DEMURRAGE CHARGES – WHETHER INCLUSIBLE IN THE ASSESSABLE VALUE FOR PAYMENT OF CUSTOMS DUTY

[Mr. M. GOVINDARAJAN]

Value of imported goods

Section 141(1) of the Customs Act, 1962 (‘Act’ for short) provides that the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf.

Such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf.

Issue

The issue to be discussed in this article as to whether the demurrage charge is to be included in the Assessable value for payment of customs duty with reference to decided case laws.

Demurrage charges

Demurrage is a charge applied to containers that are left at the port or rail yard longer than their allotted free time, or past the ‘Last Free Day.’ Shippers begin incurring this fee the day after the last free day and it is charged per container / per day until the container is picked up. In general, shipments that arrive via air or rail are given 48 hours of free storage time. Ports, however, can range from about four to seven days. However, all ports of entry have their own policies.

A shipper can incur demurrage fees for any of the following reasons-

• The consignee (the person responsible for receiving the goods) was unaware of the arrival time/date of the cargo, and therefore couldn’t arrange Customs clearance and pick up in time
• The consignee did not receive documents in time for Customs clearance and thus pickup
• The documents the consignee received were incorrect or incomplete
• The cargo that was received did not match the sales order
• The container was delayed due to a Customs exam or hold
• There was a dispute between the shipper and the consignee

The cost of demurrage charges varies depending on carriers, terminals, and contractual agreements.

The Explanation to Rule 10(2) as amended provides that the cost of transport of the imported goods referred to in clause (a) includes the ship demurrage charges on charted vessels, lighterage or barge charges.

Case laws

In ‘TATA Steels Limited and others v. Union of India and others’ – 2019 (10) TMI 226 – Orissa High Court, the High Court observed that it is well-settled principle of the statute that while interpreting a statute, one has to go by the scope and object of the principal Act. Under the principal Act, while amending it on 10.10.2007, proviso has included the costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the Rules. The demurrage has not been included as a part of cost envisaged by the legislation. Further, it is a kind of penalty. Therefore, it could not have been envisaged by the legislation to be included in the definition of Section 14 of the Act. The contentions raised by the petitioner that the relevant provisions in the Principal Act is silent about the demurrage; thus, it was beyond the legislative power to include it in the Rules is accepted and thus the explanation to Sub-Rule (2) of Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 is held to be bad and hence declared ultra vires the Constitution/provision of Section 14 of the Customs Act, 1962, and hence the same is struck down.

In ‘Commissioner of Customs, Ahmedabad v. Reliance Industries Limited’ – 2023 (10) TMI 963, CESTAT, Ahmedabad, the issue involved in the present case is whether ship demurrage charges paid by the respondent to the owner of the vessel/ ship in which the goods are imported on account of vessel/ ship having to wait at the Port are liable to be included in the Transaction value of the imported goods. The entire case based on explanation added to Rule 10 of Custom Valuation Rules, 2007. The Reliance Industries Limited relied on the TATA Steels Limited (supra) and observed that the relevant provisions in the Principal Act is silent about the ‘demurrage’. The Revenue contended that as per the explanation added to Rule 10 of Custom Valuation Rules, 2007, the cost of transportation of imported goods should be included in the transaction value. The CESTAT held that this Provision was not provided in the Customs Act, 1962 with regard to the Valuation of goods. However, the same was brought under the rule by way of explanation. The Hon’ble Orissa High Court in above case has held that the said provision in the Rule is ultra virus to the Customs Act, 1962. Therefore, when the explanation to Rule 10 to Customs Valuation Rules was held ultra virus, the entire basis of the Revenue case falls.

In ‘Indian Oil Corporation Limited (MD) v. Commissioner of Customs (Port), Kolkata’ – 2024 (12) TMI 232 – CESTAT, Kolkata, the issue involved in the present case is whether ship demurrage charges paid by the respondent to the owner of the vessel/ ship in which the goods are imported on account of vessel/ ship having to wait at the Port are liable to be included in the Transaction value of the imported goods. The Department contended that the decision of the Orissa High Court in TATA Steels Limited (supra) has been appealed against by filing SLP before the Hon’ble Supreme Court by the Revenue. The importer contended that the present appeal is squarely covered by Hon’ble Orissa High Court judgment in the case of Tata Steel Limited (supra). Merely by filing SLP before the Hon’ble Supreme Court, the judgment of Orissa High Court does not lose its binding precedent on the lower authority in the absence of stay order of the Supreme Court.

The CESTAT considered the submissions of the parties. The CESTAT observed that in the present case, the revenue seeks to include the demurrage charges in the value of the imported goods for the purpose of assessment of custom duty. The CESTAT found that very same issue has been considered by the Hon’ble Orissa High Court in the case of Tata Steel Limited (supra). When the explanation to Rule 10 to Customs Valuation Rules was held ultra virus, the entire basis of the Revenue case falls. Applying the principles of judicial discipline, the CESTAT did not have any option except to follow the Hon’ble Orissa High Court judgment in the case of Tata Steel Limited. Therefore, the CESTAT confirmed the impugned order.