Demurrage payable to a non-resident owner or charterer of a ship for delay in loading goods is not taxable under the Income Tax Act if it is a compensatory payment and not an extended freight.

K. Shivashankar Bhat, J.—The first respondent in each of these appeals is the petitioner who filed the writ petitions. In the writ petitions, two letters dated February 22, 1988, and October 11, 1988, addressed by the Reserve Bank to all the exporters/importers in the Goa Region were sought to be quashed; by those letters, it was pointed out that demurrage charges payable to the overseas owners of vessels chartered by the Indian parties attract Income Tax and hence application for remittances towards them are to be duly supported by Income Tax clearance certificates; it was further clarified 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 India Income Tax and, therefore, the exporters/importers were advised "to ensure that all applications for remittances towards demurrage payable on foreign vessels to overseas parties are duly supported by Income Tax clearance certificates or documentary evidence that tax is withheld along with a no objection certificate from the Income Tax authorities." These letters were allegedly the result of an opinion expressed by the Central Board of Direct Taxes that such demurrage charges attract tax under the Income Tax Act, 1961 ("the Act" for short).

2. The question for consideration is whether demurrage payable to a non-resident owner or charterer of a ship for the delay in loading the ore sold to the foreigner is liable to be taxed under the provisions of the Income Tax Act.

3. The two agreements entered into by the respective writ petitioners reveal that, having agreed to sell the ore, the same are to be loaded into the hip chartered by the purchaser. The agreement of sale requires the petitioners to load the goods sold; thereafter, it is the exclusive responsibility of the purchaser to transport it; the title to the goods obviously vests in the purchaser. The agreement is in the nature of a FOB contract. In case there is delay in loading, the petitioner is liable to pay demurrage at the rates stated in the agreement. The total demurrage payable to the purchaser is quantified subsequently and is to be remitted to the foreign buyer for which purpose permission of the Reserve Bank of India has to be obtained, as the remittances involve foreign exchange; payment of demurrage seems to be independent of the receipt of sale price by the petitioner. It is necessary to note that the seller-petitioner is in no way liable to pay any freight charges, since transportation of the ore is the responsibility of the buyer.

4. The Revenue contends that this demurrage is essentially an extended fright payable towards the carriage of the goods and is taxable in the same manner, as the receipt towards freight is taxed. The Petitioners, on the other hand, assert that the demurrage, here, is nothing but a compensatory payment towards the detention of the ship caused by the delay in loading the goods and it has no connection with freight. Alternatively, the Revenue contends that the demurrage receivable by the foreign buyer is income accruing to the non-resident in India and, therefore, taxable by virtue of section 5(2) of the Act, even if section 172 is inapplicable.

5. The law was declared by the learned single judge (see V. M. SALGAOCAR AND BROTHER LTD. Vs. DEPUTY CONTROLLER AND OTHERS. CHOWGULE AND CO. LTD. v. DEPUTY CONTROLLER AND OTHERS. SOCIEDADE DE FOMENTO INDUSTRIAL LTD. v. DEPUTY CONTROLLER AND OTHERS. V.S. DEMPO AND CO. LTD. v. DEPUTY CONTROLLER AND OTHERS., (1991) 187 ITR 381 KAR in favour of the petitioners who held that the demurrage in the instant case is not an expended freight at all; that section 172 covered the field of taxing a non-resident owner or charterer of a ship who was not engaged in the business of operation of shipping (the latter subject being covered by section 44B), and section 5 of the Act was inapplicable to the facts of the instant case.

6. Demurrage