Demurrage charges not includible in customs valuation

This is to apprise you regarding controversy on inclusion of demurrage charges in the assessable value of imported goods under the Customs Act, 1962 (‘Customs Act’). An importer of goods pays demurrage charges on account of delay in clearing the goods from the vessel.

There is an Explanation under Rule 10(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (‘Valuation Rules’) which includes demurrage charges in the cost of transport of the imported goods.

We would like to draw your attention towards a recent decision of the Orissa High Court in the case of Tata Steel Ltd. v. UOI, 2019-TIOL-595-HC-ORISSA-CUS wherein the constitutionality of the said Explanation was challenged. The High Court held that demurrage charges are not includible in the assessable value of the imported goods basis the following reasons:

• Section 14 of the Customs Act (dealing with valuation of goods) includes cost of transport in the assessable value of the imported goods but is silent on inclusion of demurrage charges therein. The High Court observed that demurrage charges are not included in the cost of transport in its natural meaning. The Valuation Rules cannot extend the scope of the Section by inserting an Explanation therein without amending Section 14 of the Customs Act. Hence, the Explanation is  ultra-vires as it traveled beyond the scope and purpose of the Customs Act.
• An importer pays demurrage charges as a penalty for not clearing the goods from the port within the stipulated time. The same cannot be considered as part of transportation services.

NITYA Comments:

This ruling will provide huge relief to the importers who were paying customs duty on demurrage charges. The ruling seems correct for the reason that the legislature’s intent was nowhere to cover the demurrage charges in the assessable value of imported goods under Section 14 of the Customs Act. An Explanation can be inserted in the subordinate legislation only for explaining the primary legislation and cannot enhance its scope.

Basis the above, the taxpayers may defend the issue (if raised by the department for the past period) and also consider filing of refund claim for excess customs duty paid by them in last one year. Going forward as well, the taxpayers may take a stand not to pay customs duty on the demurrage charges.

The decision of the High Court is expected to be challenged before the Supreme Court which will provide finality to the issue.