The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata Bench, has set aside a customs demand of ₹1.36 crore raised against Flemingo Dutyfree Shop Private Limited, holding that the company was liable to pay supervision charges on a Merchant Over Time (MOT) basis and not on a Cost Recovery Charges (CRC) basis as claimed by the Customs Department.

The bench of Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) examined Paragraph 11 of CBEC Circular No. 32/2016-Cus, which lays down guidelines for determining whether supervision costs should be recovered through MOT or CRC.

The appellant/assessee operates duty-free shops at several airports and seaports across India. The company was granted a Special Warehouse Licence under Section 58A of the Customs Act, 1962, permitting it to operate a special bonded warehouse at Netaji Subhas Chandra Bose International Airport, Kolkata, for storage of imported goods such as liquor, tobacco, perfumes, cosmetics, watches, food products and other duty-free merchandise.

As part of its operations, the company regularly transfers goods from the bonded warehouse to its duty-free retail outlets. Under the licensing framework, warehouse operators are required to bear the cost of customs supervision, either through Merchant Over Time (MOT) fees or Cost Recovery Charges (CRC), depending upon the nature and extent of customs officers’ deployment.

The Customs Department contended that the frequency and duration of supervision required by Flemingo warranted recovery of costs on a CRC basis. Consequently, a show cause notice issued in February 2019 sought differential charges amounting to ₹1.36 crore for the period from July 2016 to December 2018.

The assessee argued that customs officers were required only once per day and for limited durations, generally not exceeding a few hours. Accordingly, the company had consistently paid MOT charges, which had been accepted by Customs authorities without objection for several years.

The company further submitted that it had been operating under a similar arrangement since 2010 and that no material change in operations had occurred that could justify a sudden shift from MOT-based recovery to CRC-based recovery. It also challenged the Department’s reliance on the distance between the warehouse and Customs House, contending that customs officers supervising warehouse operations were stationed within the airport premises and not deputed from the Customs House located approximately 30 kilometres away.

Flemingo additionally relied on an earlier order passed by Customs authorities in Goa concerning its operations at Dabolim International Airport, where a similar demand for CRC had been dropped and MOT charges were held to be applicable.

The Tribunal noted that CRC becomes applicable only in limited circumstances, such as when the warehouse is located so far from the customs office that the officer remains away from the office for the entire day or a substantial part of it; when services are required more than once daily; or when round-the-clock or full-day supervision is required.

After reviewing the records, the Tribunal found no evidence demonstrating that customs officers had been deployed throughout the day or for the better part of the day. The Bench observed that the services were availed only for limited periods and that the Department had failed to produce substantive evidence establishing continuous or near-continuous deployment of officers.

The Tribunal also rejected the Department’s argument that the frequency of officer visits alone justified CRC recovery. It held that the actual duration of supervision was the determinative factor under the circular and not merely the number of days on which officers attended warehouse operations.

A significant aspect of the ruling was the Tribunal’s finding that part of the demand had been computed on the assumption that services of Customs Superintendents were also utilized. However, the record contained no evidence showing that any Superintendent had been specifically posted for Flemingo’s warehouse operations or that their services had actually been availed.

The Bench held that in the absence of evidence regarding deployment or utilization of Superintendent-level officers, recovery of charges attributable to such officers could not be sustained.

The Tribunal also took note of a 2021 adjudication order passed by the Deputy Commissioner of Customs, Goa, involving the same company. In that case, Customs authorities had concluded that cost recovery charges could not be demanded because no dedicated customs officer had been exclusively posted for supervision of the duty-free warehouse. Instead, MOT charges were held to be the appropriate mode of recovery.

CESTAT observed that the reasoning adopted in the Goa matter supported the appellant’s case and reinforced the conclusion that CRC could not be imposed in the absence of dedicated customs deployment.

Allowing the appeal, the Tribunal held that the Customs Department had failed to establish that the services of customs officers were utilized for the entire day or for the better part of the day, a prerequisite for invoking Cost Recovery Charges under the applicable circular. Consequently, Flemingo was liable only to pay Merchant Over Time charges for the supervision services actually utilized.

Setting aside the impugned order, the Tribunal ruled that the ₹1.36 crore demand and corresponding interest were unsustainable in law and allowed the appeal in favour of Flemingo Dutyfree Shop Private Limited.

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