CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
WEST BLOCK 2. R.K. PURAM, NEW DELHI

Date of Hearing : 15.12.2003
Date of Decision : 01.07.204

Appeal No. C/601/2001 NB(A)

Arising out of order in original No.11/Cus/2001 Dated : 25.10.2001 passed by Commissioner of Customs, Pune

Appeal No. C/519/2000-NB

Arising out of order in appeal No. CUS/NK-/2000 Dated : 26.06.2000 Passed by the Commissioner of Customs (Appeals) Pune.

M/s DABHOL POWER COMPANY

Vs

CC, PUNE

Appellant : Rep. by Shri P. Parathasarathy, Adv.
and Shri V.Lakshmikumaran, Adv.
Respondent : Rep. by Shri M. Chandra Sekharan, Sr Adv
with Shri Monish Pushkarna, Advocate

Appeal No. 1C/520/2000-NB (A)

Arising out of order in appeal No. CUS/NK-330/2000 Dated : 26.2000 passed by Commissioner of Customs (Appeals), Pune

CC PUNE

Vs

M/s DABHOL POWER COMPANY

Appellant : Rep. by Shri M. Chandra Sekharan, Sr. Adv.
with Shri Monish Pushkarna Advocate
Respondent : Rep. by Shri V. Lakshmikumaran, Adv. and
Shri R. Parathasarathy, Advocate

CORAM :

Hon'ble Justice Smt. K.K. Usha, President
Shri C.N.B. Nair, Member (Technical)

 

FINAL ORDER NO . 657-659/04-NB(A) Dated : 01.07.2004

Per : Justice K.K. Usha :

Appeal No. C/601/2001 filed by the importer M/s. Dhabol Power Co. (DPC) is directed against order passed by the Commissioner of Customs, Pune dated 25.10.2001. Appeal No.C/519/2000 at the instance of DPC and Appeal No.C/520/2002 at the instance of Chief Commissioner of Customs, Pune are against the order passed by the Commissioner of Customs (Appeals), Pune dated 26.6.2000. Since the issues in the above appeals are inter linked and the imports which are subject matter of the appeals are made by DPC, we heard the appeals together and they are being disposed of under a common order.

Under order dated 25.10.2001 the Commissioner held that the various items of equipment, machinery etc. imported for the Liquefied Natural Gas (for short, LNG) facility are not entitled to assessment under Tariff Item 9801.00 (3) as well as under Tariff Item 9801.00 (1) as project imports. It was also held that a portion of the value of the off-shore services contract is liable to be added to the declared value of the equipment etc. imported for the LNG facility. On the above basis provisional assessment was finalized and demand of duty of Rs. 245,58.73,987/- was upheld on imports effected and cleared under 319 Bills of entry. There is also a demand of Rs.8,30,94,084/- in respect of certain goods that have been assessed provisionally but are pending clearance and a demand of Rs. 21,44,77,666/- on items imported under 63 Bills of Entry that are pending assessment and clearance. The learned Commissioner also held that all items imported for LNG facility are liable for confiscation under Section 11(m) of the Customs Act, 1962 for alleged mis-declaration and he imposed redemption fine in lieu of confiscation of an amount of Rs. 1,33,54,841/- on items which are pending clearance/assessment. He further imposed a penalty of Rs. 45 crores on the importer/appellant under Section 112(a) of Customs Act, 1962.

In Revenue's appeal No.C/520/2000 challenge is against an order passed on appeal filed by DPC against an adjudication order passed by Commissioner (Appeals), Pune dated 26.06.2000 on an appeal filed by DPC against adjudication order passed by the Assistant Commissioner of Customs, Dapoli Division dated 15.01.99. Under the above order the adjudicating authority took the view that various machinery and equipment imported for Single Point Mooring (SPM) system are not covered under Heading 9801.00 as a project import and a differential Customs duty of Rs.33,29,22,069/- was demanded. It was held that SPM system which was a system of unloading of fuel from tanker and transporting it to fuel storage tanks installed at the project site is not integrated to the project of generation of power. He also took note of the fact that power project ultimately is to be fueled by LNG facility for which a separate LNG facility was being constructed and therefore, at the second stage SPM system will normally he idle. It has only the function of temporary facility and therefore not an integral part of power project. On appeal the Commissioner took the view that SPM system attains the character of integral part of the project approved by various sponsoring authorities and which has been registered in 1996 under Project Import Regulation, 1986 without any objection. According to the Commissioner (Appeals) as a result of the restrictions imposed by the Government of India that the appellant should not use the infrastructure facilities of public sector canalizing agencies and existing port infrastructure for the import of fuel, they were compelled to find a source of supply fuel which has to be imported and this could be done only with the help of SPM system. Therefore, according to him, the SPM system became a part and parcel of the project. He also took the view that having registered the project under Project Regulation, 1986 it would qualify for classification under Chapter 98.01. Taking into consideration the submission made by the appellants that even after commissioning of Phase II, SPM would not remain idle and would be used as back up system, the Commissioner took the view that SPM system would qualify for project import as an auxiliary system or an integral part of the project. However, after holding as above, the Commissioner remanded the matter to the adjudicating authority with a direction "to consider the assessment of SPM appropriately while finalizing the provisional assessment after examining its role in the second phase and thereafter decide the matter appropriately". The Revenue has come in appeal C/520/2000 against the above order contending that finding entered by the Commissioner (Appeals) that SPM system would qualify for project import as an auxiliary system for an integral part of the project, cannot be sustained. DPC has filed appeal No.C/519/2000 challenging that part of the order of the Commissioner where he remands the case directing Assistant Commissioner to finalize the provisional assessment of SPM after considering its note in the second phase.

We will first take up appeal No.C/601/2001 filed by DPC. The issues coming up for consideration are-

(a) Whether the various items of equipment, machinery etc. imported for LNG facility are entitled to the concessional rate of Customs duty under Tariff Item 9801.0 Project Imports?

(b) Whether a portion of the value of the Off-shore Services Contract is liable to be added to the declared value of the equipment under Rule 9(1) (b)(iv) of the Customs Valuation Rules, 1988? and

(c) Whether the provisions of Section 111(m) and 112 are attracted to the facts of the present case?

 

On the first issue the Commissioner came to the conclusion that the materials, equipment and machinery for setting up the LNG facility will not be covered under Tariff Heading 9801.00(3) and therefore, are entitled to concessional rate of duty for project import. He also held that machinery and material imported for LNG facility are not required for substantial expansion of an existing unit of specified power project. According to the Commissioner, LNG facility is an independent fuel venture. The Phase I of the power project had been generating power independent of LNG facility. Even Phase II the power project is capable of generating power with Naphtha/Distillate had already been constructed for catering to the phase II of the power project. He further held that LNG facility cannot be considered as auxiliary equipment of the power project for the purpose of Tariff Heading 9801.0 inasmuch as Tariff Heading does not deal with the auxiliary equipment required in connection with substantial expansion of the existing unit of the power project. Tariff Heading covers only auxiliary equipment required for substantial expansion etc. Reliance was then placed on the decision of this Tribunal in NALCO 1997 (94) ELT 409 = (2002-TIOL-138-CESTAT-DEL-LB). The alternate submissions made by the assessee that LNG facility has to be covered as an independent industrial plant, was also rejected by the Commissioner.

 

It is contended on behalf of the appellant that the above finding of the Commissioner is not liable to be sustained. A memorandum of understanding was executed on 20.06.92 amongst the Maharasthra State Electricity Board (MSEB), Enron Power Corporation (EPC) and General Electric Corporation (GEC). The above document outlined in general terms agreement between the parties for the power development, purchase and sale contract, design, construction, operation and ownership of an independent power generating facility at Dabhol with a minimum capacity of 2000 MW. The agreement contemplated the establishment of a joint venture Company named 'Dabhol Power Company' (DPC). The power plant will have generating facility of 2000-2400 MW nominal capacity. It also mentioned "Project includes construction of regasification facilities for LNG and pipeline interconnections to power plant. According to the appellant, since this is the first power generation facility to work on LNG and LNG is not available in India it had to be imported. The setting up of an LNG facility is an integral part of power plant. Referring to its letter dated 28th August 1992 seeking approval of the Government of India for setting up of the project the appellant would contend that proposal to FIPB was a consolidated proposal that included setting up of LNG facility as a part and parcel of the power project. The cost of LNG was identified separately as 845 million US$. It is submitted that the above aspects formed part of the project report submitted to FIPB. Paragraph 1.06.02 referred to initial use of fuel oil for the power station till the availability of externally sourced LNG. Letter dated 3.2.93 from FIPB conveying the approval of Government of India for setting up of the power project at Dabhol would also show that it was an integrated project including LNG facility.

 

Subsequently, the approval was modified by FIPB under communication dated 23.03.94. Pursuant thereto the project has been divided into two phases. Phase I was to run on Diesel as the raw material and Phase II on LNG. The appellant submits that consequentially LNG facility became part and parcel of Phase II of a single project. Phase I was to have a capacity of 695 MW and Phase II 1320 MW. The above would show, according to the appellant that Phase II contemplated a substantial expansion in the generating capacity vis-a-vis Phase I. Apart from the above, in the amendment letter the Government imposed a condition that import of fuel (Diesel/LNG) for project should not use infrastructure facilities of the Public Sector canalizing agencies and the existing port infrastructure. Under letter dated 24.04.98, Ministry of Industry confirmed that their approval is for execution/implementation of an integrated project involving power project and LNG regasification facility and associated infrastructure. Pursuant thereto DPC applied to the Assistant Commissioner of Dapoli for registration of the Phase II Power Project under the Project Import Regulation, 1986. In the above letter, DPC had indicated that the material imported for power project and LNG facility shall not be used for any other purpose. Therefore, according to the appellant, even though the initial proposal to FIPB recognized the capability of LNG facility for distributing gas, application for project import registration categorically stated that the LNG facility will not be used for any other purpose. The Government of Maharashtra, the sponsoring authority had recommended grant of project import concession for the equipments required for Phase II and also for LNG facility. Thus, according to the appellant, Phase II with integrated LNG facility fully satisfied the conditions required for grant of concessional rate of Customs duty applicable to power projects under Tariff Item 98.01.

 

The appellant also refers to terms of the Power Purchase Agreement (PPA) executed on 8.12.93 between DPC and Maharasthra State Electricity Board (MSEB) in support of its contention on LNG facility. The preamble to the agreement specifies that DPC will also construct facilities for the receipt, storage and transmission of fuel to the power station. These facilities include the single point, mooring and tankage for liquid fuel in Phase I and a breakwater jetty and facilities for the receipt, storage and regasification of LNG for Phase II.

 

The learned Sr. counsel who appeared on behalf of the Revenue submitted that in the matter of deciding classification Customs Department is the final authority and that the appellant cannot seek shelter under the approval granted by FIPB or the recommendation of the sponsoring authority. In support of the above proposition he placed reliance on the decision of the Supreme Court in Jackson Thevara 1992 (61) ELT 343 (SC) = (2002-TIOL-213-SC-CUS) and the decisions of this Tribunal in NALCO 1997 (94) ELT 409 = (2002-TIOL-138-CESTAT-DEL-LB) and EID Party 1991 (100) ELT 275(T). The Revenue would contend that LNG facility has been set up to make available Natural Gas which is the raw material for various industrial consumers including the Power Project. The equipment and material imported for implementing processes before gas came into existence (including unloading terminal, storage tank and regas terminal) cannot be regarded as equipment and material imported for initial setting up of the Power Project or substantial expansion of the existing Power Project within the meaning of Customs Tariff Heading 9801. Strong reliance was placed by the learned counsel on the decision of this Tribunal in NALCO wherein the port facility for unloading raw material and loading finished goods was denied the project import benefit by a Larger Bench of the Tribunal. It was further submitted that ratio of the decision in Indian Charge Chrome 1991 (112) ELT 753 (SC) could not support the appellant as it was contended. According to the Revenue the decision of Tribunal in Paradeep Phosphates Ltd. 2000 (120) ELT 704 is no longer good a law in view of the Larger Bench decision in NALCO. The decision of the Tribunal in TOYA Engineering 2000 (122) ELT 315 was rendered under different facts and that the decision is pending in appeal before the Supreme Court.

 

The Revenue would further contend that LNG facility is required neither for initial setting up of Phase I of the Power Project nor for substantial expansion of the existing unit. It only makes the project more cost effective. Therefore, the goods imported for setting up LNG facility cannot be brought within the purview of Customs Tariff Heading 9801.00(3). Equipment and material imported for setting up of LNG facility is not directly used in setting up the power project. Therefore, it cannot be treated as auxiliary equipment. This is the ratio of the decision of this Tribunal in Punjab State electricity Board 1987 (27) ELT 432. An auxiliary equipment required in connection with the substantial expansion is not covered under Tariff Heading 9801. Therefore, according to the Revenue, the LNG facility cannot be brought within the purview of the description given under Customs Tariff Heading 9801.00 (3), nor can it be considered an integral part of the power project.

 

On the second issue the Commissioner took the view that a portion of the value of off-shore services contract is liable to be added to the declared value of equipments under Rule 9(1)(b)(iv) of the Customs Valuation Rules. The Commissioner took into consideration the following facts.

 

The appellant had entered into four contracts, two off-shore contracts and two on-shore contracts. Out of the two off-shore contracts one relates to supply of equipment and machinery covered by the off-shore supply contract and the other relates to supply of services undertaken outside India covered by the off-shore services contracts. While the contract value for supply of machinery and equipment for the LNG facility was 103.354 million US$ the contract value for service charges was 149.379 million US$. Thus, the contract value for service charges for LNG facility would be 144.53% of the contract value for the machinery and equipment. In order to set up Phase II of the power project, DPC entered into two off-shore contracts. Off-shore supply contract for the supply of machinery was for 400 million US$ while the off-shore services contract for various services undertaken outside India was for consideration of 10 million US$. Thus in respect of Phase II of the Power project, the contract value for services charges was 25% of the contract value for machinery and equipment Following are the additions made by the Commissioner apportioning a portion of the service charges in respect of different items. They are given below under three charts:-

 

OTHER THAN MARINE i.e. LNG TERMINAL (Breakup of offshore services by Kvaerner)