Demurrage Charges and Dispatch Money Not Taxable as ‘Port Services’: CESTAT

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that demurrage charges paid for delayed unloading of cargo and dispatch money received for quick turnaround of vessels cannot be subjected to service tax under the category of “Port Services.” The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) quashed the service tax demand raised under the reverse charge mechanism (RCM) on consulting engineering services received by Rashtriya Ispat Nigam Limited (RINL). The appellant, RINL, a major steel manufacturer, imports raw materials and exports finished steel products through chartered vessels. Under charter party agreements with vessel owners, the company was liable to pay demurrage charges if unloading or loading operations exceeded the agreed laytime. Conversely, it became entitled to receive dispatch money if cargo handling was completed ahead of schedule. The Service Tax Department alleged that demurrage charges paid by RINL to foreign vessel owners constituted taxable “Port Services” and attracted service tax under the reverse charge mechanism. Dispatch money received by RINL was also taxable. Consulting engineering services received from a foreign contractor were liable to service tax under Section 66A of the Finance Act, 1994. Based on these allegations, substantial service tax demands were confirmed by the adjudicating authorities and later upheld by the Commissioner (Appeals). The Tribunal first examined whether demurrage charges and dispatch money could be regarded as consideration for any taxable service. The tribunal observed that under charter party agreements, demurrage is merely a contractual consequence for delay in loading or unloading operations, while dispatch money is an incentive for completing operations ahead of schedule. Both are directly linked to transportation contracts rather than independent services. The Bench noted that demurrage and dispatch money are adjusted against freight payable to vessel owners and form part of the contractual terms governing transportation of goods. Therefore, they cannot be treated as separate consideration for any service. According to the Tribunal, these payments are essentially conditions of the transportation contract and not payments made in exchange for a taxable service. A crucial aspect of the ruling was the Tribunal’s finding that vessel owners were not actually providing any port services to RINL. The Bench noted that loading and unloading operations were carried out by independent stevedores engaged separately by RINL. Those stevedores, and not the vessel owners, performed the physical cargo-handling activities. Since the vessel owners neither undertook the loading/unloading work nor engaged stevedores on behalf of RINL, they could not be regarded as providers of port services. The Tribunal held that the very foundation of the Department’s case failed because Section 66A could apply only where a service provider located outside India rendered a taxable service to a recipient in India. In the present case, the alleged foreign service provider was not providing any port service at all. The Tribunal further accepted RINL’s contention that demurrage incurred during imports forms part of transportation costs and ultimately contributes to the value of imported goods. Similarly, demurrage incurred during exports forms part of the overall cost associated with sale transactions conducted on an FOB basis. The Bench observed that these amounts are intrinsically linked to the purchase and sale of goods rather than any independent service transaction. Therefore, service tax could not be imposed merely because money changed hands under the contractual arrangement. The Department had also attempted to justify taxability for the post-July 2012 period by invoking the “declared services” provisions under Section 66E of the Finance Act. Rejecting this argument, the Tribunal relied upon earlier judicial precedents holding that liquidated damages, penalties, and similar contractual payments do not amount to consideration for a service. It observed that demurrage charges are essentially penal in nature and arise only when contractual timelines are breached. The Bench held that such payments cannot be transformed into taxable services merely because they arise from a commercial contract. The same reasoning was held applicable to dispatch money, which is simply the opposite side of the same contractual mechanism. The Tribunal also examined the demand relating to consulting engineering services received from a Russian company, CJSC “OGNEUPORTKOKSSERVICES” (OKOS). The Department had argued that since the contract was signed with the Moscow entity, RINL was required to pay service tax under the reverse charge mechanism. However, the Tribunal found that the foreign contractor maintained an established office in India with service tax registration and that the Indian establishment had already discharged the applicable service tax liability. The contractual terms specifically provided that service tax paid by the Indian office would be reimbursed by RINL. Since the Indian establishment had already paid the tax and complied with statutory requirements, the Tribunal held that demanding tax again from RINL under reverse charge would amount to duplication. Accordingly, the demand under the category of consulting engineering services was also set aside. Allowing all appeals filed by RINL, the CESTAT held that demurrage charges paid to vessel owners are not taxable as port services. Dispatch money received for quicker turnaround of vessels is also not taxable. Such payments are contractual consequences linked to transportation arrangements and not consideration for any independent service. Service tax cannot be demanded under reverse charge on consulting engineering services where the foreign contractor’s Indian establishment has already discharged the tax liability. The impugned orders confirming service tax demands and penalties were set aside. Case Details Case Title: M/s Rashtriya Ispat Nigam Ltd Versus Commissioner of Central Excise & Service Tax, Visakhapatnam - I Citation: JURISHOUR-1578-CES-2026(HYD) Case No.: Service Tax Appeal No. 22362 of 2014 Date: 03.06.2026 Counsel For Appellant: Ch. Sumanth, Advocate Counsel For Respondent: M. Anukathir Surya, AR Click Here To Read Order Read More: Rule 9(1)(bb) Can’t Be Invoked to Deny CENVAT Credit When Penalty Proceedings Fail: CESTAT

Demurrage Charges and Dispatch Money Not Taxable as ‘Port Services’: CESTAT

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