DECEMBER 28, 2005

By Vijay K Kumar

LAST fortnight TIOL had carried a researched article, B(L)INDING EFFECT OF BOARD CIRCULARS , wherein a passing remark was made that the Board circular on ship detention charges cost the Government a whopping Rs 975/- crores from IOCL alone. Loss from rest of the importers was left to your imagination. The big question is whether the value for charging customs duty on imported goods includes ship detention charges (also known as ship demurrage charges).

The Genesis: It all started in the salubrious beaches of Goa where the Customs Commissioners met in April 1991. Based on the conference recommendations, the Board in F. No. 467/21/89-Cus.V, dated 14-8-1991 clarified that it has been decided that 'demurrage' and 'despatch' money may not form a part of assessable value.

The Litigation:

Stage 1:

A hasty adjudication: The Board circular notwithstanding, somebody decided that demurrage was required to be included and a major PSU importer like IOCL was targeted for issue of a Show Cause Notice. What more, the Government by Notification No. 14/2000-Cus. (N.T.), dated 25-2-2000, appointed the Commissioner of Customs, Calcutta to be the Commissioner of Customs having jurisdiction over the whole of India under the said Act and the rules made thereunder for the purpose of investigation, issue of Show Cause Notices against M/s Indian Oil Corporation Limited in respect of their consolidated duty liability on account of non-inclusion of ships' detention/demurrage and other charges in the assessable value and also adjudication of the cases relating thereto.

The Commissioner proceeded with his work pronto. A Show Cause Notice was issued on 14-3-2000 and was received by IOCL on 15-3-2000. The notice fixed 22-3-2000 as date for personal hearing. On that day, representative of IOCL appeared before the Commissioner and prayed for time for filing written objection. That request was rejected and an order was passed on 30-3-2000 holding that demurrage was includible in the assessable value and confirming a demand of Rs. 975,98,31,199.00 with a mandatory penalty of an equal amount. Fortunately no penalty was imposed on the officers of IOCL. Maybe the fastest adjudication proceedings ever done in the department! An order involving nearly Rs 2000/- crores and the entire adjudication from issue of Show Cause Notice to final order took all of 15 days!.

Stage 2:

The Appeal : IOCL being a PSU, could not rush to Tribunal without permission from the Committee on Disputes. Though the Committee did not give permission immediately, it noted in the minutes that the issue regarding the includibility of the cost of demurrage charges and the related bank charges in determining the transaction value under Section 14 of the Act involved mixed questions of law and fact and so the matter has to be dealt with by the Tribunal and that the Committee cannot resolve the said issue.

The Tribunal in a rare gesture decided to go ahead with the case without actual sanction from the COD based on the minutes. The larger bench of the Tribunal with the President Justice Sreedhran giving the verdict held that {2000 (122) ELT 615}

1. Demurrage is paid on account of the delay in clearing the goods from the vessel. That cannot form part of the value of the goods.

2. Demurrage is an expenditure which arises in extraordinary situations. Such an expenditure is not in the contemplation of the legislature when it enacted the Sections or the Rules.

3. we are clear in our mind that the Commissioner, while passing the impugned orders, went wrong in adding the actual amount of demurrage paid on account of the delay in discharge of the goods from the vessel to find out the assessable value.

Stage 3:

The Finale: Obviously the department was aggrieved and took the matter to its logical end ' the Supreme Court. The Apex Court in 2004-TIOL-23-SC-CUS without going into the merits of the case dismissed the Revenue appeal with costs based on the Board circular. This is the famous case in which Justice P. Venkatarama Reddi expressed his doubts about the overpowering effect of Board Circulars. He observed, 'However, I am unable to reconcile myself to the view that even after the highest Court settles the law on the subject, the view expressed by the Central Board on the same point of law should still hold the field until and unless it is revoked. He hoped that the issue will be reconsidered by a Constitutional bench '.

Is it the logical end really the end? Unfortunately, NO.

Stage 4: The Damage Control exercise before the finale:

While the appeal was in the Supreme Court, the Board issued a circular withdrawing the 1991 circular by Circular No. 14/2001-Cus, dated 2-3-2001. Even while withdrawing the circular, the Board was not categorical, that demurrage was includible. The circular explained that

The decision of the Board was based on the then prevailing practice and a general perception of the Conference of Collectors held in April, 1991 about the nature of demurrage charges and despatch money, without specifically examining the implications of Rule 9 of the Customs Valuation Rules or the GATT Valuation Rules.

It was never the intention of the Board to 'exempt' ship demurrage charges from customs duty. In the circumstances, it is considered advisable to clarify that nothing contained in the earlier letter should be construed as authorising the exclusion of any ship demurrage charges paid which are required to be included in the assessable value of goods under Section 14 of the Customs Act, 1962 inter alia by virtue of Rule 9(2) of the Customs (Valuation) Rules, 1988. The earlier letter dated 14-8-1991 referred in para 1 supra shall stand withdrawn.

There is now a school of thought which believes that as the Supreme Court judgement was based on the Board circular and as that Board Circular does not exist now, demurrage is still includible for the period after 2.3.2001. The Supreme Court judgement is valid only for the period prior to 2.3.2001.

Stage 5:

Sorry no finale : Back to where we started- GOA. Welcome back to the exotic Goa where it all started. The Goa Commissioner recently issued a Standing order on the issue - STANDING ORDER NO. 18/2004-CUSTOMS - Dated 07.06.2004, extracts from which would be of interest. It has been brought to my notice that a number of provisional assessments in respect of the importation of bulk cargo have been kept pending on the ground that the issue of inclusion of the ship detention charges (also known as ship demurrage charges) in the assessable value of the goods was pending before the supreme Court.

In the case cited above, the Supreme Court has reiterated the binding character of the Departmental clarifications. Since the Board's previous circular dated 14.08.1991 has been withdrawn, and fresh clarification has been issued vide Board's later Circular 14.2001 - Cus dated 02.03.2001, going by the aforesaid order of the supreme Court, I order as follows :

(a) In respect of all bulk cargo importations with effect from 02.03.2001, the provisional assessments will be finalised by including the ship detention (demurrage) charges in the assessable value in terms of the Board's instruction communicated vide aforesaid circular 14.2001 - Cus dated 02.03.2001.

(b) Similarly, in respect of all current importations, the ship detention (demurrage) charges will be included in the assessable value, in terms of the Board's aforesaid circular.

(c) In respect of all importations prior to 02.03.2001, the assessments may be kept provisional till we receive further instructions from the Board, for which a reference is being made.

The Standing Order went on to suggest:

While passing the speaking order at the time of finalising the past provisional assessments for period after 02.03.2001, or at the time of assessing the current importations, the main ground to be spelt out in the order would be the binding nature of the Board's aforesaid Circular dated 02.03.2001; besides, the merits of includibility of ship detention (demurrage) charges in the assessable value, as recorded at para 5 of the aforesaid judgment of the apex court [2004(165) ELT 257 (SC)] should also be discussed, in addition to the main grounds. The officers should strictly follow the aforesaid instructions and take immediate necessary action accordingly. In the mean time it appears that an attempt was made to file a review petition in the Supreme Court to request for an order on merits. But with the change in Government, the Additional Solicitor General who was dealing with the case had resigned and the issue of pursuing in the SC is on hold.

The Tribunal had passed the order on merits and the Supreme Court had dismissed the revenue appeal based on the Board circular which has since been withdrawn. Now the moot question is whether the Tribunal decision (on merits) still holds good or because the Supreme Court decision was based on a now-non-existing circular, demurrage is now includible. One view is that since the revenue appeal is dismissed, the Tribunal view is still good law and another view is that the Tribunal decision has merged with the Supreme Court order and as the circular on which the Supreme Court based its decision is no longer valid, demurrage is includible.

Then is demurrage includible?

Mr. S. Dutt Majumder in his book 'Customs Valuation ' Law and Practice' 4th edition says,

According to the EEC practice, the demurrage charges payable on account of delay in loading the goods in the country of exportation or the delays before arrival of the goods at the place of importation, to a transport company in respect of the use of the means of transport of imported goods are considered as part of the cost of transport in clause (a) and hence are to be included in the Customs value.

He quotes a valuation ruling of EEC,

'demurrage charges payable to a transport company in respect of the use of the means of transport are to be considered as part of the cost of the transport...' The ruling further states that 'consequently, demurrage charges related to delays occurring before that arrival are to be included in the Customs value of the goods. On the other hand, demurrage charges related to delays occurring after that arrival are not be included in the Customs value....'

In his book, he further quotes a court judgment in the European Community

Demurrage charges (compensation payable for keeping vessels in port) form part of the cost of transport within the meaning of Article 8.2(a) of the Agreement.

Mr. Majumder's book was written before the SC judgement. But obviously he is of the strong view that demurrage is includible in the value.

The Press reaction to the mega case:

Writing in the Indian Express dated 20.6.2001 with the caption, 'We make laws without thinking, admits government! , Sunil Jain remarked,

If you think the law's an ass and those who frame it asinine, you're in good company. For those who frame the country's laws, the government itself, is now admitting that it does so without thinking. What else do you make of a recent circular from the Central Board of Excise and Customs that seeks to upturn an earlier circular (of August 14, 1991) by saying 'the decision of the board was based on the then prevailing practice and a general perception ... without specifically examining the implications of Rule 9 of the Customs Valuation Rules or the GATT Valuation Rules'! In case you still haven't got it, the circular (number 14/2001 - CUS.V) issued by the CBEC on March 2 this year is saying that no one really applied their mind while issuing the earlier circular a decade ago. Phew!

It gets even more interesting when you consider why the CBEC issued the new circular of March 2, 2001. Last year, the Central Excise and Gold Appellate Tribunal (CEGAT is the court you appeal to against perverse excise and customs rulings) ruled against the government, basing its judgement on the 1991 circular. So, since the government wanted to appeal against the CEGAT ruling, it issued this clarification, and has now moved the Supreme Court against CEGAT.

Last year, despite the CBEC ruling of 1991, a Calcutta Commissioner levied a huge penalty of Rs 2,000 crore on the state-owned Indian Oil Corporation; this was struck down by the CEGAT, and now the CBEC is appealing this in the Supreme Court. By the way, IOC engaged top lawyers to fight the case at the CEGAT, and now the government will waste top legal talent at the Supreme Court, and IOC will probably be a party to the case as well ' so in each case, it's the government fighting the government, over what it says, was a badly-drafted law!

It appears that the Finance Ministry had an opportunity to settle the case out of the court as in the ITC case but it did not utilise that. The Business Line on December 10, 2001, reported that,

In an official communication to the Finance Ministry, the Petroleum Ministry has asked the former to consider resolving these disputes with state-owned oil companies through inter-Ministerial consultations and withdrawing the same from the SC.

Obviously the Revenue Department was so sure of its case that it did not accept this proposal and in the process lost a thousand crores!. Of course there were some people laughing all their way to the banks- the lawyers engaged by IOCL and the Government.

Another round of litigation and some more smiling lawyers?

(The author is a well known Indirect Tax Expert and the views expressed are his personal)