M/s Tata Chemicals Ltd v Commissioner of Customs (Preventive), Jamnagar (2015)

This is a customs case, but it is studied in a professional-ethics course for one principle that travels far beyond customs duty. Statutes constantly hand power to an authority in words such as "deems it necessary" or "reason to believe". Do those words mean the authority may act on whatever it happens to think? The Supreme Court said no. Such words do not mean the officer's subjective satisfaction; the power "is not an arbitrary power and has to be exercised in accordance with the restraints imposed by law", and the court can examine whether there were real grounds for it.

That is why the case is applied in Indira Jaising v Supreme Court of India (2017), to explain why a subjective opinion formed under such words is not the end of the matter. The judgment also contains a second clear rule worth remembering: there can be no estoppel against law.

The appellants manufactured soda ash and coke, and imported coking coal for the coke. Notification No. 35/90 exempted coking coal with an ash content below 12% from basic customs duty in excess of 5%; notifications 36/90 and 23/91 gave further exemptions for such coal.

Under a contract of 4 February 1991 with Philbro Energy Company (USA), the appellants imported Australian low-ash metallurgical coal. The contract required the ash content not to exceed 10.3% and required sampling and analysis at the loading port by an independent international agency, CASCO. CASCO sampled the cargo following British Standards equivalent to IS 436 and IS 1350, and certified an ash content of 9.8%. Tata Chemicals imported 33,462 metric tons and B.L.A. Coke Pvt Ltd 5,000 metric tons.

The appellants filed bills of entry on 15 March 1991 claiming the exemption and submitted the CASCO certificate. The Department never said it rejected the CASCO report or found it defective. Yet a Customs Inspector at Okha drew samples of about 20 kilograms each, one from the vessel and one from the shore, and broke them up with stones into powder. It was common ground that the samples were not drawn in accordance with IS 436, and no employee of the appellants was present. The Central Fuel Research Institute, Dhanbad reported an ash content above 12%; the Central Revenue Control Laboratory, after a further delay, reported just over 12%.

Show cause notices followed, and the Assistant Collector demanded differential duty. The Commissioner (Appeals) set this aside. CESTAT restored the demand, holding that although the samples were drawn contrary to IS 436, the appellants were estopped because their representative was present and did not object at once.

1. When may the proper officer subject imported goods to a chemical test under s. 18(1)(b), which applies "where the proper officer deems it necessary"?
2. Can test reports based on samples drawn in breach of IS 436 be relied on?
3. Were the appellants estopped from objecting to the sampling?

The appeals were allowed and the Tribunal's judgment was set aside.

"Deems it necessary"

"In our opinion, the expression “deems it necessary” obviously means that the proper officer must have good reason to subject imported goods to a chemical or other tests." Where the importer has furnished all the necessary documents showing an ash content below 12%, the proper officer must, when questioned, state that at the very least the documents do not inspire confidence for some good prima facie reason. The Revenue had never said the CASCO certificate was defective, so "it is clear that the entire chemical analysis of the imported goods done by the Department was ultra vires Section 18(b) of the Customs Act."

The general principle

The Court then stated the principle for which the case is most often cited: "Statutes often use expressions such as “deems it necessary”, “reason to believe” etc. Suffice it to say that these expressions have been held not to mean the subjective satisfaction of the officer concerned. Such power given to the concerned officer is not an arbitrary power and has to be exercised in accordance with the restraints imposed by law."

It called this a well-settled position, relying on Rohtas Industries Ltd v S.D. Agarwal and Sheo Nath Singh v Appellate Assistant Commissioner of Income Tax, from which it quoted that the words "reason to believe" suggest "that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour." And: "The Court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the Court." The Court also cited Bar Council of Maharashtra v M.V. Dabholkar on the same point.

Sampling contrary to IS 436

Relying on Bombay Oil Industries (P) Ltd v Union of India, the Court held that where the method of testing is not prescribed, the Indian Standard method applies, and this applies to the Customs Act as well. IS 436 required, among other things, a minimum gross sample of 75 kg for small coal. "Clearly the samples drawn by the Inspector in the present case, have been drawn contrary to the express provisions of IS 436. On this count also, the samples being drawn not in accordance with law, test reports based on the same cannot be looked at."

No estoppel against law

The Tribunal's finding of estoppel was "a completely perverse finding both on fact and law." On fact, no representative of the appellants was present: Shri K.M. Jani said he was not the clearing agent's employee and was not present when the samples were taken. On law: "In law equally the Tribunal ought to have realized that there can be no estoppel against law. If the law requires that something be done in a particular manner, it must be done in that manner, and if not done in that manner has no existence in the eye of law at all." The Court added: "Something that is illegal cannot convert itself into something legal by the act of a third person."

Statutory expressions such as "deems it necessary" and "reason to believe" do not mean the subjective satisfaction of the officer; the power they confer is not arbitrary and must be exercised on good reason, within the restraints imposed by law, and the court can examine whether such reason existed. Under s. 18(1)(b) of the Customs Act, where the importer has produced documents supporting the claim and the Department has given no good prima facie reason to doubt them, a chemical test is ultra vires. Test reports on samples drawn contrary to the applicable Indian Standard cannot be relied on, and there is no estoppel against law.

• Direct question: Does a statutory power exercisable when an authority "deems it necessary" or has "reason to believe" confer an unreviewable discretion? Answer with Tata Chemicals: no; the belief must be that of an honest and reasonable person on reasonable grounds, not mere suspicion, gossip or rumour, and the court can examine it.
• Professional-ethics link: the principle is applied in Indira Jaising v Supreme Court of India (2017) to explain why a subjective opinion is not the end of the matter. The judgment also itself cites Bar Council of Maharashtra v M.V. Dabholkar, a leading ethics case, on the same point.
• Short note: Estoppel against law. Use the Court's words — if the law requires a thing to be done in a particular manner, it must be done that way, and "Something that is illegal cannot convert itself into something legal by the act of a third person."
• Tip: do not confuse the two limits the Court describes. The court can examine whether reasons existed and whether they are relevant, but it does not investigate the sufficiency of the reasons.