonic plates," informs Wikipedia.

"Seismic waves produced by explosions have been used to map salt domes and other oil-bearing rocks, faults (cracks in deep rock), rock types, and long-buried giant meteor craters. For example, the Chicxulub impactor, which is believed to have killed the dinosaurs, was localised to Central America by analysing ejecta in the cretaceous boundary, and then physically proven to exist using seismic maps from oil exploration."

Moving from dinosaurs to Seismos, one learns about how the Central Processing Centre located in Indian territory where tapes in the form of cartridges, imported by the assessees are processed. Importers claimed exemption from Customs duty in terms of an exemption notification. The tapes were claimed to be IT software.

From the judgment, you'd know that ONGC awarded two contracts to Sedco Forex Int. Drilling Inc. to carry out seismic survey in 1999 for $13,803,600 and $2,968,230. The contractor brought into India M.V. Geco Saphire, a seismic survey vessel, and performed the survey.

Seismic notice

Denying the benefit to oil exploration under a favourably inclined notification, the Customs Department, Mumbai, issued to ONGC a show-cause notice. This may make a tough read, so brace up. The notice asked ONGC to explain why:

3-D seismic data tapes should not be classified under Tariff heading 8524.99 and charged to duty at 40 per cent BCD + 16 per cent CVD + 4 per cent SAD and Geco Saphire should not be classified under 8905.20 and charged to duty at 40 per cent + 8 per cent CVD + 4 per cent SAD. (The abbreviations stand for basic Customs duty, countervailing duty, and special additional duty.)

Value of 3-D seismic data tapes should not be ascertained at $13,803,600 + $2,968,230 = $16,771,830 = Rs 72,11,88,690 and value of the vessel Geco Sapphire be ascertained as $45,000,000 = Rs 193,50,00,000.

Customs duty of Rs 160,46,18,960 on the assessable value should not be demanded under Section 12 of the Customs Act, 1962.

3-D seismic data tapes and Geco Sapphire and equipment valued at Rs 72,11,88,690 and Rs 193,50,00,000, respectively, imported illegally should not be confiscated.

And why penalty should not be imposed.

What did ONGC say in reply? It said that in a seismic vessel, there was no connectivity between the ship and the earth as drilling rigs/production platforms have. ONGC had applied for grant of exemption certificate before the Directorate General of Hydrocarbons in April 1999. But the `essentiality certificate' could not be produced before the appropriate authority when importation took place. The appeal before the Tribunal was dismissed in December 2003 and essentiality certificate was granted in favour of ONGC in June 2004. A wag suggests that official certificates may, at times, be tougher to find than oil! Interestingly, "Tullow had also applied for grant of essentiality certificate. Whereas ONGC could not produce essentiality certificate before the Tribunal, Tullow did."

The IT question

Tullow's contention at the Tribunal that the imported cartridges came within the purview of `IT Software' didn't meet with favour. "Despite holding that the benefit of exemption from duty on imported goods contained in the notifications should not be denied merely on the ground that the certificates were required to be produced at the time of importation only," the Tribunal dismissed ONGC's appeal saying that the certificate had not been produced even before the Tribunal. However, it allowed the appeal of Tullow and remitted the matter back to the Commissioner for his consideration.

ONGC raised three contentions before the court. One, the value of services, which were rendered under a pure service contract could not be subjected to Customs duties on the ground that the results of seismic surveys are recorded in tapes or discs and, thus, would not be `goods' within the meaning of the Customs Act, 1962.

Two, the exemption notifications having been issued for exemption of goods imported in India for petroleum exploration subject, of course, to filing of the essentiality certificate issued by the Directorate of Hydrocarbons, and as such an essentiality certificate had been produced even before this court, ONGC is entitled to such exemption.

And three, in any event, having regard to the fact that the Tribunal accepted such essentiality certificate in the case of Tullow, there is no reason why the same benefit would not be granted in its favour. In any event, tapes and discs are software within the meaning of the Notification, said ONGC.

For Tullow, it was V. Lakshmikumaran who cited a public notice issued by the Madras Custom House on `Applicability of various certificates required under different notifications issued after the date of importation'. It said, "If the substantive clauses of a notification are fulfilled by an importer, concessional assessment should not be denied on the ground of time factor." On the same reasoning, production of the essentiality certificate even at a later stage could serve the purpose, said Lakshmikumaran, putting forth a logical argument.

For the Department, it was A. K. Ganguly who insisted that the exemption notifications are required to be construed very strictly. "In view of the fact that a condition precedent has been attached thereto, namely, production of essentiality certificate at the time of importation, triggering event cannot be shifted to a later date," he argued. Even if leeway were to be there, the certificate should be produced only within a reasonable time, particularly in view of the fact that the exemption notification was valid for one year, he pointed out.

What did he have to say about the public notice issued by the Madras Custom House? Ganguly urged that the public notice could not be equated with the circular issued by the Board in exercise of its statutory power under Section 151A of the Customs Act. "The exemption notification being a statutory one cannot be clarified by one Custom house as the same must emanate from a notification issued by some authority," he contended.

The Customs Act makes a difference between `certificates which are conditions precedent' and those that are `conditions subsequent', said Ganguly, citing Jindal Drilling and Indus Ltd vs Collector of Customs, Bombay.

Hydrocarbon hold-up

Justices B. P. Singh and S. B. Sinha of the Supreme Court observed that both the importers are licensees. "Indisputably, they were entitled to the benefit of the exemption notification subject, of course, to the condition that they would produce the essentiality certificate granted by the Directorate General of Hydrocarbons at the time of importation of goods. Grant of essentiality certificate was not in the hands of the assessees. It was a function of a department of the Central Government.

"The essentiality certificate admittedly was not granted by the Directorate General of Hydrocarbons within a reasonable time. The importers could not be blamed therefor. It is possible that delay in granting the said essentiality certificate was by way of default on the part of the authorities concerned," reasoned the court.

"The Directorate General of Hydrocarbons is under the Ministry of Petroleum and Natural Gas of the Government of India. The functions performed by it are public functions. The notification never contemplated that a public functionary, having regard to the importance of the subject matter and in particular when such importations are being made in public interest, would not dispose of the application for grant of essentiality certificate within a reasonable time so as to enable the importer to avail the benefit thereof.

"Applicants for grant of such certificates, having regard to their importance, should have been processed by the Directorate General of Hydrocarbons as expeditiously as possible but they did not choose to do so probably having regard to the fact that no time schedule therefor was prescribed.

"It is trite that when a public functionary is required to discharge its public functions within a time specified therefor, the same would be construed to be directory in nature," said the court in what should be instructive to officials, citing P. T. Rajan vs T.P.M. Sahir and Ors and Punjab State Electricity Board Ltd vs Zora Singh and Ors.

In such a situation, the exemption notification cannot be construed in a way that would prove to be oppressive in nature, said the court. "However, we do not intend to lay down a law that delay on the part of the authorities in granting such certificates would automatically enable an assessee to obtain refund. Each case has to be judged on its own facts," it added, remitting the ONGC matter to the Commissioner.

In All's Well That Ends Well (as one may perhaps say of the case too), the Countess speaks of "the blaze of youth; when oil and fire, too strong for reason's force, o'erbears it and burns on." Blaze of taxman, shall we say, to o'erbear reason?

Tailpiece

"Scrap fringe benefit tax, says FICCI!"

"You mean scrap fringe, and benefit tax?"

Detaxification@TheHindu.co.in

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