India is presently following the provisions of the WTO Agreement on Customs Valuation (ACV) for determination of value on imported goods where Customs duty is levied with reference to value (ad-valorem rates). However, this does not apply to cases where tariff values have been fixed (see legal provisions below).
2. India is a founding Member of the GATT (presently WTO) and was actively involved in the GATT negotiations (Tokyo Round, 1973-79), which developed the Agreement on Customs Valuation (ACV). India implemented the ACV in August 1988.
3. Section 2(41) of the Customs Act, 1962 defines ‘Value’ in relation to any goods to mean the value thereof determined in accordance with the provisions of sub-section (1) of Section 14 thereof.
4. Sub-section (1) of Section 14, in turn, states that when a duty of customs is chargeable on any goods by reference to their value, the value of such goods shall be deemed to be: –
“The price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation or exportation, as the case may be, in the course of international trade, where the seller and the buyer have no interest in the business of each other and the price is the sole consideration for the sale or offer for sale”.
5. The provisions of sub-section (1) of Section 14 apply for the valuation of both imported goods and export goods. However, a common valuation law at international level applies only to imported goods and its basic principles are laid down in Article VII of General Agreement on Tariffs and Trade (GATT), 1948, currently known as GATT 1994 (administered by the World Trade organization, WTO). The Indian valuation law under Section 14(1) of the Indian Customs Act is based on the principles of Article VII of the GATT. This is, however, a deemed value allowing uplifting (loading) of declared value in a given case even when it represents the actual price of transaction. The Agreement on Customs Valuation (ACV), which came into force on 1st January 1981, lays down well defined methods of valuation to be strictly followed so as to ensure uniformity and certainty in valuation approach and to avoid arbitrariness.
6. Sub-section 1 A of the Indian Customs Act 1962 requires that the value of imported goods shall be determined under the Rule made in this behalf. The Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 lays down the methods of valuation based on the ACV. Transaction value, which is the price paid or payable for the imported goods, is the primary basis for valuation. If the transaction value method is not applicable in a specific case, the other methods of valuation prescribed in the Rules (based on ACV) have to be followed in a hierarchical order, subject to certain exceptions
7. Under the Customs Act, 1962, the Central Government has also been empowered to fix Tariff Values (sub-section (2) of Section 14) for any product. If Tariff Value is fixed for any goods, then ad-valorem duties are to be calculated with reference to such Tariff Value. The tariff values may be fixed for any class of imported or export goods having regard to the trend of value of such or like goods and the same has to be notified in the official gazette. This measure is resorted to only in rare cases where the price fluctuations in the market are rampant having significant economic impact. Currently tariff values have been fixed in respect of imported Crude Palm Oil, RBD Palm Oil, Crude Palmolein, RBD Palmolein, Crude Soyabean Oil and Brass Scrap.
8. As far as export goods are concerned, provisions of sub-section (1) of Section 14 provide a complete code of valuation by itself and there are no separate valuation rules for that purpose.
Methods of Valuation
9. The Customs Valuation Rules, 1988, lays down six methods for the valuation of imported goods. The primary basis for valuation is the “Transaction Value”. However, it is subject to adjustment by certain Valuation Factors (see Rule 9). There are also certain conditions for the transaction value method to be applicable (see sub-rule 2 of Rule 4). In certain situations, the Customs authorities could reject the declared value (transaction value method), if the truth or accuracy of the declaration is reasonably suspected (see Rule 10 A). In all such cases where the transaction value method is not applied, goods shall be valued by applying the subsequent methods in a strictly hierarchical order (see Rule 3).
10. In order to enable the Customs to determine the value by application of the most appropriate method, the importer is required to truthfully declare the full particulars concerning the goods under import. These include full description and specifications of the goods, basis of valuation applied, relationship with the supplier, conditions and restrictions if any attached with the sale, elements of cost not included in the invoice price, royalty and license fee payable in relation to the imported goods, etc. These details are to be declared in a special Valuation Declaration Format designed for the purpose. This is in addition to the entry declaration (Bill of Entry). In respect of EDI processing, the valuation declaration is integrated as a part of the Electronic Declaration. The importer should also provide copies of invoice, purchase contract and other supporting documents.
Transaction Value method:
11. Rule 3(i) of the Customs Valuation Rules, 1988 states that the value of imported goods shall be the transaction value. Rule 4(i) thereof defines “transaction value” as the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9.
12. The price actually paid or payable should be adjusted to include all the costs and services (dutiable valuation factors) specified in sub-Rule 9 (1) (see below) if not already included in the invoice value. In short, the transaction value should be determined by suitably adjusting the declared value so as to include all payments made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller. Since the assessment is on CIF basis, the invoice value should be suitably adjusted to include the freight, insurance and handling charges as applicable under sub-Rule 9 (2).
13. Valuation Factors (see Rule 9) are the various elements (dutiable factors), which should be added while determining the Customs value. The factors should be added to the extent they are not already included in the price actually paid or payable (invoice value). These dutiable factors are:
- Commissions and brokerage, except buying commissions;
- The cost of containers which are treated as being one for Customs purposes with the goods in question;
- The cost of packing whether for labor or materials;
- The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods, to the extent that such value has not been included in the price actually paid or payable:-
- material, components, parts and similar items incorporated in the imported goods;
- tools, dies, moulds and similar items used in the production of the imported goods;
- materials consumed in the imported goods;
- engineering, developing, artwork, design work, and plans and sketches undertaken elsewhere than in the importing country and necessary for the production of imported goods;
- Royalties and license fees related to goods being valued that the buyer must pay either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;
- The value of any part of the proceeds of any subsequent resale, disposal or use of the goods that accrues directly or indirectly to the seller;
- Advance payments;
- Freight charges up to the place of importation;
- Loading, unloading and handling charges associated with transporting the goods;
14. The following charges are not to be added for the purposes of determining the Customs value provided they are clearly distinguishable and separately declared in the commercial invoice:-
- Buying commission:
- Interest charges for deferred payment;
- Post-importation charges (e.g. inland transportation charges, installation or erection charges, etc.);
- Duties and taxes payable in India.
Transaction value method not applicable to certain cases
15. The Transaction value method cannot be applied in cases where the transactions do not comply with the definition under Rule 4 (1). Thus, if there is no sale for export to India in respect of any importation, such as gifts and consignment imports for subsequent sale, there is no transaction value and hence the method is not applicable.
16. The conditions referred to under Sub-Rule 4(2) are also required to be satisfied for applying the transaction value method. These are:
- The sale is in the ordinary course of trade under fully competitive conditions;
- The sale does not involve any abnormal discount or reduction from the ordinary competitive price;
- The sale does not involve special discounts limited to exclusive agents;
- Objective and quantifiable data exist with regard to the adjustments to be made under Rule 9;
- There are no restrictions concerning the disposition or use of the goods by the buyer (subject to certain exceptions);
- The sale or price is not subject to some condition or consideration;
- No part of the proceeds of the goods (by resale, disposal or use) after importation accrues to the seller;
- Buyer and seller are not related, and if related, the relationship should not have influenced the price.
17. Transaction value method also does not apply to situations where valuation fraud (under valuation, wrong description, misdeclaration of quantity, grade, specifications, etc) are shown to have taken place. These are cases where Customs do have adequate evidence to establish the fraud. In cases of suspected fraud, Rule 10 A could be applied to reject the declared value and the transaction value method (see below).
Related Party transactions
18. The transaction value method cannot be applied in cases where the buyer and seller are related and the relationship has influenced the price. The scope of relationship is defined in Sub-Rule 2 (2) of the Customs Valuation Rules. In such cases the burden of proof shifts to the importer, who should satisfy the Customs that the declared price closely approximates to the test values prescribed in sub-Rule 4(4). If the importer fails to discharge this responsibility, the declared value could be rejected and valuation done under any of the subsequent methods applied in hierarchical order.
Other valuation methods:
19. Transaction value method cannot be applied for determination of Customs value in several situations. These include cases where there is no sale for export, restrictions under Sub-Rule 4 (2) apply, relationship between buyer and seller has influenced, cases where valuation fraud has taken place and cases of suspected valuation fraud (see rule 10 A). In all such cases, the valuation should be under the subsequent methods. These methods are to be applied in sequential order, unless otherwise permitted under the valuation Rules. There are five such valuation methods:
- Transaction Value of Identical goods (Rule 5). This is based on the previously determined transaction value of identical goods, as defined in the Valuation Rules (see Sub-Rule 2.1), imported at or about the same time;
- Transaction Value of Similar goods (Rule 6). This is again based on the transaction value of similar goods (defined in Su-Rule 2.1) imported at or about the same time;
- Deductive Value Method (Rule 7). This is calculated based on the selling price of imported goods or identical/similar goods in India after deducting selling expenses, margin of profit, duties and taxes;
- Computed Value Method (Rule 7 A). The computed value is arrived at from the cost of materials used in production of imported goods, cost of fabrication or other processing charges at the country of production, profit and general expenses, and other dutiable factors as may be applicable under Rule 9;
- Fallback Method (Rule 8). These include a flexible application of previous valuation methods in a manner consistent with the provisions of Section 14(1) of the Customs Act.
Rule 10 A
20. Rule 10 A provides a unique procedure for rejection of transaction value method in cases of suspected valuation fraud. The Authority for this Rule is not from the Customs valuation Agreement itself, but from a separate decision by the WTO Valuation Committee (Decision 6.1). This applies to cases where there is reason to doubt the truth or accuracy of the value declared by the importer, but there is no evidence with the Customs to establish fraud. It was one of the results of Uruguay Round negotiations (which led to the establishment of World Trade Organization (WTO) in 1994) based on an Indian proposal. The Indian proposal was to provide adequate flexibility in the Valuation Agreement to deal with cases of suspected fraud, particularly those where the declared value was far below a series of contemporaneous transactions. In such cases the Customs could ask the importer to produce additional information and evidence to justify the declared value. If the information/ documents produced are not adequate to dispel the doubt regarding the truth or accuracy of the declaration or if the importer fails to produce any supporting evidence, the Customs could reject the declared value. An appealable order should be issued in such cases after giving the importer a reasonable opportunity to be heard. The goods should then be valued by applying any of the subsequent methods as laid down in the Valuation Rules. In short, Rule 10 A provides only an authority to reject the declared value and is not a method of valuation by itself.
21. The National Import data Base (NIDB) provides reliable tool for comparison of declared values with contemporaneous import prices. It is an electronic database previous importations which have been analyzed by a special software (see brief under NIDB). The NIDB is made available on a weekly basis to all Customs stations. It is also made available on the Directorate of Valuation Web site (www.dov.gov.in).
Export value information from exporting country
22. It is also possible to seek information on export value declared at the exporting country in cases; where under valuation on import is reasonably suspected. The export value information could be used to establish valuation fraud at the importing country. The mechanism for Exchange of Customs valuation information among Member countries has been made possible paragraph 8.3 of the Doha WTO Ministerial Decision (see details under WTO decisions).