Customs Supervision Charges | MOT Basis Mandatory for Services Under Half-Day Under Circular 32/2016-Cus : CESTAT Kolkata

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Kolkata has clarified that customs supervision charges for special bonded warehouses must be determined by actual hours of service rendered, not merely by the number of days. In a significant ruling, the Tribunal set aside a demand of over Rs. 1.36 crore on the ground that the Revenue failed to prove that services exceeded half a day, thereby mandating payment on Merchant Over Time (MOT) basis under the applicable circular.

Background & Facts

The Dispute

M/s. Flemingo Dutyfree Shop Private Limited (the appellant) operates duty-free shops at multiple Indian airports, including Netaji Subhas Chandra Bose International Airport (NSCBI Airport), Kolkata. To facilitate its operations, the appellant holds a Special Warehouse Licence issued under Section 58A(1) of the Customs Act, 1962, permitting storage of imported goods in a bonded warehouse located within the airport’s integrated terminal building. The licence, granted on 14.07.2016, required the licensee to pay for customs supervision services either on Cost Recovery Charges (CRC) basis or Merchant Over Time (MOT) basis.

Key Facts

• The appellant began operations at NSCBI Airport in 2007 and moved its bonded warehouse to the new integrated terminal in 2014.
• Since 2010, the appellant has consistently paid supervision charges on MOT basis for daily customs officer services, which were accepted without objection by the Customs authorities.
• The appellant’s warehouse operations require customs officers to be present for approximately six hours per day, primarily to escort bonded goods from the warehouse to the duty-free shop.
• The Preventive Officer stationed on the upper ground floor of the terminal, not from the Customs House 30 km away, provides these services.
• No Superintendent of Customs was permanently posted or specifically assigned to supervise the appellant’s warehouse.
• The appellant’s MOT payments for the period July 2016 to December 2018 were calculated based on an 8-hour slab (10:00 a.m. to 6:00 p.m.) under the Customs (Fees for Rendering Services by the Customs Officer) Regulations, 1998, despite actual service being limited to six hours.
• The Revenue issued a Show Cause Notice dated 14.02.2019 demanding Rs. 1,36,77,319/- as differential CRC charges for the same period, alleging that the services rendered amounted to a full day or better part thereof.

Procedural History

• 14.07.2016: Special Warehouse Licence No. 89/2016 issued by Commissioner of Customs (Port), Kolkata.
• 06.01.2017: Appellant submitted MOT calculation for December 2016 to Superintendent of Customs (Bond), NSCBI Airport.
• 14.02.2019: Show Cause Notice issued demanding CRC differential of Rs. 1,36,77,319/- for July 2016 - December 2018.
• 18.04.2024: Principal Commissioner of Customs (Airport & ACC), Kolkata, passed Order-in-Original confirming the demand.
• 21.05.2026: Hearing held before CESTAT Kolkata via virtual mode.
• 24.06.2026: Final Order passed allowing the appeal.

The Parties' Positions

Appellant’s Position: The services were rendered for less than half a day (six hours), on a need-basis, and never required the officer’s absence from office for an entire day. The Revenue’s shift from accepting MOT to demanding CRC after eight years was arbitrary and retaliatory. The appellant relied on a prior favorable order from the Deputy Commissioner of Customs, Goa, in an identical matter.

Respondent’s Position: The Revenue argued that customs officers were present on 558 out of 586 working days, implying continuous supervision. It contended that the warehouse’s location and operational nature necessitated CRC, citing the appellant’s own renewal application mentioning a 30 km distance from Customs House.

Relief Sought

The appellant sought: (1) setting aside of the impugned order dated 18.04.2024; (2) quashing of the demand of Rs. 1,36,77,319/-; (3) confirmation that supervision charges for the period July 2016 - December 2018 were correctly paid on MOT basis; and (4) refund of any amounts paid under protest.

The Legal Issue

The central question was whether Cost Recovery Charges (CRC) under Paragraph 11 of CBEC Circular No. 32/2016-Cus are applicable when customs officer services are rendered for less than half a day, or whether Merchant Over Time (MOT) remains the correct basis for such limited-duration supervision.

Arguments Presented

For the Appellant

The appellant relied on Paragraph 11 of Circular No. 32/2016-Cus, which explicitly states that CRC applies only when: (i) the customs officer’s absence from office exceeds half a day; (ii) services are required twice daily; or (iii) round-the-clock supervision is needed. The appellant submitted that actual service duration was six hours per day, well within the MOT threshold. It cited its long-standing practice of paying MOT since 2010, accepted without protest, and argued that the Revenue’s sudden demand was an afterthought. The appellant also relied on the Goa Deputy Commissioner’s order dated 27.02.2021, which dismissed an identical CRC demand on identical facts.

For the Respondent

The Revenue argued that the frequency of service (558 days out of 586) and the logistical distance from the Customs House justified CRC. It contended that the appellant’s renewal application mentioning a 30 km distance indicated the need for extended officer presence. It further claimed that the Preventive Officer’s duties extended beyond mere escort, implying continuous supervision. However, it produced no time logs, attendance records, or deployment orders proving actual service beyond six hours.

The Court's Analysis

The Tribunal conducted a meticulous review of Paragraph 11 of Circular No. 32/2016-Cus, emphasizing that the determination of MOT or CRC hinges on the actual duration of officer presence, not merely the number of days or administrative convenience. The Tribunal noted that the Revenue’s entire case rested on the assertion that officers were present for a "major part of the day," yet no evidence - such as duty rosters, time stamps, or movement logs - was produced to substantiate this.

"There is no evidence available on record to indicate that the officer's services have been utilized throughout the day. Thus, we hold that the determination of payment for the services as worked out by the appellant on MOT basis, for the period under dispute, is legally correct."

The Tribunal rejected the Revenue’s reliance on the 30 km distance, observing that the Customs House is an administrative office and no officers were deputed from there. The Preventive Officer was stationed within the terminal building, rendering the distance irrelevant. The Tribunal also dismissed the claim that Superintendents of Customs were involved, noting no evidence of their deployment.

The Tribunal further highlighted the appellant’s consistent payment pattern since 2010 and the Goa order, which established a precedent on identical facts. It held that the Revenue’s attempt to impose CRC retroactively, after years of accepting MOT, violated principles of legitimate expectation and fairness.

"The alleged calculation and/or computation, pertaining to the cost of supervision, as provided in the Show Cause Notice is not sustainable particularly in view of the fact that the computation provided under the Notice only enumerates the number of days spent for supervision by the Officers of the Customs and not the actual hours for which the services of the officers have been availed."

The Tribunal concluded that the Revenue’s demand was legally unsustainable because it conflated frequency with duration, a fundamental misreading of the Circular.

The Verdict

The appellant succeeded. The Tribunal set aside the impugned Order-in-Original dated 18.04.2024 and allowed the appeal. The demand of Rs. 1,36,77,319/- for Cost Recovery Charges for the period July 2016 to December 2018 was quashed. The Tribunal held that supervision charges for the period were correctly paid on Merchant Over Time basis. The appellant’s payments made under protest shall be adjusted against any future liabilities, if any, and no further demand shall be raised for the same period.

What This Means For Similar Cases

Supervision Duration, Not Frequency, Determines Charge Basis

• Practitioners must now focus on actual hours of customs officer presence, not number of days, when challenging CRC demands.
• Revenue authorities cannot infer full-day service from high frequency alone; time logs or deployment records are mandatory.
• MOT remains the default for services under half a day, even if rendered daily.

Precedent and Consistent Practice Are Defenses Against Retroactive Demands

• Long-standing acceptance of MOT payments (over 10 years in this case) creates a legitimate expectation that cannot be overturned without justification.
• Identical rulings in other jurisdictions (e.g., Goa) must be cited to invoke judicial discipline and prevent inconsistent enforcement.
• Sudden shifts in charge classification after years of compliance are prima facie arbitrary and liable to be set aside.

Administrative Convenience Cannot Override Statutory Guidelines

• Distance from Customs House is irrelevant if officers are stationed on-site.

• Generic supervisory roles under the Customs Act do not equate to dedicated warehouse supervision warranting CRC.

• The Circular’s intent is to ensure proportionality; charging for 8 hours when only 6 were used is unjustified and must be challenged.

• Always request and retain time-stamped service logs from customs authorities.

• If MOT has been accepted for years, document this history and cite it in any show cause response.

• Cite prior favorable orders from other benches as binding precedent under principles of consistency.