DEMURRAGE CHARGES TO BE INCLUDED IN VALUATION?

[Mr. M. GOVINDARAJAN]

Demurrage charge

Demurrage is a charge levied by the shipping line to the importer in cases where they have not taken delivery of the full container and move it out of the port/terminal area for unpacking within the allowed free days.   On expiration of free days, demurrage will be charged for the period of storage on all goods (except mails, post parcels, diplomatic postal bags and personal baggage irrespective of weight per parcel, bag etc.) remaining uncleared.

In respect of goods detained at the port/airport/ICD/CFS/LCS etc, the custodians of goods demand their dues for storing the goods (i.e., the warehousing charges) from the importers/exporters. Likewise the shipping lines demand container detention charges for the period the goods are kept in their custody. In situations where the goods are detained for a long period, the warehousing/demurrage charges and container detention charges become high. In cases where the charges against the importers or exporters are dropped, the Customs usually issues detention certificates for the period when goods were under detention. The custodians normally remit the detention/demurrage charges wholly or partially on the basis of detention certificates issued and recommendation made by the Customs. The demurrage charges were not known at the time of filing of bills of entry and were ascertained only after a few months of the importation, when the supplier raised the debit note on the appellant for recovery of such demurrage charges. However, it is not obligatory, as held in some recent Court judgments that custodians must waive the rentals payable to them.

Demurrage may be caused due to a variety of reasons as detailed below-

• Consignee did not receive the documents in time for customs clearance;
• Documentation received by consignee is incorrect or insufficient;
• Container has been stopped by customer, police or other authorities for inspection of the cargo which may take longer than expected;
• Consignee was unaware of the arrival of the cargo and was unable to do the customs clearance in time;
• Consignee does not have the finances in order to clear the container in time;
• Dispute between shipper and consignee;
• Cargo received was not as per the sales order.

Valuation of goods

Section 14 of the Customs Act, 1962 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.

Rule 10(2)(a) of Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 provides that the value of the imported goods shall be the value of such goods, and shall include the cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to the place of importation.    The explanation to this section provides that the cost of transport of the imported goods includes the ship demurrage charges on charted vessels, lighterage or barge charges.

In ‘Jubliant Life Science Limited v. Additional Director General’ – 2019 (10) TMI 336 – CESTAT, New Delhi, the appellant is engaged in manufacture of supply of organic chemicals. During the relevant time the appellant imported ‘Acetic Acid’ and ‘Methanol’ in bulk, in terms of agreement with the supplier for supply of these goods.   The contract price for these imported goods was on the basis of Cost, Insurance & Freight (CIF) basis and the goods were imported by the appellant on a chartered vessel.   As per the agreed terms, the cargo was to be unloading from the vessels at the port of discharge within a specified period of time, known as ‘lay time’. When there was any delay in unloading the goods beyond the ‘lay time’ the appellant was required to pay demurrage charges to the shipping lines.

 The Directorate of Revenue Intelligence (DRI), Kolkata Zonal, unit conducted an inquiry in relation of customs duty payable by the appellant on account of such demurrage charges.  During the investigation itself the appellant deposited differential customs duty amounting to ₹ 1,50,73,863/- along with interest of Rs. 63,31,105/- towards the demurrage charge paid on those bills of entry through which imports were made. The Additional Director General (DRI) vide which he has confirmed, the demand raised vide Show Cause Notice dated 15/19-05-2017 against the appellant pertain to inclusion of the ‘ship demurrage charges’ incurred by the appellant. This ship demurrage charge was not declared by the appellant for the purpose of determination of assessable value of the imported goods under the provisions of Section 14 of Customs Act, 1962 read with Rule 3 and 12 of Customs Valuation read with (Determination of value of imported goods) Rules, 2007 for the period 07.09.2012 to 11.09.2015. The Adjudicating Authority held that demurrage charges are liable to customs duty in terms of Rule 10 (2) of Valuation Rules and confirmed the demand along with interest and also imposed penalty under Section 114 of the Customs Act.

Against this order the appellant filed the present appeal.  The appellant submitted the following-

• The demurrage charges are not includable in the assessable value of imported goods under Section 14 of the Customs Act, where the duty chargeable on the price paid or ‘Payable at the time and place of importation’
• Section 14 of the Customs Act cannot be extended to include something which is not contemplated under Section 14 of the Customs Act.
• The demurrage charges are the post importation expenses and hence beyond the purview of transaction value of imported goods.
• Section 14 of the Customs Act was amended vide Finance Act, 2007 with effect from 10.10.2007 to include the cost of transportation to the place of importation, further there was no reference to the inclusion of demurrage charges as sought to be included by Explanation 2 Rule 10(2) of the Customs Valuation Rules.
• The Explanation has been added in Rule 10(2) of Valuation Rules for inclusion of demurrage charges is not sustainable and has been declared to ultra vires in the case of ‘Tata Steel Limited vs. Union of India’ -2019 –2019 (10) TMI 226 - ORISSA HIGH COURT.
•  Once the import has been affected by utilization of valid advance license, no demand can be raised after discharge of export obligation discharge certificate.
• Therefore, the demand pertaining to the value of goods which represented demurrage charges could not have been confirmed in the impugned order.
• The invocation of extended period of limitation for raising the demand is contrary to the Section 28(4) of Customs Act as there was no mis-representation on the part of the appellant. 

The Revenue contended that the Adjudicating Authority has followed the decision of Larger Bench of this Tribunal in case of ‘Commissioner of Customs, Jamnagar vs. Grasim Industries Limited’ - 2013 (10) TMI 246 - CESTAT AHMEDABAD, wherein it is held that the inclusion of demurrage charge is justified in view of insertion explained to Rule 10 (2) Valuation Rules 2007.

The Tribunal considered the submissions made by both the parties.  The Tribunal referred to the judgment of Orissa High Court relied by the appellant.  The Orissa High Court held that 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. However, in view of the clarifications by way of judgments of the Supreme Court, it is made clear that demurrage cannot be included for the purpose of valuation under the Customs Act, 1962. In that view of the matter, the High Court was  of the considered opinion that 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 Price 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.”

Relied on the Orissa High Court judgment the Tribunal set aside the impugned order since the Revenue has not brought any ruling contrary to the judgment of High Court of Orissa wherein the proviso appended to Rule 10 (2) of the Valuation Rules has been struck down.