Value for purpose of Customs Act

Customs duty is payable as a percentage of ‘Value’ often called ‘Assessable Value’ or ‘Customs Value'. The Value may be either (a) ‘Value’ as defined in section 14 (1) of Customs Act or (b) Tariff value prescribed under section 14 (2) of Customs Act.

Tariff Value - Tariff Value can be fixed by CBE&C (Board) for any class of imported goods or export goods. Government should consider trend of value of such or like goods while fixing tariff value. Once so fixed, duty is payable as percentage of this value. (The percentage applicable is as prescribed in Customs Tariff Act). As we will see later, fixing tariff value is not permitted under GATT convention and is in fact contrary to provisions of Customs Valuation Rules. However, the provision of fixing tariff values has been retained though used rarely. In August 2001, tariff value for crude palm oil, RBD Palmolein and palm oil was fixed by way of a notification.

Customs value as per section 14 (1) - Customs Value fixed as per section 14 (1) is the ‘Value’ normally used for calculating customs duty payable (often called ‘customs value’ or ‘Assessable Value'.)

Section 14 (1) provide following criteria for deciding ‘Value’ for purpose of Customs Duty :

This criteria is fully applicable for valuing export goods. However, in case of imported goods, valuation is required to be done according to valuation rules. - Chapter 6 Para 5 of CBE&C’s Customs Manual, 2001.

Valuation has to be on the basis of condition at the time of import - (a) CVD should be levied on goods in the stage in which they are imported - stage subsequent to processing of goods is not relevant - Vareli Weaves P Ltd. v. UOI - 1996(83) ELT 255 (SC) = AIR 1996 SC 1543. (b) It is well settled that the imported goods have to be assessed to duty in the condition in which they are imported. - D N Sethna v. CC - (1996) 85 ELT 75 (CEGAT) * CC v. Supreme Woollen Mills 1999(107) ELT 453 (CEGAT).

Major requirements of Customs Value - Price at which goods are being sold under an invoice is not the sole criteria for deciding ‘Value’ for Customs duty purposes (though it is a major criteria). Each word used in section 14 (1) is significant.

Price of such or like goods - The first criteria is that price of ‘such’ or ‘like’ goods and not ‘the’ goods is relevant. ‘Such’ means identical in all major respects. If buyer has incurred some expenditure in connection with the goods under sale, selling price of the goods may be lower. Hence, rule 9 of Valuation Rules provide that if buyer has supplied some materials, components, parts, tools, dies etc. or has spent on engineering, development or art work etc.; cost of such expenditure will be added to the price actually paid. [Compare this provision with provision in relation to job work in excise, where the duty is payable on material cost plus job work charges even if material is supplied by the buyer.]

Like goods - If price of the goods are not available, price of identical goods or similar goods can be considered. However, the conditions are (a) price should be for sale for export (b) price should be for sale to India (c) sale should be at substantially same quantity of goods (d) price should be at same commercial level (e) these should be imported from same country (f) prices should be of goods sold at or about the same time (g) goods should be produced by same manufacturer - price of other manufacturer can be considered only if price of same manufacturer is not available. However, ‘brnad image’ of other manufacturer should be comparable. - - Thus, price quoted for 10 pieces cannot be used for price for 1,000 pieces or price prevailing in June 2003 may not be relevant for goods imported in December 2003. Price for sale to another country or price of manufacturer in different country also cannot be considered.

Goods should be ‘Ordinarily’ sold’ at that Price - Goods should be ordinarily sold at that price as per section 14(1). As per Valuation Rule 4(2), ‘transaction value’ is acceptable only if the sale is under fully competitive condition. If there is any abnormal discount or reduction from ordinary competitive price or special discounts limited to exclusive agents, the ‘transaction value’ cannot be accepted.

As per section 14(1), ‘value’ is acceptable if goods are ordinarily sold at the price. Section 14(1A) states that Valuation Rules are subject to provisions of section 14(1), i.e. in case of conflict, provisions of section 14(1) will prevail. Rule 4(2) also states that abnormal or special discounts are not permissible. This amendment in rule 4(2) made w.e.f. 7-9-2001 has completely upset the principles of valuation under Customs.

Duel price in case of service parts and OE – It is standard universal practice to charge lower price when the component is supplied as OE (i.e. Original Equipment) part for manufacture of machine/equipment/vehicle to a co-manufacturer and charge higher price when same component is supplied as service part i.e. spare part. [The difference can be as high as two to five times]. CBE&C has confirmed, vide its circular No. MFCA(DR) dated 82-2002-Cus.V dated 3-12-2002, that such duel pricing is acceptable and both can be treated as ‘transaction value’ if other requirements of section 14 are fulfilled. Thus, price of OE component should be inclusive of factory cost, factory overheads, administration and commercial overheads and reasonable profit margin of original manufacturer. However, related party transactions should be closely looked into and aspect of ‘transfer pricing’ and ‘tie-in sales’ should be seen.

Price offered for sale can be considered - Price ‘offered for sale’ can be considered (e.g. price lists, quotations etc.) though there may not be actual sale at that price.

Price should be for delivery at the place of importation - Price at the place of importation does not mean that only expenses till goods enter Indian Customs water should be included. Import is an integrated process which culminates when goods land on land-mass of India so that they can be introduced in stream of supplies to form part of mass of goods within the country. Thus, all expenses upto the destination port, including freight, transit insurance, unloading and handling charges are to be included.

Price should be for delivery at the time of importation - Time of importation means price ruling when the goods were imported is relevant. In Rajkumar Knitting Mills P Ltd. v. CC 1998(98) ELT 292 = AIR 1998 SC 2602 = 1998(3) SCC 163 = 1998 AIR SCW 2636 (SC 3 member bench), it was held that 'ordinary' price at the time of importation is relevant and not the price prevalent on date of contract. [In this case, the contract was over 6 months old before date of shipment].

Price should be in International trade - Price should be in International trade. Price in domestic trade either in exporting country or within India can be discarded.

Buyer or Seller should not have interest in business of other – As per section 14(1) as amended w.e.f. 11-5-2002, transaction value can be accepted if (a) Seller and buyer do not have interest in business of ‘each other’ or (b) One of them has no interest in the other.

Putting it negatively, if one of them has interest in other, transaction value cannot be considered. [The drafting of amendment is faulty. As per strict interpretation of the amended provision, if one of them does not have interest in the other, transaction value is required to be accepted, even if the other has interest in the first one. Obviously, this is not the intention].

It may be noted that Customs Valuation Rules have been amended in September, 2001 giving almost unlimited power to Customs officer to discard the transaction value. Now section 14 has been amended to make this more easy for him. [It is doubtful if these amendments are in line with WTO Valuation Agreement]

Price must be the sole consideration - Price should be sole consideration for sale. If there is other consideration, it should be added to the transaction value.

In Jindal Photo Films v. CC 2002(141) ELT 202 (CEGAT), it was held that license fee related to know how embedded in machine has to be added to Assessable Value. In this case, the foreign supplier had not charged license fee but had stated that if semi-processed raw material is not purchased from the foreign supplier, flat annual license fee will be payable for seven years. It was thus obvious that price was not the sole consideration and hence the license fee, which was additional consideration, was addible.

Price in case of high sea sale – In case of high sea sale, price charged by importer to assessee would form the assessable value and not the invoice issued to the importer by foreign supplier. – National Wire v. CC 2000(122) ELT 810 (CEGAT) * Godavari Fertilizers v. CC (1996) 81 ELT 535 (CEGAT).

If the purchase is on high seas, the selling price will be naturally higher than the price at which the importer imported the goods. It will include not only his service charges, but also demurrage, bank charges etc. Thus, indirectly, duty will be payable on demurrage, which is really not part of ‘normal’ price.

Price which gave rise to importation in India is relevant - In Steel Strips Ltd. v. CC 1997(95) ELT 538 (CEGAT), it was held that price which gave rise to importation in India is relevant. In this case, goods were originally imported by one party at agreed rate of US $ 1,045 PMT. The party failed to take delivery and hence goods were sold to another party after negotiations for US $ 800 PMT. It was held that price relevant for valuation is US $ 1,045, as that is the price which gave rise to importation in India. Subsequent reduction after goods landed in India is not relevant. In Century Enka Ltd. v. CC 1997(95) ELT 534 (CEGAT) also, it was held that price negotiated after import has already taken place cannot be considered for customs valuation.

Rate of Exchange for Customs Valuation - Exchange rate as applicable on date of presentation of bill of entry as prescribed by CBE&C (Board) should be considered. This rate is not same as ‘Inter Bank Closing Rates’ fixed by ‘Foreign Exchange Dealers Association’ or by ‘Reserve Bank of India'. These rates are quoted daily by Banks, while exchange rate applicable for valuation is prescribed periodically by CBE&C (Board) by way of a notification under section 14 (3) (a) of Customs Act. Relevant date for determining foreign exchange rate is date of presentation of Bill of Entry.

The condition of ‘grant of entry inwards’ is not provided for this purpose. Bill of Entry can be presented 30 days before expected date of arrival of vessel. If Bill of Entry is presented within that time and even if ‘Entry Inward’ is granted subsequently, rate of exchange prevalent on the date of presentation of bill of entry will be considered.

Valuation Rules for imported goods

Valuation in Customs Act has to be done as per valuation rules. These rules are based on ‘WTO Valuation Agreement’ (Earlier termed as GATT Valuation Code). These rules are only for valuation of imported goods and not applicable to export goods.

WTO Valuation Agreement - General Agreement on Tariff and Trade (GATT) was an International forum for discussion on custom and other related problems so that barriers to world trade are removed. [Now GATT is replaced by WTO]. It was realised that there should be a common code for valuation to provide for greater certainty and utility. ‘GATT Valuation Code’ was formed with this concept in view. The new code came into effect on 1st January, 1981. Some members like USA and EEC introduced the GATT Valuation System immediately. India implemented the code from 18th August, 1988 by amending ‘Customs Valuation Rules’.

Under the WTO Valuation Agreement (earlier GATT code), ‘transaction value’ i.e. price at which the goods are actually sold is principal yardstick. However, it is not the only criteria for determining ‘value’ for Customs purposes.

Value to be determined as per Valuation Rules only - Section 14 (1A) provide that ‘price’ for purposes of section 14 (1) will be determined in accordance with rules made by Central Government. Accordingly, Customs Valuation (Determination of Price for Imported Goods) Rules, 1988 have been framed. These rules, which came into effect on 18th August, 1988, are based on WTO Valuation Agreement (earlier termed as GATT Valuation Code). These rules are (a) subject to section 14 (1) i.e. provisions of section 14 (1) will supersede provisions of the Customs Valuation Rules (b) the rules are for valuation of imported goods only and not of export goods (c) these rules are statutorily required to be followed. (In Central Excise, Valuation Rules are required to be applied only if valuation as per section 4 is not possible, while in Customs, valuation has to be as per Valuation Rules only.) Rules contain exhaustive interpretative notes as schedule to these rules to facilitate correct application of these rules. These interpretative notes give suitable examples to explain the provisions of rules.

Customs Value - Inclusions

Some costs, services and expenses are to be added to the price paid or payable, if these are not already included in the invoice price. Rule 9 of Customs Valuation Rules provide that following cost and services are to be added - * Commission and brokerage * Cost of container which are treated as being one with the goods for customs purposes * Cost of packing whether labour or materials * Materials, components, tools, dies etc. supplied by buyer * Royalties and license fees * Value of proceeds of subsequent sales * Other payment as condition of sale of goods being valued * Cost of transport upto place of importation * Landing charges * Cost of insurance.

These are discussed below :

Commission and Brokerage Includible - Commission and brokerage except buying commission is includible [Rule 9 (1) (a) of Customs Valuation Rules.] Buying commission means fees paid by importer to his agent for the service of representing him abroad in purchase of goods being valued.

Commission to local agent - Exporters from abroad often appoint local agents in India to promote their sales in India. These agents get commission in Indian Rupees which is paid directly by Indian Importer. (Amount net of commission is paid to foreign exporter in foreign currency.) This commission is includible for purpose of valuation.

Charges of purchasing agent abroad not includible - Charges to purchasing agent abroad are not includible - Apollo Tyres Ltd. v. CC - (1996) 9 SCALE 294 = AIR 1997 SC 3637 = 1997 AIR SCW 1042 = 1997(89) ELT 7 (SC) - confirmed and followed in Bombay Dyeing & Mfg v. CC - 1997(2) SCALE 221. = 1997 AIR SCW 1427 = AIR 1997 SC 1329 = 1997(90) ELT 276 (SC). [Probably because it was held as 'buying commission'.]

Service charges paid to canalizing agency includible - In some cases, when imports are made by canalizing agency, goods are sold to Indian buyer on ‘high sea sale’ basis. The imported goods are cleared by Indian buyer. In such cases, ‘service charges’ payable to the canalizing agency have to be included for calculation of ‘Assessable Value'. These charges are incurred before clearance of goods and these cannot be termed as ‘buying commission'.

Packing cost is includible - Cost of containers which are treated as being part of goods for customs purposes are addible for valuation purposes (e.g. * cases for camera, necklaces etc. especially shaped for the article suitable for long term * packing materials are classified along with that article. Hence, its cost will be includible). Similarly, cost of packing - both labour and material is to be included. [Rule 9 (1) (a) of Customs Valuation Rules.]

Cost of durable and re-usable containers not to be added : Modern trend is to pack goods in containers for convenience of transport. These containers are durable and re-usable. Hence, cost of such containers is not added for Customs Valuation, if importer agrees to execute a bond to re-export the containers within six months.

Value of Goods supplied by buyer to be added - If buyer has supplied goods free of cost or at reduced cost in connection with production or export of goods, these should be included. The goods may be (a) materials, components, parts and similar items incorporated in imported goods (b) tools, dies, moulds and similar items used in production of imported goods (c) consumables used in production of imported goods. [Rule 9(1)(b)](i), (ii) and (iii)]

Ascertaining cost of tooling - Cost of tooling supplied by importer to exporter should be ascertained as follows : (a) If importer has purchased the tooling from unrelated seller, the purchase cost should be considered or (b) if he has manufactured the tooling himself, the cost of production of tooling should be considered. If the tooling was previously used by importer, its original cost of purchase or cost of production should be suitably reduced (e.g. by suitably depreciating the cost) to reflect its present cost.

Apportioning of Cost of Tools - Tools, dies, moulds etc. (called tooling for abbreviation in subsequent discussions in this paragraph) are not consumed immediately, but are consumed over a period of time. Cost of the ‘tooling’ should be apportioned over the quantity produced. e.g. assume that cost of a mould is Rs. 1,00,000 and the mould is expected to produce 10,000 pieces. If the importer imports 1,000 pieces in the first lot, 10% of cost of such tooling i.e. (10% of Rs. 1,00,000) - Rs. 10,000 may be apportioned to the 1,000 pieces and Rs. 10,000 may be added to transaction value for arriving at ‘Value’ or ‘Customs Value’. Such apportionment should be made on basis of documentation provided by importer.

Services / documents / technical know-how supplied by Buyer to be added - Cost of engineering, development, art work, design work and plans and sketches undertaken by buyer which is necessary for production of imported goods is includible, only if such work is undertaken outside India. [Rule 9 (1) (b) (iv) of Customs Valuation Rules.] The addition should be done on objective and quantifiable data. Data available with importer should be used as far as possible. If the services are purchased or leased by importer, such purchase/lease cost should be added. If the importer has himself done the work abroad, its cost should be added on basis of structure and management practices of importer and his accounting methods (in other words, if development work, plans, sketches etc. is done by importer himself outside India, its cost should be calculated based on normal accounting practices - like apportionment of overheads, apportionment over various jobs if the same development work, design work etc. is used for more than one jobs etc.).

Cost of drawings if there is separate tariff heading - In Tata Iron & Steel Co. Ltd. v. CCE 2000(1) SCALE 591 = 2000 AIR SCW 572 =  AIR 2000 SC 1045 = 37 RLT 239 = 116 ELT 422 (SC 3 member bench), it has been held that cost of technical documents and drawings cannot be included in the customs value. However, if part of cost of equipment is transferred to value of engineering drawings, there will be under-valuation of equipment and this can be examined. [Note that engineering drawings are exempt from customs duty]. [This was because there was a separate heading in Customs Tariff for 'drawings'. Otherwise, the cost would have been includible]. [This decision, which is also of 3 member bench, appears to be contrary to other decisions of SC, but it is probably because there is a separate heading in the Customs Tariff for drawings].

Royalties and licence fee - If buyer has paid royalties and licence fees separately in relation to imported goods, these are includible, unless these are already included in selling price. Royalty may include payments in respect of patents, trademarks or copyrights. However, following i.e. (a) charges for the right to reproduce the goods in India shall not be added and (b) payments made by buyer (importer) for right to distribute or resale the imported goods shall not be added if such payment is not a condition for export to India.

Royalties and license fees related to imported goods that the buyer is required to pay, directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable. [Rule 9(1)(c) of Customs Valuation Rules].

Royalty payment to collaborators un-connected with imported goods not to be added - Often, a lump-sum payment of royalty is made to foreign collaborators for technical know-how. In addition, components / parts/ CKD packs are procured from foreign collaborators. Customs department normally holds that the price of parts/CKD packs should be loaded, on assumption that the part of price of component parts/CKD packs has been paid as ‘royalty payment'.

In UOI v. Mahindra and Mahindra Ltd. - 1995 (76) ELT 481 = 1995 AIR SCW 1519 = JT 1995(9) SC 635 (SC) - the company had foreign collaboration with M/s Peugeot, a French company, for engines for 10 years. A lump sum payment was made for technical know-how for manufacture of diesel engines in India. In addition, the company imported engine CKD packs from the French company in subsequent period. Revenue contended that lump-sum payment of royalty has bearing on the price charged for CKD packs. The Invoice price is not the real price and it was loaded by 1.5%. Supreme Court did not accept the view. It was held that there is no nexus between know-how transfer fee and import of CKD packs. These are independent transactions. Revenue has not produced any material to show that price shown in invoice is not the real price, or that price of goods obtained later was affected by the lump-sum royalty paid. [Original Mumbai HC decision - UOI v. Mahindra and Mahindra Ltd. - 1991 (55) ELT 15 (Bom HC).]

Value of subsequent re-sale if payable to foreign supplier - If any part of proceeds of subsequent re-sale of imported goods is payable to seller, directly or indirectly, its cost is includible. (This may happen if a distributor/agent imports goods and once he sells these goods in India, part of sales proceeds may be payable to foreign seller). [Rule 9(1)(d)].

Charges for reproduction of software in India not to be added - At present, many popular softwares like Page Maker, Norton, Windows are directly imported. If such softwares are Licensed to be reproduced in India by the foreign owner of these softwares, charges for reproducing these softwares will not be added. [As per press note dated 17-12-1992 of DOE of GOI, the purpose is to bring down cost of software in India and to save foreign exchange outflow on several copies of software].

Other payments made to seller to be added - If buyer has made, directly or indirectly, any payment to seller as a condition of sale, such payments should be included for obvious reason that ‘ordinary’ selling price has been reduced due to such payment. [Rule 8(1)(e)].

Cost of Transport upto port should be added - Cost of transport from exporting country to India is to be added in ‘Assessable Value’. [Rule 9 (2)(a) of Customs Valuation Rules.] In other words, CIF value is the basis for valuation. If the goods are imported by air, the air freight will be very high. Hence, in case air freight is higher than 20% of FOB price of goods, only 20% of FOB price will be added for Customs Valuation purposes.

If cost of transport is not ascertainable, it will be taken as 20% of FOB value of goods. However, cost of transport within India is not to be considered.

Landing charges to be added - Cost of unloading and handling associated with delivery of imported goods in port (called landing charges) shall be added. These will be calculated @ 1% of CIF value, i.e. FOB price plus freight plus insurance. [Rule 9(2)(b)].

Insurance cost should be added - Insurance charges on goods are to be added. [Rule 9(2)(c)]. If these are not ascertainable, these will be calculated @ 1.125% of FOB Value of goods.

Exclusions from Assessable Value

Note to rule 4 provide that following charges shall be excluded :

1. Charges for construction, erection, assembly, maintenance or technical assistance undertaken after importation of plant, machinery or equipment

2. Cost of transport after importation

3. Duties and taxes in India

Other payments from buyer to seller that do not relate to imported goods are not part of the customs value.

In Tata Iron & Steel Co. Ltd. v. CCE 2000(1) SCALE 591 = 2000 AIR SCW 572 = AIR 2000 SC 1013 = 116 ELT 422 (SC 3 member bench), it has been held that this note does not mean that charges other than those covered in clauses (a) to (c) are available to be included in the value of imported goods.

Cost of erection, test and commissioning is not includible. – Andhra Pradesh Gas Corpn v. CC 2001(136) ELT 860 (CEGAT).

Demurrage charges payable to port trust - Demurrage charges payable to port trust authorities for delay in clearing goods are not to be added . - Deepak Fertilisers v. CC 1989(41) ELT 550 (CEGAT) * Hindustan Lever v. UOI 2002(142) ELT 33 (Cal HC).

Demurrage charges are not ‘ordinarily payable’. Cost incurred in such extra-ordinary situations cannot be considered for purpose of levy of customs duty. – Indian Oil Corporation Ltd. v. CC 2000(122) ELT 615 = 41 RLT 251 (CEGAT 3 member bench).

Bank charges – Bank charges paid to banker for services rendered by them is not consideration of goods given to seller. It is not includible. -  EXIM India Oil Co. v. CC 2001(131) ELT 207 (CEGAT).

Computer Software – Computer software is a distinct item and is classifiable separately. Hence, even if software is supplied with the machine, its price is not includible in value of machinery. – Technova Imaging Systems v. CC 2003(151) ELT 404 (CEGAT).

Methods of Valuation for Customs

The Valuation Rules, 1988, based on WTO Valuation Agreement (earlier GATT Valuation Code), consist of rules providing six methods of valuation. The methods are (a) Transaction Value of Imported goods (b) Transaction Value of Identical Goods (c) Transaction Value of Similar Goods (d) Deductive Value which is based on identical or similar imported goods sold in India. (e) Computed value which is based on cost of manufacture of goods plus profits (f) Residual method based on reasonable means and data available. These are to be applied in sequential order, i.e. if method one cannot be applied, then method two comes into force and when method two also cannot be applied, method three should be used and so on. The only exception is that the ‘computed value’ method may be used before ‘deductive value’ method, if the importer requests and Assessing Officer permits. [Note : ‘computed value’ method was introduced w.e.f. 24-4-1995].

Valuation is required to be done by proceeding sequentially from rules 5 to 8 if value cannot be determined under rule 4. Failure to observe this sequential mandate of the rules would render such value the determination to be incorrect. - Tavadec Industries v. CC 2002(145) ELT 548 (CEGAT).

Transaction value of same goods - This is the first and primary method as per rule 3 of Valuation Rules.

What is transaction value - As per rule 4(1), ‘transaction value’ of imported goods shall be the price actually paid or payable for the goods when sold for exported to India, adjusted in accordance with provisions of rule 9. [Rule 9 gives costs and services to be added to transaction value].

When transaction value is acceptable - The value of imported goods shall be the transaction value, subject to rule 9 and 10A. [rule 3(i)]. If value cannot be determined as per rule 3(i), it shall be determined by proceeding sequentially through rules 5 to 8 of Valuation Rules. [Rule 3(ii)].

Transaction Value, i.e. the price at which such goods are actually sold is the primary method and is expected to be used in majority of cases. However, some times, transaction value of same goods cannot be accepted as the conditions prescribed for accepting such value are not fulfilled (e.g. no abnormal discount, sale not in competitive conditions, unconditional sale, sale from un-related person, no restriction on use etc.). Occasionally, transaction value may not be available when actual sale does not take place. For example, actual transaction value for goods imported on lease, hire, loan or gift may not be available. In such cases, other methods should be used.

Provisions of rules 9 and 10A override – Rule 3 is subject to rules 9 and 10A, which means that provisions of rules 9 and 10A override provisions of rule 3. As per rule 9, cost and services specified in those rules (like cost of containers, cost of packing; cost of materials, components etc. or services supplied by buyer; royalties payable etc.) are includible, if these do not already form part of transaction value. As per rule 10A, the value as declared by importer can be rejected by assessing officer, if he has doubts about truth or accuracy of the value as declared. However, the assessing officer has to give reasons for his doubts in writing and provide opportunity of personal hearing. Thus, now it is not obligatory on customs officer to accept the transaction value if he has reasons to doubt the truth or accuracy of the same.

Goods sold for export to India - Price relevant is the price at which goods are sold for export to India i.e. sale price which most directly causes the goods to be imported. Thus, if an agent purchases from a manufacturer abroad and then sells to importer in India, price charged by agent to importer is relevant and not the price charged by manufacturer to the agent abroad. Sale should be between foreign supplier and Indian importer. Subsequent sale by importer to purchaser in India is also not relevant.

Price paid or payable - The payment is total payment to seller of imported goods. Such payment may be direct or indirect e.g. adjustment of debt payable by seller. Payment may be by letter of credit or transfer of money.

What is transaction value - Rule 4(1) of Valuation Rules define transaction value as the price actually paid or payable for the goods when sold for export to India. This cost is to be adjusted in accordance with the provisions of rule 9 of Valuation Rules. (As we saw above, as per rule 9, various additions like cost of containers, cost of packing; cost of materials, components etc. or services supplied by buyer; royalties payable etc. are includible, if these do not already form part of transaction value).

Conditions for accepting Transaction Value - In Eicher Tractors v. CC 2000 AIR SCW 4080 = 2000(7) SCALE 483 = AIR 2001 SC 196 = 2001(1) SCC 315 = 122 ELT 321 = 41 RLT 621 (SC), it has been held that actual transaction value can be rejected only for reasons specified in rule 4(2) of Valuation Rules and ‘special circumstances’ or ‘extraordinary circumstances’ as specified in section 14(1). Subject to the three conditions laid down in section 14(1) of time, place and absence of special circumstances, price of imported goods is to be determined u/s 14(1A) in accordance with Valuation Rules framed in this behalf.

Thus, transaction value can be rejected either for special circumstances as per section 14(1) or conditions as specified in rule 4(2).

Special circumstances as per section 14(1) - The ‘special circumstances’ in section 14(1) are (a) Buyer and seller have no interest in business of each other or one of them has no interest in the other and (b) Price should be the sole consideration for the sale. Any other ‘special circumstances’ cannot be considered.

Conditions as per rule 4(2) - As per rule 4(2), transaction value can be accepted only if following requirements are satisfied –

(a)      The sale is in the ordinary course of trade under fully competitive conditions

(b)     The sale does not involve any abnormal discount or reduction from the ordinary competitive prices

(c)      The sale does not involve special discounts limited to exclusive agents

(d)     Objective and quantitative data exists with regard to adjustments required to be made under the provisions of rule 9, to the transaction value

(e)      There are no restriction on buyer on use or disposition of goods except the following: (a) restrictions prescribed by public authorities in India (b) restriction on geographical area within which goods may be resold e.g. goods should not be sold outside particular State or outside India or (c) restriction that does not materially affect value of goods - e.g. exporter puts a condition to importer of automobile that car should not be exhibited before a particular date.

(f)      The sale or price should not be subject to a condition or consideration for which value cannot be determined.

(g)      Seller should not be entitled to further consideration like part of subsequent resale, disposal or use of goods by the buyer will accrue directly or indirectly to seller, unless proper adjustment in value terms can be made as per rule 9 e.g. if the importer is a trader and the condition is that after he sales the goods in India, the foreign exporter will get a fixed amount after the sale, that extra amount can be added for Customs Valuation.

(h)     Buyer and seller are not be related, unless the transaction value is acceptable under rule 4(3).

If any of the aforesaid requirement is not satisfied, ‘transaction value’ cannot be accepted for valuation purposes.

Conditions are too vague – The conditions (a) to (d) have been added w.e.f. 7-9-2001. As can be seen, the conditions are too broad and vague. As per rule 10A, the assessing officer can reject ‘transaction value’ merely if he has doubt about its truth or accuracy. Thus, burden is not on him to prove that the declared value is incorrect.

Related person under Customs Valuations Provisions - Rule 2 (2) of Customs Valuation Rules define that persons shall be deemed to be ‘related’ only if one of the conditions is satisfied:

Person includes legal person i.e. Company, partnership firm, trust etc. Note to rule 2 clarify that one person is deemed to control other if he is legally or operationally in a position to exercise restraint or direction over the other. Thus, control need not be only legal - even operational control is enough.

Burden of proof that transaction value is 'Value' - Importer has to declare 'value' of goods. If the assessing officer has reason to doubt about truth or accuracy of the value declared by the importer, he can ask the importer to submit further information and evidence. If the customs officer still has reasonable doubt, he can reject the 'value' as declared by the importer. [rule 10A(1) of Customs Valuation Rules added w.e.f. 19-2-1998]. If the importer requests, the assessing officer has to give reasons for doubting the truth or accuracy of value declared by importer. [rule 10A(2) of Customs Valuation Rules]. Thus, burden is on the importer to prove that the 'value' declared by him is correct as per section 14 of Customs Act. This amendment has been made after agreement reached at WTO by all countries. - CBE&C circular No. 13/98-Cus dated 9-3-1998.

Transaction value of identical goods - Rule 5 of Customs Valuation Rules provide that if valuation on the basis of ‘transaction value’ is not possible, the ‘Assessable value’ will be decided on basis of transaction value of identical goods sold for export to India and imported at or about the same time, subject to making necessary adjustments.

What are identical goods - ‘Identical goods’ are defined under Rule 2(1)(c) as those goods which fulfil all following conditions i.e. (a) the goods should be same in all respects, including physical characteristics, quality and reputation; except for minor differences in appearance that do not affect value of goods. (b) the goods should have been produced in the same country in which the goods being valued were produced. (c) they should be produced by same manufacturer who has manufactured goods under valuation - if price of such goods are not available, price of goods produced by another manufacturer in the same country.

Imported at or about same time - Import of identical goods should be at or around same time. Price of identical goods imported in July 2003 may not be relevant for valuation of goods imported in December 2003.

Adjustments to be made - Price of identical goods should be compared at same commercial level and in substantially same quantity of goods.

Adjustment for distances and transport costs - If valuation of identical goods was made after adding costs and services as per rule 9, differences arising due to differences in distances and means of transport should be considered, while arriving at ‘Assessable Value’ of goods under valuation. This will be required if value of identical goods manufactured by different manufacturer and/or at different place is being taken as basis for valuation.

Lowest value to be taken - If more than one value of identical goods is available, lowest of such value should be taken. - followed in Resina Combination v. CC 1999(114) ELT 860 (CEGAT).

Transaction value of similar goods - If first method of transaction value of the goods or second method of transaction value of identical goods cannot be used, rule 6 provide for valuation on basis of ‘Transaction value of similar goods imported at or about the same time'.

What are Similar goods - Rule 2 (1) (e) define ‘similar goods’ as (a) alike in all respects, have like characteristics and like components and perform same functions. These should be commercially inter-changeable with goods being valued as regards quality, reputation and trade mark. (b) the goods should have been produced in the same country in which the goods being valued were produced. (c) they should be produced by same manufacturer who has manufactured goods under valuation - if price of such goods are not available, price of goods produced by another manufacturer in the same country can be considered.

Other conditions are similar to valuation on ‘identical goods’ basis i.e. (a) Adjustments for commercial level and/or quantity can be made (b) if valuation of identical goods is made after adding costs and services as per rule 9, differences arising due to differences in distances and means of transport should be considered. (c) if more than one value is available, lowest of such values should be taken.

The major distinction between 'identical goods' and 'similar goods' is that the 'identical goods' should be same in all respects, except for minor differences in appearance, while in case of 'similar goods', it is enough if they have like characteristics and like components and perform same functions. In both the cases, (a) quality and reputation (including trade mark reputation) should be same (b) Goods should be from same country. (c) Goods produced by another manufacturer can be considered if price of goods produced by same manufacturer are not available. However, brand reputation and quality of other manufacturer should be comparable.

Deductive Value - Rule 7 of Customs Valuation Rules provide for the next i.e. fourth alternative method, which is called ‘deductive method'. This method should be applied if transaction value of identical goods or similar goods is not available; but these products are sold in India. The assumption made in this method is that identical or similar imported goods are sold in India and its selling price in India is available. The sale should be in the same condition as they are imported. Assessable Value is calculated by reducing post-importation costs and expenses from this selling price. This is called ‘deductive value’ because assessable value has to be arrived at by method of deduction (deduction means arrive at by inference i.e. by making suitable additions/subtractions from a known price to arrive at required ‘Customs Value').

Subtractions from selling price in India - Following subtractions should be made from selling price of imported goods in India. (a) Selling commission, general (selling) expenses and selling profits made in connection with sale of imported goods in India. General expenses includes direct and indirect cost of marketing the goods in question in India. (b) transport, insurance and associated costs within India (c) customs duties, sales tax and other taxes levied in India.

Seller in India of imported goods will incur all these expenses and hence, it is clear that ‘CIF Value’ can be arrived at i.e. ‘deduced’ only after all these expenses are reduced from selling price of identical or similar goods sold in India. In other words, all (estimated) expenses incurred after importation of goods should be subtracted from selling price in India to arrive at ‘CIF Price’ of goods.

Unit price sold in greatest numbers - Rule 7 specify that while considering selling price of imported goods in India, unit price at which greatest aggregate quantity of identical or similar goods are sold to unrelated persons in India should be the basis. e.g. if 65 units are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold @ Rs. 90; then greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit, which will be the basis for valuation.

Chances of using this method of valuation are indeed very rare.

Computed Value for Customs - If valuation is not possible by deductive method, the same can be done by computing the value under rule 7A, which is the fifth method. [This method has been added w.e.f. 24-4-95]. If the importer requests and the Customs Officer approves, this method can be used before the method of ‘deductive value'. In this method, value is the sum of (a) Cost of value of materials and fabrication or other processing employed in producing the imported goods (b) an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind, which are made in the country of exportation for export to India. (c) The cost or value of all other expenses under rule 9 (2) i.e. transport, insurance, loading, unloading and handling charges.

Method suitable when producer prepared to give costing - Generally, valuation should be done on basis of information available in India. Thus, this method is normally possible when the importer in India and foreign exporter are closely associated and the foreign exporter is willing to give necessary costings and to provide for subsequent verification, which may be necessary.

How to calculate cost - The Cost and Value should be on the basis of information supplied by or on behalf of the producer. The information should be on basis of commercial accounts based on generally accepted accounting practices. Cost of commission and brokerage and packing cost has to be added. Similarly, cost of material supplied free, tooling cost, development and engineering charges, design work cost etc. have also to be added. No cost should be counted twice.

Residual Method - The sixth and the last method is called “residual method”. It is also often termed as ‘fallback method’. This is similar to ‘best judgment method’ of the Central Excise. This method is used in cases where ‘Assessable Value’ cannot be determined by any of the preceding methods. While deciding Assessable Value under this method, reasonable means consistent with general provisions of these rules should be the basis and valuation should be on basis of data available in India. [Rule 8 (1) of Customs Valuation Rules]. This method can be considered if valuation is not possible by any other method - CC v. Sanjay Chandiram - (1995) 4 SCC 222 = 1995 (77) ELT 241 (SC) = 1995 (58) ECR 574 (SC) = JT 1995 (7) SC 260 = 1995(3) SCALE 262.

Best judgement assessment is a residuary rule and it cannot prevail over previous rules in the absence of discussion as to how transaction value was not to be accepted.

What can be considered - Note on rule 8 provide that to the greatest extent possible, value should be based on previously determined values. Method of valuation should be based on previous methods e.g. transaction value, identical goods, similar goods, deductive value or computed value but some flexibility may be used in applying these rules. e.g. (a) if value of identical or similar goods produced in same country is not available, value of identical or similar goods manufactured in other country could be considered (b) if value of identical or similar goods imported at or about the same time is not available, value at other time may be considered (c) while considering deductive method, condition that imported goods should be sold in the same condition as imported may be flexibly applied. These are only illustrations. Similar other flexibilities may be considered, but certainly, arbitrary or whimsical valuation cannot be permitted under this rule.

What cannot be considered - While arriving at ‘best judgment price’ some assumptions, extrapolations and estimations are inevitable. However rule 8 (2) expressly prohibits use of any of the following for determining Assessable Value. These prohibitions are as follows :

In other words, selling price for export to India can alone form the basis. (Thus, fixing ‘tariff value’ is really against this rule).

Valuation - Other provisions

Other provisions of valuation for customs are summarised here.

Valuation of old Machinery and old Motor cars - In Essar Graphics v. CC 1999(107) ELT 94 (CEGAT), it was held that concept of transaction value is applicable to second hand machinery also, particularly because no exactly comparable imports can be found or exist. – followed in International Converyors  v. CC 2000(125) ELT 1205 (CEGAT), where it was held that rule 4 of Valuation Rules applies to second hand goods also. In Medak Rubber v. CC 2000(117) ELT 700 (CEGAT), it was held that invoice value of second hand machine supported by Chartered Engineer's certificate is acceptable when transaction is in normal course of international trade and there is no contemporaneous imports of like goods at higher value. In Coats Vivella v. CC 2001(133) ELT 373 (CEGAT), it was held that mere fact that age as certified by Chartered Engineer is wrong cannot vitiate the invoice and transaction value has to be accepted unless it is rejected under rule 4.

Depreciation will be allowed on value of old machinery on following scale: (i) for every quarter in 1st year : 4% (ii) for every quarter in 2nd year: 3% (iii) for every quarter in 3rd year : 2.5% (iv) for every quarter in 4th and subsequent year : 2% Maximum : 70% [Vadodara Commissionerate No. Cus/t/93 dated 15-6-1993]. [same depreciation rate applied for old cars also].

Valuation of old cars - Department values cars on basis of price catalogue of new cars and depreciation is allowed at standard rates. The value is arrived at on the basis of world car catalogue price less 15%. This practice has been approved in B J Singh v. CC - 1990 (45) ELT 474 (CEGAT) * B K Roy v. CC - 1992 (59) ELT 329 (CEGAT) * Sudesh Kumar Arora v. CC - 1993 (65) ELT 491 (CEGAT) * Umesh Kumar v. CC 2000(124) ELT 1053 (CEGAT).

Export Goods - Valuation for Assessment - Customs value of export goods is to be determined under section 14 (1) of Customs Act. Customs Valuation Rules are applicable only for imported goods. Thus, Assessable Value of export goods shall be “deemed to be the price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of exportation in the course of international trade, where the seller and the buyer have no interest in the business of each other or one of them has no interest in the other, and the price is the sole consideration for the sale or offer for sale”.

Normally, ‘FOB Value’ of exports will be the basis. If the export sale contract is a CIF contract, post exportation elements i.e. insurance and outward freight will have to be deducted. However, now many instances have come to notice where exported goods have been over-valued to get export benefits. [In Nav Bharat Enterprises v. CC 2001(134) ELT 154 (CEGAT), it was observed that provisions of section 14 are not applicable to export goods. With respect, it is submitted that this observation does not seem to be correct].