Customs Cannot Re-determine Export FOB Value: CESTAT Delhi

Jayantah Trading Co Vs Commissioner of Customs(Appeals) (CESTAT Delhi)

In a significant ruling for exporters, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Delhi has set aside an order by the Commissioner of Customs (Appeals) that re-determined the Free on Board (FOB) value of exported readymade garments. The appeals were filed by M/s Jayantah Trading Company and its proprietor, Shri Sunil Kumar, challenging the re-determination of FOB value, confiscation of goods, and imposition of fines and penalties. Appellant was represented by Shri Viney Kumar, Advocate.

The case originated from intelligence received by the Directorate of Revenue Intelligence (DRI) alleging that Jayantah Trading Company was exporting sub-standard and over-valued garments to avail inadmissible duty drawback and other export incentives. A show cause notice (SCN) was issued, proposing to re-classify certain goods and re-determine the declared FOB value of Rs. 2,49,90,427/- to a significantly lower value of Rs. 61,93,360/-. The SCN also proposed confiscation of goods under Section 113 of the Customs Act, 1962, imposition of redemption fine under Section 125, and penalties under Sections 114 and 114AA of the Act on both the company and its proprietor. Furthermore, it was proposed that pending duty drawback and export incentives be re-determined and appropriated against the fine and penalties.

The Additional Commissioner adjudicated the SCN, confirming all proposals. He re-classified men’s manmade fiber jersey, re-determined the FOB value, confiscated the goods, imposed a redemption fine of Rs. 6,00,000/-, and levied penalties of Rs. 8,00,000/- each under Section 114(iii) and Section 114AA on Jayantah. A penalty of Rs. 4,00,000/- each was also imposed on Sunil Kumar under the same sections. These amounts were ordered to be recovered from pending disbursal of export incentives. The Commissioner (Appeals) subsequently upheld this order.

Core of the Dispute: FOB Value and Customs Authority

The central issue before CESTAT was whether Customs officers possess the authority to re-determine the FOB value of exported goods. The department’s case entirely rested on the allegation of over-valuation based on market inquiries, leading to the re-determination of the FOB value under Rule 6 of the Customs Valuation (Determination of Export Goods) Rules, 2007, read with Section 14 of the Customs Act. Consequently, all export benefits were also ordered to be re-determined.

CESTAT observed that FOB value, an international commercial term (INCOTERM), represents the “Free on Board” value agreed upon between the buyer and seller. It is the transaction value for the goods, signifying the price the buyer agrees to pay the seller, excluding transportation and transit insurance costs. The Tribunal emphasized that a stranger to a contract cannot alter its terms. Therefore, if a buyer and seller agree to a specific FOB price, no third party, including Customs officers or DRI, has the authority to modify this transaction value.

The Tribunal clarified that Section 14 of the Customs Act and the Valuation Rules are intended solely for determining the assessable value for duty purposes, not for re-determining the transaction value (FOB value). While Customs officers can reject a declared transaction value if they have reasons to doubt its truth or accuracy, and then determine an assessable value using alternative methods prescribed in the Valuation Rules, this does not empower them to change the agreed-upon transaction value between the buyer and seller.

The CESTAT bench illustrated this point: if an overseas seller sells goods for $1000 and Customs rejects this transaction value, re-determining the assessable value as $2000 for duty purposes, the buyer is still only obligated to remit $1000 to the seller. The transaction value remains $1000, even if the assessable value for customs duty is $2000. The Tribunal explicitly stated, “No power has been conferred under the Customs Act or Rules on any officer to change the transaction value. Therefore, the FOB value of the exported goods, which is the transaction value, cannot be modified by any officer.”

Duty Drawback and Export Incentives

The Tribunal further deliberated on whether duty drawback and other export incentives should be paid on the original FOB value or the re-determined value. It concluded that if the drawback schedule mandates payment as a percentage of the FOB value, it must be paid accordingly. No officer has the power to unilaterally modify the drawback schedule for individual cases.

CESTAT highlighted the direct correlation between export incentives and the realization of sale proceeds. Exporters are incentivized to export and obtain remittances for the price at which they sold the goods (FOB value). The rules for drawback and schemes like Merchandise Export from India Schemes (MEIS) often require proof of remittance. The Tribunal noted that if the exporter has realized the remittance as per the declared FOB value, that should be the basis for incentives.

Crucially, the Commissioner (Appeals) in the impugned order had acknowledged that the exporter had realized remittances as per the declared FOB value but dismissed this fact, stating that foreign remittance does not establish the truth of the declared value. CESTAT found this to be a “grave error,” reiterating that what is declared and what is realized is the FOB value, and this value cannot be re-determined by any Customs officer.

Judicial Precedents and Principles:

While the CESTAT order itself provides a clear articulation of the principles, it implicitly relies on established judicial precedents regarding customs valuation and the sanctity of transaction value.

• Essence of Section 14 of the Customs Act: The interpretation by CESTAT aligns with the fundamental principle that Section 14 primarily governs the “assessable value” for the purpose of levying customs duty. It does not confer upon Customs authorities the power to unilaterally alter the commercial contract or the “transaction value” agreed upon between an unrelated buyer and seller, provided there is no doubt about the truth or accuracy of that value.
• Rule 12 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (and analogous rules for export): This rule allows for the rejection of a declared value if the proper officer has “reason to doubt the truth or accuracy of such value.” However, even when a declared value is rejected, the subsequent determination of value must follow the hierarchical methods laid down in the Valuation Rules (e.g., comparable goods, deductive value, computed value). The re-determined value is for assessment purposes, not a re-negotiation of the commercial terms.
• Supreme Court’s stance on transaction value: Although not explicitly cited in the CESTAT order, the Supreme Court in various judgments (e.g., Eicher Tractors Ltd. v. Commissioner of Customs (2000), Essar Steel Ltd. v. Commissioner of Customs (2009)) has consistently upheld the primacy of transaction value under Section 14, unless there are specific reasons to doubt its veracity as per the valuation rules. The burden of proof to demonstrate that the transaction value is not the true value generally lies with the revenue.
• Jurisprudence on Export Incentives: Courts and Tribunals have consistently held that export incentives like duty drawback are tied to the actual export performance and the realization of foreign exchange. Any disallowance or re-determination of incentives must be based on clear legal provisions and not on an arbitrary re-determination of the underlying commercial value without statutory backing.

Conclusion:

Based on its analysis, CESTAT concluded that the re-determination of FOB value by the Additional Commissioner was “without any authority of law.” Consequently, the impugned order, which was based on this unauthorized re-determination, could not be sustained. The Tribunal set aside the Commissioner (Appeals)’s order and allowed the appeals, granting consequential relief to the appellants. This ruling reinforces the principle that Customs authorities, while empowered to assess duties based on statutory valuation rules, cannot alter the commercial transaction value agreed upon by parties in good faith.

FULL TEXT OF THE CESTAT DELHI ORDER

1. M/s Jayantah Trading Company¹ and its proprietor Shri Sunil Kumar² filed these two appeals to assail the order in appeal dated 10.11.2022³ passed by the Commissioner of Customs (Appeals), New Delhi, whereby he rejected the appeals filed by both the appellants and upheld the order-in-original dated 08.12.2020⁴ passed by the Additional Commissioner. In the OIO, the Additional Commissioner decided the proposals made in the show cause notice dated 5.4.2018⁵ issued to Jayantah, Sunil and two other persons.

2. Jayantah is an exporter of readymade garments and it exported garments under various shipping bills. Receiving intelligence that Jayantah was exporting sub-standard garments and over valuing them in order to avail inadmissible duty drawback and other incentives, the Directorate of Revenue Intelligence⁶ investigated the matter and thereafter issued the SCN proposing to re-classify the some goods and to re-determine the Free on Board⁷ values of the goods exported under various shipping bills. The declared FOB value of Rs.2,49,90,427/- was proposed to be re-determined as Rs. 61,93,360/- and it was proposed to confiscate the goods under section 113 of the Customs Act, 1962⁸.

3. It was also proposed to impose redemption fine in lieu of confiscation under section 125 of the Act and to impose penalties under section 114 and 114 AA of the Act. It was further proposed that the duty drawback and export incentives pending disbursal should be re-determined and appropriated against the fine and penalties.

4. The SCN also proposed to impose penalties under section 114 and 114 AA of the Act on Sunil.

5. These proposals in the SCN were adjudicated by the Additional Commissioner. The following seven points were identified for determination.

“(i) the goods exported by M/s KKR & M/s JTC under Shipping Bills as mentioned in Annexure-KT, Annexure-KP & Annexure-JT was mis-declared/mis-classified under the Customs Tariff Act, 1975;

(ii) Whether the FOB value declared of the goods by M/s KKR & M/s JTC should be rejected and re-determined the under Rule 6 of CVR, 2007.

(iii) the goods covered under Shipping Bill mentioned in Annexure-KT & Annexure-KP & Annexure-JT should be confiscated under the provisions of Sections 113(i) and (ii) of the Customs Act, 1962.

(iv) Whether redemption fine in lieu of confiscation of the goods covered under Shipping Bill mentioned in Annexure-KT, Annexure-KP & Annexure-JTC should be imposed on them under Section 125 of the Customs Act, 1962 on M/s KKR & M/s JTC.

(v) Whether penalty should be imposed under Section 114 and Section 114AA of the Customs Act, 1962 upon M/s KKR, M/s JTC, Sh. Amit Kumar, Prop of M/s Arora Exports, Sh. Sunil Kumar r/o H. No. 34 Lucky Enclave, St. No. 2, Near Basti Jodhewal Chowk, Ludhiana and Sh. Sunil Kumar, resident of H. No. 63, Mahavir Nagar, Ferozepur Road, Ludhiana.

(vii) Whether (vi) export incentives viz, duty drawback and other export incentives of M/s KKR & M/s JTC & Sh. Amit Kumar, Prop of M/s Arora Exports, pending disbursal should appropriated against the fine and penalties.”

6. The Additional Commissioner confirmed the proposals made in the SCN and re-classified men’s manmade fiber Jersey from CTH 611 03010 to 610 79 990. The Additional Commissioner re­determined the FOB value of the goods from Rs. 2,49,90,427/- to Rs. 61,93,360/- and confiscated the goods and imposed a redemption fine of Rs. 6,00,000/- in lieu of the confiscation. The Additional Commissioner also imposed penalties of Rs. 8,00,000/-on Jayantah under section 114 (iii) and Rs. 8,00,000/- under section 114AA. The Additional Commissioner ordered the redemption fine and penalties to be recovered from the pending disbursal of duty drawback and other export incentives to Jayantah. The Additional Commissioner also imposed of penalty of Rs. 4,00,000/- on Sunil under section 114(iii) and a penalty of Rs. 4,00,000/- under section 114AA of the Act.

7. Aggrieved, the appellant appealed to the Commissioner (Appeals) who, by the impugned order, upheld the OIO.

8. We have heard learned counsel for the appellant and the learned Authorized Representative appearing for the Revenue and perused the records.

9. The undisputed legal position is that duty drawback is to be paid on FOB value and so should be the other export incentives. The entire case of the department rests on the allegation that the Jayantah had over-valued the export goods. Based on the market inquiry conducted by the DRI, it was felt that the value of the goods must be much lower and, therefore, the FOB value was re-determined. The remaining proposals of confiscation of fine and penalties flow from this re-determination of FOB value.

10. The FOB value was purportedly rejected under Rule 8 of the Customs Valuation (Determination of export Goods) Rules, 2007⁹ and re-determined under Rule 6 of the Valuation Rules read with Section 14 of the Act. Consequently, all the export benefits were also ordered to be re-determined as per the FOB value re-determined by the Additional Commissioner and this decision was upheld in the impugned order.

11. The question which arises is what is the FOB value and if it can be re-determined by the Customs Officers. FOB value is not defined in the Act. It refers to the “Free on Board” value agreed to between the buyer and the seller of the goods. It is the transaction value for the goods. It is the price which the buyer agrees to pay the seller for the goods without including the costs of transportation and transit insurance. FOB is one of the INCOTERMS i.e., international commercial terms which are the universally understood standards to determine the risks and responsibilities and liabilities of the buyers and sellers. If goods are sold on FOB basis, the seller is free from all his responsibilities once the goods are put on board the ship or aircraft. If goods are sold on C & F basis, the seller is also responsible for the transport of the goods upto the place of destination. However, the seller is not responsible for any risk which may occur during the transportation. If the goods are sold on CIF basis, the seller is responsible for delivery of the goods including the cost of transportation and transit insurance upto the port of delivery. What is common in all these cases is that it is the price agreed to between the buyer and the seller.

12. It is a universally known principle that a stranger to the contract cannot change the terms of contract. If the buyer and seller agree to a particular price on FOB basis, no stranger to the contract including the Customs Officers, DRI etc., have any locus standi to modify the FOB value.

13. Section 14 of the Act and the Valuation Rules is the basis for determining the duty. Section 14 reads as follows:

14. Valuation of goods.

(1)For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, 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 as the case may be, 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:

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable 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 manner specified in the rules made in this behalf:

Provided further that the rules made in this behalf may provide for,-

(i)the circumstances in which the buyer and the seller shall be deemed to be related;

(ii) the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case;

(iii) the manner of acceptance or rejection of value declared by the importer or exporter, as the case may be, where the proper officer has reason to doubt the truth or accuracy of such value, and determination of value for the purposes of this section:

Provided also 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 of export, as the case may be, is presented under section 50.

(2) Notwithstanding anything contained in sub-section (1), if the Board is satisfied that it is necessary or expedient so to do, it may, by notification in the Official Gazette, fix tariff values for any class of imported goods or export goods, having regard to the trend of value of such or like goods, and where any such tariff values are fixed, the duty shall be chargeable with reference to such tariff value.

Explanation.-For the purposes of this section-

(a) “rate of exchange” means the rate of exchange-(i)determined by the Board, or(ii)ascertained in such manner as the Board may direct, for the conversion of Indian currency into foreign currency or foreign currency into Indian currency;

(b)”foreign currency” and “Indian currency” have the meanings respectively assigned to them in clause (m) and clause (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).”

14. Generally speaking, the transaction value shall be the assessable value on which duty should be determined-whether it is import duty or export duty. However, there are circumstances under which the transaction value can be rejected by the Customs Officers and the value can be re-determined as per the Valuation Rules adopting other methods. What needs to be noted is that if the transaction value is rejected and the value is re-determined by the officer, he is not changing and he cannot change the transaction value. All he is doing is refusing to accept the transaction value as the assessable value and is determining the assessable value through some other method.

15. An illustration would make this position clear. ‘A’, an overseas seller sells goods to ‘B’ in India for $ 1000. The proper officer of Customs rejects this transaction value and re-determines the value as $2000. The assessable value will be $2000 and duty has to be paid on this value. However, ‘B’ has to remit to ‘A’ only $1000 as agreed to between them. The transaction value will continue to be $1000 while the assessable value will be $2,000/-. Both section 14 of the Act and the Valuation Rules are only meant to determine the assessable value and not to re-determine the transaction value. No power has been conferred under the Customs Act or Rules on any officer to change the transaction value. Therefore, the FOB value of the exported goods, which is the transaction value, cannot be modified by any officer. The re-determination of FOB value by the Additional Commissioner is without any authority of law. The Commissioner (Appeals) erred in upholding such re­determination of FOB value.

16. The next question is if the drawback and other export incentives must be paid on the FOB value or on the value re­determined by the officer. If the drawback schedule provides for payment of drawback as a percentage of FOB value, it should be paid so. No officer has the power to modify the drawback schedule in any particular case and hold that it shall, instead, be paid on some value determined by him/ her.

17. A doubt may arise as to why drawback and other export incentives have been made payable as a percentage of the FOB value and not on the basis of the assessable value under the Act which is basis for determining the duty. The reason for this is self-evident. Drawback and other export incentives are given to encourage exporters to export and to obtain remittances of sale proceeds.

18. The remittance which the exporter is to obliged to obtain is the price for which the exporter had sold the goods. If the exporter had sold the goods for $ 2000 he has to obtain remittance of $2000. It will not be sufficient if the exporter obtains remittance of an amount equal to the value determined by the customs officer. There is a direct nexus between the drawback and other export incentives and the receipt of remittance. In fact, the drawback rules provide that if the remittance is not received, the drawback can be recovered. Similarly, in some schemes like Merchandise Export from India Schemes¹⁰, the exporter is required to apply for the scrip along with bank releasing certificate showing that the remittance has been received. In other words, neither the transaction value (FOB value) nor the obligation on the exporter to realize remittance of the FOB value can be modified by any customs officer. Therefore, export incentives also need to be paid accordingly as per rules.

19 In this case the Commissioner (Appeals) specifically recorded in paragraph 5.4 of the impugned order that the exporter had realized remittance as per FOB value of the goods but dismissed this fact on the ground that the foreign remittance does not establish that the declared value was true.

20. We find that the Commissioner (Appeals) committed a grave error in this respect. What is declared is the FOB value and what is realized is the FOB value and not some value determined by the Customs Officer. The FOB value cannot be re­determined by any Customs Officer.

21. Such being the case, the impugned order which is based on re-determination of FOB value cannot be sustained. The impugned order is set aside and the appeals are allowed with consequential relief, if any.

(Order pronounced on 06.06.2025)

Notes:-

¹ Jayantah

² Sunil

³  Impugned order

⁴ OIO

⁵ SCN

⁶ DRI

⁷ FOB

⁸ ACT

⁹ Valuation Rules

¹⁰ MEIS