Section 172: Demurrage Charges Not Covered !

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The assessee entered into an agreement to sell ore to foreign buyeron FOB contract. As per teh agreement, teh buyer charted the ships for the purpose of conveying the ores purchased from the seller and In case there was delay in loading, the seller had to pay demurrage and similarly in case time was saved in loading, the seller was entitled to receive dispatch money. As per the assessing officer the receipt of demurrage was essentially an extended freight payable towards the carriage of the goods and was taxable in the same manner, as the receipt towards freight was taxed.

Assessee filed a writ which was disposed off by the Single Judge holding that the demurrage was not an extended 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 and section 5 was inapplicable to the facts of the instant case.


The Kerala in case of Chowgule & Co. Ltd vs CIT held vide its order dt:6/3/1991 as under :

Section 172(1) identifies the subject of taxation. That subject is to be taxed only as provided under section 172(2) to (7). There is no question of any residuary income attributable to that subject being taxed elsewhere. That will be amending section 172(1) by reading into it a supposed intention of the law-maker; such a course is impermissible.

Section 172(1) is not attracted to the case of a non-resident assessee engaged in the business of operation of ships. A non-resident owner of charterer of a ship which carries passengers, livestock, mail or goods shipped at a port in India only, is covered by section 172.

Since section 172 is a complete code by itself, the levy and collection of tax in respect of the subject on which the tax is levied thereunder has to be only as provided therein. For whatever reason, the concept of total income of a non-resident person coming within section 172(1) is confined to the specified income under section 172(2). There is no scope at all to travel outside section 172 to impose tax on such a person’s income derived in the manner stated in section 172(2).

Thus, if the payment is to be made not on account of carriage of goods, etc., then section 172(2) is not attracted and, therefore, such a receipt or payment is not taxable under section 172.

A perusal of the agreements showed that that demurrage payable was to prevent delay in loading the goods. In other words, the payment was to speed up the activity of delivering the goods to the purchaser in whom the title vested on delivery into the ship. If the seller expedited the delivery and loading, then he gets “dispatch money”. While dispatch money was receivable by the seller, i.e., the petitioners, the demurrage was receivable by the purchaser. The carriage of goods by the ship commenced on completion of the loading work till then the goods were in the process of delivery on board the ship. The demurrage payable in the instant case at the most was on account of deley in the delivery of the goods on board the ship. If so, certainly section 172(2) was inapplicable.

The demurrage paid or payable under the said two agreements could not be taxed in the manner pleaded by the revenue.


Reference 192 ITR 40