1. Introduction:
1.1 The rates of Customs duties leviable on imported goods and export goods are either specific or on ad valorem basis or at times on specific cum ad valorem basis. When Customs duties are levied at ad valorem rates, i.e., based on the value of the goods, it becomes essential to lay down in the law itself the broad guidelines for such valuation to avoid arbitrariness and to ensure that there is uniformity in approach at different Customs formations. Accordingly, Section 14 of the Customs Act, 1962 lays down the basis for valuation of import and export goods. The present version of the said Section 14 is applicable with effect from October 2007.
2. Tariff value:
2.1 Board is empowered to fix values, under Section 14(2) of the Customs Act, 1962 for any item, which are called “Tariff Values”. If tariff values are fixed for any goods, ad valorem duties thereon are to be calculated with reference to such tariff values. 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 have to be notified in the official gazette. Tariff values have presently been fixed in respect of import of Crude Palm Oil, RBD Palm Oil, Other Palm Oils, Crude Palmolein, RBD Palmolein, Other Palmoleins, Crude Soyabean Oil, Brass Scrap (all grades), Poppy Seeds, Areca Nuts, Gold and Silver.
[Refer Notification No.36/2001-Cus. (NT), dated 3.8.2001]
3. Valuation of imported/export goods in general:
3.1 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 Section 14(1) of the Act ibid. In turn, Section 14(1) of the Act ibid states that 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”. It is also provided that in the case of imported goods such transaction value shall include “in addition…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.”
3.2 In accordance with the provisions of Section 14(1) of the Customs Act, 1962 the rules specified for the purpose of valuation 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; and
(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.
3.3 The price paid or payable 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 of the Customs Act, 1962.
3.4 When compared to the earlier provisions Section 14(1), the present provisions have discarded the concept of “demand value” and adopted the concept of “transaction value”.
Also, the present Section 14 contains therein provisions for specific rules to be made for determination of value and also for specific additions to value on account of cost and services. Some provisions deleted from the earlier Section 14 include:
(i) Reference to such or like goods. Thus, the value (transaction value) shall be the price actually paid or payable for the goods under consideration.
(ii) The reference to price of the goods ordinarily sold or offered for sale.
(iii) The price of the goods when sold for export to India is to be considered and not the price in the course of international trade.
3.5 As provided in Section 14(1), the Custom Valuation (Determination of Value of Imported Goods) Rules, 2007 and the Custom Valuation (Determination of Value of Export Goods) Rules, 2007 have been framed for valuation of imported goods and export goods, respectively.
3.6 The provisions of Section 14(1) and the Custom Valuation (Determination of Value of Imported Goods) Rules, 2007 are based on the provisions of Article VII of GATT and the Agreement on implementation of Article VII of GATT. The methods of valuation prescribed therein are of a hierarchical (sequential) order.
3.7 The importer is required to truthfully declare the value in the import declaration and also provide a copy of the invoice and file a valuation declaration in the prescribed form to facilitate correct and expeditious determination of value for assessment purposes.
4. Methods of valuation of imported goods:
4.1 According to the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, the Customs Value should be the “Transaction Value”, i.e., the price actually paid or payable after adjustment by Valuation Factors and subject to (a) compliance with the Valuation Conditions and (b) satisfaction of the Customs authorities with the truth and accuracy of the Declared Value.
5. Transaction value:
5.1 Rule 3(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 states that subject to rule 12, the value of imported goods shall be the transaction value adjusted in accordance with the provisions of its Rule 10.
5.2 The price actually paid or payable is the total payment made or to be made by the buyer to the seller or for the benefit of the seller for the imported goods. It includes 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.
5.3 If objective and quantifiable data do not exist with regard to the valuation factors, if the valuation conditions are not fulfilled, or if Customs authorities have doubts concerning the truth or accuracy of the declared value in terms of Rule 12 of the said Valuation Rules, 2007 the valuation has to be carried out by other methods in the following hierarchical order:
(i) Comparative Value Method – Comparison with transaction value of identical goods (Rule 4);
(ii) Comparative Value Method – Comparison with transaction value of similar goods (Rule 5);
(iii) Deductive Value Method – Based on sale price in importing country (Rule 7);
(iv) Computed Value Method – Based on cost of materials, fabrication and profit in country of production (Rule 8); and
(v) Fallback Method – Based on earlier methods with greater flexibility (Rule 9).
6. Valuation factors:
6.1 Valuation factors are the various elements which must be taken into account by addition (factors by addition) to the extent these are not already included in the price actually paid or payable or by deduction (factors by deduction) from the total price incurred in determining the Customs value, for assessment purposes.
6.2 Factors by addition are the following charges:
(i) Commissions and brokerage, except buying commissions;
(ii) The cost of containers, which are treated as being one with the goods in question for Customs purposes;
(iii) The cost of packing whether for labour or materials;
(iv) 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, namely:
a) Material, components, parts and similar items incorporated in the imported goods;
b) Tools, dies, moulds and similar items used in the production of the imported goods;
c) Materials consumed in the imported goods; and
(v) Engineering, developing, artwork, design work, and plans and sketches undertaken elsewhere than in the importing country and necessary for the production of the imported goods;
(vi) Royalties and license fees related to imported 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;
(vii) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller;
(viii) Advance payments;
(ix) The cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to the pace of importation wherein the cost of transportation includes ship demurrage charges on chartered vessels, lighterage and barge charges; and
(x) The cost of insurance to the place of importation.
(xi) all other payments actually made or to be 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 to the extent that such payments are not included in the price actually paid or payable. {This sub-clause is not included in the draft text but is a part of Rule 10 (1) (e)}
Wherein the “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.
[Refer Notification No. 91/2017-Cus (N.T.) dated 26.09.2017 and Circular No. 39/2017 dated 26.09.2017]
6.3 As regards (v) and (vi) above, an explanation to Rule 10(1) clarifies that the royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.
[Refer Circular No. 38/2007-Cus, dated 9-10-2007]
6.4 Factors by deduction are the following charges provided they are separately declared in the commercial invoices:
(i) Interest charges for deferred payment;
(ii) Post-importation charges (e.g., inland transportation charges, installation or erection charges, etc.); and
(iii) Duties and taxes payable in the importing country.
7. Cases where transaction value may be rejected:
7.1 The transaction value may not be accepted in the following categories of cases as provided in Rule 3(2) of the said Valuation Rules, 2007:
(i) If there are restrictions on use or disposition of the goods by the buyer. However, the transaction value not to be rejected on this ground if restrictions:
(a) Are imposed by law or public authorities in India;
(b) Limit geographical area of resale; and
(c) Do not affect the value of the goods substantially.
(ii) If the sale or price is subject to a condition or consideration for which a value cannot be determined. However, conditions or considerations relating to production or marketing of the goods shall not result in rejection.
(iii)If part of the proceeds of the subsequent resale, disposal or use of the goods accrues to the seller, unless an adjustment can be made as per valuation factors.
(iv) Buyer and seller are related; unless it is established by the importer that:
(a) The relationship has not influenced the price; and
(b) The importer demonstrates that the price closely approximates one of the test values.
7.2 The transaction price declared can be rejected in terms of Rule 12 of the said Valuation Rules, 2007, when the proper officer of Customs has reason to doubt the truth or accuracy of the value declared and if even after the importer furnishes further information/documents or other evidence, the proper officer is not satisfied and has reasonable doubts about the value declared. An Explanation to Rule 12 clarifies that this rule does not, as such, provide a method for determination of value, and that it merely provides a mechanism and procedure for rejection of declared value in certain cases. It also clarifies that where the proper officer is satisfied after consultation with the importer, the declared value shall be accepted. This Explanation also gives certain illustrative reasons that could form the basis for doubting the truth of accuracy of the declared value.
7.3 The interpretative notes are specified in the schedule of the said valuation rules and are to be applied for interpretation of the rules.
8. Provisional clearance of imported goods:
8.1 Section 18 of the Customs Act, 1962 allows an importer to provisionally clear the imported goods from Customs pending final determination of value by giving a guarantee in the form of surety, security deposit or bank guarantee. Rules 4(1)(a) and 5(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 concerning identical goods and similar goods, respectively provide that the value of the goods provisionally assessed under Section 18 of the Customs Act, 1962, shall not be the basis for determining the value of any other goods.
9. Valuation of imported goods in case of related party transaction:
9.1 Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 enumerates the persons who shall be deemed to be “related”. It has been made clear by Explanation II thereto that the sole agent, sole distributor or sole concessionaire shall be deemed to be related only if they fall within the criteria of this sub-rule. Further, Rule 3(3) provides that where buyer and seller are related, the transaction value can be accepted if the examination of circumstances of the sale of the imported goods indicate that the relationship did not influence the price or if the importer demonstrates that the declared value of the goods being valued, closely approximates to one of the test values namely transaction value of identical/similar goods, in sales to unrelated buyers in India, deductive value for identical/similar goods or computed value for identical/similar goods ascertained at or about the same time can be used.
9.2 In related party transactions, the importer is required to fill a questionnaire and furnish a list of documents so that it can be ascertained whether the said case requires investigation by SVB or not. The proper officer shall examine the information provided by the importer in terms of Rule 3(3)(b) of the CVR, 2007 and shall submit the findings to the Commissioner for a decision as to whether the case is fit for being referred to the SVB for investigation. The Commissioner shall after due consideration of the preliminary findings, take a considered view whether:
(a) the matter be referred to the SVB for further investigations and the goods be provisionally assessed to duty in terms of section 18 of the Customs Act, 1962, or
(b) the transaction does not merit investigation by the SVB, and that assessment be finalized on the basis of enquiries to be conducted by the proper officer in terms of Rules 4 to 9 of the CVR 2007, or
(c) the transaction be assessed in terms of Rule 3 of the CVR 2007.
9.3 In cases, where the Commissioner concerned finds it fit that the transaction requires investigation to be conducted by SVB, the Investigations are carried out by Special Valuation Branches (SVB) located presently in the major Custom Houses at Bengaluru, Mumbai, Kolkata, Chennai and Delhi. As and when imports requiring investigation by SVBs are noticed at any customs formation, the concerned Commissionerate shall after following the laid down procedure, transfer all records to the jurisdictional SVBs for investigations.
9.4 With effect from 09.02.2016, the functional and supervisory control over the SVBs has been divested from DGOV and the same has been vested with the jurisdictional Chief Commissioner/ Principal Commissioner/ Commissioner. DGOV will continue to support the SVBs by issuing advisories on legal issues & guidance notes. DGOV shall also qualitatively monitor investigation orders issued by SVBs.
9.5 The provision of taking Extra Duty Deposit @ 1% of declared assessable value for four months, during which he is supposed to submit requisite documents and information to SVBs, has been withdrawn and in order to reduce the transaction cost it has been mandated that no security in the form of EDD shall be obtained from the importer. However, if the importer fails to provide the documents and information required for SVB inquiries, within 60 days of such requisition, security deposit at a rate of 5% of the declared assessable value shall be imposed by the Commissioner for a period not exceeding the next three months.
9.6 Only cases with significant revenue implications are taken up for SVB investigations. The following cases are not to be taken up for SVB investigations:
(a) Import of samples and prototype from related sellers
(b)Imports from related sellers where duty chargeable (including additional duty of customs etc.) is unconditionally fully exempt or NIL.
(c) Any transaction where the value of imported goods is less than Rs.1 Lac but cumulatively these transactions do not exceed Rs 25 lac in any financial year.
9.7 Apart from investigation of transactions involving related parties, cases involving possible additions to declared transaction value also need to be examined to determine whether SVB investigations are necessary. Accordingly, transactions where any payments are sought to be made which are in the nature of instances given below shall also be examined with respect to the need for SVB investigations:
(i) ‘royalty’ and ‘licence fee’ under Rule 10(1)(c) of CVR,2007, or
(ii) where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller i.e. Rule 10 (1)(d) of CVR, 2007 or
(iii) Where any other payments are made or are contemplated to be made in future by buyer to seller as a condition of sale of imported goods etc. Rule 10 (1)(e) of CVR, 2007.
[Refer Circulars No.11/2001-Cus, dated 23.2.2001 and Circular No. 5/2016 dated 09.02.2016]
10.Methods of valuation of export goods:
10.1 The provisions of Section 14(1) of the Customs Act, 1962 specifically cover the valuation of export goods. Also, the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 have been framed to provide a sound legal basis for the valuation of export goods and check deliberate overvaluation of export goods and mis-utilization of value based export incentive schemes.
10.2 Rule 3 of the Customs Valuation (Determination of Value of Export Goods) Rules 2007 that are framed in a format similar to the said Valuation Rules, 2007 for the imported goods emphasizes for acceptance of the transaction value, which is the primary basis for valuation of export goods. In cases where the transaction value is not accepted, the valuation shall be done by application of Rules 4 to 6 sequentially. As per Rule 7, exporter has to file Export Value Declaration relating to the value. Also, the value of the export goods declared by the exporter can be rejected under Rule 8.
10.3 Wherever there are doubts about the declared value of export goods and an investigation/enquiry is being undertaken to determine whether or not the Declared Value should be accepted, the export consignments should not be ordinarily detained. Due process envisaged under Rule 8, for rejection of declared value and consequent redetermination of value may be undertaken by applying valuation Rules sequentially.
10.4 The explanation to Section 14 provides for the determination of rate of exchange for the conversion of Indian currency into foreign currency and foreign currency into Indian currency which will be used by the assessing officer to arrive at the value of exported and imported goods respectively. Currently, such values are notified for 20 currencies. For the purpose of valuation of goods, “foreign currency” and “Indian currency” have the same meanings assigned to them in terms of clause (m) and clause (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999) respectively.]
11. Rights of appeal:
11.1 The principles of natural justice are required to be followed in valuation matters also. When the Customs authorities do not accept the declared value and re-determine the Customs value, the importer or his representative is normally required to be given a written notice followed by a personal hearing. An adjudication order giving in detail the basis of determination of the value can be obtained if the importer is aggrieved with the re-determination of value. Under the Customs Act, 1962, an importer can appeal against a decision on valuation to the Commissioner of Customs (Appeals) in the first instance. A second appeal lies to the Tribunal (CESTAT) consisting of administrative and judicial members. A third appeal lies to the Supreme Court of India. The importer is informed regarding his rights of appeal by each of the adjudicating and appellate authorities.
12. Customs (Assistance in Value Declaration of Identified Imported Goods) Rules, 2023 (CAVR, 2023)
12.1 To address the issue of undervaluation in imports the Board has framed Customs (Assistance in Value Declaration of Identified Imported Goods) Rules, 2023. These rules provide for the additional obligations of the importer in respect of a class of imported goods whose value is not being declared correctly, the criteria of selection of such goods, and the checks in respect of such goods. The Rules shall enter into force on 11th February 2023. Any person having information on undervaluation prevailing for any class of goods may refer the matter to CBIC for examination on [email protected].
12.2 The CAVR, 2023 can be applied only by following the processes referred in the rules. The written reference must have been made to the Board which, if found suitable by Screening Committee for detailed examination, must have been comprehensively examined by Evaluation Committee which should have concluded the likelihood that the value of the relevant class of goods may not be declared truthfully, having regard to the trend of the declared value or other relevant criteria. Thereafter, the Screening Committee’s recommendation confirming the completeness of such report must have been made to the Board. If satisfied that the recommended report should be accepted, the Board may specify the identified goods.
12.3 The rules provide for the processes to be followed before the Board may specify a class of imported goods, for which there is a reason to believe that the value may not be declared truthfully or accurately but below it, as identified goods. The rules also provide for the procedures to be followed by an importer of identified goods, once the relevant class of goods have been specified as identified goods by the Board. These include declaring certain aspects while filing the bill of entry. Further, if required by the Customs Automated System, such importer shall also fulfil the specified additional obligations, and specified checks shall be performed so as to enable and assist the importer to demonstrate the truthfulness and accuracy of the declared value.
12.4 The circumstances, and manner, in which an Order may be withdrawn, or its parameters altered, as also the manner of review of Order, are described in the rules.
[Refer Circular No. 1/2023 dated 11.01.2023]
Source – Custom Duty Manual 2023
