prpri Adoption of Customs Valuation under the Transfer Pricing arena Adoption of Customs Valuation under the Transfer Pricing arena

With the increased transaction flows between the Multinational Enterprises (“MNEs”) of international group in recent times, interalia, transfer of goods within the group has become a vital issue under Transfer Pricing as well as the customs law.

A dichotomy exists in the overall objective of these two regulations – while the Customs authorities seeks to derive the transaction price between related entities in such a manner that the same is not understated which may entail reduction of import duty, the Income tax authorities on the other hand, through its Transfer Pricing wing, seeks to arrive at a transaction price between related entities to ensure that the same is not overstated thereby reducing the taxable profits.

Convergence between Transfer Pricing and Customs law

It is worthwhile to note that there are marked similarities between the Transfer pricing and Customs regulations in terms of the methodology to arrive at the relevant transfer price. For instance, the deductive method under Customs law can be correlated to the resale price method under Transfer Pricing law. Further, the computed value method under Customs law is based on a value built up from materials and manufacturing costs etc., plus profit, which is similar to cost plus method under Transfer pricing regulations.

However, there are certain dissimilarities between the Customs and Transfer Pricing regulations. In this regard, given hereunder are some of the key elements which finds its place in Transfer pricing literature however are absent under Customs law:

  • Transfer Pricing regulation permits use of multiple year data of comparable uncontrolled transactions[1] however as per the Custom regulations, the value of identical goods or similar goods imported at about the same time as the goods being valued is considered[2]
  • Transfer Pricing regulation allows economic and commercial adjustments wherever adequately justified[3] whereas as per the Custom regulations, only specific adjustments such as commission and brokerage, packing costs, license fees, etc. which are prescribed are allowed.
  • Transfer Pricing regulation allows use of arithmetic mean[4] (where the comparables are less than 6) and range of 35th and 65th percentile (where the comparables are 6 or more)[5]; however, the Custom regulation permits use of lowest value under the transaction value of identical or similar goods method[6].
  • One of the parameters for ascertaining arm’s length price under Transfer Pricing provisions is conducting a Functions, Assets and Risk analysis (“FAR”) for each of the parties[7]. However, no such parameter is prescribed for ascertaining transaction value under any of the methods specified in Custom regulation.

Jurisprudence over the subject matter

There are various judicial precedents wherein the adoption of custom valuation has been rejected for the purpose of Transfer Pricing. Some of the key precedents in this regard are as under:

i. In the case of Serdia Pharmaceuticals (India) Private Limited[8]the Mumbai Income Tax Appellate Tribunal (“ITAT”) rejected the assessee’s reliance on customs data and held that merely because the customs authorities consider the price at arm’s length does not relieve the taxpayer’s burden of establishing that the price is at arm’s length for the purpose of Transfer Pricing requirements under the Income Tax Act.

ii. Further, in the case of Panasonic India (P.) Ltd[9], the Delhi ITAT held that custom valuation is for different purpose and different criterias are used under the two legislations.

Similar principles have also been upheld in Fuchs Lubricants (India) Private Ltd[10] and Mobis India Ltd[11].

However, there are few judicial precedents wherein the tax authorities have accepted the Custom Valuation wherever adequate justifications were provided. For example, in the case of Coastal Energy Private Ltd Vs ACIT[12], it was held that the valuation arrived by the customs authorities is not an arbitrary exercise but based on the scientifically formulated methods and accordingly the prices adopted by Customs authorities may be considered as an appropriate benchmark for Transfer pricing perspective.

Therefore, it may be observed that there is no settled view of the judiciary on accepting the value adopted by customs authorities as arm’s length price under the Transfer pricing proceedings.

Central Board of Direct Taxes (“CBDT”) inks Advanced Pricing Agreement (“APA”) accepting Custom Valuation as Arm’s Length Price (“ALP”)

Recently, CBDT has concluded an APA where the price determined by Special Valuation Bench of Custom Authorities was accepted as ALP for import transaction. It is possibly the first of its kind APA wherein the Custom Valuation is adopted for Transfer Pricing purposes. The said APA also brings out the willingness of the tax authorities of accepting the valuation adopted by another arm of Indian Government thereby emanating a mutually acceptable solution.


The acceptance of customs valuation by APA authorities is a welcome move from a taxpayer’s perspective and is widely applauded in the business fraternity. It is a need of hour that the efforts be taken to align the Transfer pricing and Customs law so that the businessman can focus on its business rather than inducing itself in the cumbersome compliance procedures to adhere to respective regulations.

However, on a practical note, taxpayers should set the price in such a manner so as to avoid the conflicts under the said laws at a later date. In this regard, it may be important for the taxpayers to relook at the Transfer pricing documentation so as to evaluate whether the positions taken by it under Transfer pricing and Customs law are consistent.

Lastly, given the approach adopted by APA authorities, one may also seek to consider APA as a viable option to resolve the above conflict, achieve a tax certainty on the complex intercompany transaction of supply of goods and accordingly get rid of the pains of litigation.


[1] CBDT Notification no – 83/2015, dated 19 October 2015

[2] Rule 4 and 5 of the Customs Valuation Rules 2007

[3] Rule 10B(3) of the Income Tax Rules, 1962

[4]  Proviso to section 92C(2) of the Income Tax Act, 1961

[5]  Rule 10CA(4) of the Income Tax Rules, 1962

[6]  Rule 4 and 5 of the Customs Valuation Rules 2007

[7]  Rule 10B(2) of the Income Tax Rules, 1962

[8]   ITA Nos: 2469/Mum/06, 3032/Mum/07 and 2531/Mum/08

[9]  ITA no. 1417/Del/2008

[10] TS-92-ITAT-2014(Mum)-TP

[11] S-235-ITAT-2013(CHNY)-TP

[12] TS-356-ITAT-2011

*The authors are Transfer Pricing Professionals and the views expressed are strictly personal. They can be reached at  and for any queries.

CA Harshil Shah and CA Manasi Raval

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July 2021