Demurrage charges are collected by the shipping line from the foreign vendor in case of delay in unloading the goods beyond a specified period since such delay results in his vessel being detained. If there is a delay in unloading the goods because of the Indian Importer, the Indian Importer will reimburse an amount equal to the demurrage charges which the foreign vendor will have to pay to the vessel owner. Thus, in effect, the amount reimbursed by the Indian Importer to the foreign vendor is in the nature of penalty/damages to compensate the loss which the foreign vendor suffers due to the delay in unloading the goods on the part of the Indian Importer.
CGST Act 2017 as per section 9(1) tax will be levied on supplies and supply is defined under section 7(1) –the expression “supply” includes––
all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; import of services for a consideration whether or not in the course or furtherance of business; the activities specified in Schedule I, made or agreed to be made without a consideration; and the certain activities to be treated as supply of goods or supply of services as referred to in Schedule II.” i.e.agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;”
IGST Section 5 also specifies under proviso that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 (51 of 1975) on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962 (52 of 1962).”
Section 12 of the Customs Act, 1962 provides for the “valuation of goods” for importation, which reads as under:
SECTION [14. Valuation of goods. — (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, 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 :
Provided that 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 :
Further, Rule 10 of the Customs Valuation (Determination of value of imported goods) Rules, 2007 provides for determining the transaction value as under:
10. Cost and services. —
……
[(2) For the purposes of sub-section (1) of section 14 of the Customs Act, 1962 (52 of 1962) and these rules, 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 cost of insurance to the place of importation:
……..
Explanation – 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.]
Thus, to summarize, the GSTR states that in case of damage claims like loss of profit, breach of contract, copyright infringement etc., the payment made is not towards any supply but only towards settlement of the damage claim. The said GSTR states that if a payment made under a court order is wholly in respect of such a claim, the payment will not be consideration for a supply.
It is pertinent to bear in mind that the definition of “supply” under the Australian GST legislation includes within its ambit “entry into an obligation to tolerate an act”. Thus, when the aforesaid GSTR namely GSTR 2001/4 states that payment of damages is not towards any supply, it is reasonable to conclude that the GSTR has also considered the clause “entry into an obligation to tolerate an act”. In other words, the GSTR impliedly concludes that the acceptance of damages does not amount to tolerating an act and hence would not fall within the ambit of “supply” for the purposes of GST.
Conclusion
Thus, it can be argued the amount recovered by the foreign vendor from the Indian Importer for loss suffered by the vendor in the form of “demurrage” charged by the foreign shipping line will not be treated as “consideration” for service of “tolerating an act” under Entry 5(e) of Schedule II of the CGST Act. The said amount will be treated as damages/compensation only and therefore the amount received would not be leviable to GST. It could be contended “demurrage” is in the nature of “penalty” and thus, no GST shall be attracted on the same as “supply” of “agreeing to tolerate” an act. However, in light of the provisions of customs which include “demurrage” in the value of “cost of transportation” and as a conservative view, the Indian Importer may opt to pay GST on demurrage as a part of “ocean freight” on reverse charge basis in terms of Notification no. 10/2017 – I.T. (Rate).However, the said view shall remain to be contingent on decision of the Supreme Court in the matter of Tata Steele Ltd. v. Union of India, wherein the validity of the Explanation to Rule 10 of the Customs valuation rules. Further, if the Indian Importer opts to pay GST on demurrage on reverse charge basis as part of ocean freight, the Indian Importer is also advised to treat “demurrage” as a part of “ocean freight” paid for transportation of goods from outside India to India in their books of accounts as well.
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Can the same view be applied even in respect of Demurrage charges collected by the Shipping Lines from the Importers in respect of Containerised Cargo ??