Demurrage paid to non-resident ship-owners or charterers does not constitute income falling under Sec. 44B and Sec. 172 of the IT Act 1961 and is not exigible to tax.

Headnote:
Demurrage - Income Tax - Sec. 44B, Sec. 172 - The court discussed the provisions of Sec. 44B and Sec. 172 of the IT Act 1961 and their applicability to demurrage payments made to non-resident ship-owners or charterers. The court held that demurrage paid does not constitute income falling under these sections and is not exigible to tax under the Act. The circular instructions requiring Income Tax clearance for remittances of demurrage payments were found to be without the authority of law. The petitioners were not affected by the circular referring to Indian (resident) charterers. The court hoped that such actions would not cause undue hardship to exporters in India and affect international shipping.
Fact of the Case:

The petitioners, mine owners and exporters of ores to foreign countries, challenged circular letters requiring Income Tax clearance for remittances of demurrage payments. They argued that demurrage paid to non-resident ship-owners or charterers is not exigible to tax under Sec. 44B and Sec. 172 of the IT Act 1961.
Finding of the Court:

The court found that demurrage paid does not constitute income falling under Sec. 44B and Sec. 172 of the Act and is not exigible to tax. The circular instructions requiring Income Tax clearance for remittances of demurrage payments were found to be without the authority of law. The petitioners were not affected by the circular referring to Indian (resident) charterers.
Issues: The main issue was whether demurrage paid to non-resident ship-owners or charterers is exigible to tax under Sec. 44B and Sec. 172 of the IT Act 1961.
Ratio Decidendi: The court analyzed the provisions of Sec. 44B and Sec. 172 of the Act and held that demurrage paid does not constitute income falling under these sections and is not exigible to tax. The circular instructions requiring Income Tax clearance for remittances of demurrage payments were found to be without the authority of law.
Final Decision: The court disposed of the writ petitions, holding that demurrage paid is not income exigible to tax under Sec. 44B or Sec. 172 of the Act. The circular instructions requiring Income Tax clearance for remittances of demurrage payments were found to be without the authority of law. The petitioners were not affected by the circular referring to Indian (resident) charterers. The court hoped that such actions would not cause undue hardship to exporters in India and affect international shipping.

ORDER

M. P. CHANDRAKANTARAJ URS, J.-- These four writ petitions are disposed of by the following common order as the grievances of the petitioner therein are identical and they have sought the same relief. The petitioner in W.P. No. 6979/1989 is M/s. V. M. Salgaocar and Brother Ltd., of Vasco de Gama Goa. The petitioner in W.P. No. 7166/1989 is M/s. Chowgule & Company Ltd., Mormugao Harbour, Goa. The petitioner in W.P. No. 7273/1989 is M/s. Sociedade de Fomento Industrial Ltd., Margao, Goa. The petitioner in W.P. No. 10636/1989 is M/s. V. S. Dempo & Company Ltd., Campal, Panaji, Goa.

2. All the petitioners are mine owners, mining among other things manganese and iron ores and they are also exporters of the ores to foreign countries mostly to Japan and Korea. It is alleged in the first of the petitions (I propose to go by the facts stated in that petition), that it entered into the agreement with the foreign buyer on credit price for iron and/or manganese ore and foreign buyers sent their ships either owned by them or chartered by them and the petitioners loaded their ore stacked at the berth at the port side by mechanical means into the vessel which carried the ore and sometimes it used barges and loaded the ships on the sea when convenient depending on the size of the ship which was to be loaded. In any event all the contracts entered into with the foreign buyers were on the basis of f.o.b. All such contracts provided a clause for detention of a ship in the port for unforeseen reasons and in that behalf the exporters, i.e., the petitioners bad to bear the demurrage charges and pay the same to the owner of the ship or the charterer. The practice all along had been to pay such demurrage and subsequently work out details having regard to the requirement of complying with certain formalities, the payments were made after obtaining the necessary permission from the Reserve Bank of India through the regular bank channels.

3. It is alleged that some time in February, 1988, the 1st respondent-Deputy Controller, Reserve Bank of India, Exchange Control Department, Panaji, Goa, issued circular letters to all exporters requiring them to obtain Income Tax clearance for remittances of demurrage payments. One such specimen of the circular letters is produced at Annexure-B to the petition. Substance of that letters that on the advice (opinion) of the CBDT. The overseas owners vessels chartered by Indian parties attract Income Tax and therefore the exporters should ensure that applications for remittances towards demurrage payable on chartered vessels should be duly supported by Income Tax clearance certificates.

4. The 2nd respondent in this petition is the Chairman, CBDT, Ministry of Finance, New Delhi. By yet another communication dated 11th October, 1988 as at Annexure-C all exporters of Goa Region have been informed by the 1st Respondent that all demurrage amounts payable in respect of foreign vessels chartered for carriage of goods exported from India under any type of contract, i.e., C & F/CIF/FOB, attract Indian Income Tax. Therefore, the exporters are advised to ensure that all applications for remittances towards demurrage payable to foreign vessels to overseas parties should be duly supported by Income Tax clearance certificates or documentary evidence that tax is withheld along with no objections certificate from the IT authorities. These facts have not been disputed.

5. The petitioners feel aggrieved by the circular instructions as at Annexures B and C. Annexure B apparently is based on the opinion formed by the 2nd respondent, Chairman, CBDT.

6. The petitioners have impleaded the CIT, Karnataka and the Union of India by its Secretary, Ministry of Finance as respondents 3 and 4 as necessary and proper parties.

7. The main contest to the petitions has been entered by the 3rd respondent, the CIT in Karnataka.

8. Mr. G. Sarangan, learned counsel appearing for the petitioners, has pleaded and contended that income from shipping of non-reside

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1990 Supreme(Kar) 685

Demurrage paid to non-resident ship-owners or charterers does not constitute income falling under Sec. 44B and Sec. 172 of the IT Act 1961 and is not exigible to tax.

Cases Referred (1)