“Once on demurrage, always on demurrage”
It is a well known maxim developed by the shipping industry meaning once Charterers have used up their laytime and the vessel is on demurrage, all time used will fall for their account, whatever the apparent cause.
Demurrage in common parlance is known as a charge payable to the owner of a chartered ship on failure to load or discharge the ship within the time agreed (laytime). Generally speaking “demurrage” charges are in the nature of penalty for delay in loading/unloading cargo from the vessel than the contractual laytime allowed. It is not a charge for providing transportation service. Hence, by no means, can it be regarded as rendering of service, there being no service element involved.
Even CBEC in the Circular No. 121/3/2010-ST dated 26th April, 2010 clarified that ‘detention charges’ are‘penal rent’ for retaining the containers beyond the pre-determined period.Therefore, the amount collected as ‘detention charges’ is not chargeable to service tax. Though demurrage and detention cover completely different situations, both are similar and penal in nature. Hence applying ratio of Board’s circular in the pre-negative list scenario, demurrage charges were not eligible to service tax.
However, with the introduction of Negative List in 2012, Board took a U-turn by including “demurrage” in the service tax valuation rules.
As per Rule 6 of the Service Tax (Determination of Value) Rules, 2006
“the amount realised as demurrage or by any other name whatever called for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service” should beadded to the value of taxable services subject to the section 67 of the Finance Act, 1994 as amended to date.
With this amendment coming into force w.e.f. 01.07.2012 vide Notification No. 24/2012-ST dated 06.06.2012 any sort of amount paid for demurrage or in relation to the same would have to be added to the gross value for the purpose of service tax. As already specified, demurrage by no means can be regarded as payment for rendering of service. Then, of course, question arises, how the same can be included in value of taxable service.
In the new regime, the same can be squarely covered under clause (e) of Sec 66E-Declared Service. As per section 66E(e), ‘agreeing to an obligation to refrain from an act or to tolerate an act or a situation, or to do an act,’ has been declared as a service. In the given case demurrage payment can be regarded as payment to ship – owner for tolerating charterer’s act of delay in loading or unloading of vessel.
Once, it has been established, next we need to analyse in what scenarios can service tax be leviable on “demurrage”. Given the nature of ship demurrage, in order to determine whether service tax is leviable on demurrage payments, reference has to be made to Place of Provision of Services rules, 2012.
Let us examine demurrage payments at loadport/disport in different situations and service tax impact thereon.
Scenario A: Not a Service
Company X in India has imported goods on CIF Basis from Company Y in Australia.
In the given case, since, Y has to arrange for transportation, any demurrage incurred whether at the load port/disport is payable by Y to the vessel owner. Demurrage incurred at disport on account of X will be recovered by Y from X as per contractual rate agreed. Hence, in the given case, demurrage payment by X to Y is nothing but re-imbursement of cost to Y. Therefore, no service tax will be leviable on such re-imbursements as the same has been paid by X to Y not for any service perse but as a reimbursement. Hence the same would not be exigible to service tax.
Scenario B : Import of Service
Company X in India has imported goods on FOB Basis from Company Y in Australia.
In the given scenario, since X has to arrange for transportation, any demurrage incurred whether at loadport/disport is payable by X to the vessel owner. Demurrage at loadport on account of Y will be recovered by X as per contractual rate agreed. Thus, payment to vessel owner by X is this case is payment for demurrage which is leviable to service tax.
- If the vessel owner is located in India, service tax will be payable by the vessel owner.
- If vessel owner is located outside India, it would amount to import of service. It is pertinent to note here that for import of service, tax has to be paid under reverse charge by the service recipient under Notification No. 30/2012-ST dated 20.06.2012.Hence, service tax will be paid by X under reverse charge.
With the advent of Negative List based service tax regime, Place of Provision of Service Rules, 2012 determines the situation of import of service. The import of services will be when the services are rendered by a person having establishment in a non-taxable territory. In the above example if the vessel owner/service provider is located outside India, then it amounts to import of service by X.
Some are of the view that demurrage can be treated as bundled service, it being naturally bundled in the ordinary course of business along with transportation service. Applying that argument, since, ocean freight on importation is exempt from service tax, any demurrage in relation to such importation will also be exempt from service tax.
In the absence, of any clarification on the issue by CBEC, the position will remain ambiguous and litigations are bound to arise.