The appellant is engaged in drilling operations for exploration of offshore oil, gas and other related activities under contracts awarded by the Oil and Natural Gas Commission. The drilling operations are carried on at oil rigs/vessels which are situated outside the territorial waters of India. Until November 1993 the appellant and all other similarly situated companies which were engaged in oil and gas exploration and exploitation were permitted to tranship stores to the oil rigs without levy of any customs duty. From November 1993 onwards, the Revenue Authorities refused to permit companies engaged in onward offshore operations to tranship stores to the oil rigs without payment of customs duty.

The appellants challenged the levy of customs duty. The Bombay High Court held that the appellant should not be permitted to clear the consignments without payment of duty. The appellant appealed.

Held: Appeal dismissed with costs.

The Customs Act is an Act to consolidate and amend the law relating to customs. Under s 12, all goods imported into India or exported from India are liable to customs duty unless the Customs Act itself or any other law for the time being in force provides otherwise. The goods imported are required to be valued under s 14 and duty payable is required to be determined according to the rates specified under s 15 of the Customs Act or any other law for the time being in force.

The contention advanced on behalf of the appellant is that the oil rigs which are located in the Exclusive Economic Zone (EEZ) are beyond the territorial waters of India, fall outside the territory of India and, therefore, any stores consumed on the oil rigs would be deemed to have been consumed by a foreign-going vessel.

Under UNCLOS, the territorial sovereignty of the coastal State extends beyond the land territory only up to the outer limits of the territorial sea. 'Territorial waters' extend up to 12 nautical miles from the low water mark line of the coast (base line) which is consistent with UNCLOS. The oil rig is deemed to be stationed at a designated area in the continental shelf/EEZ. The designated area is within the territorial limits of the coastal State. The maritime limit of the coastal State would include territorial waters, the continental shelf and the EEZ, as recognised under UNCLOS, including the rights, exclusive jurisdiction and duties of the coastal State with regard to customs, fiscal safety, health, immigration laws and regulations: see arts 56, 60, 77 and 80 of UNCLOS.

Article 127 of UNCLOS deals with customs duties, taxes and other charges. Clause 1 provides that traffic in transit shall not be subject to any customs duties, taxes or other charges except charges levied for specific services rendered in connection with such traffic and cl 2 provides that means of transport in transit and other facilities provided for and used by land-locked States shall not subject to taxes or charges higher than those levied for the use of means of transport of the transit State. According to this article, where the goods are in transit to other country shall not be subject to any customs duties, taxes or other charges except for the charges levied for specific services in connection with such traffic. In other words, there is no prohibition for levying customs duties on the goods which are not in transit for onward transmission to any other country. If the goods are brought in only while proceeding to other country, then no customs duty can be levied. In all other cases, it seems to be permissible.

In the present case, as the goods were being taken to a territory which would be deemed to be a part of the territory of India though the goods have left the territorial waters, the same would be exigible to levy of duty when they are taken and consumed within the deemed territory of India. There would be no customs duty or any other duty levied while the goods are in transit to the deemed territory of India by any other country although they have gone out of the territorial waters of India.