Valuation Under the Customs Act

Table of 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

3. Rate of Exchange for Customs Valuation
4. WTO Valuation Agreement
5. Customs Value – Inclusions

5.1 Commission and Brokerage Includible

5.2 Packing cost is includible

5.3 Value of Goods supplied by buyer to be added

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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).

See Division Two of Taxmann’s Customs Law & Foreign Trade Policy, [23^rd Edition | 2021] authored by V.S. Datey, for text of Valuation Rules.

• • 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 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.

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 that 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 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 Rs. 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].

3. Rate of Exchange for Customs Valuation

Exchange rate as applicable on date of presentation of bill of entry u/s 46, as prescribed by CBI&C (Board) should be considered. As per Explanation (a) to section 14(2) of Customs Act, the rate of exchange will be determined by CBI&C or ascertained in such manner as CBI&C may direct.

This rate is not same as ‘Inter Bank Closing Rates’ fixed by ‘Foreign Exchange Dealers Association’ or foreign exchange rate announced by ‘Reserve Bank of India’.

This rate cannot deviate widely from the exchange rate determined by RBI for foreign exchange transactions. If there is wide variation, it must be shown that Board (that time Central Government) has good reasons to do so. Otherwise, rate fixed by Board (that time Central Government) would be arbitrary. – Indian Acrylics v. UOI 1999(113) ELT 373 (SC 3 member bench). [In this case, RBI rate was Rs.  25.95 while rate of exchange as per customs notification was Rs.  31.44. Government did not explain why that rate was fixed.]

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.

The date of first presentation of Bill of Entry is relevant for purpose of considering rate of exchange. If it is returned for correction and is represented after correction, the date after representation cannot be considered. – Samar Timber Corporation v. ACC (1995) 79 ELT 549 (Bom HC DB).

Customs duty is leviable on commission payable to Indian agent in Rupees. This should also be calculated on basis of rate of exchange as in force when Bill of Entry is presented, as announced u/s 14. This is because commission paid to Indian agent forms part of total price of imported goods – CC v. District Controller of Stores 2005 (186) ELT 448 (CESTAT).

• • Rate of exchange in case of warehoused goods – Relevant exchange rate for valuation is as in force on date on which bill of entry is presented u/s 46. Bill of Entry is presented u/s 46 of Customs Act either for home consumption or for warehousing. Hence, in case of warehoused goods, exchange rate prevailing on the date on which Bill of Entry is presented u/s 46 of Customs Act is to be considered and not when Bill of Entry is presented u/s 68 for clearance from customs warehouse – confirmed in Sri Maharaja Industries CC (2007) 207 ELT 270 (CESTAT).

4. WTO Valuation Agreement

Valuation in Customs Act has to be done as per valuation rules. These rules are based on ‘WTO Valuation Agreement’.

Under the WTO Valuation Agreement, ‘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.

5. Customs Value – Inclusions

Rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 provide that following cost and services are to be added, if these are not already included in the invoice price. –

• • Commission and brokerage, except buying Commission, if not already included in the invoice price [rule 10(1)(a)(i)].
  • Cost of container which are treated as being one with the goods for customs purposes, if not already included in the invoice price [rule 10(1)(a)(ii)].
  • Cost of packing whether labour or materials, if not already included in the invoice price [rule 10(1)(a)(iii)].
  • Materials, components, tools, dies, moulds, and consumables used in production of imported goods, supplied by buyer directly or indirectly, free of charge or at reduced cost, to the extent not already included in price [rule 10(1)(b)(i), (ii) and (iii)]
  • Engineering, development, artwork, design work, plans and sketches undertaken elsewhere than in India and necessary for production of imported goods, to the extent not already included in price [rule 10(1)(b)(iv)].
  • Royalties and license fees relating to imported goods that buyer is required to pay, directly or indirectly, as a condition of sale of goods being valued [rule 10(1)(c)]
  • Value of proceeds of subsequent resale, disposal or use of goods that accrues directly or indirectly to seller (i.e., to foreign exporter) [rule 10(1)(d)]
  • All other payments made as condition of sale of goods being valued made directly or to third party to satisfy obligation of seller, to the extent not included in the price [rule 10(1)(e)]
  • Cost of transport upto place of importation [rule 10(2)(a)]
  • Insurance to place of importation [rule 10(2)(b) Customs Valuation (Determination of Value of Imported Goods) Rules, 2017 as amended on 26-9-2017.]

The additions should be on the basis of objective and quantifiable data [rule 10(3) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007].

• • No other additions – No other addition shall be made to price paid or payable, except as provided for in rule 10 [rule 10(4) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Interpretative Note to rule 3 also clarifies that activities undertaken by buyer other than those for which adjustments are provided in rule 10 are not to be added, even though it may be regarded as benefit to the seller.

5.1 Commission and Brokerage Includible

Commission and brokerage except buying commission is includible [Rule 10(1) (a) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007]

• • Meaning of ‘buying commission’ – Buying commission means fees paid by importer to his agent for the service of representing him abroad in purchase of goods being valued [Interpretative Note to rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007].

In Reliance Industries Ltd. v. CC (2007) 207 ELT 412 (CESTAT) the foreign person organised procurement of various components to set up a plant in India for which he got commission. It was held that this is buying commission and is not includible.

• • Charges of purchasing agent abroad not includible – Charges to purchasing agent abroad are not includible – Apollo Tyres Ltd. CC AIR 1997 SC 3637 = 1997 AIR SCW 1042 = 89 ELT 7 (SC) – confirmed and followed in Bombay Dyeing & Mfg v. CC 1997 AIR SCW 1427 = AIR 1997 SC 1329 = 90 ELT 276. [Probably because it was held as ‘buying commission’.]
  • Rate of exchange for commission to commission agent – Customs duty is leviable on commission payable to Indian agent in Rupees. This should also be calculated on basis of rate of exchange as in force when Bill of Entry is presented, as announced u/s 14. This is because commission paid to Indian agent forms part of total price of imported goods – CC District Controller of Stores 2005 (186) ELT 448 (CESTAT).
  • 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.

In Allu Graphic v. CC 1997(90) ELT 432 = 71 ECR 160 (CEGAT), it was held that actual commission paid alone is includible. If the agency commission includes installation charges, technical advice etc., whole commission is includible if no split up is shown in documents.

However, if the local agent himself imports goods, there is no question of adding indenting agent’s commission as the commission is payable only when he imports on behalf of others – Mittal International v. CC (2002) 50 RLT 382 = 145 ELT 667 (CEGAT).

Customs duty is leviable on commission payable to Indian agent in Rupees. This should also be calculated on basis of rate of exchange as in force when Bill of Entry is presented, as announced u/s 14. This is because commission paid to Indian agent forms part of total price of imported goods – CC v. District Controller of Stores 2005 (186) ELT 448 (CESTAT).

• • Service charges paid to canalising agency includible – In some cases, when imports are made by canalising 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’. The canalising agency is not ‘agent’ of the importer and ‘service charge’ is not ‘buying commission’ – Hyderabad Industries Ltd. UOI 2000(1) SCC 718 = 118 STC 293 = 2000 AIR SCW 245 = 115 ELT 593 = AIR 2000 SC 712 (SC 3 member bench) – followed in Umi Special Steel v. CC 2001(137) ELT 174 (CEGAT) * Usha Martin v. CC (2007) 216 ELT 122 (CESTAT).
  • Brokerage is paid to third party – Brokerage is paid either by buyer or seller to third party. Similarly, commission (which are clearly distinct from discounts) are payable only to a third party – CC Hewlett Packard Ltd. 1999(108) ELT 221 = 29 RLT 290 (CEGAT).

5.2 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. [Rules 10(1)(a)(ii) and 10(1)(a)(iii) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007] – upheld in Garden Silk Mills Ltd. v. UOI 1999(8) SCC 744 = 1999 AIR SCW 4150 = 113 ELT 358 = AIR 2000 SC 33 (SC 3 member bench).

• • Cost of Packing done in customs area not includible in customs valuation – In CC Indian Potash (2009) 234 ELT 507 (CESTAT), packing of imported goods was done in customs area to meet requirements of Fertilizer Price Control Order. It was held that this packing cost is not includible as taxable event has reached when goods reached customs barrier and bill of entry filed. Hence cost incurred after landing of goods is not includible.
  • 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.

5.3 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 10(1)(b)(i), (ii) and (iii) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007]

The inclusion is necessary as price of imported goods would certainly have been higher if the parts, etc. were not supplied by buyer. Section 12, which is charging section, specify that ‘Customs duty’ is on ‘goods’. Section 14 specifies that value of ‘such goods ordinarily sold’ should be considered. Thus, ‘ordinary price’ of ‘such goods’ can be ascertained only after adding cost of such free material supplied by buyer.

• • 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.

Interpretative Notes to rule 10(1)(b)(ii) provide that importer may request to apportion the entire cost of tooling on any of the following basis:

1. 1. If first shipment is of 1,000 pieces, importer may request Customs Officer to apportion total cost of tooling on the 10,000 pieces. In such case, cost of tooling per tool will be Rs. 10 (Cost of mould 1,00,000 divided by No. of pieces 10,000) and Rs.  10,000 will be added to transaction value.
   2. It may happen that by the time first shipment of 1,000 pieces arrives, the exporter has already produced 4,000 pieces in his country (though balance quantity of 3,000 may not have been exported by him). In such case, importer may request Customs Officer to apportion cost of tooling over 4,000 pieces and charge accordingly for first consignment. In such case, tooling cost per piece will be Rs. 25 (1,00,000/4,000) and Rs.  25,000 will be added to transaction value of first consignment of 1,000 pieces towards cost of tooling.
   3. Importer may request Customs Officer to apportion full cost of tooling on first consignment itself e.g. if first shipment is of 1,000 pieces, importer may request Customs Officer to add total cost of tooling of Rs. 1,00,000 to the transaction value of the first 1,000 pieces itself – of course, in such case, no tooling cost will be added for subsequent shipments. (The option of selecting method (a), (b) or (c) above is of the importer and not of Customs Officer.)

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