Supreme Court clarifies the conditions for invoking extended limitation period under Section 28 of the Customs Act in duty evasion cases: Aban Loyd Chiles Offshore Limited vs. Commissioner of Customs (07 August 2006)

Date of the Judgment: 07 August 2006
Citation: [Not Available in Source Text]
Judges: Ashok Bhan, J. and Markandey Katju, J.

When can customs authorities use a longer period to demand unpaid duties? The Supreme Court addressed this important question in the case of Aban Loyd Chiles Offshore Limited vs. Commissioner of Customs. The core issue revolved around whether the Customs Department could invoke an extended period of limitation under Section 28 of the Customs Act to recover unpaid duties from companies engaged in offshore oil exploration. The Supreme Court held that the extended period of limitation could not be invoked in the absence of specific allegations of “collusion,” “willful misstatement,” or “suppression of facts” in the show cause notice.

Case Background

In the 1970s, the Oil and Natural Gas Corporation (ONGC) began offshore operations to explore and extract oil and natural gas. ONGC contracted with various companies to carry out these operations on its behalf. These contractors used oil rigs, following ONGC’s instructions. From 1970 to 1987, ONGC operated from facilities at 12, Victoria Docks, Mumbai. During this time, the customs department allowed goods to be transferred to and from the oil rigs without requiring customs formalities or duty payments.

In 1987, ONGC moved its offshore operations to Nhava Base because the facilities at Victoria Docks were insufficient for the expanding operations. Nhava Base offered larger-scale operations with five berths and extensive warehousing.

Between May 27, 1987, and June 30, 1987, the Appellants entered into contracts with ONGC to provide offshore oil, gas, and related services. These contracts were periodically extended. The appellants used oil rigs, which are floating vessels towed to drilling locations and then jacked up on legs that rest on the ocean floor. These rigs include drilling machinery to penetrate the ocean floor. The appellants conducted drilling operations beyond 12 miles from India (outside territorial waters) on the Continental Shelf.

Timeline

Course of Proceedings

The Commissioner of Customs confirmed the demands as per the show cause notices, rejecting the arguments made by the appellants. Essar Oil Limited was levied a duty of Rs. 10,16,35,914/- and a penalty of Rs. 50,00,000/-. Aban Loyd Chiles Offshore Limited was levied a duty of Rs. 5,06,12,412/- and a penalty of Rs. 25,00,000/-, and Amarship Management Limited was levied a duty of Rs. 68,66,092/- and a penalty of Rs. 4,00,000/-.

The Commissioner of Customs also ordered the confiscation of goods and levied a duty of Rs. 4,95,406/- and a penalty of Rs. 25,000/- upon Essar Oil Limited, and a duty of Rs. 4,69,104/- and a penalty of Rs. 25,000/- upon Aban Loyd Chiles Offshore Limited.

The appellants then filed five appeals before the Tribunal, which disposed of them through a common order.

The Tribunal accepted the appeals filed by Essar Oil Limited and Aban Loyd Chiles Offshore Limited, setting aside the confiscation of goods and the levied duties and penalties. The Tribunal noted that the department was aware of ONGC’s operations at Nhava and could have taken steps to regulate them. The remaining three appeals were dismissed, and the orders of the Commissioner of Customs were upheld.

Legal Framework

The primary legal provision at the heart of this case is Section 28 of the Customs Act, which deals with the recovery of duties not levied, short-levied, or erroneously refunded. The section stipulates a standard limitation period of six months for issuing a notice to demand such duties. However, the proviso to Section 28 allows for an extended period of five years under specific circumstances.

Section 28 of the Customs Act states:

“28. Notice for payment of duties, interest etc.-
(1) When any duty has not been levied or has been short-levied or
erroneously refunded, or when any interest payable has not been paid, part
paid or erroneously refunded, the proper officer may,-
(a) in the case of any import made by any individual for his personal
use or by Government or by any educational, research or charitable
institution or hospital, within one year;
(b) in any other case, within six months,
from the relevant date, serve notice on the person chargeable with the duty
or interest which has not been levied or charged or which has been so
short-levied or part paid or to whom the refund has erroneously been made,
requiring him to show cause why he should not pay the amount specified in
the notice:
Provided that where any duty has not been levied or has been short-
levied or the interest has not been charged or has been part paid
or the duty or interest has been erroneously refunded by reason of
collusion or any wilful mis-statement or suppression of facts by
the importer or the exporter or the agent or employee of the
importer or exporter, the provisions of this sub-section shall have
effect as if for the words “one year” and “six months”, the words
“five years” were substituted.
Explanation.- Where the service of the notice is stayed by an order
of a court, the period of such stay shall be excluded in computing
the aforesaid period of one year or six months or five years, as
the case may be.”

The proviso to Section 28 is crucial. It allows a longer period of five years to issue a notice if the duty was not levied or was short-levied due to “collusion” or “any willful mis-statement or suppression of facts” by the importer or exporter.

Arguments

Appellants’ Arguments:

• The Tribunal incorrectly applied the extended limitation period under Section 28 of the Customs Act.
• The Customs Department was fully aware of all activities carried out by the appellants and ONGC at Nhava Base and, before that, at 12 Victoria Docks.
• The show cause notice did not allege that the appellants evaded duty payments through collusion with customs officers or by making willful misstatements or suppressing facts.
• Relying on Collector of Central Excise v. H.M.M. Limited., [1995] Supp 3 SCC 322, the notice must specify which omissions or commissions were committed to justify the extended limitation period.
• The show cause notice failed to specify the omissions or commissions that would justify invoking the extended period of limitation.
• The extended period cannot be invoked based on mere inaction or failure by the appellants; there was no deliberate withholding of information.
• Section 11-A of the Central Excise Act is similar to Section 28 of the Customs Act.

Department’s Arguments:

• The show cause notice, when read as a whole, indicates that the appellants were guilty of willful suppression of facts, even though it does not explicitly state collusion, willful misstatement, or willful suppression of facts.

Submissions Table

Issues Framed by the Supreme Court

1. Whether the Department could invoke the extended period of limitation under the proviso to Section 28 of the Act.

Treatment of the Issue by the Court

Authorities

• Collector of Central Excise v. H.M.M. Limited., [1995] Supp 3 SCC 322 (Supreme Court of India): The court relied on this case to emphasize that a show cause notice must specifically state which omissions or commissions were committed to justify extending the limitation period.

Judgment

The Supreme Court partly accepted the appeals, stating that the appellants were liable to pay duty only for the six months immediately preceding the issuance of the show cause notice. The demand for the subsequent period was held to be beyond the period of limitation, and the corresponding duty and penalty were quashed. The penalty for the initial six-month period was also waived, given the appellants’ agreement to pay the duty for that period. The point on merits was left open, and the parties were directed to bear their own costs.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Collector of Central Excise v. H.M.M. Limited., [1995] Supp 3 SCC 322: The Court heavily relied on this case, citing it to emphasize that a show cause notice must specifically state which omissions or commissions were committed to justify extending the limitation period. This case was used to support the argument that the show cause notice was deficient because it did not contain specific allegations of collusion, willful misstatement, or suppression of facts.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the absence of specific allegations in the show cause notice regarding collusion, willful misstatement, or suppression of facts. The Court emphasized that the extended period of limitation under Section 28 of the Customs Act could only be invoked if the show cause notice explicitly stated that the duty was not levied or was short-levied due to these factors. The Court also considered the fact that the Customs Department was aware of ONGC’s operations at Nhava Base, which further weakened the argument that the appellants had willfully suppressed any information.

Fact:Law Ratio

Key Takeaways

• Specificity in Show Cause Notices: Customs authorities must include specific allegations of collusion, willful misstatement, or suppression of facts in show cause notices to invoke the extended period of limitation under Section 28 of the Customs Act.
• Awareness of Operations: If the Customs Department is aware of the operations being carried out by an entity, it weakens the argument for willful suppression of facts.
• Compliance with Legal Requirements: Strict compliance with the legal requirements for invoking extended periods of limitation is essential to ensure fairness and transparency.

Development of Law

The judgment reinforces the principle that the extended period of limitation under Section 28 of the Customs Act can only be invoked when there is clear evidence of collusion, willful misstatement, or suppression of facts. This clarifies the conditions under which customs authorities can pursue duty evasion cases beyond the standard limitation period.

Conclusion

In Aban Loyd Chiles Offshore Limited vs. Commissioner of Customs, the Supreme Court held that the extended period of limitation under Section 28 of the Customs Act could not be invoked because the show cause notice lacked specific allegations of collusion, willful misstatement, or suppression of facts. The court emphasized the importance of specificity in show cause notices and the need for customs authorities to comply with legal requirements when pursuing duty evasion cases.