Demurrage and Despatch Money Related to Vessel Detention, Not Freight: CESTAT Favours Vedanta [Read Order]
CESTAT ruled that demurrage and despatch money arise only from vessel detention or early release and do not constitute freight or consideration for any taxable service
CESTAT Chennai, Vedanta, Demurrage and Despatch
CESTAT Chennai, Vedanta, Demurrage and Despatch
The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that demurrage and despatch money relate only to the detention or early release of a vessel at the port and cannot be treated as freight for the purpose of levying service tax.
Vedanta Ltd., formerly known as Sesa Sterlite Ltd., imported raw materials on CIF contracts. Under these contracts, the company was required to unload cargo within a specified laytime. If unloading exceeded this period, Vedanta had to pay demurrage to the vendor. If the unloading was completed earlier than the permitted time, the vendor was required to pay despatch money to Vedanta.
The department issued a show cause notice proposing to tax despatch money under “Port Service” for the period from April 2008 to June 2012. The Commissioner upheld the demand through the Order-in-Original dated 29.05.2015, treating despatch money as remuneration for facilitating early release of the vessel and holding demurrage as consideration for a corresponding service rendered by the vendor. Penalties were also imposed.
Aggrieved by the Commissioner’s order, Vedanta approached the CESTAT. Counsel for the appellant, Vishal Agarwal and Akshit Malhotra, argued that demurrage and despatch money were only consequences of contractual terms and were not payments for any service.
The counsel that these amounts did not relate to the transportation of goods and could not be treated as freight. They also argued that the demurrage and despatch arrangements involved no act or effort by either party, and thus could not qualify as a service under the definition of “Port Service.”
The revenue counsel supported the Commissioner’s findings and argued that the despatch money represented consideration received by Vedanta for enabling early release of the vessel, which amounted to a service rendered to the vendor.
The two-member bench comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that freight is the consideration paid for transportation of goods, whereas demurrage and despatch money arise only from how the vessel is dealt with at the port.
The tribunal explained that neither the importer nor the transporter performs any activity when these amounts arise. Demurrage and despatch money are merely contractual consequences and do not involve the rendering of any service. Since the basic requirement of a “service” was not met, the levy could not be sustained.
The tribunal pointed out that the Commissioner’s conclusion treating these payments as consideration for services was incorrect. The tribunal observed that the nature of the agreement showed no activity being performed for consideration. The tribunal explained that once it is found that no service exists, the demand and penalties cannot survive. The appeal filed by Vedanta Ltd. was allowed.
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