Whether the director general of hydrocarbons is defensible in cancelling the essentiality certificate issued to the effect that certain goods are required for petroleum operations, on the ground that the importer is not a bonafide subcontractor of ONGC?

PJ/Case Laws/2010-11/1171

Case: -LARSEN & TURBO LTD, MUMBAI & Another v/s UNION OF INDIA & Ors

Citation: -2011-TIOL-292-HC-MUM-CUS

Issue: -Whether the director general of hydrocarbons is defensible in cancelling the essentiality certificate issued to the effect that certain goods are required for petroleum operations, on the ground that the importer is not a bonafide subcontractor of ONGC?

Brief Facts: -Respondent no. 7 namely ONGC Ltd was the Exploration & Production company which was nominated by the Government of India for exploration and development. ONGC had appointed Petitioner no. 1 as a subcontractor for executing the petroleum project. At the instance of the Petitioner no. 1, the ONGC through the customs sought the Essentiality Certificate for import of certain goods required for petroleum operations from DGH, so that clearance of the above goods can be obtained at nil rate of duty as per Notification no. 21/2002 dated 1.3.2002.

For duty free import of specified goods, the said Notification prescribed the condition that Essentiality certificate was required to be taken from Director General of Hydrocarbons (DGH) which is a technical arm of the Ministry of Petroleum & Natural Gas.

DGH issued the Essentiality Certificate on 6.12.2010 specifically recording that the goods are required for petroleum operations undertaken by the ONGC. It was further recorded that the Petitioner no. 1 was the subcontractor appointed by the ONGC for executing the petroleum project and Petitioner no. 2 would be the importer.

Accordingly, petitioner no. 2 imported the goods covered under the said Certificate and sought clearance with the benefit of Notification no. 21/2002-Cus. The Customs Authorities were informed that the imported goods would be re-exported within six months after completing the petroleum project on behalf of ONGC.

As the Customs Authorities were taking time in investigation, Petitioner No. 2 filed writ petition in the High Court wherein order was passed and accordingly, Customs released the goods on provisional assessment on bond and bank guarantee.

Thereafter, the Customs Authorities were of opinion that the Petitioner no. 2 - importer was not the subcontractor appointed by the ONGC and therefore the benefit of Notification no. 21/2002 would not be available in respect of the imported goods for use by Petitioner No.1. The Customs Authorities wrote to DGH and requested for cancellation of Essentiality Certificate granted to Petitioner No. 1.

In turn, DGH issued notice to ONGC. ONGC and Petitioner No. 1 represented before the DGH that Petitioner no. 2 was a wholly owned subsidiary of Petitioner no. 1 which has imported goods for use by Petitioner No, 1 in executing the petroleum project of ONGC.

DGH cancelled the Essentiality certificate on the grounds that Petitioner No. 2 has not been evaluated as subcontractor of petitioner no. 2 for any installation activity by the ONGC and that neither the ONGC not the petitioner No. 1 could produce any documents showing that petitioner No. 2 was evaluated as subcontractor of ONGC. And held that petitioner no. 2 cannot be termed as a bona fide subcontractor of ONGC and benefit of exemption under Notification No. 21/02 is not available to them/

Reasoning of Judgment: -The Tribunal held that the reasons recorded for cancelling the Certificate were wholly unsustainable in law. The obligation cast upon the DGH was to ascertain as to whether the goods sought to be imported are actually required for petroleum operations or not. The exemption under Notification No. 21/2002 was available only if the goods sought to be imported are required for petroleum operations and not otherwise.

It was held that it was neither the case of Customs Authorities nor of DGH that goods imported on the basis of Certificate were not required for petroleum operations. The petitioner No. 1 in fact were using the imported goods for petroleum operations for and on behalf of ONGC. The DGH has cancelled the Certificate on the grounds which are not within their domain. It was not a relevant criteria that whether Petitioner No. 2 was a subcontractor of ONGC for issuance of Essentiality certificate.

It was held that the obligation cast upon DGH was to ascertain the use of imported goods for petroleum operations. Once it was found by DGH that the goods were required for petroleum operations, then DGH could not have refused to issue Essentiality certificate.

It was held that the question of availability of exemption under Notification No. 21/2002-Cus was a question to be considered by the Customs Authorities and not by the DGH. Therefore, DGH could not have cancelled the Certificate on the ground that the benefit of the Notification is not available to the importer.

It was held that DGH should not have mechanically on the reasons cited by Customs Authorities cancelled the certificate. Customs should not have written to DGH to cancel the said certificate but should have decided the fulfilment of conditions of Notification No. 21/2002-Cus on their own. It was also noted by the Tribunal that the neither the petitioner no.1 nor ONGC have represented before Customs Authorities or before DGH that Petitioner No. 2-importer was subcontractor of ONGC. The Essentiality certificate showed Petitioner no. 1 as subcontractor and petitioner no. 2 was the importer. Therefore, it was required to produce the documents showing appointment of petitioner no. 2 as sub-contractor. Cancellation of certificate was not sustainable.

It was noted by the Tribunal that if the imports were of permanent use, then the benefit of Notification No. 21/2002-Cus would not have been available. The import was on temporary basis for ONGC project and after the completion, the same were to be re-exported.

It was further held that the contention that the petitioner no.2 was not sub-contractor of ONGC and therefore benefit was not available, is without merit. No one had claimed that petitioner no.2 was sub-contractor of ONGC. The fact that petitioner no. 2 was not the sub-contractor of ONGC was to be considered by Customs Authority for grant of exemption under Notification No. 2 but could not be a ground for cancellation of Essentiality certificate.

The Essentiality certificate was granted for use of the imported goods for ONGC project and the fact that Petitioner no. 2 was not the subcontractor was not a ground for cancellation of the said certificate.

The Tribunal further held that the clause of the contract between ONGC and the petitioner no. 1 had no relevance for cancelling the essentiality certificate. Impugned order passed by DGH cancelling the Essentiality certificate set aside.

Decision: -Petition allowed.

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PJ/Case Laws/2010-11/1171

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