CUSTOMS VALUATION – IMPORT AND EXPORT K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT Flat No.3, First Floor, 402, Front Wing,No.9, Thanikachalam Road, House of Lords, T. Nagar, 15/16, St. Marks Road, Chennai - 600 017. Bangalore – 560 001 Mobile: 98400-96876 E-mail : firstname.lastname@example.org K.Vaitheeswaran
SECTION 14Value shall be the transaction value that isto say the price actually paid or payable whenthe goods are sold for export to India.For delivery at the time and place ofimportation or as the case may be for exportfrom India for delivery at the time and placeof exportation
SECTION 14Buyer and seller are not related.Price is the sole consideration for the sale subject toother conditions as may be specified in the RulesTransaction value shall include in addition to theprice amounts for costs and services, license fees,cost of transportation to the place of importation,insurance, loading, unloading and handling chargesto the extent and the manner specified in theRules.
SECTION 14 Rules may provide for(ii) Circumstances determining relationship.(iii)Method of valuation when there is no sale or when parties are related or price is not the sole consideration or any other case.(iv)Manner of acceptance or rejection of value, where the officer has reason to doubt the accuracy of value.
IMPORTValuation Rules are based on GATT(now WTO) Rules.Originally framed in 1988.Major change to Rule 4 in 2001.Customs Valuation (Determination ofValue of Imported Goods) Rules, 2007introduced from 10.10.2007.
CHANGES IN DEFINITIONSTransaction value means the valuereferred to in Section 14.Under the old Rules transaction value isthe value determined under Rule 4.
VALUATION RULESMethods are to be applied in a sequentialorder.When the first method is not applicable, thesecond method has to be applied and so onso forth.If transaction value is rejected by theDepartment, Department has to gosequentially and cannot straightway adoptthe residual method.
RULE 3Value shall be transaction value subject toadjustmentsValue of imported goods shall be accepted providedthat(i) there are no restrictions as to disposition or use(excluding territorial / legal / minor)(ii) price is not subject to some condition orconsideration for which value cannot be determined(iii) no part of the subsequent sale proceeds accrueto the seller.(iv) buyer and seller are not related.
RULE 3Where buyer and seller are related,price can still be accepted if it isdemonstrated that the relationship hasnot influenced the price.
RULE 4 – IDENTICAL GOODSIdentical goodsTransaction valueShall not include provisionally assessed valuesSame commercial level / same quantityAdjustments for differencesAdjustments for differences in transportationcostsWhen multiple values are available lowest tobe adopted.
RULE 5 – SIMILAR GOODSSimilar goodsTransaction valueShall not include provisionally assessed valuesSame commercial level / same quantityAdjustments for differencesAdjustments for differences in transportationcostsWhen multiple values are available lowest tobe adopted.
RULE 6Where value cannot be determinedunder Rule 3 or Rule 4 or Rule 5 thenvalue has to be determined under Rule7.At the request of the importer and withthe approval of the proper officer, Rule8 can be applied first and then Rule 7can be applied.
RULE 7 – DEDUCTIVE VALUESale price in IndiaDeductions for commission, transport,insurance and associated costs in India,duties and taxes on import / sale.Where there is manufacture and salededuction for value addition shall be given.Sale must happen within 90 days after importfor this Rule to operate.
RULE 8 – COMPUTED VALUEValue shall consist of the sum of(a) cost or value of materials and fabricationor other processing employed in producingthe imported goods.(b) profit and general expenses in respect ofgoods of same class.(c) transportation, loading and insurance.
RULE 9 – RESIDUAL METHODWhere value cannot be determined under thepreceding rules, it shall be determined usingreasonable means consistently the principles andgeneral provisions of these rules and on the basis ofdata available.Value shall not exceed the price at which suchor like goods or ordinarily sold or offered forsale for delivery at the time and place ofimportation when the seller and buyer has nointerest in the business of each other and priceis the sole consideration.
RULE 9No value shall be on the basis of- Selling price of goods produced in India- Highest of two alternative values- Domestic price in the country of export- Export price to another country- Cost of production- Minimum customs values- Arbitrary or fictitious values
RULE 10 – COST AND SERVICESThe following shall be added to price paid orpayable provided it is not already included.- Commissions and brokerage other thanbuying commission- Cost of packing- Cost of containersGoods and services supplied free of costs bythe buyer or at a concessional rate.
RULE 10 – COST AND SERVICESRoyalty and license fee related to importedgoods that the buyer is required to paydirectly or indirectly as a condition ofsale.Value of any part of proceeds of anysubsequent resale or disposal.Other payments made by the buyer to selleror third party to satisfy obligation of seller.
RULE 10 – ROYALTY & LICENSE FEEAn explanation provides that where royalty orlicense fee or any other payment for aprocess whether patented or otherwiseis includable, such charges shall beadded to price paid or payablenotwithstanding the fact that suchgoods may be subjected to the saidprocess after importation of such goods.Board Circular dated 09.10.2007 refers topost importation activity, like running ofmachinery when the process is put to use.
RULE 10 – ROYALTY & LICENSE FEEBoard Circular states that the explanation has been added inthe context of Supreme Court judgment in the case of JKCorporation.J.K. Corporation Ltd. (2007) 208 ELT 485, a collaborationagreement was entered into with a foreign company and as perPart-A of the agreement a lumpsum payment of US Dollars14,00,000 was made for the supply of license, knowhow, andtechnology. Under Part-B of the agreement the price of theforeign equipment was said to be US Dollars 34,86,000 + DM12,00,000 + Yen 88,50,00,000. The Supreme Court held thatno part of the know-how fee was relevant for the fabrication ofthe plant or machinery or its design. The amount paid underPart-A was towards services to be offered for the mattersspecified. The value of license and technical know-howcannot be included in the value of goods.
RULE 10 – ROYALTY & LICENSE FEEDisputes are likely and old decisionscould be questioned.Mahindra & Mahindra (1999) 76 ELT481 (SC) – Royalty for know-how hasno bearing as transactions areindependent.
RULE 10 – ROYALTY & LICENSE FEEThe Supreme Court in the case of CC Vs. FerodoIndia Pvt. Ltd. (2008) 224 ELT 23 has held thattechnical knowhow costs and payment of royalty canbe included in the price of imported goods only if thepayment constitutes a condition pre-requisite for thesupply of imported goods. If the payment has nonexus with the working of the imported goods thensuch payment is not includable in the value.
RULE 10 – ROYALTY & LICENSE FEEThe Supreme Court in the case of Bombay Dyeing andManufacturing (1997) 90 ELT 276 has held that expensesin connection with dismantling of old machinery to facilitatetransport including inspection charges is includable in the value.In the case of Toyota Kirloskar Motor Pvt. Ltd. (2007) 213ELT 4, capital goods and parts were imported from Toyota andthe question was whether royalty and know-how fees should beincluded or not in the value. The Supreme Court held thatpayments for post import activities cannot be included. Amountspayable for as a condition of import of goods for motorsgoverning the manufacturing activities are distinct and suchpayments are not related to the import of capital goods.Amounts cannot be included.
RULE 10 – ROYALTY & LICENSE FEEIn the case of Matsushita Television and Audio (I) Ltd. (2007)211 ELT 200, the The Department while valuing the goods added acertain percentage taking into account the royalty payment. TheSupreme Court held that in terms of the agreement, the net factorysales price is defined to mean the sale prices to customersincluding the cost of bought out components and the cost ofimported goods. In terms of Rule 9 of the Valuation Rules, 1988only such royalty relatable to imported goods and which is a conditionof sale of such goods can be added to the declared price. In theinstant case, it is clear that the royalty is payable on the sale priceincluding the cost of imported goods. In other words, thepayment under the agreement was not only in connection withproduction of goods but also to imported components and thereforethe Department’s contention is correct.
RULE 10 – ROYALTY & LICENSE FEEIn the case of CCE Vs. Living Media India Ltd.(2011) 271 ELT 3, the Supreme Court held thatcassettes are brought into India as pre-recordedcassettes which carry the music or song of an artist.There is an agreement as per which royalty paymentis towards the money due to the artists. Royaltybecomes payable on distribution of cassettes andsuch royalty is payable on the entire shipment lessrecords returned. Royalty is a condition of sale andwould form part of value.
RULE 10(2)Cost of transportLoading, unloading and handling chargesInsuranceExplanation provides that cost of transport ofimported goods includes ship demurragecharges on chartered vessels, lighterage orbarge charges.Supreme Court in the case of Ispat Industries(2006) 202 ELT 561 had held that transportationcharges for use of barges for carrying cargo frommother vessel to jetty cannot be added to value sincecost of transport is already included – MimansaPrinciples/Guna “as subordinate and Pradhan as
RULE 10(2)Supreme Court in the case of IOC (2004) 165 ELT257 had confirmed that demurrage should not beincluded in value since there was a Board Circular tothat effect in 1991.The new explanation will increase the valuesince all these charges will now have to beadded.Board Circular dated 09.10.2007 clarifies that shipdemurrage charges paid by importer for detention ofship in the harbour before touching the landmass atthe docks has to be included in the value.
OTHER RULESRule 11 deals with declarationRule 12(1) deals with rejection ofdeclared value.Explanation to Rule 12
Explanation to Rule 12Rule does not provide for a method ofvaluation.Where declared value is rejected value shallbe determined by proceeding in accordancewith Rule 4 to Rule 9Officer has powers to raise doubts on truth oraccuracy of declared value based on certainreasons which may include
Explanation to Rule 12Significantly Higher Value at which identical or similargoods imported in comparable quantity incomparable commercial transactions were assessed.Abnormal discount or abnormal reduction fromordinary competitive price.Special discounts limited to exclusive agents.Mis-declaration of origin, quality, quantity, etc.parameters.Non-declaration of parameters such as brand, grade,specifications that have relevance to value.Fraudulent or manipulated documents.
BOARD CIRCULAR DT.12.2.2008Transaction value under Rule 3 has to be rejected byre-determining value of secondhand machinery underRule 9.No difficulty to reject where the documents such ascertificates, invoice, etc. are manipulated orfraudulently obtained or there is mis-declaration inrespect of particulars such as model, year ofmanufacture, etc.
BOARD CIRCULAR DT.12.2.2008Rule 12 can be applied in appropriate cases. As an illustration ifthe declared value of the second hand machinery is much belowthe value arrived at by the depreciation method on the basis ofthe certified price of the new machinery in the year of itsmanufacture, the officer may have reason to doubt the truth oraccuracy of the declared value and can ask for furtherinformation and explanation. If the reasonable doubt persiststhe declared value can be rejected under Rule 12 and value canbe re-determined by factoring depreciation.Even in respect of other imported goods, the re-determinationof value would be similar as in the case of second handmachinery.
VALUATION – OTHER CASE LAWSThe Supreme Court in the case of Hewlett PackardIndia Sales (P) Ltd. (2007) 215 ELT 484 hasheld that pre-loaded operating system (software)recorded in Hard Disc Drive in the laptop forms anintegral part of the laptop. Without operatingsystem, like Windows, the laptop cannot work.Computer cannot open without operating system.When a laptop is imported with in-built pre-loadedoperating system recorded on Hard Disc Drive, thesaid item forms an integral part of the laptop.
VALUATION – OTHER CASE LAWSThe Supreme Court in the case of CC Vs.Competent Business Machines (2009) 236 ELT629 has held that where the assessee had importedsecond hand photocopier machines with theChartered Engineer’s report stating that the machineswere old and obsolete, there is no material on recordfor the Department to enhance value. The websiteinformation relied upon by the Department is inrespect of another model of photocopying machines.
VALUATION – STANDING ORDERSSecond hand printers and Copiers – Order to regulateprocedure for engaging a chartered engineer forvaluation and duties pertaining to assessment is validand cannot be challenged under Article 226 – VinayAuto Copier Machine Vs. UOI (2011) 274 ELT33 (Mad).Furniture - Valuation based on standing order whichdirects 60% deduction from MRP for the purpose ofarriving at value ignoring the negotiated pricebetween the parties is not valid – Life StyleInternational Pvt. Ltd. Vs. UOI (2011) 271 ELT190 (Bom)
CONTEMPORANEOUS IMPORTSDepartment’s point of DecisionreferencePrices on the internet No investigation to demonstrate import of identical goods at higher prices – not valid – BC TradingPrices in foreign journals Not valid – Varsha plasticsPrices in international Spices imported at USD 2600market weekly bulletins PMT. International price was USD 5500 to 6500. No evidence for pricing except contract. SC accepted Department’s valuation based on weekly of spices market which indicated higher prices – Radhey Shyam Ratanlal .
CONTEMPORANEOUS IMPORTSDepartment’s point of reference DecisionPrices in London Metal Exchange Department demanded additional duty on the ground that prices on the London Metal Exchange was more than the declared price on the day of import. SC held that the order of the Tribunal had no reference to contemporaneous imports even at the stage of adjudication, so valuation based on declared prices need not be interfered with – Prabhu Dayal Prem Chand.
CONTEMPORANEOUS IMPORTSDepartment’s point of reference DecisionPrices of goods imported by the As many goods were imported bysame importer the same importer, it was found that the value of similar goods were higher than declared goods of same specifications. SC held therefore adoption of the deemed value by the customs is correct – Lan Eseda Industries Ltd.
EXPORTExport Valuation Rules for the first time.Transaction value as per Section 14.Definition of related person.Value of export goods shall be thetransaction value.If value cannot be determined, it shallbe determined by proceedingsequentially through Rule 4 to Rule 6.
RULE 4 – EXPORT VALUATION RULES On transaction value of goods of like kind and quality. Exported at or about the same time. To buyers in the same destination country of import or in its absence, another destination country with adjustments. Adjustments for difference in dates, levels, quantity, quality, composition, design, freight, insurance has to be done.
OTHER RULESComputed value which shall include cost ofproduction, charges for design or brand andamount towards profit.Where Rule 5 fails, residual method would beapplied through Rule 6Rule 8 provides for rejection of declaredvalue. Doubts can be raised if there issignificant variation in value, export value issignificantly higher compared to marketvalue, there is mis-declaration, etc.
SPECIAL VALUATION BRANCHSVB operates at Metros to investigate related partytransaction.Definition of related person.Questionnaire.1% extra deposit.5% extra deposit of duty if details not furnishedwithin 30 days of receipt of questionnaireInvestigation and finalization of assessment within 4months and deposit should be discontinued if notfinalized. (Board Circular 23.02.2001)
CONCLUSIONTransfer pricing and customs.Service Tax and Customs.GST
Thank you K. VAITHEESWARAN Advocate & Tax Consultant Flat No.3, First Floor, 402, Front Wing,No.9, Thanikachalam Road, House of Lords, T. Nagar, 15/16, St. Marks Road, Chennai - 600 017. Bangalore – 560 001 Mobile: 98400-96876 E-mail : email@example.com K.Vaitheeswaran