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TMI Blog2003 (6) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of the articles relating to transaction value, and would therefore offer valuable guidance in construing the scope and meaning of the Valuation Rules. The Explanatory Note 1.1 provides that under Article I of the Agreement on Customs Valuation corresponding to Rule 4 of the Valuation 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. The basis for value, the sale price in 1997, was, as we have seen, among the highest in the recent past, and therefore, is arbitrary. If at all the Commissioner was of the view that depreciation was the only method of valuing the rig, he ought to have done so on the basis of the price of the rig when it was built, of $ 15 million, and applying the rates of depreciation specified in the Board's circular to this cost, and the additions to this cost of amounts subsequently incurred on account of repair etc. This is in fact precisely what he has done in valuing the rig Griffin Alexander II imported by Aban Loyd Chiles Off Shore Ltd. which formed the subject matter of appeal C/716/02 before us. It is significant to note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation or exploitation. It entered into a contract with the Oil Natural Gas Commission in January, 1999 for lease to the latter of a jack-up rig of 300 ft depth to be utilised for oil exploration and exploitation off the coast of India. The appellant was not in ownership of such a rig, and in order to comply with the terms of the contract, purchased in March, 1999 the rig Pride Pennsylvania from Pride Global Limited, a company registered in the British Virgin Islands at a price of U.S. $ 17 million. The rig was being deployed for off sea exploration in accordance with the directions of the hirer, Oil Natural Gas Commission, and did not initially enter either Indian territorial waters 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pride International Inc. He notes that the rig was purchased in 1997 by Pride International Inc from Cartier Shipping Co. at $ 35.35 million. He discounts the report by Bureau Veritas issued in March, 2000 valuing the rig at $ 17 million on the ground that it has been arrived at without taking into account the fact of the earlier sale at $ 35.35 million. He values the rig by applying the rates of depreciation specified in the Circular number of F 4951/16/93-Cus V of 26-5-1993 of the Board at $ 35.35 million, taking into account the additional amounts that have subsequently been spent on the rig. 4. The contentions of the counsel for Pride Foramer, the importer, are as follows. The 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the rig in 2000 and 1999 impartially. He contends that penalty has been imposed by the Commissioner solely on the ground that valuation of the rig was done in a careless and slipshod manner pointing out that this falls far short of satisfying the requirement contained in Section 112 of the Act. 6. The representative of the department contends that it has not been established by the importer that the transaction value was uninfluenced by the relationship. He contends that the drop of the price of 50% between 1997 and 1999 cannot be explained merely by changes in oil price and draws upon material relied upon by the appellant in order to demonstrate this point. He also defends 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 side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore to examine the contentions put forth by the appellant that the relationship between buyer and seller did not influence the price. 11.Among the materials relied upon by the importer, are extracts from two publications, the Bassoe Offshore Monthly, published by Bassoe Offshore Consultants, Edinburgh, Scotland and the Offshore Drilling Monthly, published by Jeferies Company Inc., with offices worldwide. The Bassoe Offshore Monthly of March, 1999 has a table of changing values of rigs, which is reproduced below : Changing Value of Jack-Ups and Semis 1992-99 in US$ M Dec. 1992 Dec. 1994 Dec. 1995 Dec. 1996 Dec. 1997 Dec. 1998 Mar. 1999 Jack-Ups built after 1980 300 feet indcant N. Sea 25 30 30 45-50 80-90 55 40 300 feet indcant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incess 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 is the oil that is traded, and prices quoted in newspapers and financial publications. The figures show the high and the low of Brent crude for the last day of each month from January, 1997 onwards and also the monthly average. The average for January, 1997 is US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 follow each other, with minor variations. The figures in Bassoe Offshore Oil Review of May, 1999 also indicates a sharp fall in worldwide dayrates between May, 1997 and May, 1999. The figures for May, 1999 have significantly fallen compared to two years earlier. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the production planning of oil fields is a long term planning, which includes survey of the hydrocarbon resources, exploration and exploitation. Demand for oil always remains positive whereas supply is manipulated by vested interests. Fluctuations in oil prices are created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co-founded and edited the London Financial Times Newsletters, Financial Times, World Rig Forecast and Financial Times World Rig Facts. He has, in addition to arbitrating cases in Edinburgh, Scotland, written reports and appeared as an expert witness for trials in the Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 difficult to believe that it would do so in order to save duty of about Rs. 29 crores. The decision of the Tribunal in Mirah Decor v. CCE - 1988 (35) E.L.T. 357 (at 360) takes note of the commercial practice of marine insurance being done at 110% of the value of the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 rigs prior to its contract with the ONGC in January, 1999. It is contended that the appellant, in its communication to the ONGC, pending acceptance of its appeal, stated that it had spent US $ 10 million on upgradation of the ships, which sum has not been taken i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nished 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 have changed its value if the importer had brought to its notice the fact of the earlier sale. It must also be noted that sales of rigs are not a secret matter. They are regularly reported in the publications of Bassoe Jeferies, no doubt others. We, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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