2024 (6) TMI 1530 - AT - Customs

Demurrage Not Part of Customs Transaction Value u/r 10(2); Demand Breaches Section 28(2) and Judicial Discipline

Appeal was allowed, setting aside the impugned order confirming differential customs duty on alleged short payment arising from non-inclusion of demurrage ... Short payment of Customs Duty - demurrage charges paid by the appellant during the “lay time” period should also have been included in the assessable value - invocation of rule 10(2) of Customs Valuation Rules - principles of natural justice - HELD THAT:- It is observed that the decision of the Hon’ble High Court of Orissa as has been brought to the notice by the learned counsel for the appellant in the case of M/s Tata Steel Ltd. & Anothers vs. Union of India [2019 (10) TMI 226 - ORISSA HIGH COURT] has held the Explanation to rule 10(2) of Valuation Rules as ‘ultra vires’. From the facts, it is clear that the entire amount of demand along with the appropriate interest i.e. Rs. 33,34,407/- was paid by the appellant almost 2 years prior the impugned show cause notice was issued to the appellant. As per section 28 (2) of the Customs Act, 1962, if the duty along with the amount of interest as calculated by the proper officer is paid by the assessee, a show cause notice should not have been issued against the such assessee. Accordingly, it is held that the show cause notice has wrongly been issued. The demurrage charges has already been held to not to be includable in the assessable value. The order under challenge has wrongly confirmed the demand under a non-existent provision and also in violation of principles of judicial discipline - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether ship demurrage charges incurred during 'lay time' are includible in the assessable value of imported goods under section 14 of the Customs Act, 1962 read with rule 10(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, in view of the Explanation to rule 10(2) having been declared ultra vires. 1.2 Whether a demand of customs duty and issuance of show cause notice under section 28 of the Customs Act, 1962 is sustainable when the importer has already paid the entire differential duty and interest prior to issuance of the notice, and whether voluntary payment and recourse to section 28(5)/(6) estop the importer from disputing the liability. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Includibility of demurrage charges in assessable value after Explanation to rule 10(2) was struck down Legal framework 2.1 The demand was raised and confirmed on the basis that ship demurrage charges formed part of 'cost of transportation' and, by virtue of the Explanation to rule 10(2) of the Customs Valuation Rules, 2007 read with section 14 of the Customs Act, 1962, were to be included in the transaction value. 2.2 The Court noted the judgment of the High Court which held that the Explanation to sub-rule (2) of rule 10 of the Customs Valuation Rules, 2007, in so far as it sought to include demurrage in the valuation, was ultra vires section 14 of the Customs Act and was struck down. Interpretation and reasoning 2.3 The demand in the impugned order was confirmed solely by invoking rule 10(2) on the footing that demurrage paid for delay beyond 'lay time' must be added to the assessable value. 2.4 The Court relied on the extracted reasoning of the High Court that: (i) section 14, as amended, specifically enumerates costs and services such as commissions, brokerage, engineering, royalties, licence fees, transportation, insurance, loading, unloading and handling charges, but not demurrage; (ii) demurrage is in the nature of a penalty and is not a cost envisaged by the principal legislation; and (iii) in view of Supreme Court decisions (Wipro Ltd., Essar Steel Ltd., Mangalore Refinery & Petrochemicals Ltd.), demurrage cannot be included in the customs valuation. 2.5 On that basis, the High Court held that inclusion of demurrage through the Explanation exceeded the rule-making power and declared the Explanation to rule 10(2) as ultra vires section 14 and struck it down. 2.6 The Court observed that the appellant had specifically brought this High Court decision to the notice of the adjudicating authority by written submissions dated 22.01.2018, but the adjudicating authority, by order dated 01.03.2019, confirmed the demand without considering or following that judgment. 2.7 The Court held that once the Explanation to rule 10(2) had been struck down, the provision ceased to exist in law, and any demand confirmed on the basis of such a non-existent provision is inherently unsustainable and violative of judicial discipline. 2.8 The Court further drew support from a subsequent Tribunal decision holding that demurrage charges are not includible in assessable value, which itself relied upon the same High Court judgment. Conclusions 2.9 Demurrage charges incurred during 'lay time' are not includible in the assessable value under section 14 of the Customs Act, 1962 in the absence of a valid statutory provision. 2.10 The Explanation to rule 10(2) of the Customs Valuation Rules, 2007 having been declared ultra vires and struck down, no demand can be sustained on the basis of that Explanation. 2.11 The impugned order, having confirmed demand under a provision which was no longer on the statute book and in disregard of a binding High Court judgment, is vitiated and liable to be set aside. Issue 2: Validity of show cause notice and demand where duty and interest were already paid; effect of sections 28(2) and 28(5)/(6) Legal framework 2.12 Section 28(2) of the Customs Act, 1962, as noticed by the Court, contemplates that where the duty along with applicable interest, as calculated by the proper officer, is paid by the assessee, a show cause notice need not be issued. 2.13 The Department relied on section 28(5) and 28(6) to contend that the appellant, having voluntarily paid duty along with interest and 15% penalty in some cases, after admitting short payment, could not resile from such admission or challenge the liability. Interpretation and reasoning 2.14 The Court recorded that prior to the issuance of the show cause notice, the appellant had already paid the entire differential customs duty and interest, aggregating to Rs. 33,34,407/-, through separate challans dated 17.03.2017, 20.03.2017 and 21.03.2017, and that the subsequent show cause notice was issued on 17.04.2017. 2.15 On these facts, the Court held that, in view of section 28(2), once the duty and interest as determined were paid, there was no justification to issue a show cause notice, and issuance of the notice was contrary to the statutory mandate. 2.16 The Court rejected the Department's contention that the appellant was estopped from disputing the duty liability by reason of: (i) voluntary deposit; (ii) admission of mistake; or (iii) payment of penalty in certain cases, and request for closure under section 28(6). 2.17 The Court did not accept that section 28(5)-(6) barred the appellant from contesting the legality of the demand, particularly when the demand itself rested on a provision already struck down and when the statutory condition under section 28(2) against issuance of notice stood satisfied. 2.18 The Court also did not accept the argument that failure to dispute the demand at the adjudication stage precluded the appellant from raising legal challenges in appeal, given that the very foundation of the demand was a non-existent provision and the statutory protection of section 28(2) had been overlooked. 2.19 The Court drew support from a prior Tribunal decision which held that once the duty and interest are paid in terms of section 28(2), issuance of a show cause notice is not warranted. Conclusions 2.20 Since the appellant had fully paid the differential duty and interest before issuance of the show cause notice, issuance of the notice was contrary to section 28(2) and unsustainable. 2.21 Voluntary payment of duty, interest, and partial penalty, or invocation of section 28(5)/(6), does not estop the assessee from challenging the legal validity of the demand, especially where the demand is based on a provision that has been struck down. 2.22 The demand and appropriation of amounts under the impugned order, being based on an invalid legal provision and contrary to section 28(2), are liable to be set aside, and the appeal is to be allowed with consequential relief.