All-about the Valuation for Customs Duty under Customs Act

Table of the Contents:

1. Value for purpose of Customs Act

1.1 Valuation for CVD when goods are under MRP provisions upto 30-6-2017

1.2 Valuation has to be on the basis of condition at the time of import

1.3 Sale to related person

2. Transaction value at the time and place of importation

2.1 Price must be the sole consideration

2.2 Price in case of high sea sale

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1. 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 CBI&C (Board) for any class of imported goods or export goods. CBI&C 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). Fixing tariff value is not permitted under GATT convention. However, the provision of fixing tariff values has been retained.

Once tariff value has been notified, customs duty cannot be paid on basis of transaction value – CC v. Ashirvad Udyog (2014) 43 GST 56 = 40 taxmann.com 449 (Mad HC DB).

• • Customs Valuation on basis of transaction value – Section 14(1) of Customs Act states that ‘value’ of imported and export goods will be ‘transaction value’ of such goods i.e. the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale, subject to such other conditions as may be specified in the rules made in this behalf.

Accordingly Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and Customs Valuation (Determination of Value of Export Goods) Rules, 2007 have been notified effective from 10-10-2007.

In Wipro Ltd. v. ACC (2015) 52 GST 47 = 58 taxmann.com 123 = 319 ELT 177 (SC), it has been held objective of section 14 of Customs Act is to accept actual cost paid or payable for customs valuation. Any fictional cost (like landing charges, insurance, freight etc.) can be added only when actual cost is not ascertainable. The intention of section 14 of Customs Act is to pay customs duty on price ‘actually paid or actually payable for the goods’.

• • Addition to transaction value – First proviso to section 14(1) states that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid [i.e. as specified in section 14(1)], any amount that the buyer is liable to pay for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manners specified in the Rules.

Though the proviso does not specifically say so, it is obvious that only those expenses which are relating to imported goods alone can be added.

• • Rate of foreign exchange – Third proviso to section 14(1) states that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under section 46, or a shipping bill or bill of export, as the case may be, is presented under section 50. As per Explanation (a) to section 14(2), the rate of exchange will be determined by CBI&C or ascertained in such manner as CBI&C may direct.
  • Tariff value – Section 14(2) empowers CBI&C to fix tariff values of imported goods or export goods by issuing a notification.
  • Valuation Rules if transaction value is not determinable – If there is no sale or buyer or seller are related or price is not the sole consideration, value of the goods will be determined as per Valuation Rules [Clause (ii) of second proviso to section 14(1)].

Valuation Rules are applicable only if value is not determinable under section 14(1) of Customs Act – CCE v. Hindustan Lever (2015) 325 ELT 7 (SC).

• • Reasonable nexus between measure and nature of levy of tax is sufficient – It is not necessary that there should be direct relation between measure of levy and nature of levy. Measure is not controlled by nature of levy. Reasonable nexus between measure and nature of levy of tax is sufficient – CCE v. Grasim Industries Ltd. (2018) 7 SCC 233 = 68 GST 569 = 94 taxmann.com 312 = 360 ELT 769 (SC – 5 member bench).

1.1 Valuation for CVD when goods are under MRP provisions upto 30-6-2017

In respect of some consumer goods, excise duty was payable on basis of MRP (Maximum Retail Price) printed on the carton. If such goods are imported, CVD was payable on basis of MRP printed on the packing.

Now, after 1-7-2017, IGST is payable on basis of transaction value only.

1.2 Valuation has to be on the basis of condition at the time of import

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.

If goods are imported as set, it should be assessed as ‘set’ and not individual components. – In CC v. Indian Organic Chemicals 2000 AIR SCW 1633 = 118 ELT 3 (SC).

Transaction value as on date of filing of Bill of Entry will be basis for assessment. Subsequent depreciation is not permissible – M S Shoes East v. CC (2007) 210 ELT 641 (SC) – confirming decision in CC v. M S Shoes East Ltd. 2006 (202) ELT 698 (CESTAT), where it was held that only depreciation upto date of import is allowed even if the car was cleared later and was lying with customs for a long time. In this case, car was imported in 1996 but clearance was given only in year 2005.

In Vizag Shipping & Metal Processors v. CC 2005 (189) ELT 40 (CESTAT), it was held that if a vessel is imported by its own motive power, it is ‘ocean going vessel’ even if it is brought for subsequent breaking. Imported goods are to be assessed in the form in which importation takes place. What happens to goods afterwards may not be a criteria to assess them unless tariff specifically says so.

1.3 Sale to related person

Transaction value is not acceptable if buyer and seller are ‘related’. Definition of ‘related person’ is identical in rule 2(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and rule 2(2) of Customs Valuation (Determination of Value of Export Goods) Rules, 2007. The definition is discussed in a later chapter.

Dive Deeper:
Valuation Under the Customs Act

2. Transaction value at the time and place of importation

Price should be at the time and place of importation.

• • Place of importation – Place of importation means the customs station, where the goods are brought for being cleared for home consumption or for being removed for deposit in a warehouse – rule 2(da) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2017 as amended on 26-9-2017.
  • Price should be for delivery at the place of importation – Value 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.

In Essar Oil Ltd. v. CC 2004 (174) ELT 379 (CESTAT), it was held that landmass of India where unloading occurs (usually a wharf of jetty) is the place of importation and all expenses incurred for bringing goods there are includible. In addition, 1% ‘landing charges’ [for loading, unloading and handling charges for delivery at the port] are also includible in Assessable Value.

2.1 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 to include value of intellectual property contained in it – A software cannot be valued on basis of price of CD. In Globe Entertainment v. CC 2005 (180) ELT 258 (CESTAT), it was held that value of video cassettes cannot be valued on basis of material cost plus recording charges. Value of intellectual property i.e. serial recorded in cassettes has also to be taken into consideration. It is not value of material but value of intellectual property which is recorded in the cassettes.

2.2 Price in case of high sea sale

Price relevant for customs valuation under section 14(1) is the price for delivery at time and place of importation.

High sea sale (HSS) means sale of goods by transfer of documents before clearance of goods from customs.

In case of high sea sale (HSS), 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 original buyer imported the goods. However, even if price is lower, the duty will be payable on price at which goods are sold on high seas basis to final importer. Original price at which original buyer purchased the goods cannot be basis for valuation – Excel Glasses Ltd. v. CC 2004 (166) ELT 496 (CESTAT) (In this case, price was lower due to one year delay in arrival of ship).

In Tata Power Co. Ltd. v. CC (2009) 240 ELT 742 (CESTAT), the sale was on high seas. The agreement provided that service charges for services like tender negotiations, participation in international bidding etc. were payable. Bank charges, facilitation fee, demurrage and survey fees were payable at fixed rates as per agreement. It was held that all these are includible as the charges were condition of sale of goods.

Only actual cost incurred by ultimate buyer is to be considered. Inclusion of 2% notional commission cannot be done after 2007 amendment – Indian Farmers Fertilisers Coop Ltd. v. PCC (2020) 373 ELT 530 (CESTAT).

CBI&C vide circular No. 32/2004-Cus dated 11-5-2004 has clarified that the valuation should be on basis of last sale price. Even if there are more than one high sea sales, the last sale price should be taken for purpose of valuation, as that is the price at which final importation has been caused. If importer is unable to produce original invoice, high sea sale (HSS) contract etc. to establish link, valuation can be done on basis of Valuation Rules.

In Bhansali Engineering v. CC (2011) 263 ELT 728 (CESTAT), it was held that there was no direction in trade notice that trade should adopt HSS plus 2% in all cases. Value for customs would include service charges and profit of seller and other expenses incurred before clearance of goods for home consumption (Now the circular dated 11-5-2004 makes no provision of 2% addition).

• • High seas sales agreement to be on stamp paper and dated after ship commences journey – As per CC, ACC. Mumbai Facility Notice No. 18/2012 dated 22-5-2012 [280 ELT T15], High Seas sale agreement should be on stamp paper of ` 100 in Maharashtra [The reason given is that the agreement is similar to Customs bond. Really it is not similar to customs bond at all. However, instead of fighting over petty issues, advisable to execute agreement on stamp paper of value as per State law. The agreement date should be after the ship has started sailing, not because law requires so, but to avoid harassment of customs and sales tax authorities].