Valuation of Imported Goods and its Transaction Value under Custom Valuation Rules

Topics covered in this article are as follows:

1. Applicability of Transaction Value
2. Transaction Value and Apex Court Judgment in Eicher Tractors case
3. Eicher Tractors Judgment followed under existing CVR, 2007
4. Price actually Paid or Payable
5. Transaction Value to be Accepted in the Absence of Conditions and Restrictions under Rule 3(2)

5.1 Apex Court Judgment in Eicher Tractor Case

5.2 Eicher Case Judgment followed as Precedent in subsequent Cases

For a complete and comprehensive commentary on laws relating to valuation under Customs laws, refer to the [2021 Edition] of Taxmann's Guide to Customs Valuation. It is a brief, concise and handy reference book, which provides the updated and simplified analysis of provisions to determine valuation under the Customs laws.

1.  Applicability of Transaction Value

Article VII of GATT Code Valuation laid down that primary method of determination of value of imported goods is the transaction value. Based on this Agreement, Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988) were promulgated. These rules were further modified by promulgation of Customs Valuation (Determination of Value of Imported Goods), Rules, 2007 (CVR, 2007 for short). According to Rule 3 of the Customs CVR, 2007, sub-rule (1), “Transaction Value” of imported goods shall be accepted subject to adjustments on account of costs and services mentioned in Rule 10 thereof. Rule 3(2) carves out exceptions to acceptance of “Transaction Value”. According to this sub-rule, transaction value under sub-rule (1) shall be accepted provided:

(a) there are no restrictions on use of goods by the buyer.

(b) the sale or price is not subject to some conditions or consideration for which a value cannot be determined in respect of the goods being sold.

(c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller.

(d) the buyer and the seller are not related, or where they are related, the relationship has not influenced the price.

If transaction value cannot be determined as per Rule 3(1) of CVR, 2007, the value shall be determined by proceeding sequentially through Rules 4 to 9.

2. Transaction Value and Apex Court Judgment in Eicher Tractors case

In the case of Eicher Tractors v. CC – 2000 (122) ELT 321 (SC) – the Apex Court delivered an important judgment while interpreting Rule 4 of CVR, 1988 (pari materia with rule 3 of CVR, 2007). The Honourable Court observed that “a mandate has been cast on the authorities to accept the price actually paid or payable for the goods under assessment as the transaction value. But the mandate is not invariable and is subject to certain exceptions specified in Rule 4(2) namely :

(a) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which –

(i) are imposed or required by law or by the public authorities in India; or

(ii) limit the geographical area in which the goods may be resold; or

(iii) do not substantially affect the value of the goods;

(b) the sale or price is not subject to same condition consideration for which a value cannot be determined in respect of the being valued;

(c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Rule 9 of these rules; and

(d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule (3).

It follows that unless the price actually paid for the particular transaction falls within the exceptions, the Customs authorities are bound to assess the duty on the transaction value.”

3. Eicher Tractors Judgment followed under existing CVR, 2007

The judgment of Eicher Tractors Limited (supra) was followed by CESTAT and also made applicable to the new CVR, 2007 in the case of Indian Farmers Fertiliser Co-op. Ltd. v. CCE, C&ST, Bhubaneswar – 2010 (252) ELT 523. The Tribunal observed that “the Hon’ble Supreme Court in the case of M/s. Eicher Tractors Limited, reported in 2000 (122) E.L.T 321, has been held that if the transaction value can be determined under Rule 4(1) [now Rule 3(1)] and does not fall under any of the exceptions in Rule 4(2) [now Rule 3(2)], there is no question of determining the value under the subsequent rules.” (vide para 5.4).

4. Price actually Paid or Payable

According to the Interpretative Note to Rule 3, the price actually paid or payable is the total payment made or to be made by the buyer or for the benefit of the seller for the imported goods. It need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller. The Apex Court in the case of Eicher Tractors Ltd. (supra), while interpreting the provision of Rule 4 of CVR, 1988 [pari materia with Rule 3 of the CVR, 2007] observed that “Payable” in the context of the language of Rule 4(1), must be read as referring to “the particular transaction” and payability in respect of the transaction envisages a situation where payment of price may be deferred. (vide para 12 thereof).

5. Transaction Value to be Accepted in the Absence of Conditions and Restrictions under Rule 3(2)

5.1 Apex Court Judgment in Eicher Tractor Case

In the case of Eicher Tractors Ltd. v. CC – 2000 (122) ELT 321 (SC) while interpreting the provision of Rule 4(2) of the CVR, 1988 [pari materia with Rule 3(2) of CVR, 2007] the Apex Court held that –

“7.The rules which have been framed are the Customs, Valuation (Determination of Price of Imported Goods) Rules, 1988. The rules came into force on 16th August, 1988. Under Rule 3(i) the value of imported goods shall be the transaction value. ‘Transaction value’ has been defined in Rule 2(f) as meaning the value determined in accordance with Rule 4. Rule 4(1) in turn states :

“The transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of these rules.”

8. Reading Rule 3(i) and Rule 4(1) together, it is clear that a mandate has been cast on the authorities to accept the price actually paid or payable for the goods in respect of the goods under assessment as the transaction value. But the mandate is not invariable and is subject to certain exceptions specified in Rule 4(2) namely :

(a) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which –

(i) are imposed or required by law or by the public authorities in India; or

(ii) limit the geographical area in which the goods may be resold; or

(iii) do not substantially affect the value of the goods;

(b) the sale or price is not subject to same condition or consideration for which a value cannot be determined in respect of the goods being valued;

(c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Rule 9 of these rules; and

(d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule (3).”

9. These exceptions are in expansion and explicatory of the special circumstances in Section 14(1) quoted earlier. “It follows that unless the price actually paid for the particular transaction falls within the exceptions, the Customs authorities are bound to assess the duty on the transaction value.” (Emphasis supplied).

5.2 Eicher Case Judgment followed as Precedent in subsequent Cases

Principles laid down in Eicher case have been followed by the Supreme Court in subsequent cases. Gist of some of these judgments is reproduced below:

(1) C.C. v. Mahalaxmi Gems – 2008 (231) ELT 198 (SC) —

Imported rough diamonds were found to be over-valued in appraiser’s valuation report and trade panel report. Tribunal rejected these findings holding declared value to be the transaction value as genuineness of the invoice was not questioned and it was not shown by contemporaneous evidence that the declared prices are not correct. It was held by the Apex Court that price declared in the invoice unless shown to be not correct by some contemporaneous evidence, transaction value has to be accepted.

(2) Motor Industries Co. Ltd. v. CC – 2009 (244) ELT 4 (SC) —

In this case second hand machinery was imported and declared value was rejected by the Adjudicating Authority. Commissioner (Appeals) however accepted the declared value for purpose of valuation. Tribunal allowed the appeal filed by the Revenue. It was held by the Apex Court that the Appellate Tribunal order contrary to the principle laid down by the Supreme Court in Eicher case is not sustainable.

(3) Prabhat Steel Traders Pvt. Ltd. v. CC – 2019 (366) ELT 544 (Tri. – Mum.)—

Minimum import price was prescribed by Notification No. 48/2015-20 issued by the DGFT under Section 3 of Foreign Trade (Development and Regulation) Act, 1992, read with Foreign Trade Policy, 2015-20. It was held that it cannot be used to decide valuation of imported goods. It is neither tariff value under Section 14(2) of the Customs Act, 1962 nor ‘best judgment’ under CVR, 2007. It is only intended to ensure that goods conforming to acceptable threshold quality are brought into the country. The Hon’ble Tribunal therefore held that recourse to ‘minimum import price’ as a substitute for transaction value is patently bereft of legality and propriety.