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Navinchandra & Co. v. Commissioner Of Customs/Acc, Mumbai
Factual and Procedural Background
The appellants, in the normal course of business, imported a consignment described as "WITTOCX IMPREGNATED SCAIVES (COBALT FREE)" and filed Bill of Entry No. 07451 dated 17-12-93 at the Air Cargo Complex, Sahar Airport, Mumbai for clearance. The consolidated assessable value on conversion to Indian Rupees with requisite additions was declared (variously reflected in the invoice) and the declared total CIF Bombay (in Belgian Francs in the invoice) was BF 623,900.
The invoice showed two differently priced types of scaives identified by the supplier's references "REF : LMJ-3" and "REF : LMJ-1" with markedly different unit prices (e.g., one line showing 53 units at 9,000 BF each and another showing 3 units at 27,000 BF each). Because of this price disparity, customs officers sent the goods for examination on first check, drew samples and conducted enquiries to ascertain whether the items were two distinct kinds of goods or were essentially the same item declared under different descriptions and values.
A show cause notice followed from departmental enquiries and laboratory testing (including reports from IIT). The Commissioner relied upon a second IIT test report to conclude that the two types (LMJ-1 and LMJ-3) were essentially identical in physical and chemical properties and thus not sufficiently different to justify different declared values. The appellants challenged this conclusion before the adjudicating authority whose decision was appealed to the tribunal (order delivered per S.S. Sekhon, Member (T)). The tribunal heard documentary material (invoice, manufacturer literature, a manufacturer's letter dated 14-12-93, catalogue, video, and test reports) and submissions from both sides before issuing its order allowing the appeal.
Legal Issues Presented
- Whether the imported scaives described as LMJ-1 and LMJ-3 were distinct goods justifying different transaction values as declared in the invoice.
- Whether the transaction value as declared (total CIF) could be rejected and the value determined afresh under subsequent rules (Rules 5–8) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.
- Whether any enhancement of value, imposition of additional duty or penalty on the appellants was justified on the facts and evidence.
Arguments of the Parties
Appellant's Arguments
- The appellants maintained that LMJ-1 and LMJ-3 are different types of scaives and legitimately carry different prices. They relied on a manufacturer letter (dated 14-12-93) which explained differences in composition, quality of diamond powder (natural vs. synthetic), fabrication, re-use of moulding frames and finishing, and asserted LMJ-1 provides faster polishing and better smoothing than LMJ-3.
- They argued the Department's doubts were based on suspicion and that absence of certain descriptive details in the manufacturer's published catalogue or video did not disprove the supplier's written technical explanation; the catalogue need not list every internal manufacturing distinction.
- They contested the validity of some test procedures and results: they alleged incorrect sample labeling/sampling (one sample from another supplier was allegedly sent), urged rejection of the first IIT report on that basis, and questioned reliance on investigatory material not set out in the show cause notice (e.g., investigations by a Belgian official).
- They produced certificates from an academic (Professor Wettinck) and relied on manufacturer evidence showing developmental and tested differences, and they relied on case law to support valuation under transaction value rules.
Respondent / Department's Arguments
- The Department noted a substantial price disparity between the two invoice line items and, given historical patterns of imports from the same manufacturer with variable descriptions but identical appearance, suspected misdeclaration. This prompted physical examination, sampling and laboratory testing.
- The Commissioner relied primarily on a second IIT test report concluding that the material constituents and the distribution of diamond particles in LMJ-1 and LMJ-3 were "basically identical" in physical and chemical properties and that there was "no significant qualitative difference in the polishing media."
- On the basis of the IIT report, the Department proceeded to treat the declared transaction value as unreliable and proposed valuation adjustments (and consequential demands) under the relevant customs rules and issued the show cause notice.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Eicher Tractors Ltd. v. Commissioner of Customs, Mumbai (Supreme Court) | Principle that transaction value under Rule 4 should be accepted unless conditions to reject it (as specified in the Rules) are made out; if transaction value stands, there is no basis to determine value under Rules 5–8. | The tribunal followed the Supreme Court's position to hold that the declared transaction value (total CIF) could not be displaced because none of the prescribed conditions for departing from transaction value were established on the facts. Accordingly, the tribunal rejected the departmental enhancement based on the presumption that the two types were the same. |
Court's Reasoning and Analysis
The tribunal's analysis proceeded through the following steps, based strictly on the material and findings recorded in the opinion:
- Examination of invoice and packaging details: The tribunal reviewed the invoice entries showing two differently priced items referenced as LMJ-1 and LMJ-3, and noted the departmental concern that a small quantity at a much higher unit price contrasted sharply with a larger quantity at a much lower unit price.
- Review of departmental investigation materials: The tribunal considered that the Department had obtained catalogues, price lists, literature and a video demonstration from the manufacturer and that these sources did not indicate the existence of different varieties of scaives identified by "extent of impregnation" or by LMJ-1 / LMJ-2 / LMJ-3 nomenclature in a way that would explain the price differential.
- Consideration of IIT test reports: The Commissioner heavily relied on a second IIT test report which concluded that, in basic physical and chemical properties and in the distribution of diamond particles, LMJ-1 and LMJ-3 were essentially identical, and that there was "no significant qualitative difference" in the polishing media.
- Examination of manufacturer's letter and technical claims: The tribunal carefully set out the manufacturer's letter (dated 14-12-93) which claimed material and fabrication differences — higher concentration of natural diamond powder in LMJ-1 versus synthetic powder in LMJ-3, differences in moulding frames and finishing, and a claim that LMJ-1 yields faster polishing and better smoothing. The tribunal noted these claims in detail (composition and fabrication paragraphs).
- Reconciling test findings with manufacturer's claims: The tribunal observed that the IIT test reports established similarity in basic physical and chemical properties but did not address or specifically disprove the manufacturer's assertions about fabrication differences, the re-use of moulding frames for LMJ-3, differential finishing, or the practical commercial difference in polishing performance (faster polishing/better smoothing), which bore directly on market value and demand.
- Application of Customs Valuation rules and precedent: Relying on the Interpretative Notes to Rule 4 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (the "price actually paid or payable" principle) and on the Supreme Court decision in Eicher Tractors Ltd., the tribunal held that the transaction value as declared (total CIF) must stand unless the specific conditions to reject transaction value were established. The tribunal concluded none of those conditions were made out in the record.
- Conclusion on evidence sufficiency: Because the departmental reliance was essentially on the IIT report which did not address the crucial commercial and fabrication differences advanced by the manufacturer and importer, the tribunal found that misdeclaration was not proved and there was no justified basis to depart from the declared transaction value, to enhance the value, or to impose penalties.
Holding and Implications
Holding: APPEAL ALLOWED.
Implications:
- Direct effect on the parties: The tribunal allowed the appeal and held that the declared transaction value (total CIF as declared) should be accepted; there was no valid basis on the record to enhance the value, levy additional duty or impose penalty on the appellants.
- On valuation methodology: The tribunal applied the Interpretative Notes to Rule 4 and followed the Supreme Court precedent (Eicher Tractors Ltd.) to hold that the transaction value cannot be departed from unless the conditions in the Rules to reject it are satisfied — which the Department had not established in this case.
- On precedent and broader law: The opinion does not set a new legal precedent; it applies existing rules and the cited Supreme Court authority to the facts before it. The tribunal emphasized that the IIT test report did not conclusively rebut the manufacturer's claims and therefore did not justify rejection of the transaction value.
This summary is prepared solely from the text of the provided opinion and does not add or infer facts not contained therein.
[Order per : S.S. Sekhon, Member (T)]. - The appellants in their normal course of business imported a consignment of WITTOCX IMPREGNATED SCAIVES (COBALT FREE) and filed a Bill of Entry No. 07451 dated 17-12-93 in the Air Cargo Complex at Sahar Airport, Mumbai for clearance of the subject goods. The goods were described as ‘SCAIVES’ and the consolidated assessable value on conversion to Indian Rupees with requisite additions was declared as Rs. 5,63,010/-. The perusal of the invoice described the goods as follows -
| Description | Nos. | Unit Price B/F | Total B/F | ||
| Wittocx Impregnated Scaives (Cobalt Free) | |||||
| REF : LMJ-3 | |||||
| Width of Diamond Layer : 30 MM | |||||
| Grain : BB | 53 | 9,000 | 4,77,000 | ||
| Wittocx Impregnated Scaives (Cobalt Free) | |||||
| REF : LMJ-1 | |||||
| Width of Diamond Layer : 30 MM | |||||
| Grain : BB | 3 | 27,00 | 81,000 | ||
| Packing : | 14,300 | ||||
| --------- | |||||
| Total Ex-Factory | : | 5,72,300 | |||
| Insurance : | 2,400 | ||||
| Air Freight : | 49,200 | ||||
| ---------- | |||||
| Total CIF Bombay : | 6,23,900 | ||||
| ---------- | |||||
The details in the invoice as extracted above are also followed by :
“PLEASE NOTE : SCAIVES PACKED INTO 01 CASE 0.85 X O.65 X 0.85H:
• SCAIVES ARE NOT WORKED-IN FOR PURPOSE OF EYE-CHECKING:
• THE CASE IS MARKED WITH YELLOW BAND ACROSS FOR EASY IDENTIFICATION”
However, the appellants submitted that both the types of SCAIVES fall under the same heading of the Tariff Schedule. They declared the consolidated value of the subject imports.
2. Since the invoice for the imports of the goods had declared two different types of scaives at different unit price for each, it was observed by the officers that the price of 3 pieces was almost three times of the price declared for 53 pieces of the scaives. Since there was a vast difference between the price of the two types of scaives named as LMJ-3 and LMJ-1, the goods were sent for examination on first check basis and samples were drawn for inspection and enquiries were alleged to ascertain whether they were two kinds of goods and whether there was a difference between the two types of scaives necessitating the difference in value.
3. Diamond impregnated scaives are tools used for polishing diamonds. The subject import is an item consisting of a disk mounted on a spindle. The polishing medium is in the form of a band of about 30 millimetres and is said to be made up of diamond powder held together by a binding material. The manufacturer and the supplier for the subject import is M/s. Wittocx N.V. of Belgium. The Department has observed several instances of import of this item from the aforementioned manufacturer/supplier. It has been observed that there is a considerable variation in the unit price of scaives which, though variously described, were identical in appearance and the differences in value were attributed to quality differences. The invoices received over a period of time indicate that scaives have been imported at different values, wherein the description given in the invoice bear qualifications such as “1/3rd impregnated”, “fully impregnated”, “1/5th impregnated” etc. There was even an instance of import of 1/10th impregnation. The value declared was in proportion to the “extent of impregnation”. Subsequently, it was observed that Scaives were described in invoice as “LMJ-1”, “LMJ-2”. “LMJ-3” etc. without a reference to “extent of impregnation”. The value of LMJ-1 was same as that of the “fully impregnated” Scaives. Give the variety of references and classifications attached to Scaives imported from this company for items which are indistinguishable in appearance, it was felt that these Scaives received from the supplier bearing such description need to be investigated further.
4. In an effort to gather further information about the Scaives catalogues, price lists, literature and a video demonstration pertaining to the item in question were obtained. These were studied to determine whether there is indeed such a variety of scaives with such description as mentioned above in the market and whether any other manufacturer supplies Scaives with a reference to the extent of impregnation. It was observed from the study that the catalogue and literature supplied by the manufacturer did not indicate the existence of different variety of Scaives with respect of -
(a) extent of impregnation i.e. fully impregnated, 1/3rd impregnated, 1/5th impregnated, etc., or
(b) LMJ-1, LMJ-2, LMJ-3, etc.
5. The importer all along have been insisting that there was a vast difference between the two types Scaives LMJ-1 and LMJ-3 imported by them and in support of their claim on the basis of certain write-up given by the suppliers M/s. Wittox N.V., which outlines the basic difference between the two types of scaives. They have claimed the allegation of show cause notice issued were based on insufficient appreciation of facts. According to the importer, since the show cause notice itself states that a variety of scaives are imported with different specifications at different prices and in direct proportional to the “extent of impregnation” and it was not mandatory for a supplier to publish in its literature, the detailed particular of all the items manufactured by them merely to educate the officials of the Government Department or for the publicity and therefore non-availability of such information in the published catalogue itself adequately satisfy the need of the customer to difference between the two types of scaives would not cause the issue of the present show cause notice.
6. They also submitted that with regard to the term “extent of impregnation”, while indicating that there are possibility of what this terms could mean, the Department was merely expressing a doubt, therefore, not amounting to any acceptable evidence. They further argue that if scaives have been imported regularly then how come the Department has never subjected the items imported from M/s. Wittox N.V. (being the major supplier) to any verification as to the “extent of impregnation”. They have questioned the motive of the Department with regard to the fact that the importer has been singled out for such “ignominous treatment” when it is known that several consignment has been imported by different importer. They have questioned as to whether the Department has sought any particular clarification from the suppliers to support the allegation.
7. Going to the Video tape demonstration they have stated that the different types of scaives such as LMJ-1 and LMJ-3 has not been mentioned in Video tape is due to the fact that these tapes were produced before the introduction of LMJ type of Scaives. They further stated that the Department has based their case on suspicion, in spite of investigating the case spread over considerable amount of time. They say that the auction conducted by the Airport Authority of India was stage managed with the willingness and voluntary collusion of the Department with the purpose of harassing the importers. They have contested that out of the samples sent for test to IIT Mumbai, incorrect samples were sent because one of the samples sent to them belong to the consignment of M/s. Diampol and that sample was LMJ-3, although the handwritten label showed the nature of the sample toto be LMJ-1. Therefore, they requested that the test result obtained from IIT (which is being termed as first report in this case) should be rejected in toto and the valuation under the Customs Rules made, thereunder did not permit the price to be increased for the purpose of assessment as proposed in the above show cause notice. The appellants also submitted that the enquiries were conducted by the department through Second Secretary in the High Commission of India in London which they claimed was based on the investigation carried out by one Mr. L. Van Schorisse, Head Inspector of Excise and Customs in Antwerp concerning different types of cases. That report has not been relied upon in the show cause notice. They relied on the certificates from a Professor Wettinck, which was to prove that LMJ-1 and LMJ-3 are the result of development efforts made by the manufacturer over a period of 20 years and that the manufacturing formula has been tested in University of Ghent (Belgium) and that itself was probably possible to produce Scaives of the said types in the prices declared i.e. LMJ-1 for 27000 BEF and LMJ-3 for 9000 BEF and they relied upon various case laws.
8. After hearing both sides and considering the submissions, it is found -
(a) The Commissioner has gone by the second test report by IIT, of samples forwarded to them. He has considered that report going to determine the crux of this case to hold the material constituents of both types of Scaives LMJ1 and LMJ3 to be basically identical in physical and chemical properties with the size of the distribution of diamond particles in the matrix to be similar and that there was no significant qualitative difference in the polishing media. The Commissioner has relied in detail and concluded, as to how there was no significant qualitative difference in the two types of Scaives under test. He has relied upon the book “The properties of Natural and Synthetic diamonds” Edited by J.E. Field, Academic Press, cited by IIT in the reply to the importer’s questionnaire wherein it was observed that natural diamonds do no necessarily shine brighter than synthetic diamonds. It depends upon the origin of the diamond and the type of inclusions/impurities found in the diamonds. He has observed that there was no specific findings as to the silicon carbide content. His findings are silent whether the quality of diamond powder used was ‘natural’ or of synthetic diamonds.
(b) The appellants have taken the stand that the main differences in composition and fabrication of WITTOCX impregnated scaives Ref. LMJ1 and LMJ3 as per the manufacturer letter dated 14-12-93 is -
“COMPOSITION
Size of the diamond grain into LMJ - (13B) and LMJ-3(BB) scaives is the same. You also find the same grainsize in LMJ-1 (mm) and LMJ-3 (mm) scaives.
LMJ-1 scaives however contain high quality, special selected and well sized micron powder, with a high concentration on natural diamond powder.
In comparison with LMJ-1, LMJ-3 scaives contain poor quality powder, with only synthetic diamond powder.
Difference in the quality of the diamond powder worked up in the 2 types of scaives becomes visible when you keep the scaives in the sunlight or under a bulb. When the scaives are not yet worked in or not treated with an anticorosion liquid, LMJ-1 scaives will clearly show more glittering.
In addition to the difference of the diamond powder itself, there is also a difference in the components of the matrix, which hold the diamond grains together
FABRICATION
The moulding frame of our impregnated scaives is made of a special refractair steel, which is used only once for the manufacturing of a LMJ-1 scaife, but several times for the manufacturing of LMJ-3 scaives, before adjusting or replacing the frame. Consequently LMJ-1 scaives, compared with LMJ-3 scaives, have a more equal hardness all over the surface of the scaife.
Extra man-hours are also required to give out LMJ - scaives a more accurate level with flatness between 1 and 2 micron, going up to 5 micron for LMJ-3 scaives.
The use of more expensive but in quality also better raw materials, as well as a more profound finishing of the product, explains the difference in price but also the difference in quality : LMJ-1 scaives will provide faster polishing and better smoothing, compared to LMJ-3 scaives.”
A perusal of the above would show, that LMJ-1 scaives contain high quality, special selected and well sized Micron Powder with a high concentration on natural diamond powder, whereas LMJ-3 Scaives would contain poor quality powder, with only synthetic diamond powder. The fabrication is on the moulding frame, which are made of a special Refractair steel, used only once in the manufacturing of LMJ-1 Scaives, while for LMJ-3, the said steel frame is used several times. It is claimed that LMJ-1 as compared to LMJ-3 Scaives require extra man hours to fabricate. The use of more expensive but better raw material in LMJ-1 Scaives requiring more labour inputs to produce as compared to LMJ-3 which are Scaives with refurbished polishing surface would definitely result in the cost and consequently price of LMJ-1 to be more than LMJ-3. The reasons for importing only 3 pieces of costlier Scaives at 27,000/- B/F each and 53 pieces of LMJ-1 at 9,000 is explained by a statement that LMJ-1 provides faster polishing and better smoothing, compared to LMJ-3 by the manufacturer, vide his above extracted letter on record. This when read with the appellants submissions made, that for the type of diamonds to be polished in India, there is a higher demand for LMJ-1 than LMJ-3 scaives has to be considered, even if final effect would leave the same polish on ‘job’ which these scaives have to be put to work. The lower authority has not considered this vital commercial aspect and overlooked this aspect of the end result, which LMJ-1 will provide as compared to LMJ-3. The test report, as relied upon, do not comment anything as regards fabrication of the frames and the claims and submissions as regards the re-use of the frame. The test reports only go on to establish that in basic physical and chemical properties the tool in question are the same and no effective difference was observed. There is no finding in the test report to reject the claim of the appellants, that LMJ-1 provides faster better, smoother polish than LMJ-3. This aspect of the quality of two types scaives could have been easily tested by the investigators at any diamond polishing unit, since a tool that would result in faster polishing and better smoothing would obviously be more in demand and be more costly than a tool not as efficient, which is stated to be refurbished on the frame, as claimed by the letter dated 14-12-93 of the manufacturer. These aspects of the claim of a vital nature, of differences in LMJ-1 and LMJ-3 have not been rebutted. These are essential points going to the root of the difference between the prices of the two types of scaives. The IIT test report and relied upon extensively and solely by the Commissioner, does not specifically reject this claim of the difference between LMJ-1 and LMJ-3 by the manufacturer. Therefore it cannot be safely concluded from this test report that LMJ-1 and LMJ-3 are the same Scaives. It is claimed, LMJ-1 is original, while LMJ-3 is refurbished, and that claim is not assailed. Therefore there is no misdeclaration proved.
(c) The manufacturers and appellants, both have claimed that LMJ-1 and LMJ-3, are with different, declared prices; No finding has been arrived at to challenge the different prices as shown in the invoice. The invoice price should be the transaction value for the imported goods. From the Interpretative Notes of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and especially note to Rule 4 which reads as follows -
“Note to Rule 4
Price actually paid or payable.
The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods.”
It would appear that Valuation under Rule 4, the Transaction Value in the facts of this case should be total c.i.f. Bombay : BF 623900 on which Air freight deductions are to be granted. This total price payable cannot be ignored and the transaction value can be departed from, only in terms of the conditions provided under the rules. None of the conditions as prescribed in the rules to debar from the transaction value has been made out. The alleged misdeclaration of the two types scaives to be the same is not established as per the findings herein above. Therefore, relying upon the decision of the Supreme Court in the case of Eicher Tractors Ltd. v. Commissioner of Customs, Mumbai reported in (S.C.) wherein the Apex Court has held as under -
“It is only when ‘the’ transaction value is rejected, then under Rule 3(ii) the value shall be determined by proceeding subsequently through Rules 5 to 8 - Conversely, if the transaction value can be determined under Rule 4(1) and does not fall under any of the exceptions in Rule 4(2), there is no question of determining the value under the subsequent Rules.”
and following this position of the law, the present determination of value, as arrived cannot be upheld, especially when the LMJ-1 and LMJ-3 are not established to be the same goods.
(d) When Valuation under Rule 4(1) as applicable, is determined, then there is no case to enhance the values and or determine any additional duty. There is also no cause for any penalty.
9. In view of our above findings this appeal is to be allowed. Ordered accordingly.
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