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Can Customs authorities impose full-fledged Cost Recovery Charges (CRC) merely because customs officers frequently supervise a bonded warehouse? Or must the department first establish that officers were continuously or exclusively deployed for full-day supervision?
These questions formed the core of the decision delivered by the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) in Flemingo Dutyfree Shop Pvt. Ltd. v. Commissioner of Customs1. In its ruling dated 24 June 2026, the Tribunal clarified that Customs cannot mechanically impose CRC simply because customs officers supervise warehouse operations regularly. Unless the department demonstrates continuous, dedicated or full-day deployment of customs personnel in terms of the governing regulations and circulars, only Merchant Overtime (MOT) charges can be recovered.
The ruling is significant for airport duty-free operators, bonded warehouse licensees and businesses functioning under customs supervision frameworks.
The dispute arose from the operations of Flemingo Dutyfree Shop Private Limited at the Netaji Subhas Chandra Bose International Airport, Kolkata, where the company operated a special bonded warehouse for storing imported duty-free goods before sale through airport duty-free outlets. For several years, Flemingo had been paying supervision charges on a Merchant Overtime (MOT) basis. However, following the grant of a Special Warehouse Licence under Section 58A(1)2. Customs authorities took the position that the company was instead liable to pay Cost Recovery Charges (CRC).
A Show Cause Notice dated 14 February 2019 consequently raised a demand of approximately ₹1.36 crore for the period between July 2016 and December 2018. According to the department, customs officers were being utilized almost every day for warehouse-related activities and therefore the company was liable to bear supervision costs on a CRC basis. The proceedings ultimately culminated in an Order-in-Original dated 18 April 2024, which was challenged before CESTAT.
The principal issue before the Tribunal was whether Flemingo’s warehouse operations satisfied the conditions necessary for levy of CRC under Regulation 3(e) of the Special Warehouse Licensing Regulations3, read with CBEC4 Circular No. 32/2016-Cus dated 13 July 2016. The dispute essentially turned on the distinction between Merchant Overtime charges, which apply where customs officers are required occasionally or for limited periods, and Cost Recovery Charges, which apply where officers are required on a continuous, dedicated or full-day basis.
Flemingo argued that Customs had fundamentally misunderstood both the regulatory framework and the factual position. The company contended that the services of Preventive Officers were generally utilized only once per day and typically for less than two hours, and therefore the conditions necessary for CRC were absent. It further argued that no dedicated customs officers or superintendents had been exclusively posted for its warehouse operations and that Customs had accepted MOT payments for years without objection.
A particularly important argument raised by Flemingo concerned the department’s methodology for calculating liability. The company pointed out that the show cause notice merely counted the number of days on which officers rendered services while completely ignoring the actual duration of supervision. Flemingo also challenged the Revenue’s assertion that customs officers had been deployed on approximately 95% of working days by arguing that international airports operate on a 24/7 basis and that, when calculated against the actual operational period, customs supervision had only been utilized for approximately 63% of the time.
The appellant additionally relied upon an earlier Order-in-Original concerning its operations at Dabolim International Airport, Goa, where Customs authorities had dropped an identical CRC demand after holding that no dedicated customs officers had been exclusively deployed for supervision and that only Merchant Overtime charges were payable. The Goa proceedings also revealed that the officer assigned to the warehouse was simultaneously managing airport baggage functions, thereby demonstrating that the deployment was never exclusive in nature.
The Revenue, on the other hand, argued that Flemingo had availed customs supervision services on approximately 95% of working days during the relevant period and that such frequency itself established regular and substantial deployment warranting CRC recovery.
CESTAT ultimately ruled in favour of Flemingo and set aside the entire CRC demand. The Tribunal held that the department had failed to establish the factual conditions necessary for levy of CRC under the governing Circular and Regulations. The Bench noted that although the department repeatedly asserted that customs officers were deployed for major parts of the day, there was no documentary evidence proving that officers had actually worked throughout the day or for the “better part thereof.”
The Tribunal further observed that there was absolutely no evidence showing that any Superintendent of Customs had ever been exclusively posted for Flemingo’s warehouse operations. The absence of dedicated deployment substantially weakened the department’s case. The Bench also accepted the appellant’s argument that the department had incorrectly focused only on the number of operational days while ignoring the actual duration of supervision. Clarifying the interpretation of Circular No. 32/2016, the Tribunal held that the duration and intensity of supervision are the determinative factors for CRC liability and not merely the frequency of operational days.
While arriving at its decision, the Tribunal relied upon the earlier Order-in-Original concerning Flemingo’s Goa operations where an identical CRC demand had already been dropped. The Tribunal also referred to CBEC Circular No. 32/2016-Cus dated 13.07.2016, Circular No. 68/95 dated 15.06.1995 and Circular No. 20/2016 dealing with duty-free shop warehousing structures.
Conclusion
The Flemingo ruling provides important clarity on the limits of Customs’ power to recover supervision costs from bonded warehouse operators and duty-free businesses. The decision makes it clear that Customs cannot impose Cost Recovery Charges merely because customs officers frequently supervise warehouse operations. CRC becomes recoverable only where the department can demonstrate continuous, dedicated or full-day deployment of customs personnel in terms of the governing regulations and circulars.
The judgment also highlights that recovery proceedings based on assumptions or broad operational patterns may not survive judicial scrutiny unless supported by concrete evidence satisfying the precise statutory framework governing customs supervision charges.
Citations
Expositor(s): Adv. Aparna Shukla
