fd of tax-ii

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DR. RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW

AFINAL DRAFT IS SUBMITTED FOR PROJECT WORK IN THE PARTIAL FULFILLMENT OF B.A.LL.B

(HONS.)IXTH SEMESTER.

PROJECT OF LAW OF TAXATION-II

ON

TOPIC

VALUATION OF GOODS UNDER CUSTOMS ACT, 1962

SUBMITTED TO; SUBMITTED BY:

Ms. Seema Siddique Ashish Ransom

Assistant Professor B.A.LL.B(Hons.)

Faculty in Law 9th

Semester

Dr. RMLNLU Roll No. 31


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ACKNOWLEGDEMENT

A research project of such great scope and precision could never have been possible without

great co-operation from all sides. Contributions of various people have resulted in this effort.

Firstly, I would like to thank God for the knowledge he has bestowed upon me.

I would also like to take this opportunity to thank Seema Maam without whose valuable support

and guidance, this project would have been impossible. I would like to thank the library staff for

having put up with my persistent queries and having helped me out with the voluminous

materials needed for this project. I would also like to thank my seniors for having guided me and

culminate this acknowledgement by thanking my friends for having kept the flame of

competition burning, which spurred me on through the days.

And finally My parents who have been a support to me throughout my life and have helped me ,

guided me to perform my best in all interests of my life , my grandparents who have always

inculcated the best of their qualities in me .

ASHISH RANSOM


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able of contents

1. INTRODUCTION

2. SCOPE AND NEED FOR VALUATION

The Customs Valuation (Determination of Price of Imported Goods) Rules, 2007

3. TRANSACTION VALUE METHOD

Dutiable Factors

Non Dutiable Factors

4. TARIFF VALUE METHOD

Rule 10a

Export Goods- Valuation For Assessment

5.CONCLUSION

6.BIBLIOGRAPHY


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INTRODUCTION

Valuation is an aspect which is essentially required to determine the amount of duty to be levied

in the transaction of goods and services. Customs act of 1962 in itself codifies it under section

14. Valuation of goods under the customs act can be done by two ways i.e. Transaction value

method which is provided under clause 1 of section 14 and tariff value method which is stated

under clause 2 of section 14. When the transaction value method is not being used to determine

the tax then methods have been provided under the custom valuation rules called as Custom

Valuation (Determination of Value of Imported Goods) Rules, 2007 which is based on WTO

Valuation Agreement. It lays down six methods of valuation namely, transaction value of

imported goods, transaction value of similar goods, deductive value which is based on identical

or similar imported goods sold in India, computed value which is based on cost of manufacture

of goods plus profits. And residual method based on reasonable means and data available. This

project vehemently studies the basic two methods in detail with and takes into account the

valuation methods discussed during import and export of goods. It is limited to the methods

given in the cat and does not discuss the methods of valuation given in Rules of 2007 in detail.

The process of estimating values of goods at customs presents problems just as probing as the

actual duty that will be charged. The WTO agreement on custom valuation and the Indian

Custom Act of 1962 aims at fair and uniform way of valuation of goods for custom purposes.

The definition of goods has been defined under section 2 of the Indian customs act and it refers

to:

(a) Vessels, aircraft and vehicles

(b) Storages

(c) Baggages

(d) Currency and negotiable instrument

(e) Any other kind of movable properties.

And section 2(41) of the Customs Act,1962 defines value in relation to any goods to means the

value thereof determined in accordance with the provisions mentioned in the section 14 (1).


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Valuation of goods is done to determine the amount of duty payable on the goods imported and

expected. India presently follows the WTO provisions mentioned with the agreement of custom

valuation. As per the Indian Customs act, goods in India can be valued by transaction value

method enumerated under section 14(1) and by the Tariff Value method stated in section 14 (2).

The Custom Valuation Rules of 1988 though lays down six methods of valuation. This paper

studies the valuation of goods under the customs act and discusses the manner in which it is

done. The paper discuses as to how the goods that are imported and exported are chargeable to

duty. The methods of valuation determine the amount of duty leviable under the Rules of 2007 in

detail.

SCOPE AND NEED FOR VALUATION

India presently follows the WTO provisions enumerated in the agreement on custom valuation

Customs valuation is done to determine the value on imported goods that comes into India and

also on the exported items by India. India is one of the founding members of the WTO and was

actively involved in the development of the Agreement on Custom Valuation (ACV). India has

adopted this agreement in the year 1988. Indian customs act per se has been enacted to define the

rules and procedure regarding the export and import of goods with respect to India.

Most of the custom duties are ad valorem. Goods therefore are to be valued for the purpose of

valuation that in turn decides the tax liability. Goods of import and export have to be valued as

per the relevant statutory provisions which are section 14 of the customs act, 1962 and custom

valuation (determination of price of imported goods) rules 1988,(proposed to be revised ; draft

rules circulated), commonly referred to as valuation rules. The new section 14 and these rules

follow the GATT (General Agreement on Trade and Tariff) and WTO (World Trade

Organization) provisions where under the norm is the transaction value or the invoice value of

the goods subject to the assessment when sold for export to India provided it is genuine, is the

sole consideration and the buyer or the seller has no interest in the business of the other party to

the sale (it does not contain the doctrine of Mutuality of Interest). The valuation provisions have

been re-drafted in the Finance Act of 2007, with a view to do away with the earlier dichotomy

between deemed value and transaction value.


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The new valuation law applies specifically to export goods also.

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, 2007 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.

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 regarded 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.

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 purpose1.

Transaction value method cannot be applied in all the cases. These cases include situations when

there is no sale of export, restriction under rule 4(2), relationship between buyer and seller has

been influenced and where valuation has been done fraudulently by any one of the parties. The

methods enumerated should be applied in the same order unless provided by the valuation rules.

These are five such methods:

1. Transaction value of identical goods- this is defined in rule 5 and is based on the

previously transacted value of identical goods as defined in the valuation rules (sub rule 2.1)imported at or about the same time.

1 http://www.dov.gov.in/newsite3/brief_on_customs_valuation.asp accesed on 1 march 2012


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2. Transaction value of similar goods- this is stated under rule 6 and is again based on the

previous transaction value of similar goods under sub rule 2.1 imported at or about the same

time.

3. Deductive value method- it is provided under rule 7and is calculated based on the

selling price of imported goods or identical/similar goods in India after deducting selling

expensed, margins of profits, duties etc.

4. Computed Value method- as given in rule 7A, it states that computed value method 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 defined in rule 9.

5. Fall back method- these include a flexible application of previous valuation methods in

a manner consistent with the provisions of 14(1) of Customs Act. This is enlisted in rule 8.

6. Residual method- it is based on reasonable means and data available as defined in rule 9.

TRANSACTION VALUE METHOD

Transaction value is the price actually paid or payable (when the payment is deferred). It should

fulfill the following three conditions:-

(a) It should be the price at the time (or date) of importation. Herein value at the place of

importation does not only mean the value and expenses incurred till goods enter the custom

waters but all expenses up to the destination port, including freight, transit insurance, unloading

and handling charges are to be included

(b) It should be the price at the place of importation and it should be the sole consideration.2

In case of high sea sale, price charged by the importer to assesee would form the assessable value

2Jindal Photo films v CC, 2002 (141) ELT 202 (CEGAT), it was held that license fee related to know how embedded

in machine has to be added to the accessible value. In this case the foreign supplier had not charged license fee

but had stated that if semi-processed raw material is not purchased from the foreign supplier, flat annual license

fee will be payable for 7 years. It was thus obvious that the price was not the sole consideration and hence the

licensee fee, which was additional consideration, was addible. Also in case of Globe Entertainment v CC, 2005 (180)


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and not the invoice issued to the importer by the foreign supplier. It has been notified by the

CBE&C in the circular dated 11-5-2004 that valuation should be done on the last sale price even

if there are more than one high sea sale, the last sea sale price should be taken for the purpose of

valuation, as that is the price at which the final importation has been done and if the importer is

unable to produce the original invoice and prove his sale contract then it will be done according

to the valuation rules.

(c) It should be the price at which such or like goods are ordinarily sold. The word ordinarily

implies the exclusion of extraordinary or special circumstances which have been statutorily

particularized in valuation Rule 4(2).

First proviso to section 14(1) states that such transaction value in case of imported goods shall

include, in addition to the prices, any price that the buyer is liable to pay for costs and services

including commission brokerage, engineering, design work, royalties and license fees, costs of

transportation to the place of importation insurance, loading etc in the manner specified in the

rules,

Third proviso to section 14(1) state that such price shall be calculated with reference to the rate

of exchange as in force on the date on which the shipping bill pr bill of export, as the case may

be is presented under section 50. As per explanation (a) to section 14(2), the rate of exchange

will be determined by CBE&C or ascertained in the manner as it directs.

The most authoritative and specific pronouncement on what the transaction value is and how it

should be determined is contained in the apex court decision in Eicher Tractors Ltd v

Commissioner of Customs3where it was held that When a discount is permissible commercially,

and there is nothing to show that the same would not have been offered to any one else wishing

to buy the old stock, there is no reason why the declared value in question was not accepted

under Rule 4(1). In the circumstances, production of the price list did not discharge the onus cast

on the Customs authorities to prove that the value of the 1989 bearings in 1993 as declared by

the appellant was not the ordinary sale price of the bearings imported. The decision of the

ELT 258 (CESTAT), it was held that value of intellectual property i.e. serial recorded in cassettes has also to be

taken into consideration. It is not the value of material but the value of intellectual property which is recorded in

the cassettes32000(122) E.L.T.321(S.C)


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Tribunal accepting the determination of value by the Assistant Collector cannot, therefore, be

sustained. This was also endorsed later by a three judge bench of the Supreme Court in C.C v

Bureau Veritas4.

Valuation factors are those factors that are necessary to be taken into account. They consist of

dutiable factors called as additions which are not already included in the price that have to be

paid or are payable or non dutiable factors called deductions which are not to be included.

Dutiable Factors

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;

42005(181) E.L.T.3(SC)


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Loading, unloading and handling charges associated with transporting the goods;

Insurance5.

Non dutiable factors

1. Post-importation charges are not addable- activities undertaken by the buyer on his own

account, other than those for which an adjustment has been provided in Rule 9, are not an

indirect payment to the seller even though they might be regarded as of benefit to the

seller.

2. The charges or costs for construction, erection, assembly, maintenance or technical

assistance undertaken after importation on imported goods such as industrial plant,

machinery or equipment, are not included in the assessable value but care should be taken

to distinguish them in the contract or the invoice from the price actually paid or payable

for the goods. Technical know-how fee charged in respect of post importation activities is

not includible in assessable value of imported goods6.

3. Interest charges for deferred payments are dutiable factors and are not to be included in

determining the transaction value.

4. Duties and taxes that are payable in the importing country shall also come under a

non dutiable factor.

But the new section 14 seems to blur this position by providing that in the case of imported

goods the transaction value shall include any amount paid or payable for costs and services,

including commissions and brokerage, engineering, design work, royalties, and license fees,

costs transportation to the place of importation, insurance, loading, unloading, handling and

handling changes to the extent and in the manner to specified in the valuation rules. A great

concern is in relation to royalty ad license fee which are only to be in clued din the transaction

value if they are required to be paid as a condition of sale of the imported goods extensive bout

of litigation is apprehended. There have been various cases with regard to this point of royalty.

5 http://www.dov.gov.in/newsite3/brief_on_customs_valuation.asp accesed on 1 march 2012

6C.C v Prodelin India (P) Ltd, 2006(202) E.L.T. 4 (S.C); Commissioner v Toyota Kirloskar Motor Pvt Ltd,

2007(213)E.L.T 4(SC


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In the case of Commissioner of Custom Excise v Living Media India (Ltd)7, where in the issue

before the Supreme Court was, whether the royalty was/were to be included in the transaction

value of imported goods in the light of custom valuation (Determination of value of Imported

Goods)2007. The Supreme Court held that the royalty would be included in the transaction value

as royalty in this case was a condition for sale.

Also to refer Commissioner of Customs v Ferodo India (Pvt) Ltd8, where in emphasis was laid on

rule 9(1)(c) which states that the cost of technical know how and the royalty has to be included in

the transaction value if it forms a condition prerequisite for the supply of the imported goods by

the suppliers. If such a condition is formed then royalty charges and technical know how cost has

to be included in the accessible value and if does not form a condition then it need not be

included.

The same proposition has also been laid down in Associated Cement Companies Ltd v

Commissioner of Customs9that if a pre recorded or a popular film has been imported into India,

duty will necessarily have to be charged on the value of the final product. As per rule 9, to

determine the transaction value, the prices actually paid, royalties, licensee fee related to

imported goods that the buyer had to pay, directly or indirectly as a condition of sale of goods

has to be added. Therefore if pre-recorded cassettes are being imported as against the blank CD,

then the value has to be obviously been charged at the final product and royalty has to be

included in the transaction value.

TARIFF VALUE METHOD

Under section 14 sub clauses 2, of Customs Act, 1962 the Central Government has been

empowered to fix values for any product, and they are called as tariff values. If tariff values are

fixed for any goods, ad valorem duties 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 regarded to the

trend of value of such or like goods and the same has to be notified in the official gazette.

7CIVIL APPEAL NO. 2959 of 2008

82008 (4) SCC 563

9(2001) 4 SCC 593


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Recently tariff values have been fixed in respect of import of Crude Palm Oil, RBD Palm Oil,

RBD Palmolein under Notification No.36/2001-CUS (N.T.), dated 3.8.2001 and for RBD Crude

Palmolein under Notification No. 40/2001-CUS (N.T.) dated 28.08.2001.10

Section 14(2)

empowers CBE&C to fix rate of tariff values of import or export goods by issuing a notification.

If the transaction value is not determinable as there is no sale or buyer and seller are related or

price is not the sole consideration then value be determined by the valuation rules (clause ii of

second proviso to section 14(1))

Rule 10A enumerates a unique feature for the rejection of transaction value method in suspected

valuation fraud cases. The authority for this rule will not be custom valuation agreement itself

but from a separate decision by WTO valuation Committee. 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. 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.11

Export goods- valuation for assessment

Custom value of export goods is to be determined under section 14 of Customs Act with Custom

Valuation (Determination of Value of Export Goods) Rules, 2007. under this chapter too

transaction value remains the main criteria for valuation and states that the value of imported and

exported goods will be the transaction value of such goods that is to say the price actually paid orpayable for the goods when sold for export to India for delivery at the time and place of

10 http://www.eximguru.com/exim/indian-customs/customs-manual/customs- valuation.aspx accessed on 4

March 201211

http://www.eximguru.com/exim/indian-customs/customs-manual/customs- valuation.aspx accessed on 4

March 2012.


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exportation, where the buyer and seller of the goods are not related and the price is the sole

consideration for the sale subject to the other condition as specified in the rules.

Rate of exchange remains the same as at the time of date on which the bill of entry is presented

under section 46 or a shipping bill, or a bill of export as the case may be under section 50. Tariff

values shall be fixed by the CBE&C by issuing a notification, if transaction value is also not

applicable then goods will be valued under the Valuation Rules proceeding sequentially though

rules 4 to 6 [rule 3(3) of Custom Valuation (Determination of Value of Export Goods) Rules,

2007]. Methods adopted in this are-

- Export value by comparison given in rule 4 which provides that value of export good can

be determined on the basis of transaction value of goods of like quantity and kind

exported at or about the same time to other buyers in some destination country of

importation. If such price is not available, another destination country of importation can

be considered. ,

- Computed value given in rule 5 is taken into consideration when the value cannot be

determined by comparison under rule 4. it can be decided on the basis of (a) cost of

production, manufacture or processing of export goods (b) charges, if any, for design or

brand (c) an amount towards profit- rule 5 of custom valuation rules of 2007. while

applying this rule, the proper officer shall give due consideration to the cost certificate

issued by the Cost Accountant or Chartered Accountant or Government approved valuer,

as produced by the exporter by circular dated 9-10-2007.

- Residual value given in rule 6 shall come into use when value cannot be determined by

the above two rules. It can be determined using reasonable means consistent with

principles and general provisions of the rules.

Rule 8 of the valuation rules prescribes for rejection of declared value of goods. As per the

explanation provided in rule 8, it only provides to reject the declared value, where there isreasonable doubt, assessing officer can raise doubts for reasons like significantly higher value of

goods of like kind and quality exported at about same time in comparable quantities or higher

value as compared to the market value prevailing. While raising doubt about the truth or

accuracy of the declared value, proper officer shall issue a query memo specifying reasons for

such doubt.


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In the meanwhile export goods should not ordinarily be detained. Custom officers shall retain

samples wherever considered necessary and feasible and allow the goods for export. Rules

should be implemented without hindering the flow of bonafide export goods.

CONCLUSION

Since the times goods were imported to our country, problem related to the amount of duty to be

payable to the government has been the borne of contention. With the passage of time and with

our liberalization policies, export and import became smoother and easier. But problem of

valuation of these export and import still continued so in order to determine the liability of tax to

be paid on this transaction of goods; two methods were stated in the Custom Act of 1862. It

provided for transaction value method under section 14(1) and for tariff value method under

section 14(2). But there again persisted the problem that if both these methods were not

applicable then how should the goods be valued? So with regard to this, Custom valuation rules

of 2007 were enacted that provided for 6 methods of valuation with different rules. In my

opinion these rules are drafted in a way to help the free flow of trade but yet the implementation

of it becomes difficult. To take into instance the question regarding royalty and license fee

should be included in transaction value method or not. Authorities should be given more power

to decide such issues as Supreme Court solely should not be burdened with cases which are

being already stated in the act.


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BIBLIOGRAPHY

Books

1. V.S Datey, Indirect Taxes, Law and Practice, Taxmann, 21 edition, 2008

2. R.K Jain, Custom Law Manual, Centax Publication, 2007-2008

Weblinks

1.http://www.dov.gov.in/newsite3/brief_on_customs_valuati on.asp

2. http://www.eximguru.com/exim/indian-customs/customs-manual/customs-

valuation.aspx
http://www.dov.gov.in/newsite3/brief_on_customs_valuathttp://www.dov.gov.in/newsite3/brief_on_customs_valuathttp://www.dov.gov.in/newsite3/brief_on_customs_valuation.asphttp://www.eximguru.com/exim/indian-customs/customs-manual/customs-valuation.aspxhttp://www.eximguru.com/exim/indian-customs/customs-manual/customs-valuation.aspxhttp://www.eximguru.com/exim/indian-customs/customs-manual/customs-valuation.aspxhttp://www.eximguru.com/exim/indian-customs/customs-manual/customs-valuation.aspxhttp://www.eximguru.com/exim/indian-customs/customs-manual/customs-valuation.aspxhttp://www.eximguru.com/exim/indian-customs/customs-manual/customs-valuation.aspxhttp://www.dov.gov.in/newsite3/brief_on_customs_valuation.asphttp://www.dov.gov.in/newsite3/brief_on_customs_valuat

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