Valuation in Customs

Customs duty is payable as a percentage of ‘Value’ often called ‘Assessable Value’ or ‘Customs Value’. The
Value may be either (a) ‘Value’ as defined in section 14(1) of Customs Act or (b) Tariff value prescribed under
section 14(2) of Customs Act (section amended w.e.f.10-10-2007)
• Transaction value at the time and place of importation or exportation, when price is sole consideration
and buyer and sellers are unrelated is the basic criteria for ‘value’ u/s 14(1) of Customs Act. Thus, CIF
value in case of imports and FOB value in case of exports is relevant.
• In case of high sea sale, price charged by importer to assessee would form the assessable value and not
the invoice issued to the importer by foreign supplier. – National Wire v. CC 2000(122) ELT 810 (CEGAT) *
Godavari Fertilizers v. CC (1996) 81 ELT 535 (CEGAT).
• Rate of exchange will be as determined by CBE&C or ascertained in manner determined by CBE&C.
• Valuation for customs is required to be done as per provisions of Customs Valuation (Determination of
Value of Imported Goods) Rules, 2007
• CIF value of goods plus 1% landing charges is the basis for deciding ‘Assessable Value’.
• Commission to local agents, packing cost, value of goods and toolings supplied by buyer, royalty relating
to imported goods are addible.
• Interest on deferred payment, demurrage and value of computer software loaded is not to be added.
• Old machinery and old cars are often valued on basis of depreciated value, though such method has no
sanction of law.

Additions to ‘Customs Value’
Rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 [Rule 9 upto 10-10-2007]
provide that following cost and services are to be added, if these are not already included in the invoice price. –
• Commission and brokerage, except buying Commission, if not already included in the invoice price [rule
10(1)(a)(i)].
• Cost of container which are treated as being one with the goods for customs purposes, if not already
included in the invoice price [rule 10(1)(a)(ii)].
• Cost of packing whether labour or materials, if not already included in the invoice price [rule 10(1)(a)(iii)].
• Materials, components, tools, dies, moulds, and consumables used in production of imported goods,
supplied by buyer directly or indirectly, free of charge or at reduced cost, to the extent not already
included in price [rule 10(1)(b)(i), (ii) and (iii)]

• Engineering, development, art work, design work, plans and sketches undertaken elsewhere than in
India and necessary for production of imported goods, to the extent not already included in price [rule
10(1)(b)(iv)].
• Royalties and license fees relating to imported goods that buyer is required to pay, directly or indirectly,
as a condition of sale of goods being valued [rule 10(1)(c)]
• Value of proceeds of subsequent resale, disposal or use of goods that accrues directly or indirectly to
seller (i.e. to foreign exporter) [rule 10(1)(d)]
• All other payments made as condition of sale of goods being valued made directly or to third party to
satisfy obligation of seller, to the extent not included in the price [rule 10(1)(e)]
• Cost of transport upto place of importation [rule 10(2)(a)]
• Loading, unloading and handling charges associated with delivery of imported goods at place of
importation [These are termed as landing charges and are to be taken as 1%] [rule 10(2)(b)]
• Cost of insurance [rule 10(2)(c)]
The additions should be on the basis of objective and quantifiable data [rule 10(3) of Customs Valuation
(Determination of Value of Imported Goods) Rules, 2007 (earlier rule 9(3)].

Services / documents / technical know-how supplied by Buyer – Cost of engineering, development, art work,
design work and plans and sketches undertaken by buyer which is necessary for production of imported goods
is includible, only if such work is undertaken outside India. [Rule 10(1) (b) (iv) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (earlier rule 9)] The addition should be done on objective and quantifiable data. Data available with importer should be used as far as possible. If the services are purchased or leased by importer, such purchase/lease cost should be added. If the importer has himself done the work abroad, its cost should be added on basis of structure and management practices of importer and his accounting methods (in other words, if development work, plans, sketches etc. is done by importer himself outside India, its cost should be calculated based on normal accounting practices – like apportionment of overheads, apportionment over various jobs if the same development work, design work etc. is used for more than one jobs etc.) [Interpretative Note to rule 10(1)(b)(iv) of Customs Valuation Rules].

Technical know how related to imported machinery – In CC v. Essar Gujarat Ltd. (1997) 9 SCC 738 = 88 ELT 609
= 17 RLT 588 (SC 3 member bench), it was held that payment of licence fee and transfer of technology, without
which the imported plant could not function, will have t o be added to the value of imported plant. However,
training charges cannot be included. —wrongly followed in CC v. Himson Textile Engg. Ltd. 1997(93) ELT 301
(CEGAT).

Royalties and licence fee – Royalties and license fees related to imported goods that the buyer is required
to pay, 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, are required to be added in assessable value.
[Rule 10(1)(c) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (earlier rule 9)].

Royalty payment un-connected with imported goods not to be added – Often, a lump-sum payment of
royalty is made to foreign collaborators for technical know-how. In addition, components / parts/ CKD packs
are procured from foreign collaborators. Customs department normally holds that the price of parts/CKD
packs should be loaded, on assumption that the part of price of component parts/CKD packs has been paid as
‘royalty payment’.

Charges for reproduction of goods in India not to be added – Interpretative Note to rule 10(1)(c) of Customs
Valuation Rules makes it clear that charges for right to reproduce the imported goods in India shall not be
added.

Barge/lighterage charges includible – In some cases, the ship is not brought upto jetty. Goods are discharged
at outer anchorage. This may be for various reasons, e.g. (a) deep draught at port (b) Ports are busy (c) Odd
dimensional or heavy lifts or hazardous cargo discharged at anchorage. Charges for brining the goods from
outer anchorage are known as ‘barging/lighterage charges’.

Landing charges to be added – Cost of unloading and handling associated with delivery of imported goods
in port (called landing charges) shall be added. These will be calculated @ 1% of CIF value, i.e. FOB price plus
freight plus insurance. [Rule 10(2)(b) of Customs Valuation (Determination of Value of Imported Goods) Rules,
2007 – earlier rule 9].

Cost of Transport up-to port should be added – Cost of transport from exporting country to India is to be
added in ‘Assessable Value’. [Rule 10(2)(a) of Customs Valuation (Determination of Value of Imported Goods)
Rules, 2007 (earlier rule 9).] In other words, CIF value is the basis for valuation. If the goods are imported by air,
the air freight will be very high. Hence, in case air freight is higher than 20% of FOB price of goods, only 20% of
FOB price will be added for Customs Valuation purposes.
If cost of transport is not ascertainable, it will be taken as 20% of FOB valu of goods. However, cost of transport
within India is not to be considered.

Insurance cost should be added – Insurance charges on goods are to be added. [Rule 10(2)(c) of Customs
Valuation (Determination of Value of Imported Goods) Rules, 2007]. If these are not ascertainable, these will be
calculated @ 1.125% of FOB Value of goods.

Exclusions from Assessable Value
Interpretative Note to rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007provide
that following charges shall be excluded :
(a) Charges for construction, erection, assembly, maintenance or technical assistance undertaken after
importation of plant, machinery or equipment
(b) Cost of transport after importation
(c) Duties and taxes in India
Other payments from buyer to seller that do not relate to imported goods are not part of the customs value.
Demurrage charges payable to port trust authorities for delay in clearing goods are not to be added. – Deepak
Fertilisers v. CC 1989(41) ELT 550 (CEGAT) * Hindustan Lever v. UOI 2002(142) ELT 33 (Cal HC). [However, ship
demurrage is includible w.e.f. 10-10-2007].
Ship demurrage includible w.e.f. 10-10-2007 – explanation to rule 10(2)

Methods of Valuation
The methods of valuation for customs methods are as follows –
• Transaction Value of Imported goods [Section 14(1) and Rule 3(1)]
• Transaction Value of Identical Goods [Rule 4]
• Transaction Value of Similar Goods [Rule 5]
• Deductive Value which is based on identical or similar imported goods sold in India [Rule 7]
• Computed value which is based on cost of manufacture of goods plus profits [Rule 8]
• Residual method based on reasonable means and data available [Rule 9]

Methods to be applied sequentially – These methods are to be applied in sequential order, i.e. if method
one cannot be applied, then method two comes into force and when method two also cannot be applied, method
three should be used and so on. The only exception is that the ‘computed value’ method may be used before
‘deductive value’ method, if the importer requests and Assessing Officer permits.

Rejection of’ Value’ –
Importer has to declare ‘value’ of goods. If the assessing officer has reason to doubt about truth or accuracy of
the value declared by the importer, he can ask the importer to submit further information and evidence. If thecustoms officer still has reasonable doubt, he can reject the ‘value’ as declared by the importer. [rule 12(1) w.e.f. 10-10-2007 – earlier rule 10A(1) of Customs Valuation Rules added w.e.f. 19-2-1998]. If the importer requests, the assessing officer has to give reasons for doubting the truth or accuracy of value declared by  importer. [rule12(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 – earlier rule 10A(2) of Customs Valuation Rules upto 10-10-2007].

Rule 12 is only mechanism to reject the declared value – As per explanation (1)(i) to rule 12, the Rule 12 does
not provide any method for determination of value. It only provides mechanism to reject declared value,
where there is reasonable doubt. If transaction value is rejected, valuation has to be done as per rule 4 to 9
[Explanation (1)(i) to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007].

Export Goods – Valuation for Assessment
Customs value of export goods is to be determined under section 14 of Customs Act, read with Customs
Valuation (Determination of Value of Export Goods), Rules, 2007. Transaction value at the time and place of
exportation, when price is sole consideration and buyer and sellers are unrelated is the basic criteria If there is
no sale or buyer or seller are related or price is not the sole consideration, value of the goods will be determined
as per Valuation Rules [Clause (ii) of second proviso to section 14(1)].

Valuation when buyer and seller are related – Definition of related person as per rule 2(2) of Customs
Valuation (Determination of Value of Export Goods) Rules, 2007 is same as per definition of rule 2(2) of Customs
Valuation (Determination of Value of Imported Goods) Rules, 2007.
As per rule 3(2) of Customs Valuation (Determination of Value of Export Goods) Rules, 2007, the transaction
value, the transaction value will be accepted as ‘value’ even if buyer and seller are ‘related’, if the relationship
has not influenced price.

Valuation if value cannot be determined on basis of transaction value – If valuation is not possible on basis
of transaction value, valuation will be done by proceeding sequentially through rules 4 to 6 [Rule 3(3) of
Customs Valuation (Determination of Value of Export Goods) Rules, 2007].
The methods are – Export value by comparison on the basis of transaction value of ‘goods of like kind and
quality’ exported at or about the same time to other buyers in same destination country [Rule 4}, Computed
value on basis of cost of production plus profit [Rule 5] and Residual method using reasonable means consistent
with principles and general provisions of rules [Rule 6].

Rejection of value as declared by exporter – As per rule 7 of Customs Valuation (Determination of Value of
Export Goods) Rules, 2007, the exporter has to file declaration about full ‘value’ of goods. If the assessing officer
has doubts about the truth and accuracy of ‘value’ as declared, he can ask exporter to submit further information,
details and documents. If the doubt persists, the assessing officer can reject the value declared by importer.
[rule 8(1) of Customs Valuation (Determination of Value of Export Goods) Rules, 2007]. If the exporter requests,
the assessing officer has to give reasons for doubting the value declared by exporter. [rule 8(2)].

Rule 8 is only mechanism to reject the declared value – As per explanation (1)(i) to rule 8, the Rule 8 does not
provide any method for determination of value. It only provides mechanism to reject declared value, where
there is reasonable doubt. Declared value shall be accepted if assessing officer is satisfied about truth and accuracy of the declared value
[Explanation (1)(ii) to rule 8 of Customs Valuation (Determination of Value of Export Goods) Rules, 2007].

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