1. Pride Foramer, the appellant in appeal 1348/02, was the owner of oil well drilling rigs and drill ships which it leased out to parties engaged in oil exploration 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 the rig to be Rs. 783,439,838. The bill of entry was accompanied by an invoice showing details of the value of fixed and loose equipment, spares and consumables on the rig for a total c.i.f. value of U.S. $ 17,682,690.
The invoice was issued by the project office in Mumbai of Pride Foramer, and signed by Jean Paul Rabier, its manager in India. The rig was permitted to be cleared on payment of duty at the declared value.
2. Subsequent investigation by the department led it to conclude that the value of the price was underdeclared and that the true value of the rig ought to be Rs. 1966,950,295. The rig was placed under seizure in September 2001 and ordered to be released provisionally by the Bombay High Court after securing guarantees and deposits. Notice was issued proposing to enhance the value of the rig as stated above, proposing its confiscation under Clause (m) of Section 111 of the Act on the ground that its value was misdeclared. Penalty was also proposed on the importer, Rabier and Bureau Veritas, a marine inspection agency whose Singapore office had issued two reports in 1999 and 2000 certifying the value of the rig. The notice alleged that the values certified by Bureau Veritas were improper. After considering the cause shown and hearing the parties, the Commissioner passed the order impugned in this appeal. He held the value of the rig to be Rs. 1451,893,375 (equivalent to $ 32.78 million) and demanded differential duty of about Rs. 29.45 crores. He ordered confiscation of the rig with an option to redeem it on payment of fine of Rs. 5 crores, demanded interest on the differential duty, imposed penalties equal to the duty on the company, Rs. 2 lakhs on Jean Paul Rabier and Rs. 2 lakhs on Bureau Veritas. The appeals against this order filed by these persons and by the Commissioner are being disposed of in this order.
3. In his order, the Commissioner finds that the transaction value in terms of Rule 4 of the Customs Valuation Rules, 1988 of the rig was the price paid for its purchase in March, 1999 by the importer of US $ 17 million. The sale was made in order for the appellant to bring the rig into India so that it could fulfil the contract that it signed in January of that year. He declines to accept this value on the ground that the buyer, Pride Foramer and seller, Pride Global Ltd. were related parties, each of them being a subsidiary company of 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 of owners of such rigs is limited. Such leases require the deployment of a rig with its crew onboard. Oil well drilling is a specialised task requiring considerable skill and experience and this is why companies undertaking oil exploration or exploitation venture do not themselves engage upon drilling but hire the rigs with their crew who are competent to do so.
In addition, number of owners of rigs are limited, addition to the existing fleet of rigs also takes time and involves expenses. The rigs are hired out by their owners on the basis of the daily rent referred to as the dayrate. Whenever oil prices go up due to any reason, there is increase in exploitation of existing oil reserve and exploration for new field. This results in increased demand for rigs, pushing up dayrates. This, in turn increases the price of the rigs. Therefore, the prices of rigs are subject to considerable fluctuation which is more than the fluctuation in the prices of other commodities which are not in such short supply. The prices of oil fell to very low level in 1999 from the high level in 1997. This explains the substantial difference between the price paid for the rig in 1997 and 1999. The counsel for the appellant cites considerable material from various publications relating to the drilling rigs in support of this contention. Prior to the purchase in 1999, an estimate was obtained from a reputed ship broker in Paris, Barry Rogliano Salles & Cie who indicated the price to be between $ 15 and $ 17 million. The fact that the rig was insured for $ 18 million also shows that the transaction value has not influenced the relationship. It is contended alternatively that if the transaction value is not to be accepted, its value ought to be based on the depreciation from its cost of manufacture by applying the Board's circular. This is exactly what has been done with regard to the rig Griffin Alexander II imported by Aban Loyd Chiles Offshore Ltd in appeal C/716/02. The Commissioner in this matter has declined to do so in an arbitrary manner. He also questions the applicability of the extended period of limitation contained in Sub-section (1) of Section 28 of the Act, invoked in the show cause notice. He disputes the liability to penalty on the importer and on Rabier.
5. The Counsel for Bureau Veritas contends that the appellant, a reputed valuer of ships, had carried out the valuation 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 sides are agreed that this price is the transaction value. Both sides are also agreed that the seller of the rig and its purchaser were related. What is therefore to be determined is whether the transaction value is to be accepted and if not by what method the value for assessment of the rig has to be determined.
8. Rule 4(2) of the Valuation Rules, 1988 provides that the transaction value of goods shall be accepted, except in cases specified in the proviso under that sub-rule. Clause (d) of the proviso under that sub-rule provides that where a buyer and seller are related, the transaction value is acceptable for Customs purposes under the provisions of Sub-rule (3). Sub-rule (3) reads as follows : "3 (a) Where the buyer and seller are related, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicates that the relationship did not influence the price.
(b) In a sale between the related persons, the transaction value shall be accepted whenever demonstrates that the declared value of the goods being valued, closely approximates to one of the following values ascertained at or about the same time - (i) the transaction value of identical goods, or of similar goods, any sales to unrelated buyers to India; (ii) the deductive value for identical goods or similar goods; (iii) the computed value for identical goods or similar goods.
Provided that in applying the value used for comparison, due account shall be taken of demonstrated differences in commercial levels, quantity levels, adjustments in accordance with the provisions of Rule 9 of these rules and cost incurred by the seller in sales in which he and the buyer are not related; (c) Substitute values shall not be established under the provisions of Clause (b) of this sub-rule." 9. The interpretative notes to Rule 4(3) explain that Rule 4(3)(a) and Rule 4(3)(b) provide different means of establishing the acceptability of the transaction value. It is not intended while applying Rule 4(3)(a) that there should be an examination of the circumstances of sale in all cases where the buyer and the seller are related. Such examination would only be required where there are doubts about the acceptability of the price.
10. There were no earlier transaction between the buyer and the seller of this rig which had been examined by the Customs. We have now therefore 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: The values shown are levels at which we believe there is a reasonable chance of a unit selling. They are based on our outlook with potential buyers and sellers, oil companies, shipyards, financial institutions etc. There is no guarantee that a particular rig will fetch precisely the amount shown.
12. The figures in this table are illuminating for two reasons. Firstly they establish that values of rigs are subject to fluctuations, sometime violent fluctuation. Secondly they show that in the period from 1992 to rigs both jack-ups and semi submersible rose in value from 1992 to 1999 rigs both jack-ups and semi-submersible rose in value from 1992 until December, 1997, began to fall steeply thereafter. Prices in March, 1999 of both kinds of rigs were half, or less than half, of the prices in December, 1997. The rig that we are concerned with is a 300 feet cantilever built in 1972. Such rigs built after 1980 are estimated to have a value of $ 70 million in December, 1997 and of $ 35-40 million in March, 1999. The price of a rig built in 1972 is not indicated. However, the rate of fall in the prices of rigs, as shown in the table, more or less corresponds to a difference between the price that the rig under consideration fetched in October, 1997, and the price that it fetched in March, 1999. These are not of course actual prices, as the note to the table makes it clear. However, in every field of trading, the price at which the transaction so concluded would be based, where earlier recent sale available on the market conditions based upon expectations of the buyer and seller.
13. The Offshore Drilling Monthly of Jefferies & Co. Inc. also publishes, in its monthly reports, current rig fleet status and net asset values of major rig owning companies. It indicates, for each rig, in addition to such details as year of delivery, its design (or class), the asset liquidation value and the asset replacement value and current dayrates. These values are no doubt appraised in order to arrive at the total value of assets of a company, which is again required to determine its net asset value. The reference to these publications shows the changing values of drilling rigs at different points of time.
A few examples are cited below: 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 $ 23.45 per barrel (rounded off to the second decimal point). They dropped to US $ 17.45 in April and, hovering around this price for 7 or 8 months, dropped to US $ 15.11 in January, 1998. This downward trend continued in this manner until the lowest figure of US $ 9.88 was the average for December, 1998. This sharp and continuing fall is also referred to in these publications. The Bassoe Offshore Review of 1999 says that "at the start of 1999, oil was selling as cheap as at any time this Century -after adjustment for inflation - was in residual confidence from 1998 evaporated completely." It is, therefore, an undisputed fact that in between January, 1997 and January 1999 there was a drop of more than 50% in the price of oil. It is also worth keeping in mind that it is only after April 1999 that oil prices began to pick up. The Brent oil prices went up from a low of US $ 9.98 in January to US $ 11.12 in the following month, fell again to US $ 10.23 in March; thereafter it began to climb slowly reaching US $ 19.03 at the end of August.
16. Let us now examine the relationship between the prices of oil and prices at which rigs are traded and to conclude whether the contention that the fall in prices of oil resulted in the fall in the prices of rigs has to be accepted. The appellant's argument in this regard runs thus. Providing for oil, both developing new fields as well as exploiting current fields, is undertaken mainly by oil companies. The money for this purpose comes out of the profit of these companies. When oil prices are high, the profits are high and a greater proportion can be allocated towards development. Further, when oil prices shown upward trend, existing fields which would otherwise be unviable for exploitation and are therefore drilled to produce oil. Conversely, when the prices fall, profits of oil companies fall and prospects for development of fresh fields also look less inviting. Therefore, the oil companies cut down on drilling and the demand for rigs falls. The number of rigs is small as is the number of operators. Drilling for oil is a complex and sophisticated business requiring considerable technical knowledge and experience. The oil rig ow ers are specialized in this field. In the main, oil companies hire rigs from their owners along with crew on board, for purpose's of drilling. Therefore, changes in demand and supply of oil are more 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 fall varies from area to area, being more pronounced for some than others. Thus, the value for jackups 350 feet long in the US (Gulf of Mexico) has fallen from a range of US $ 60,000 - 85,000 in May, 1997 to US $ 17,000 - 31,000 in May, 1999. It is less pronounced for Middle East, being US $ 31,000 - 56,000 in 1997 and US $ 21,000 - 29,000 in 1999. These publications too clearly appreciate about the fact that use of oil rigs reduce during periods of low prices of oil. The Bassoe Review of February, 1999 indicates that due to the pessimistic outlook for the offshore drilling market for the remainder of this year, and the possibility that it remained depressed into 2000 is likely that values of drilling rigs, which have already fallen, will fall further. It emphasizes that drilling contractors are seeking to conserve cash, preparing for what could be volatile market in the next couple of years.
18. These arguments were also raised before the Commissioner and data produced in support. He has, however, refused to accept it. He says that in Paragraphs 44.2 and 44.3 of his order as follows : "44.2 The changes in petroleum may not have a major impact on the earning capacity of the rig, in view of the fact that most of the rigs are admittedly tied up with various oil companies on long term contracts. The contract obtained at peak demand time derives higher income even during the lean period during the running of the contract and vice versa. In effect, these may fluctuate and the immediate gains in the long-term aspect may remain the same. As per information furnished by the noticee themselves, the demand for oil worldwide is increasing and the crude price has in fact gone up by 23% in the international market when compared with the value in the time of purchase of the rig in 1997 by M/s. Pride Global at US $ 35.35 mil lion. The valuation as reflected in the journals and information produced by the noticee, therefore, at the best, can be considered as a utility value related to demand and supply rather than the value in exchange. It is also important that in lean season there is virtually no transaction of oil rigs between independent parties.
44.3 It is a matter of common knowledge that economic viability is a basic concept involved in the analysis of consumer behaviour and demand, utility is a subjective concept and depends on the intensity of want. In principle, the 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 and not natural. Since almost all the rigs are deployed on long term contract, there is hardly any rig available to meet additional demand.
Therefore the rig owners quote substantially high dayrates.
20. It is no doubt true, as the department contends, that fluctuations in oil prices are created and not natural. The existence of OPEC (Organization of Petroleum Export Countries), a cartel of the major oil producing countries, when the significant role he plays in influencing oil prices by determining the quotas for export of oil from these countries is well known. However, whether created or not, the effect that the oil prices do undergo fluctuations, sometimes violent. The contention that jackup rates remained high because there is a long-term demand for oil is what reflected in the varying figures for dayrates that have been sought by the appellants. The Commissioner in fact relies in the extract quoted above on the fact that these publications do show fluctuations. His explanation that they refer to 'value in utility", which is different from "value in exchange" is difficult to understand. In the normal course, the price of any article would be determined by interaction between the value to it of the seller and the prospective value attributed to by the buyer. It is the interplay of these two forces that results in a sale and purchase at a particular price. If the value of the article of buyer is so high that he would not sell it for any price, there would be no sale. This could be true, for example, of an article that has sentimental value to a person.
Conversely, the price that a buyer is willing to buy would depend upon, the extent to which he requires to possess or use the article in question. If it were of no use to him, that it did not satisfy any of his wants physically, mentally or emotionally, he would not buy it.
19. The Commissioner or the Departmental Representative do not cast doubt on the accuracy or reliability of these publications. On the other hand, they rely upon them to challenge the importer's case, and to find support for the department's own case. Prices and other details relating to specialized field such as oil well drilling would, in the normal course be referred to only in specialized journals which may be well known within that field but are not well known outside it. It is also to be noted that these publications deal 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 United Kingdom and now in the United States, in matters relating to value of rigs and has also prepared reports for Court use as an expert in matters relating to oil rigs in the United States, United Kingdom, Australia and New Zealand. Among his clients are the United Kingdom Inland Revenue Oil Taxation Office and U.S. Marine Administration. In his affidavit, Strachan explains that dayrates fluctuate depending on the supply of and demand for, a particular type of rig, and the values of rigs go up and down accordingly. The age of a rig plays only a small part in determining its value. Most important is a reflection of the state of the market and the technical capability of the unit. The condition of a rig is also a determinant of value. Rigs are normally valued on a contract free (charter free) basis to reach a Fair Market Value. However, the offshore drilling market is a volatile one and the Fair Market Value fluctuates on a regular basis, often monthly. While this affidavit does not specifically say anything about the rig in question, it indicates the changing values of LcTourneau 116-C jack-up rig, the same class as the rig under consideration, working in the North Sea. The graph indicates that starting at around US $ 38 million in 1980, value of a rig fell to around US $ 10 million in 1985, began to climb and rose to around US $ 25 million in 1990, fell again around to US $ 20 million in 1993, stayed more or less steady until 1996 when it began to climb steeply at around US $ 90 million a year or so later and dropped equally sharply to a little by US $ 40 million in 1999. It rose somewhat to around US $ 50 million in the next year and has been steady at that price. This chart again indicates strong fluctuations that exists in rig prices and emphasizes the steep fall in price between 1997 and 1999.
20. The data that we have referred to above establish that prices of rigs vary from time to time, and do not steadily fall with use, as do many other capital goods. The total number of rigs at any time existing is small. The total of the entire oil rig fleet in 2000 is reported by Jefferies to be 540. Of this, the number of jack-up rigs is 257. The number of 300 ft jack-ups accounted for 103 out of this number. The rig under consideration was thus one of just 103. They also show that prices of rigs of different kinds dropped by 50% or more between 1997 and 1999. The 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 goods.
22. The Commissioner has also said that the fact that the ONGC, in the contract that was signed, undertook to reimburse to the appellant duty on rig assessed on the value of $ 18 million, gave it a motive to show the sale price below this level; he is of the opinion that $ 18 million is the maximum which ONGC would accept as the value of the rig for purpose of reimbursement. This is claimed to be wrong. The appellant has produced evidence in the form of a copy of an agreement by Aban Loyd Chiles Off Shore Ltd. with the ONGC in which no such limit is shown for the purpose of payment of Customs duty in respect of a rig, Griffin Alexander II.23. These data, in our opinion, constitute enough evidence of the circumstances of the sale to justify the view that the sale of the rig in 1999 was uninfluenced by the relationship between the buyer and the seller. This price therefore would be the transaction value in terms of Rule 4.
24. Having accepted that the transaction value was US $ 17 million, it has to be considered whether this is a price that should be applied for the importation of the rig a year after the purchase, in April, 2000.
We have already held that the rig was sold in March, 1999 for export to India. Therefore, any subsequent changes in market price will not affect this transaction price. The Explanatory Note 1.1 of the Technical Committee on Customs Valuation of the World Customs Organization is worth referring to. This committee has been established consequent upon the agreement between member countries for the implementation of Article 7, the basis for the concept of transaction, of the GATT (General Agreement on Tariff and Trade), 1994. The Committee consists of representatives of all the member countries. The Explanatory Notes would therefore reflect the consensus of the member countries as to the 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. "In this connection the expression 'when sold...' in Paragraph 1 of Article 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 ONGG, pending acceptance of its appeal, stated that it had spent US $ 10 million on upgradation of the ships, which sum has not been taken into account by the Commissioner. The Commissioner has not added this sum, on the ground that it has not been substantiated, and added costs spent towards the rigs, which were substantiated by documentary evidence. We have determined the valuation not on the basis of depreciation but on the basis of transaction value and Department's appeal therefore would not re quire consideration.
26. We are conscious of the fact that value determined under Rule 8 cannot be precise; it is, as the rule itself indicates, only the best judgment that can be arrived at on the facts before it. This, however, docs not mean that the value can be arbitrary, capriciously determined, arrived by ignoring relevant factors which are required to be considered. The Commissioner has arrived at the value by depreciating from the sale price in 1977 of $ 35 million. It has been demonstrated that prices of rigs are subject to fluctuations, often violent. 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 that the department did not challenge in that appeal the method of valuation that the Commissioner has adopted, and the departmental representative stoutly defended it. It is therefore difficult to resist the conclusion that the Commissioner, in this matter, has adopted as the base, a different value, only because it was far higher, and would lead to a larger assessable value than if the price at the time of construction had been adopted. It would thus follow that, even if the transaction value were not acceptable, the method of valuation applied by the Commissioner cannot be accepted.
27. The Commissioner has imposed a penalty on Bureau Veritas on the ground that it was careless in making the reports of valuation that it furnished 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, therefore, do not find grounds for imposition of penalty.