Basic Primer on Customs Duty and Customs Law

Table of Contents

1. Brief Background of Customs Law

2. Nature of Customs Duty

3. Territorial Waters and Customs Waters

Check out Taxmann's Customs Law & Practice with Foreign Trade Policy 2023 which provides a subject/topic-wise, comprehensive yet concise commentary on Customs Law & Foreign Trade Policy in India. It also includes various Case Laws and a detailed explanation of various export promotion schemes. This book is amended by the Finance Act 2023.

1. Brief Background of Customs Law

Customs duty is on import into India and export out of India. As per ancient custom, a merchant entering a kingdom with his goods had to make a suitable gift to the King. In the course of time, this ‘custom’ was formalised into ‘Customs Duty’. This is collected on imports (and occasionally on exports too). The word ‘Customary’ is derived from ‘customs’, which indicates that it is a very old tax. Taxes on goods were levied on various goods right from the Veda period.

Customs Duty as we understand today has its origin in British period. British established its first Board of Revenue in 1786 at Calcutta. New Board of Trade was established in 1808. A uniform Tariff Act was introduced in 1859 all over India. General rate of import duty was 10%, which was reduced to 7.5% in 1864. Customs duty in India is linked with history of textile industry. British manufacturers wanted to export their products to India and due to their pressure, duty on coarser varieties of cotton goods was abolished in 1877. In the meanwhile, Sea Customs Act was passed in 1878. In 1882, all import duties were abolished, but re-introduced in 1894 at general rate of 5%. Indian Tariff Act was passed in 1894. Import duty on cotton goods @ 5% was introduced in 1894. At the same time, excise duty on Indian cotton goods was imposed, which was bitterly resented in India and it was finally abolished in 1925. General rate of customs duty was later increased to 7.5%. Land Customs Act was passed in 1924. Air Customs was covered by making some rules under Indian Aircraft Act, 1911. After independence, manufacturing industry grew and trade expanded. Customs Act, 1962 was passed to consolidate Sea Customs Act, Land Customs Act and provisions for air customs.

1.1 WTO and India

World Trade Organisation was formed on 1-1-1995 in place of GATT.

World Trade Organisation – WTO (World Trade Organisation) has been formed on 1st January, 1995, based at Geneva, to replace GATT. After World Bank and IMF, this is the third biggest international organisation in finance and trade matters. It is a permanent body with global status similar to IMF & World Bank. It provides permanent forum for trade negotiations. WTO is the legal and institutional foundation of multilateral trading system. Its basic principle is equal treatment to products and services of all other WTO countries. (Of course, there are concessions and let-outs). Its scope is much wider than that of GATT. GATT focused primarily on trade in goods, while WTO covers multilateral trading system and commercial activities like trade in services, intellectual property protection also.

The four main WTO guidelines are – (i) Trade without discrimination (ii) Predictable and growing market access (iii) Promoting fair competition and (iv) Encouraging development and economic reforms.

WTO has full time representatives from member countries. It works on the basis of one member one vote principle, not weighed on basis of country’s position in global trade. Decisions are arrived on basis of consensus among members, but matters can be decided by voting also.

TRIPS – TRIPS means Trade Related Intellectual Property Rights. It was agreed as follows – (i) Product Patents should be introduced in drugs, food products and chemicals in place of process patents as at present (India introduced product patents w.e.f. 1-1-2005). (ii) Patent and copyright period should be 20 years (Implemented by India) (iii) Agricultural hybrid seeds should be allowed to be patented (Not implemented). – – However, Government can undertake compulsory licensing for non-commercial public use and to prevent inadequate supply or exorbitant pricing.

WCO – World Customs Organisation (WCO) [earlier known as Customs Coordination Council] is an international body to develop coordination among customs offices in various countries. WCO has HQ at Brussels. WCO is organisation of 179 Customs Administrations. It is headed by Secretary General who is appointed for five years at a time.

WCO was established in 1952. 26th January is observed every year as International Customs Day as WCO was formed on that day.

WCO has implemented – (a) Harmonised System of Nomenclature of goods (b) Kyoto Convention on harmonization and simplification of customs procedures. The draft has been adopted in June, 1999 (c) ATA convention.

1.2 Scope and Coverage of Customs Law

Section 1(2) of Customs Act (as amended w.e.f. 29-3-2018), states that the Customs Act, 1962 extends to whole of India and, save as otherwise provided in this Act, it applies also to any offence or contravention thereunder committed outside India by any person. [The words in italics inserted w.e.f. 29-3-2018].

The extension of scope outside India is only for purpose of offences and not for any other purposes.

Parliament can enact Legislation with regard to extra-territorial aspects – Parliament can enact Legislation with regard to extra-territorial aspects of certain events – Union of India v. Mohit Minerals (P.) Ltd. [2022] 10 SCC 700 = 138 taxmann.com 331 = 92 GST 101 = 61 GSTL 257 (SC 3 member bench).

Liability of customs duty – Section 12(1) of Customs Act is the charging section, which provides that duties of customs shall be levied at such rates as may be specified under ‘The Customs Tariff Act, 1975’, or any other law for the time being in force, on goods imported into, or exported from, India. The rate of duty is as prescribed in Customs Tariff Act, 1975, read with relevant exemption notifications. Import duty is levied on almost all items, while export duty is levied only on a few limited products, where Indian goods are in commanding position.

Imports by Government – Section 12(2) of Customs Act makes it clear that customs duty is payable by Government also. Thus, there is no general exemption to goods imported by Government. However, various exemption notifications have been issued and Imports by Indian Navy, specific equipment required by Police, Ministry of Defence, Coastal Guard etc. are fully exempt from customs duty. However, if there is no such exemption notification, duty will be payable even if goods are imported by Central/State Government.

1.3 Overview of Customs Act

Raising revenue for Central Government is the main but not the only purpose of Customs Act. Customs Act is used to (a) regulate imports and exports (b) protect Indian industry from dumping (c) collect revenue of customs duty. In addition, provisions of Customs Act are used for other Acts like Foreign Trade (Development and Regulation) Act, Foreign Exchange Management Act (FEMA) etc. Customs Law is covered under various Acts, rules, regulations and notifications, as follows :

Customs Act, 1962 – This is the main Act, which provides for levy and collection of duty, import/export procedures, prohibitions on importation and exportation of goods, penalties, offences etc.

Customs Tariff Act, 1975 – The Act contains two schedules – Schedule 1 gives classification and rate of duties for imports, while Schedule 2 gives classification and rates of duties for exports. In addition, the CTA (Customs Tariff Act) makes provisions for duties like additional duty (CVD), preferential duty, anti-dumping duty, protective duties etc.

Rules under Customs Act – Under section 156 of Customs Act, 1962, Central Government has been empowered to make rules, consistent with provisions of the Act, to carry out the purposes of the Act. Various rules have been framed under these powers.

In Sukhdev Singh v. Bhagatram Sardar Singh (1975) 1 SCC 421 = AIR 1975 SC 1331 (SC Constitution Bench), it was held that regulations framed under statutory provisions would have the force of law.

Notifications under Customs Act – Various sections authorise Central Government to issue notifications. The main are section 25(1) to grant partial or full exemption from duty and section 11 to prohibit import or export of goods. Others are: – specifying notified goods (section 11B), specifying specified goods (section 11-I) etc.

Board Circulars – CBIC is empowered u/s 151A of Customs Act to issue, for purpose of uniformity in classification of goods or with respect to the levy of duty thereon, issue such instructions and directions to officers of customs and they are required to observe and follow such orders, instructions and directions of Board. CBI&C issues circulars giving various instructions/prescribing various procedures etc. Normally, these instructions should be followed.

CBIC’s Customs Manual, 2023 – Customs Manual, 2023 has been released by CBI&C on 31-12-2023. The Manual gives an overview of Customs Law and Procedures, mostly based on CBI&C circulars.

1.4 Functions of Customs Department

Indian Customs handle various tasks, important among them are as follows – Chapter 1 Para 1.2 of CBI&C’s Customs Manual, 2023.

• Collection of Customs duties on imports and exports as per basic customs laws.
• Enforcement of various provisions of Customs Act governing imports and exports of cargo, baggage, postal articles and arrival and departure of vessel, aircrafts etc.
• Discharge of various agency functions and enforcing various prohibitions and restrictions on imports and exports under Customs Act and other allied enactments.
• Prevention of smuggling including interdiction of narcotics drug trafficking.
• International Passenger clearance.

Activities and authorities involved in customs work – Customs functions cover substantial areas of activities involving international passengers, general public, importers, exporters, traders, custodians, manufacturers, carriers, port and airport authorities, postal authorities and various other government and semi-government agencies, banks etc. – Chapter 1 Para 1.3 of CBI&C’s Customs Manual, 2023.

Integration with global customs practices – Customs is continuously rationalizing and modernizing its procedures through adoption of EDI and global best practices. Also, as a member of the World Customs Organization, Indian Customs has adopted various International Customs Conventions and procedures including the Revised Kyoto Convention, Harmonized Classification System, GATT based valuation etc. – Chapter 1 Para 1.4 of CBI&C’s Customs Manual, 2023.

1.5 Common aspects of Customs and CGST

There are some common or similar provisions in Customs and CGST.

• Both are Central Acts and derive power of levy from Constitution. Both are under administrative control of one Board (Central Board of Indirect Taxes and Customs) (CBI&C) under Ministry of Finance.
• Departmental organizational hierarchy is same from top upto Assistant Commissioner level.
• Classification Tariffs of CGST and customs are based on HSN and principles of classification are identical.
•  Principles of deciding ‘Assessable Value’ are similar i.e. both are principally based on ‘transaction value’.
• Concept of ‘related person’ for valuation purposes appears in Customs as well as CGST. Principle of ‘piercing of corporate veil’ can apply in both cases.
• Provisions of refund, including principle of ‘unjust enrichment’ are similar. Provisions for interest for delayed payment are also similar.
• Provisions of raising demand for short levy, non-levy or erroneous refund are similar. Provisions in respect of recovery, mandatory penalty etc. are also similar.
•  Provisions for granting exemptions from duty – partial or full – conditional or unconditional are similar.
•  Powers of search and seizure are quite similar.
•  CGST and customs law make provisions of arrests and prosecution of offences.
•  Provisions in respect of Authority for Advance Ruling are similar.
•  Appeal provisions are similar in some aspects.

1.6 Extension of time limits prescribed under Customs Act and Customs Tariff Act due to Corona

In view of the spread of pandemic COVID-19 (Corona) across many countries of the world including India, lockdown was declared in India first as janata curfew on 22-3-2020 and then general lockdown.

Due to lockdown and curfew, normal working of companies and Government was completely disturbed. Hence, it had become imperative to relax certain provisions, including extension of time limit, in the taxation and other laws.

The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 was issued on 31-3-2020 for this purpose. The Ordinance was later converted into Act.

As per section 6 of the Act, the time limit specified in, or prescribed or notified under, the said Acts which falls during the period from 20-3-2020 to 29-6-2020 or such other date after 29-6-2020 as the Central Government may, by notification, specify, for the completion or compliance of such action as—

(a) completion of any proceeding or issuance of any order, notice, intimation, notification or sanction or approval, by whatever name called, by any authority, commission, tribunal, by whatever name called; or

(b) filing of any appeal, reply or application or furnishing of any report, document, return or statement, by whatever name called, shall, notwithstanding that completion or compliance of such action has not been made within such time, stand extended to the 30th day of June, 2020 or such other date after the 30th day of June, 2020 as the Central Government may, by notification, specify in this behalf:

Provided that the Central Government may specify different dates for completion or compliance of different actions under clause (a) or clause (b).

Supreme Court extends various timelines in view of Covid-19 – Supreme Court, suo motu, has extended various timelines in view of Covid-19 as follows – The period from 15-3-2020 to 28-2-2022 shall stand extended for the purposes of limitation as may be prescribed under any general or special laws in respect of all judicial or quasi-judicial proceedings. Balance period of limitation remaining available as on 3-10-2021, if any, shall become available w.e.f. 1-3-2022. If limitation had expired during 15-3-2020 to 28-2-2022, limitation period of 90 days will be available from 1-3-2022. The period under Arbitration Act, Commercial Courts Act, Negotiable Instruments Act and any other law is also extended. Time limit for completion of claim and defence and service of notices, summons and every legal proceeding is also extended – Cognizance for Extension of Limitation In re (2022) 3 SCC 117 = 134 taxmann.com 307 = 379 ELT 276  = 56 GSTL 385 (SC 3 member bench – order dated 10-1-2022).

1.7 Changes in Customs Law made vide Finance Act, 2023

Nirmala Sitharaman, Hon’ble Minister of Finance, Government of India, presented Budget 2023-24 on 1-2-2023. Finance Bill, 2023 was also presented. Finance Bill, 2023 has been passed by Parliament and became Finance Act, 2023 on 31-3-2023, after receiving assent of President. Some changes have become effective from 1-4-2023. Provisions in respect of section 65A of Customs Act will be effective from date to be notified.

The changes in Customs Act made by Finance Act, 2023 are as follows.

Specified conditional customs exemption notifications will be valid without limit of  two years – Section 25(4A) of Customs Act inserted w.e.f. 28th March, 2021 provided that any conditional customs exemption notification issued under section 25(1) of Customs Act will have sunset clause. Unless otherwise specified, varied or rescinded, it will be valid only upto 31st March falling immediately after two years from date such grant or variation.

It is now provided that nothing contained in section 25(4A) of Customs Act shall apply to any such exemption granted to, or in relation to,––

(a) any multilateral or bilateral trade agreement;

(b) obligations under international agreements, treaties, conventions or such other obligations including with respect to United Nations agencies, diplomats and international organisations;

(c) privileges of constitutional authorities;

(d) schemes under the Foreign Trade Policy;

(e) the Central Government schemes having validity of more than two years;

(f) re-imports, temporary imports, goods imported as gifts or personal baggage;

(g) any duty of customs under any law for the time being in force, including integrated tax leviable under section 3(7) of the Customs Tariff Act,1975, other than duty of customs leviable under section 12 – proviso to section 25(4A) of Customs Act inserted vide Finance Act, 2023 w.e.f. 1-4-2023.

Manufacture in warehouse subject to section 65A of Customs Act – Permission for in-bond manufacture facility can be given by Principal Commissioner/Commissioner, subject to section 65A of Customs Act and such conditions as may be prescribed – section 65(1) of Customs Act – words in italics inserted by Finance Act, 2023 from date to be notified.

Warehousing of imported inputs or removed from other warehouse on which IGST and GST Compensation Cess has been paid for purpose of manufacture in warehouse – Section 65A of Customs Act has been introduced vide Finance Act, 2023, to make provisions of warehousing of goods on which IGST and Compensation Cess has been paid, for manufacture as per provisions of section 65 of Customs Act. Such goods may be imported goods or removed from another customs warehouse.

The intention seems to be to allow bringing goods for manufacture in warehouse on payment of IGST and GST Compensation Cess. The exemption will be only to the extent of customs duty and social welfare surcharge.

The provision will be effective from date to be notified.

Settlement proceedings lapse if order is not passed within one year – The order of settlement commission under section 127C(5) of Customs Act shall be passedwithin a period of nine months (extendable by further three months) from the last day of the month in which the application under section 127B of Customs Act is made. If, no order is passed within the said period, the settlement proceedings shall abate, and the adjudicating authority before whom the proceeding at the time of making the application was pending shall dispose of the application in accordance with the provisions of Customs Act as if no application was made for settlement – section 127C(8A) of Customs Act inserted vide Finance Act, 2023 effective from 1-4-2023.

Really, why Applicant should suffer for delay by Settlement Commission? In fact, he will be in great trouble, as he has made full disclosure before Settlement Commission and is now defenseless.

1.8 Foreign Trade Policy 2023 effective from 1-4-2023

Foreign Trade Policy 2023 [FTP 2023] has been notified and made effective from 1-4-2023. Handbook of Procedures 2023 [HBP 2023] has also been discussed.

2. Nature of Customs Duty

Entry 83 to List I – (Union List) of Seventh Schedule to Constitution reads ‘Duties of customs including export duties’. Thus, import and export duty is a Union subject and power to levy is derived from Constitution. Section 12 of Customs Act, often called charging section, provides that duties of customs shall be levied at such rates as may be specified under ‘The Customs Tariff Act, 1975’, or any other law for the time being in force, on goods imported into, or exported from, India.

Section 3 of Customs Tariff Act has also been held as ‘charging section’ (for levy of CVD – additional customs duty) – Jain Brothers v. UOI AIR 1999 SC 2550 = 112 ELT 5 = 1999 AIR SCW 2718 (SC 3 member bench).

Customs Duty is leviable on free replacements and free supplies also – Customs duty is payable on replacement of parts provided free of cost during warranty period even if duty was paid on parts originally supplied – New Video Ltd. v. CC – (1996) 87 ELT 509 (CEGAT).

Free replacements during warranty period are exempt under notification 80/70-Cus dated 29-8-1970, if the articles are private personal property of importer. This exemption is not available to imports of free replacements during warranty for commercial purpose – MF(DR) circular No. 1/2005-Cus dated 11-1-2005 – relying on Echjay Industries v. UOI 1994(52) ECR 366 (Bom HC).

Import should be for ‘home consumption’, if goods imported for repairs and return, customs duty not payable – Import should be for ‘home consumption’, if goods imported for repairs and return, customs duty not payable, as import is not for home consumption – CC v. Aban Loyd Chiles Offshore Ltd. (2017) 3 SCC 211 = 60 GST 207 = 78 taxmann.com 25 (SC).

2.1 Taxable Event for Import duty

Goods become liable to import duty or export duty when there is ‘import into, or export from India’.

As per section 2(18), ‘export’ with its grammatical variations and cognate expressions, means taking out of India to a place outside India.

As per section 2(23) of Customs Act, ‘import’ with its grammatical variations and cognate expressions, means bringing into India from a place outside India. In Gramophone Company of India v. Birendra Bahadur Pandey – AIR 1984 SC 667, it was held that ‘import’ included goods imported for transit across to Nepal.

In Indian Airlines v. CC 2005 (180) ELT 502 (CESTAT), Indian Airlines had international flights. After return from international flight, the fuel (ATF) was used for domestic run. It was held that fuel left in the fuel tank after termination of international run is ‘import’ and liable to customs duty.

Section 2(27) of Customs Act defines ‘India’ as inclusive of territorial waters. Hence, it was thought that ‘import’ is complete as soon as goods enter territorial water. Similarly, export is complete only when goods cross territorial waters. There were conflicting judgments of High Courts.

Finally, in Kiran Spinning Mills v. CC 1999 (113) ELT 753 = AIR 2000 SC 3448 = 2000 AIR SCW 2090 (SC 3 member bench), it has been held that import is completed only when goods cross the customs barrier. The taxable event is the day of crossing of customs barrier and not on the date when goods landed in India or had entered territorial waters. In the case of goods which are in the warehouse the customs barrier would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country.

In Garden Silk Mills Ltd. v. UOI 1999 AIR SCW 4150 = 1999 (113) ELT 358 = AIR 2000 SC 33 [SC 3 member bench – same bench which passed judgment in Kiran Spinning Mills (Supra)], it was held that import of goods in India commences when they enter into territorial waters but continues and is completed when the goods become part of the mass of goods within the country. The taxable event is reached at the time when the goods reach customs barrier and bill of entry for home consumption is filed.

Though there is slight contradiction between the SC judgments, it can be said that ‘mixing up with mass of goods in the country’ after crossing customs barrier is the ‘taxable event’ for customs duty on imports.

Taxable event in case of warehoused goods – In case of warehoused goods, the goods continue to be in customs bond. Hence, ‘import’ takes place only when goods are cleared from the warehouse – confirmed in UOI v. Apar P Ltd. 1999 AIR SCW 2676 = 112 ELT 3 = 1999 (6) SCC 118 = AIR 1999 SC 2515 (SC 3 member bench).- followed in Kiran Spinning Mills v. CC 1999 (113) ELT 753 = AIR 2000 SC 3448 = 2000 AIR SCW 2090 (SC 3 member bench), where it was held that taxable event occurs when goods cross customs barrier and not when goods land in India or enter territorial waters.

This was followed in LML v. CCE 2002(142) ELT 273 (SC 3 member bench). In this case, there was no ‘Special Additional Duty’ (SAD) when goods were imported, but SAD was imposed later. It was held that SAD is payable when goods are cleared from customs bonded warehouse as removal from customs bonded warehouse is the taxable event and rate of duty as applicable on that day applies – followed in CC v. SJK Steel Corporation (2004) 168 ELT 194 (CESTAT). [Note that SAD has been abolished w.e.f. 9-1-2004].

This was also followed in Mangalore Refinery v. CCE 2002 (141) ELT 247 (CEGAT), where it was held that customs duty is payable only on the quantity which is cleared from warehouse [and not the quantity which had entered the territorial waters].

Sale in duty free shop at international airports before goods crossed customs frontier is not subject to sales tax as it is sale in course of import – Hotel Ashoka v. ACCT (2012) 3 SCC 204 = 276 ELT 433 = 48 VST 443 (SC). In this case, it was held that transfer of documents of title to goods is one of the methods. Transfer can be by physical delivery also. [sales tax issue but principle applies to customs also]

In State Trading Corporation v. State of Tamilnadu 2003 (129) STC 294 (Mad HC DB), it was held that if documents of title of goods are transferred before clearance of goods from customs bonded warehouse, it is ‘sale during import’ and hence exempt from sales tax, as sale takes place before goods cross customs frontier of India.

Taxable event when goods cross customs barrier – In CC v. HPCL 2000 (121) ELT 109 (CEGAT), it was held that the ‘bulk liquid cargo’ would be considered to have crossed customs barrier only when they are pumped into shore tanks. That being the taxable event, duty is leviable only on that quantity. The view has been accepted by the department. It has been confirmed that duty will be payable on the basis of ‘shore tank receipt’ i.e. dip measurement in tanks on shore into which oil is pumped from tanker; and not on the basis of ullage survey report i.e. ullage quantity at the port of discharge on board the vessel, as determined by independent surveyors in presence of customs officers. – MFCA(DR) circular No. 96/2002-Cus dated 27-12-2002.

Date of filing bill of entry is relevant for deciding duty liability – As we will see later, rate of duty and tariff valuation as on date of presentation of bill of entry or date of entry inward of the vessel, whichever is later, is relevant for determining the customs duty payable. Thus, rate of duty when ship enters the port is relevant and not the date when ship enters territorial waters. Validity of this provision has been upheld by Constitution Bench of SC in M Jhangir Bhatisha v. UOI (1989) 3 SCR 356 = 42 ELT 344 (SC) * Dhiraj Lal R Vohra v. UOI – 1993 (Suppl 3) SCC 453 = 66 ELT 551 * Bharat Surfactants (P.) Ltd. v. UOI – 1989 (43) ELT 189 (SC) = AIR 1989 SC 2054 = 1989(4) SCC 21 * UOI v. Apar Pvt Ltd. 1999 AIR SCW 2676 = 1999(6) SCC 117 = AIR 1999 SC 2515 = 112 ELT 3 (SC 3 member bench) [Reversing decision in Apar P Ltd. v. UOI 1985 (22) ELT 644 (Bom FB)]. Decision of SC in Apar Pvt. Ltd. was followed in Kiran Spinning Mills v. CC 1999(113) ELT 753 = AIR 2000 SC 3448 = 2000 AIR SCW 2090 (SC 3 member bench).

Definition subject to context – Section 2 of Customs Act, which defines various words, starts with the clause ‘unless the context otherwise requires’. Thus, it is not essential to stick to definition of ‘India’ in section 2(27) for determining the taxable event, if context otherwise requires. There are other sections in Customs Act too where ‘India’ does not include territorial waters.

No duty for innocent passage – If taxable event occurs as soon as goods enter territorial waters, duty will be leviable if a vessel passes through territorial waters, even if it has no intention of touching Indian port. As per Article 17 of ‘United Nations Convention on the Law of the Sea’ [UNCLOS] dated 7th October, 1982, ships of all countries have right of innocent passage through territorial sea (analogous to territorial waters). Thus, Customs Act should not normally overstep limits of internationally accepted convention.

Special provision prevails over general provision – Section 4 of Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 also state that all foreign ships (other than warships) shall enjoy right of innocent passage through territorial waters. Since this is a special provision, it should prevail over the general provision in Customs Act.

Interpretation consistent with international convention should be favoured – Unless there is conflict, interpretation consistent with international convention and treaties should be adopted – Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey – AIR 1984 SC 667. This observation was not in connection with this issue, but was in relation to a different matter. However, ratio of this judgment can be applicable to the present issue. Thus, interpretation of Customs Act should be in consonance with international convention, to the extent possible.

Sales tax analogy – In sales tax matter also, it has been held that import is complete only when goods cross customs barrier in India – J v. Gokal and Co. (P.) Ltd. v. Assistant CST – 1960 (2) SCR 852 = 110 ELT 106 = AIR 1960 SC 595 (SC 5 member Constitution Bench).

2.2 Taxable event in case of exports

In UOI v. Rajindra Dyeing and Printing Mills (2005) 10 SCC 187 = 180 ELT 433 (SC), it has been held that export is complete when goods cross territorial waters of India. If ship sinks within territorial waters, export is not complete and hence duty drawback is not payable. In CC v. Sun Exports 35 ELT 241 = 71 STC 149 (SC), it was held that export is complete once the goods leave Indian waters and property passes to purchasers. Even if goods return due to Engine trouble, duty drawback is payable.

In B K Wadeyar v. Daulatram Rameshwarlal AIR 1961 SC 311 = 11 STC 757 (SC), it was held that export is complete when ship leaves territorial waters of India.

Note that even if export duty is collected before ship leaves the port, that does not mean that taxable event has occurred. Duty can be collected in advance also.

In V M Salgaocar v. UOI 1987(30) ELT 251 (Bom HC DB), it was held that export is complete only when the goods are taken out of territorial waters of India. In this case, Shipping Bill for export of iron ore was filed by exporter on 8-3-1985 and entry outward was granted on 11-3-1985. Export duty of ` 3,00,000 was deposited. Loading was started. In the meanwhile, export duty on iron ore was exempted vide notification dated 17-3-1985. The ship actually left territorial waters on 25-3-1985. It was held that at the time of export, the duty was exempted and hence there is no duty liability. Export duty deposited was ordered to be refunded [Really, as per section 16 of Customs Act, ‘relevant date’ for export duty is date on which clearance for export is permitted by customs officer. May be this was not brought to notice of High Court].

Indeed in CC v. Narayan Bandekar & Sons (2008) 227 ELT 258 (CESTAT), ‘let export’ order was given on 28-2-2007 while duty on iron ore was imposed on 1-3-2007. Goods were not even loaded. It was held that export duty is not payable. – view confirmed in Narayan Bandekar and Sons v. CCE (2010) 259 ELT 362 (Bom HC DB) – same view in Kineta Minerals v. CCE (2009) 241 ELT 416 (CESTAT) * VSL Mining Products v. CC (2010) 251 ELT 449 (CESTAT).

In Lucas TVS Padi v. ACC (1980) 6 ELT 465 (Mad HC), it was held that export is complete only when goods leave territorial waters of India. Thus, if export goods loaded in vessel are damaged by fire in the docks itself, there is no ‘export’ and hence export benefit of drawback is not admissible.

In Spares Corporation v. State of AP – (1995) 97 STC 645 (AP HC DB), it was held that sale from bonded customs warehouse to owners of fishing trawlers at port after clearance from customs are not ‘export sales’. – same view in Spares Corporation v. State of AP – (2001) 122 STC 485 (AP HC DB).

In Burn Standard Co. v. ACCE 2006 (197) ELT 185 (Cal HC), it has been held that supply to oil rig located in exclusive economic zone is ‘export’, unless that area is declared as ‘designated area’ for purpose of that Act.

In Aban Lloyd Chiles v. UOI 2002 (139) ELT 273 (Bom HC DB), relying on Pride Foramer v. UOI AIR 2001 Bom HC DB 332, it was held that oil rigs proceeding to designated areas or operating therein would be deemed to be part of Indian territory. Hence, the oil rig proceeding to such area will not be ‘foreign going vessel’. [This may be for customs purposes but may not be for sales tax purposes, as a ‘deeming provision’ cannot be extended beyond the purpose for which it has been created].

In various cases discussed elsewhere in this chapter, it was held that sale to ship within territorial waters is ‘Sale within the State’ i.e. local sale.

Not a Sale in course of import, if property passes in exclusive economic zone – In B G Exploration v. State of Gujarat (2016) 84 VST 1 = 65 taxmann.com 147 (Guj HC DB), Government of India had production sharing contract with assessee for development and exploration of oil and gas. The gas was delivered to ONGC at off-shore point in the pipeline. It was held that the goods were appropriated in exclusive economic zone. It was not sale in course of import. The sale is not taxable.

Sale from shore to vessel in sea is sale within State – In Raj Shipping v. State of Maharashtra (2016) 89 VST 460 = 62 taxmann.com 309 (Bom HC DB), sale of HSD (High Speed Diesel) from State to vessel in territorial waters was held as sale within the State. The reason given was that there is sufficient nexus.

3. Territorial Waters and Customs Waters

Concept of territorial waters and customs waters are highly relevant for customs law.

Territorial waters means that portion of sea which is adjacent to the shores of a country. On 22nd March, 1956, President of India had issued a proclamation that territorial waters of India shall extend upto 6 nautical miles from the base line. This was extended to 12 nautical miles w.e.f. 30th Sept., 1967. Later, ‘Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976’ was passed.

Section 3 of the ‘Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976’ specifies that territorial water extend upto 12 nautical miles from the base line on the coast of India and include any bay, gulf, harbour, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853 Kms). Sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space over the waters.

In British India Steam Navigation Co Ltd. v. Shanmughavilas Cashew Industries (1990) 3 SCC 481, it was held that a statute extends to territory, unless the contrary is stated, throughout the country and will extend to the territorial waters and such places as intention to that effect is shown. Indian Parliament has no authority to legislate for foreign vessels or foreigners in them on the high seas. – quoted with approval in World Tanker Carrier Corpn v. SNP Shipping Services P Ltd. 1998(3) SCALE 165 (SC 3 member bench).

International Convention – United Nations Convention of the Law of the Sea (UNCLOS) dated 7th October, 1982 has been signed by most of the countries. This convention uses the words ‘territorial sea’, which is analogous to the term ‘territorial waters’ used in Customs Law. As per Article 2(1) of this convention, Sovereignty of a coastal State extends beyond its land territory upto ‘territorial sea’. The sovereignty extends to airspace over the territorial sea as well as to sea bed. Vide article 3 of the Convention, territorial sea extends upto 12 nautical miles from normal base-line. Base line is the low-water line along the coast. As per article 17 of the Convention, ships of all countries have right of innocent passage in the territorial sea. Article 21(1) specifically provides that coastal State may adopt laws and regulations in conformity with this convention.

Article 127 of UNCLOS provides that traffic in transit shall not be subject to any customs duties or other charges, except charges levied for specific services rendered.

‘Exclusive economic zone’ extends to 200 nautical miles from the base-line. In this zone, the coastal State has exclusive rights to exploit it for economic purposes like constructing artificial islands (for oil exploration, power generation etc.), fishing, mineral resources and scientific research. However, other countries have right of navigation and over-flight rights. Other countries can lay submarine cables and pipelines with consent of Indian Government. Such consent may be declined for protecting interest of India. Section 7 of Territorial Waters Act, 1976 has made similar provisions and thus, these provisions have been adopted in India too.

Beyond 200 nautical miles, the area is ‘High Seas’, where all countries have equal rights. These high seas are reserved for peaceful purposes. Any Country can use it for navigation, over-flight, laying submarine cables and pipes, fishing, construction of artificial islands permitted under international law and for scientific research.

‘Continental shelf’ is an area of relatively shallow seabed between the shore of a continent and the deeper ocean. [Concise Oxford Dictionary, 1990 edition].

Extension of Income Tax Act, Customs Act and Excise Act to designated areas in EEZ – Customs Act has been extended to designated areas in Continental Shelf and Exclusive Economic Zone of India vide notification Nos. 11/87-Cus dated 14-1-1987 and 64/97-Cus dated 1-12-1997. Similarly, Central Excise Law and Service Tax (Chapter V of Finance Act, 1994) have been extended to designated areas in Continental Shelf and Exclusive Economic Zone of India, as declared by Notification No. S.O. 429(E) dated 18-7-1986 issued by Ministry of External Affairs, vide notification No. 166/87-CE dated 11-6-1987.

Income Tax Act was extended to continental shelf and exclusive economic zone by issuing notification No. G.S.R. 304(E) dated 31-3-1983 [142 ITR (ST) 11] u/ss 6(6)(a) and 7(a) of Territorial Waters, Continental Shelf Act, 1976.

As per section 2(25A) of Income Tax Act (amended on 11-5-2007 with retrospective effect from 25-8-1976), ‘India’ means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976 and the airspace above its territory and territorial waters – similar definition in section 2(ka) of Wealth tax Act.

Vide notification No. SO 189(E) dated 7-2-2002 issued by Ministry of External Affairs, Customs Act and Customs Tariff Act has been extended to whole of Exclusive Economic Zone (EEZ) and continental shelf of India for the purpose of

(i) processing for extraction or production of mineral oils and

(ii) Supply of any goods in connection with activities mentioned in clause (i).

This has following implications –

(a) Supplies from India in connection with production of mineral oils within EEZ and/or continental shelf of India shall not be treated as export and will not be entitled to export incentives.

(b) Supplies of goods (for extraction or production of mineral oils) from other countries to units in this zone will be treated as import and duty will be levied accordingly. [Earlier, vide MF(DR) circular No. 17/2002-Cus dated 13-3-2002, it was stated that mineral oil produced within territorial waters are leviable to central excise duty. This circular has been rescinded, probably because though Customs Act has been extended but Central Excise Act has not been extended].

In a further circular No. 638/29/2002-CX dated 22-5-2002, it has been clarified that Excise duty is not payable on LSD or HSD supplied to research vessels operating in territorial waters. However, if the vessels are engaged in exploration or extraction of mineral oil within EEZ or continental shelf, then no export has taken place and duty free supply of fuel is not permitted.

In Aban Lloyd Chiles v. UOI 2002(139) ELT 273 (Bom HC DB), relying on Pride Foramer v. UOI AIR 2001 Bom HC DB 332 = 148 ELT 19 (Bom HC DB), it was held that oil rigs proceeding to designated areas or operating therein would be deemed to be part of Indian territory. Hence, the oil rig proceeding to such area will not be ‘foreign going vessel’ – view confirmed in Aban Lloyd Chiles v. UOI (2008) 11 SCC 439 = 227 ELT 24 (SC).

In Burn Standard Co. v. ACCE 2006 (197) ELT 185 (Cal HC), it has been held that supply to oil rig located in exclusive economic zone is ‘export’, unless that area is declared as ‘designated area’ for purpose of that Act.

In CCE v. Aban Lloyd Chiles Offshore (2017) 3 SCC 211 = 60 GST 207 = 78 taxmann.com 25 = 346 ELT 513 (SC), it has been held that if goods are used within territorial waters, these would be ‘imported goods’ and customs duty will be payable.

In Reliance Industries v. Assessing Authority (2006) 148 STC 324 (Ori HC DB), it was held that area in exclusive economic zone (beyond territorial waters) is not ‘local area’ of State in absence of any notification by Government of India.

Earlier, in Essar Oil v. CC (2001) 129 ELT 761 (CEGAT), it was held that goods brought in India from rigs located in exclusive economic zone or international waters is ‘import’. This decision will not be valid after 7-2-2002.

Extension of Code of Criminal Procedure to EEZ – Code of Criminal Procedure Code has been extended to exclusive economic zone (EEZ), vide Notification dated 27-8-1981. Section 188A of Cr PC makes provisions in respect of offences committed with EEZ. In Republic of Italy v. UOI (2013) 4 SCC 721, it has been held that beyond territorial waters, only Government of India has jurisdiction and not State Government.

3.1 Indian Customs Waters

As per section 2(28) of Customs Act, ‘Indian Customs Waters’ means the waters extending into the sea up to the limit of Exclusive Economic Zone under section 7 (earlier the words were ‘contiguous zone of India under section 5’) of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and includes any bay, gulf, harbour, creek or tidal river. [The words in italics inserted w.e.f. 29-3-2018].

Thus, ‘Indian Customs Waters’ extend upto 200 nautical miles from base line inside sea [till 29-3-2018, it was extending only upto 24 nautical miles].

Significance of definition of ‘Indian Customs Waters’ is as follows –

• Customs Officer has powers to arrest a person in India or within Indian customs waters. [section 104].
• Customs Officer has powers to stop and search any vessel in India or within the Indian Customs waters. [section 106]. If such vessel does not stop, it can be fired upon. If a vessel does not stop, it can be confiscated [section 115(1)(c)].
• A vessel which is within Indian customs waters or which has been in Indian Customs Waters can be confiscated which is constructed or fitted in any manner for purpose of concealing goods. [section 115(1)(a)].
• Customs Officer has power to search any person who is on board any vessel within customs water, if he has reason to believe that goods liable to confiscation are secreted about his person [section 100(2)(a)].
• Any goods brought within customs waters contrary to any prohibition for import are liable to confiscation [section 111(d)].

Thus, powers of customs officers extend upto 12 nautical miles beyond territorial waters.

The Customs Act was extended only upto contiguous zone upto 29-3-2018 – As per provisions of that Act, contiguous zone of India comes immediately after territorial waters. The outer limit of contiguous zone is 24 nautical miles from the nearest point of base line. Thus, area beyond 12 nautical miles and upto 24 nautical miles is ‘contiguous zone of India’. The Central Government has powers to take measures in this area for security of India and immigration, sanitation, customs and other fiscal matters. [section 5(4) of Territorial Waters Act, 1976].

3.2 Territorial waters belong to State Government or Central Government?

One interesting question, which has not yet been finally resolved, is whether the territorial waters belong to respective State Government or to Central Government. If the territorial waters belong to State Government, sale from coastal town to a ship in territorial waters will be ‘sale within the State’. If territorial waters belong to Union, the sale will have to be held as ‘inter State sale’.

Territorial waters within jurisdiction of State Government for GST – Section 9 of IGST Act, 2017 provides that notwithstanding anything contained in IGST Act, (a) where the location of the supplier is in the territorial waters, the location of such supplier; or (b) where the place of supply is in the territorial waters, the place of supply, shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.

Thus, so far as Goods and Services Tax (GST) is concerned, it is clear that the territorial waters are within jurisdiction of State Government.

Constitutional provisions – As per Article 297 of Constitution, all land, minerals and other things of value underlying ocean within the territorial waters or continental shelf or the exclusive economic zone of India shall vest in the Union and to be held for purposes of Union. The limits of territorial waters, continental shelf and exclusive economic zones shall be specified by Parliament by or under any law.