MARCH 15, 2019

By Nupur Maheshwari, Partner, Raghav Khurana, Senior Associate and Vijaya Nandini, Associate, Lakshmikumaran and Sridharan Attorneys

THE determination of the assessable value of goods under the Customs Act, 1962 ('Customs Act') has been an age-old bone of contention between the Department and the importer. One of the major issues that has concerned the importers has been the inclusion of demurrage charges in the assessable value of the goods.

What are demurrage charges?

Demurrage charges are liquidated damages owed by a charterer to a shipowner for the charterer's failure to load or unload cargo by the agreed time¹. Demurrage charges are levied in order to ensure quick clearance of the cargo from the harbor.² These charges are always fixed in such a way that they would make it unprofitable for importers to use the port premises as a warehouse.

In simpler terms, the demurrage charges are the costs paid by the importer/ exporter concerned for delays caused in unloading of the goods once the vessel containing the consignment of the importer has arrived at the port. Usually, the demurrage charges are calculated using the concept of lay time, which is essentially the amount of time allowed in a time or voyage charter to the party to load or unload its goods. Once the said time is exceeded, demurrage charges are payable. Thus, the demurrage charges are a penalty on the importer who delays the unloading of the goods.

Treatment of demurrage charges in the Customs Valuation Code

Article 8.2 of the Customs Valuation Code provides that in framing its legislation, each party shall provide for the inclusion in or the exclusion from the customs value, in whole or in part, of the cost of transport of the imported goods to the port or the place of importation. ³

The GATT Valuation Code gives leeway to the signatories to either adopt a CIF or FOB basis for valuation of imported goods. Most of the countries including India have adopted CIF basis of valuation wherein customs duties are calculated on price including the element of international freight.

India and its position on demurrage charges

In terms of the Indian Customs law, the value of the imported goods is required to be determined as per Section 14 of the Customs Act read with the Customs Valuation (Determination of Prices of Imported Goods) Rules, 2007 ('Customs Valuation Rules'). These provisions have been adopted on the basis of the GATT based valuation system (now termed WTO Valuation Agreement) and are followed globally.

Section 14 has undergone amendments in the years 1988 and 2007 to align the concept of valuation of goods imported into India with the GATT Valuation Code under the Article VII of WTO's GATT Agreement.

In terms of Section 14, as it stands today, the value of the imported goods shall be the transaction value of such goods, i.e. the 'price actually paid or payable' for the goods when sold for export to India for delivery at the time and place of importation, subject to the following conditions:

i. Goods are sold for export to India;

ii. Goods are sold for delivery at the time and place of importation;

iii. Buyer and seller of the goods are not related; and

iv. Price is the sole consideration for the sale.

The first proviso to Section 14 provides that such value in case of imported goods shall include certain costs including cost of transport, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules.

Section 14, and the first proviso to Section 14 clearly states that the cost of transport, insurance, loading, unloading and handling charges shall be includible to the extent and in the manner specified in the rules. Therefore, in the context of amended Section 14, it is necessary to refer to the rules for ascertaining as to the extent to which such charges are to be included in the value for determining the assessable value for customs purposes.

Changes to Section 14 in 2007

Section 14 of the Customs Act was amended vide Section 95 of the Finance Act, 2007. Prior to the said amendment, Section 14 (1) of the Customs Act provided that the valuation of the goods was based on 'deemed value'. However, Section 14 (1A) provided that the valuation of the goods is based on the concept of 'transaction value'. To remove the said contradiction between the aforesaid sub-sections, Section 14 was substituted by a new Section 14 which provided for the value of the imported goods and the exported goods to be the 'transaction value', subject to the Customs Valuation Rules.

It is pertinent to note that the proviso to Section 14 was also substituted to provide for the inclusion of cost of transportation to the place of importation to the extent and manner specified under the Customs Valuation Rules. The said proviso provided that the transaction value in the case of imported goods shall include in addition to the price, 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 Customs Valuation Rules.

Demurrage charges: Status post-2007

Rule 10 (2) of the Customs Valuation Rules provides that the value of the imported goods shall include the cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to the place of importation and the cost of insurance to the place of importation.

At the time of the introduction of the Customs Valuation Rules⁴ in its present form and along with the introduction of the new Section 14 of the Customs Act (vide Section 95 of the Finance Act, 2007), an Explanation was added to Rule 10 (2) of the Customs Valuation Rules.

The said Explanation provides that the cost of transport of the imported goods under Rule 10(2)(a) includes the ship demurrage charges on charted vessels, lighterage or barge charges. It was also clarified ⁵ that the said Explanation is to take care of cases of imports by time-chartered vessels or bulk carriers discharging goods on high seas needing additional expenditure for delivery of the goods at the "place of importation" mentioned in Rule 10(2)(a).

Thus, vide the said Explanation to Rule 10 (2), the demurrage charges were sought to be included in the assessable value of the goods.

Does the explanation expand the scope of the Section?

On a perusal of the provisions of Section 14, prior to or after the amendment, it is clear that the Section does not authorize the inclusion of demurrage charges to the value of the imported goods for the assessment to duty of customs, either directly or by implication. The proviso to Section 14 provides for inclusion of cost of transportation to the place of importation to the extent and manner specified under the Customs Valuation Rules. However, as noted under the Customs Valuation Code, the demurrage charges are essentially not costs of transportation to the place of importation.

Further, it is trite in law and has been held by the Hon'ble Apex Court in various decisions that an explanation cannot increase the scope of the main Section. In other words, an explanation only explains. The Hon'ble Apex Court has held that an explanation should be harmoniously construed with the main section and an explanation cannot expand the scope of the Section. The said principle has found acceptance in various judicial pronouncements.⁶

Also, whether "Ship demurrage charges" paid can form part of the transaction value of the imported goods or could be attributed to the cost of transport as envisaged in Section 14 of the Customs Act or the Customs Valuation Rules is questionable, since primarily it is a post importation expense. Thus, even though Explanation to Rule 10(2)(a), Customs Valuation Rules, prescribes the inclusion of ship demurrage charges, the same goes beyond the purview of Section 14 of the Customs Act.

The "Ship demurrage charges" were never intended to be included in the Transaction Value under Section 14 of the Customs Act as is also evident from the Statement of Objects and Reasons for the proposed amendment in Section 14 of the Customs Act.

Therefore, whether demurrage charges can be included in the transaction value merely by virtue of an Explanation to the Customs Valuation Rules remains a question of law, since it goes beyond the scope of the Section 14.

Recent Developments

The constitutionality of the said Explanation was challenged before the Odisha High Court in the case of Tata Steel Ltd. vs. Union of India, W.P. (C) 7917 of 2009. The Hon'ble High Court, vide its order dated 30.01.2019 - 2019-TIOL-595-HC-ORISSA-CUS, has held that the inclusion of the demurrage charges by way of an explanation to Rule 10 (2) is ultra vires as it travels beyond the scope and purport of Section 14 of the Customs Act. The Hon'ble High Court has struck down the Explanation to Rule 10 (2). Relevant portion of the order is reproduced below: -

"13. …It is well-settled principle of the statute that while interpreting a statute, one has to go by the scope and the object of the principal Act. Under the principal Act, while amending it on 10 th October, 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. However, in view of the clarifications by way of judgements of the Hon'ble Supreme Court, more particularly, in the case of Wipro Ltd. (supra), Essar steel ltd. (supra) and Mangalore refinery & Petrochemicals Ltd. (supra), 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, we are 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 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 the past 2 years, many importers across the country have been issued notices by the Department alleging undervaluation of goods on account of non-inclusion of demurrage charges in the assessable value of the goods. The Department has also alleged mis-representation against the importers and raised the demand invoking the extended period of limitation for a period of 5 years.

Therefore, the decision of the Hon'ble Odisha High Court will provide huge relief to the importers who are facing huge demands from the Departments on account of demurrage charges. Accordingly, the lighterage charges and the barge charges as provided for under Rule 10 (2) may also now be outside the scope of Section 14 of the Customs Act.

(The views expressed are strictly personal.)

____________________________________________

¹ Black's Law Dictionary, 9 th Edition, Page 498

² Wharton's Law Lexicon With Exhaustive Reference to Indian Case Law, 15 th Edition, p 500; Board of Trustees of Port of Bombay vs. Jai Hind Oil Mills Co., (1987) 1 SCC 648: AIR 1987 SC 622.

³ http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/valuation/instruments-and-tools/gatt/general-introductory-commentary.pdf?db=web

⁴ Vide Notification No. 94/2007-Customs (N.T.) dated 13-9-2007, w.e.f. 10-10-2007.

⁵ Vide Circular No. 38/2007- Cus., dated 09.10.2007.

⁶ Bihta Co-operative Development Cane Marketing Union Ltd. and Ors. vs. The Bank of Bihar and Ors., AIR 1967 SCR 389; Vidushi Wires Pvt. Ltd. vs. Union of India, 2003 (156) E.L.T. 168 (Bom.) =2003-TIOL-152-HC-MUM-CX