Customs Valuation: Mark up by 1% on account of Handling, Loading and Unloading Charges

CA Jaikishan Manghani

In India, it is a common practice at customs that at the time of valuation of imported goods into India for levy of customs duty 1% mark up is made in the assessable value on account of handling, loading and unloading charges of the goods without going into detail what are in fact the actual expenses in this regard. This is hardly observed or pointed out or objected by the importers or their customs house agents while getting the goods customs cleared on payment of requisite customs duty. This is clear from the fact that Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, was amended vide notification dated July 5, 1990 and the said amendment has been struck down to the extent it is inconsistent with the spirit and intention of the law, by the Hon’ble Supreme Court of India while deciding the case of Wipro Limited v. Assistant Collector of Customs and Ors. [2015-TIOL-79-SC-CUS].

In the said case the issue had emerged due to the contradiction between the provisions of Section 14 of the Customs Act, 1962 and the provisions of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.

Now, let us examine the provisions of section 14 of the Customs Act, 1962:

Section 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)    xxxxx;

(ii)   xxxxx;

(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.

(1A) Subject to the provisions of sub-section (1), the price referred to in that sub-section in respect of imported goods shall be determined in accordance with the rules made in this behald

(2)  Notwithstanding anything contained in sub-section (1) or sub-section (1A) , 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.

From the above provisions of section 14, the following points with regard to valuation of imported goods emerge:

• That, the value of the goods being imported shall be the transaction value of such goods;
• That, the transaction value shall be the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation;
• That, such transaction value, including other cost factors shall include the cost of loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf and
• That, the CBSE has power to fix by notification, the tariff values for any class of imported goods having regard to the trend of value of such or like goods.
  

Now, let us examine the relevant provisions of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988:

Rule – 03 Determination of the method of valuation. — For the purposes of these rules, (i) subject to rules 9 and 10A, the value of imported goods shall be the transaction value;
(ii) if the value cannot be determined under the provisions of clause (i), th value shall be determined by proceeding sequentially through rules 5 to 8 of these rules.

Rule – 04 Transaction value. — (1) The transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of these rules.

(2) xxxxx.

(3)xxxxx.

Rule – 05 Transaction value of identical goods. — (1)(a) Subject to the provisions of Rule 3 of these rules, the value of imported goods shall be the transaction value of identical goods sold for export to India and imported at or about the same time as the goods being valued.

(b) In applying this rule, the transaction value of identical goods in a sale at the same commercial level and in substantially the same quantity as the goods being valued shall be used to determine the value of imported goods.

(c) Where no sale referred to in clause (b) of sub-rule (1) of this rule, is found, the transaction value of identical goods sold at a different commercial level or in different quantities or both, adjusted to take account of the difference attributable to commercial level or to the quantity or both, shall be used, provided that such adjustments shall be made on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustments, whether such adjustment leads to an increase or decrease in the value.

(2) Where the costs and charges referred to in sub-rule (2) of Rule 9 of these rules are included in the transaction value of identical goods, an adjustment shall be made, if there are significant differences in such costs and charges between the goods being valued and the identical goods in question arising from differences in distances and means of transport.

(3) In applying this rule, if more than one transaction value of identical goods is found; the lowest such value shall be used to determine the value of imported goods.

Rule – 06 Transaction value of similar goods. — (1) Subject to the provisions of Rule 3 of these rules, the value of imported goods shall be the transaction value of similar goods sold for export to India and imported at or about the same time as the goods being valued.

(2) The provisions of clauses (b) and (c) of sub-rule (1), sub-rule (2) and sub-rule (3), of Rule 5 of these rules shall, mutatis mutandis, also apply in respect of similar goods.

Rule – 06A Determination of value when transaction value is not available. — If the value of imported goods cannot be determined under the provisions of rules 4, 5 and 6, the value shall be determined under the provisions of rule 7 or, when the value cannot be determined under that rule, under rule 7A : Provided that at the request of the importer, and with the approval of the proper officer, the order of application of rules 7 and 7A shall be reversed.

Rule – 07 Deductive value. — (1) Subject to the provisions of Rule 3 of these rules, if the goods being valued or identical or similar imported goods are sold in India, in the condition as imported at or about the time at which the declaration for determination of value is presented, the value of imported goods shall be based on the unit price at which the imported goods or identical or similar imported goods are sold in the greatest aggregate quantity to persons who are not related to the sellers in India, subject to the following deductions :—

(i) either the commission usually paid or agreed to be paid or the additions usually made for profits and general expenses in connection with sales in India of imported goods of the same class or kind;

(ii) the usual costs of transport and insurance and associated costs incurred within India;

(iii) the customs duties and other taxes payable in India by reason of importation or sale of the goods.

(2) If neither the imported goods nor identical nor similar imported goods are sold at or about the same time of importation of the goods being valued, the value of imported goods shall, subject otherwise to the provisions of sub-rule (1) of this rule, be based on the unit price at which the imported goods or identical or similar imported goods are sold in India, at the earliest date after importation but before the expiry of ninety days after such importation.

(3) (a) If neither the imported goods nor identical nor similar imported goods are sold in India in the condition as imported, then, the value shall be based on the unit price at which the imported goods, after further processing, are sold in the greatest aggregate quantity to persons who are not related to the seller in India.

(b) In such determination, due allowance shall be made for the value added by processing and the deductions provided for in items (i) to (iii) of sub-rule (1) of this rule.

Rule – 07A Computed value. — Subject to the provisions of rule 3, the value of imported goods shall be based on a computed value, which shall consist of the sum of :-

(a) the cost or value of materials and fabrication or other processing employed in producing the imported goods;

(b) an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to India;

(c) the cost or value of all other expenses under sub-rule (2) of rule 9 of these rules.]

Rule – 08 Residual method. — (1) Subject to the provisions of Rule 3 of these rules, where the value of imported goods cannot be determined under the provisions of any of the preceding rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of Section 14 of the Customs Act, 1962 (52 of 1962) and on the basis of data available in India.

(2) No value shall be determined under the provisions of [this rule] on the basis of —

(i) the selling price in India of the goods produced in India;

(ii) a system which provides for the acceptance for customs purposes of the highest of the two alternative values;

(iii) the price of the goods on the domestic market of the country of exportation;

[(iiia) the cost of production other than computed values which have been determined for identical or similar goods in accordance with the provisions of rule 7A.]

(iv) the price of the goods for the export to a country other than India;

(v) minimum customs values; or

(vi) arbitrary or fictitious values.

Rule – 09 Cost and services. — (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, —

(a) the following cost and services, to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely : —

(i) commissions and brokerage, except buying commissions;

(ii) the cost of containers which are treated as being one for customs purposes with the goods in question;

(iii) the cost of packing whether for labour or materials;

(b) 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 imported goods, to the extent that such value has not been included in the price actually paid or payable, namely :—

(i) materials, components, parts and similar items incorporated in the imported goods;

(ii) tools, dies, moulds and similar items used in the production of the imported goods;

(iii) materials consumed in the production of the imported goods;

(iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;

(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.

(d) 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;

(e) 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.

(2) For the purposes of sub-section (1) and sub-section (1A) of Section 14 of the Customs Act, 1962 (52 of 1962) and these rules, the value of the imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include —

(a) the cost of transport of the imported goods to the place of importation;

(b) loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation; and

(c) the cost of insurance :

[Provided that —

(i) where the cost of transport referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods;

(ii) the charges referred to in clause (b) shall be one per cent of the free on board value of the goods plus the cost of transport referred to in clause (a) plus the cost of insurance referred to in clause (c);

(iii) where the cost referred to in clause (c) is not ascertainable, such cost shall be 1.125 % of free on board value of the goods;

Provided further that in the case of goods imported by air, where the cost referred to in clause (a) is ascertainable, such cost shall not exceed twenty per cent of free on board value of the goods :

Provided also that where the free on board value of the goods is not ascertainable, the costs referred to in clause (a) shall be twenty per cent of the free on board value of the goods plus cost of insurance for clause (i) above and the cost referred to in clause (c) shall be 1.125% of the free on board value of the goods plus cost of transport for clause (iii) above

Provided also that in case of goods imported by sea stuffed in a container for clearance at an Inland Container Depot or Container Freight Station, the cost of freight incurred in the movement of container from the port of entry to the Inland Container Deport or Container freight Station shall not be included in the cost of transport referred to in clause(a).

(3) Additions to the price actually paid or payable shall be made under this rule on the basis of objective and quantifiable data.

(4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule.

From the above provisions of Rules 3 to 9, the following points with regard to valuation of imported goods, emerge:

• That, the provisions of Rules 3 to 6 are similar to the provisions of section 14 of the Customs Act, 1962;
• That, as per Rule 6A, if the transaction value of the goods is not available the same will be valued as per the provisions of Rule 7 based upon the similar or identical goods being sold in India.
• That, even in the cases the valuation under Rule 7 is not possible, the same will be valued on cost basis as per the provisions of Rule 7A.
• And if the value is not determinable under Rule 7A, the goods will be valued on reasonable basis under Rule 8 read with section 14 of the Act.
• That, after valuation of the goods under Rules 3 to 6 or Rule 7 or Rule 7A or Rule 8, the costs such as commission, brokerage, cost of dies, material, development and royalties etc as referred to in Rule 9(1) will be added.
• Likewise, the cost of transportation will be added in terms of Rule 9(2) and in its absence, 20% cost will be added.
• However under proviso (ii) to the Rule 9(2)(b) there is provision of arbitrary addition of 1% on account of loading, unloading and handling charges without mention of the phrase “in absence of actual cost of loading, unloading and handling charges”

Conclusion:

From the above analysis it is clear that the clause (ii) of proviso to Rule 9 (2) (b) is arbitrary and against the spirit of basic provisions of valuation of imported goods under section 14 of the Customs Act, 1962 and therefore the Hon’ble Supreme Court of India has rightly stuck down these provisions to the extent they are arbitrary by observing:

Whenever actual cost of the goods or services is available, that would be the determinative factor. Only in the absence of actual cost, fictionalised cost is to be adopted. Here again the scheme gives ample message that an is attempt to arrive at the value of goods or services as well as costs and services which bear almost near resemblance to the actual cost price of the goods or actual price of costs and services. That is why the sequence goes from the price of identical goods to similar goods and then to deductive value and the best judgement assessment as a last resort.

The author is a practising CA based at Indore (MP) and can be contacted at [email protected].

Click here to Read Other Articles of CA Jaikishan Manghani