VALUATION OF GOODS - DG Education Valuation.pdf · Sec 14 of the Customs Act, 1962 which deals with...

© DG Education (P) Ltd [Cus : Valuation of Goods]

VALUATION OF GOODS: CUSTOMS VALUATION – SYSTEM 1. XYZ Co. the assessee has claimed before the Customs Authority that since the exports of goods in its case attracted no duty, the

value for purposes of Customs Act, 1962 to be declared shall be the value of the goods, which he expects to receive on sale of goods in the overseas market. Briefly discuss giving reasons whether the stand taken by XYZ Co. is correct.

(4 Marks) Tutorial Note: Generally, export of goods from India is wholly exempt from any customs duty and therefore, need of valuation thereof doesn’t arise. But, since drawback of duty paid on inputs used in manufacture of such goods is allowed and such drawback is as per notified rates which are generally linked to the “value of export goods”, valuation of export goods assumes significance. In this backdrop (background), an issue arose whether Sec 14(1) shall be applicable only in case the goods are dutiable or shall it be applied to each case, irrespective of dutiability of product.

Sec 14 of the Customs Act, 1962 which deals with the valuation of goods. Sec provides for valuation of export goods irrespective of

their dutiability. Exporter cannot take the plea that since no export duty is leviable, declared transaction value shall be accepted as assessable value.

New section 14 provides for acceptance of “transaction value” as assessable value but subject to fulfillment of conditions specified in the rules made for this purpose. The related rules are Customs Valuation (Determination of Value of Export Goods) Rules, 2007 which provides that the declared transaction value of export goods is acceptable if proper officer has no doubt as to truth and accuracy of the declared value. Burden of proof as to establishment of genuineness has been casted on the exporter. If exporter fails to satisfy the proper officer, then proper officer is entitled to reject the declared transaction value and do the valuation as per other specified methods.

Tutorial Notes: 1. Sec 14(1) opens up with the words “For the purposes of the Customs Tariff Act, 1975, or any other law for the time being in force, the

value of the imported goods and export goods shall be …..”. The wordings used are clearly indicative that value of export goods shall be determined in terms of Sec 14(1) even if such valuation is not for the purposes of levying duty in terms of Customs tariff Act, 1975.

2. In the context of old valuation rules also, the Apex Court (SC), in case of OM PARKASH BHATIA – 2003- SC has hold out that “if the export value of the goods is to be determined, then even if no duty is leviable, the method (mode) for determining the value of the goods provided under Section 14 is required to be followed”

3. Over-Invoicing of Export Goods = Offence under Customs Act, 1962 [A] IMPORT VALUATION TRANSACTION VALUE – SEC 14(1) TRANSACTION VALUE – SEC 14(1) READ WITH RULE 3 CHECKING TRUTHNESS AND ACCURACY OF DECLARED VALUE --RULE 12

2. The importer entered into contract for supply of crude sunflower seed oil @U.S. $ 435 C.I.F./Metric ton. Under the contract, the

consignment was to be shipped in the month of July, 2011. The period was extended by mutual agreement and goods were shipped on 5th August, 2011 at old agreed prices. In the meanwhile, the international prices had gone up due to volatibility in market and other imports during August, 2011 were at higher prices. Department sought to increase the assessable value on the basis of the higher prices as contemporaneous imports.

Decide whether the contention of the department is correct. You may refer to decided case law, if any, for your decision. (May 2013- 4 marks)

Contention of Department is not correct. On identical facts, Hon’ble SC in case of AGGARWAL INDUSTRIES LTD- 2011-SC, it was held that ‘the commodity involved had volatile fluctuations in its price in the international market, but having delayed the shipment; the supplier did not increase the price of the commodity even after the increase in its price in the international market. When there is no allegation of the supplier and importer being in collusion, 'transaction value' acceptable.

3. Mysore Textiles Ltd imported Nylon/ polyester cloth from Taiwan. Mysore Textiles Ltd declared US$ 27,800 as the value of the

goods and self-assessed the duty on that value. The same value was reflected in the invoice. However, the Customs Department rejected the self-assessed duty on the basis of INSURANCE VALUE of US $ 45,600. The Customs Officials claimed that Mysore


Textiles Ltd had undervalued the goods and therefore, the insurance value shall be adopted for purpose of valuation. Can insurance value be regarded as AV without making any deductions therefrom.

[ICAI Study Material] NINA CHAKA PVT LTD- 2004-TRIBUNAL The dispute relates to valuation of imported goods. The department is alleging that the declared value does not conform to the concept

of “Transaction Value” as envisaged under Section 14 of the Customs Act, 1962 read with Rule 3 of Import Valuation Rules, 2007. Obviously, in that situation, the assessable value has to be determined in accordance with the provisions contained in the Import Valuation Rules, 2007. In that situation Customs Valuation Rules provide that the value determination process has to progress in a sequential manner from Rules 5 to 8.

It is a common knowledge that the insurance value takes into account not only the CIF value but also duties and taxes payable on the goods involving transfer from seller’s premises to buyer’s premises. The insurance price as such, therefore, cannot form the basis of valuation without making deductions therefrom of taxes and other permissible components. Thus, “Insurance Value” as such cannot serve the purpose of “reason to doubt” the declared value and thus, rejection of declared value on that count is not proper.

(Expected) 4. Whether order rejecting TV is proper when document relied upon by PO for rejection of TV are not supplied to the importer despite

request of importer?

No Rule 12 empowers PO to reject TV in case its accuracy is doubted and importer provides no satisfactory explanation. But, Rule 12 also provides that the if importer requests, then grounds for rejecting TV shall be intimated to the importer and also provide a reasonable opportunity of being heard. Thus, PO is obliged to supply document relied upon by PO to reject the TV. Reliance of any document or material without furnishing the same would render the ultimate decision bad for failure of natural justice.

Principle of NATURAL JUSTICE ‘Audi alterm partem (which literally means – to hear the other side)’ is one of the basic principle of natural justice. Not only the affected party shall be provided with opportunity of being hear, the hearing shall be fair hearing free from bias. • Notice is the first limb of this principle.

1) Notice shall be precise and unambiguous. 2) It should appraise the party determinatively the case he has to be meet. 3) Time given for this purpose shall be adequate so as to enable him to make his representation. 4) The notice must clearly indicate material on the basis of which the proposed action is being taken.

o The right to know such material is part of the right to defend oneself. The copy of material relied upon by the authority in SCN shall be furnished (free of charge) without being demanded. Reliance of any document or material without furnishing the same would render the ultimate decision bad for failure of natural justice.

.

GIRA ENTERPRISES - 2014 - SC [ICAI RTP, MAY 2015 / NOV 2015] Facts Goods imported from China.

On the basis of certain information obtained through a computer printout from the Customs House, Department alleged that during the period in question, large number of such goods were imported at a much higher price than the price declared by the appellant. Therefore, Department valued such goods on the basis of transaction value of identical goods (applying Rule 4 of Valuation Rules, 2007) and demanded the differential duty alongwith penalty and interest from the appellant. However, Department did not provide these printouts to the appellant. Importer requested for supply of the computer print out relying upon his TV was rejected. However, such print out was not supplied to the importer. Importer alleged that order rejecting TV is bad in law as it is opposed to the principles of natural justice.

Issue Whether rejection of TV is proper? Held NO, rejection of TV is not proper as it is not in compliance with principles of natural justice.

• Mere existence of alleged computer printout was not proof of existence of comparable imports. • Even if assumed that such printout did exist and content thereof were true, such printout must have been

supplied to the appellant and it should have been given reasonable opportunity to establish that the other import transactions (of identical goods) were not comparable. Since Revenue did not supply the copy of computer printout, which formed the basis of the conclusion that the appellants under-valued the imported goods, the appellants obviously could not and did not have any opportunity to demonstrate that the transactions relied upon by the Revenue were not comparable transactions.

•

o When statements of witnesses are made basis of demand, not allowing assessee to cross-examine witnesses is a serious flaw which makes order nullity, as it amounts to violation of principles of natural justice because of which the assessee was adversely affected. [ANDAMAN TIMBER INDUSTRIES -2015- SC]

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5. Mother Mary Hospital and Research Centre imported a machine from Delta Scientific Equipments, USA for in-house research. The

price of the machine was settled at US $ 5,000. The machine was shipped on 10 Jan, 2009. Meanwhile, the Hospital Authorities


negotiated for REDUCTION IN THE PRICE. As a result, Delta Scientific Equipments agreed to reduce the price by $ 850 and sent the revised price of $ 4,150 under a telex dated 15 Jan, 2009. The machine arrived in India on 18 Jan, 2009. The Commissioner of Customs had decided to take the original price as the transaction value of the goods on the ground that the price is reduced only after the goods have been shipped.

Do you agree to the stand taken by the Commissioner? Give reasons in support of your answer. [ICAI Study Material]

GUJARAT HEAVY CHEMICALS LTD- 2004-TRIBUNAL As per Section 14 of Customs Act, the transaction value of the goods is the value AT THE TIME AND PLACE OF IMPORTATION.

It was decided in GARDEN SILK MILLS -1999-SC that importation is completed only when the goods become a part of mass of goods within the country. Since the price of the goods is reduced while they are in transit, it could not be contended that the price was revised after importation took place. Therefore, the goods shall be valued as per reduced price, which was the price at the time of importation.

VALUATION CONDITIONS --RULE 3 (2)

6. State the requirements to be satisfied to accept ‘transaction value’ under rule 3(2) of Customs Valuations (Imported Goods) Rules,

2007. (May 2007 3 Marks) Rule 3(2) of Customs Valuation (Imported Goods) Rules, 2007 lays down the conditions, often referred to as “valuation conditions”,

the fulfillment of which precludes(*disentitle) the customs authorities from rejecting “transaction value” of imported goods and doing valuation on basis of contemporaneous imports of other goods (identical or similar). These conditions are: i) There are no restrictions as to the disposition/use of the goods by the buyer. However, existence of following restrictions shall be

ignored (i.e., they shall not preclude acceptance of transaction value) (a) Restrictions which are imposed or required by law or by the public authorities in India; or (b) Restrictions which limit the geographical area in which the goods may be resold; or (c) Restrictions which do not substantially affect the value of the goods.

ii) The sale or price is not subject to some Condition or Consideration for which a value cannot be determined in respect of the goods being valued;

iii) No part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue to the seller for which adjustment can’t be made in terms of Rule 10;

iv) The buyer and seller are not related,

Tutorial Note: TV can be rejected under any of the following two conditions: a) When the proper officer has any doubt as to the truthfulness or accuracy of the declared transaction value and such doubt is not removed

by the importer (Rule 12); or b) When any of the valuation condition as spelt out in Rule 3(2) is not satisfied; In any other case, customs officer is precluded from rejecting the TV. However, while answering discussion about Rule 12 has not been done. This is on account of the reason that question is specifically

asking the circumstances of Rule 3 only which disentitle the officer to reject the TV. 7. Discuss briefly with reference to decided case laws as to how the value shall be determined under section 14 of the Customs act,

read with custom valuation rules in the following cases:- (i) Goods are offered at specially reduced price to buyer and the buyer is asked not to disclose the specially reduced price to any

other party in India. (ii) The sale involves special discount limited to exclusive agents.

(2 Marks each) (i) Sec 14 read with Rule 3 of said rules provides for acceptance of “declared transaction value” (subject to adjustments referred to in

Rule 10) if: i) All the valuation conditions as stipulated in Rule 3(2) are satisfied; and ii) PO is satisfied as to truth and accuracy of declared value

The given transaction is satisfying all the valuation conditions so declared transaction value can not be rejected on that count. The transaction has taken place at specifically reduced price and thus, it may casts a doubt in mind of PO as to truth and accuracy of declared transaction value (in fact Explanation to Rule 12 of IVR, 2007 specifically provides that this is a reason for doubting the genuineness of declared value). But allowance of abnormal discount can not be conclusive as to non-genuineness of declared value as such discount may be given on commercial considerations also. Rule 12 requires importer to satisfy PO as to genuineness of declared value in case a doubt is casted by PO. Presuming that the importer is otherwise in a position to establish


allowance of special discount on commercial considerations, allowance of special discount can not be objected to by the Department and thus, declared transaction value shall be acceptable in terms of Rule 3.

Tutorial Note: Infact in case of EICHER TRACTOR’S even allowance of 77% discount on commercial consideration was upheld.

(ii) Same as in (i). TV- RELATED PARTY TRANSACTION 8. Explain briefly: Related persons (4 marks)

Rule 2 of the CV(DVIG)R, 2007 defines the term “related person” in the context of valuation of goods for customs purposes. It provides that persons shall be deemed to be related persons if :

They are

Officers or directors of one another's businesses; or Legally recognized partners in business; or Employer and employee; or Members of the same family; or

Both of them

Are controlled by a third person (directly/indirectly); or Control a third person (directly/indirectly) ;

One of them Controls the other (directly/indirectly); or

Any Person

Owns, controls or holds (directly/indirectly) 5 % or more of the outstanding voting stock/shares of both of them

Explanation to the definition clarifies that sole-agent or sole-distributor shall not be treated as “related persons” not just because of

their being so associated. They will be treated as “related persons” only if they fall under any of the criteria laid down above. 9. When can the “transaction value” be accepted under the Customs Act, 1962 and the Customs Valuation (Determination of Value of

Imported Goods) Rules, 2007 even if the buyer and seller are related persons? Write a brief note. (5 marks) Rule 3(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 provides for acceptance of transaction

value as assessable value only if buyers and sellers are not related However, Rule 3(3) provides two situations under which the transaction value is acceptable for customs purposes even where the buyer and the seller are related. These 2 situations have been stated below:

Situation 1: Where examination of circumstances of the sale of imported goods indicate that the relationship has not influenced the price. For example, where transaction price of the goods sold by a subsidiary to another company (which is also a subsidiary of his holding company) is in conformity with the pricing done by the holding company world-wide.

Situation 2: Where the importer demonstrates that the declared value of the imported goods closely approximates to one of the following (ascertained at/about the same time):-- i) Transaction Value of identical goods/similar goods in sales to unrelated buyers in India; or ii) Deductive Value (as computed under Rule 7) for the identical goods/ similar goods; or iii) Computed Value (as computed under Rule 8) for the identical goods/ similar goods;

10. DD India Private Ltd., imported components and spares of diesel engines, such as impellers, gaskets, elements etc. from DD Asia

Private Ltd., Singapore. The Special Valuation Branch (SVB) Customs House, Chennai initiated investigation into the question of admissibility of invoice value for the purpose of valuation of goods imported and assessment of customs duty.

The SVB found that DD India was reselling the imported goods at a margin of 65% (which includes expenses and profits) in the domestic market. The SVB felt that the said margin should not be more than 45%.

The SVB came to the following two conclusions: (1) DD India is related to DD Asia as per Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules,

2007 as DD India are sole distributors in India of DD Asia. (2) The assessable value shall be determined as per rule 9. Consequently the invoice value of all imports by DD India was ordered to be loaded by 20% for purpose of assessment to

customs duty.

© DG Education (P) Ltd [Cus : Valuation of Goods] DD India had taken over the distribution from M/s Elandtee, who were the erstwhile(*old) distributors in India for DD Asia.

During the enquiry proceedings DD India had placed evidence before the SVB that the margin enjoyed by M/s Elandtee was also 65%. This was however ignored by the SVB as being not relevant.

The SVB also rejected the price list of foreign suppliers produced by DD India without assigning any reasons. Write a brief note on the two conclusions arrived at by the SBV and state, how as the Excise and Customs consultant of DD India you would assail(*couter-

argue/ challenged) the same in the aforesaid facts and circumstances of the case. (5 marks)

The conclusions arrived by the SVB can be assailed (challenged) on the following grounds: Conclusion 1: Rule 2 defines the situations under which two persons shall be deemed to be related. The relationships

enumerated therein are exhaustive (as the definition contains the qualifying words “only if”). The relationship between DD INDIA and DD ASIA doesn’t fall in any of the specified relationships. Merely because DD INDIA is the sole distributor of DD ASIA in the region of India, they can’t be treated as related person within the meaning of the Customs Valuation Rules, 1988. [Explanation II to Rule 2(2)] Thus, the first conclusion of SVB that DD INDIA is a related person of DD ASIA is erroneous (wrong).

Conclusion 2: DD INDIA & DD ASIA is not “related person” in terms of Rule 2(2). Further, the declared sale price is not subject to any other condition/restriction contained in rule 3(2). Thus, the transaction value shall be taken as value of imported goods. In re, DAWARKA INTERNATIONAL–1999, Tribunal has also held that if the Department does not produce any evidence to show that any of the restrictions contained in rule 3(2) is applicable to the facts of the case, it cannot proceed to determine the value of imported goods under Rules 4 to 9 of these rules.

Even if for the sake of argument it is assumed that DD India and DD Asia are related persons, the transaction value can’t be rejected as such since Rule 3(3) clearly provides for acceptance of TV as assessable value even in case of “related party transactions”. Under the given facts, earlier sole-distributor was also importing the same goods at same price, which in their case was accepted as assessable value. Hence, examination of these circumstances are indicating that declared TV is genuine and has not been influenced on account of the relationship. Further, submission of price list of other foreign suppliers also establishing that TV is closely approximating the TV of “identical or similar goods”. Thus, on any count declared TV is acceptable [Rule 3(3)]

In view of above discussion, the second conclusion that the value shall be determined under Rule 9 also suffers from the same infirmity and is erroneous. The value shall be determined under Rule 3. In other words, the declared transaction value shall be taken as value of imported goods and no loading of 20% profit margin shall be made.

11. M/s IES Ltd. (assessee) imported certain goods at US $ 20 per unit from an exporter who was holding 30% equity in the share

capital of the importer company. Subsequently, the assessee entered into an agreement with the same exporter to import the said goods in bulk at US $ 14 per unit. When imports at the reduced price were effected pursuant to his agreement, the Department rejected the transaction value stating that the price was influenced by the relationship and completed the assessment on the basis of transaction value of the earlier imports i.e. at US $20 per unit under rule 4 of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007, viz transaction value of identical goods. State briefly, whether the Department's action is sustainable in law, with reference to decided cases, if any.

(May 2008 5 Marks) As per the facts of the case, assessee imported goods from foreign supplier at a certain price. The same goods were later on imported

in bulk quantities at much lower price which was rejected by Customs Officers on ground of transaction being between the related persons. And the reason for holding the parties as related party was that assessee importer was holding 30% shares in the supplier company.

The issue for consideration is whether the parties are “related parties” and thus, transaction value shall be rejected on that reason. So far as the first issue is concerned, the Department’s action is not sustainable in law. Rule 2 of Import Valuation Rules, 2007,

inter alia, provides that persons shall be deemed to be "related" if one of them directly or indirectly controls the other. The word “control” has no where been defined under the said rules. As per the common parlance, the control is established when one enterprise holds at least 51% of the equity shareholding of the other company. However, in the instant case, the exporter company held only 30% of shareholding of the assessee. Thus, exporter company did not exercise a control over the assessee. So, the two parties cannot be said to be related. Thus, transaction is between unrelated parties.

Thus, transaction value shall be acceptable. Further, the declared value (self-assessed by importer) cannot be said to be untrue as lower/reduced prices can be attributed to bulk imports. Unless officer has any other reason to doubt the truth and accuracy of declared value (self-assessed), declared value (self-assessed value) shall be accepted.

In the light of foregoing discussion, it could be inferred that Department’s action is not sustainable in law. 12. The assessee imported certain goods from a foreign supplier, who is holding 40% equity in assessee company. The department has

rejected the transaction value contending that the price was influenced by relationship. Is the action of customs department justified? Explain with reference to decided case law.

[CS Final, June 2009] As per the given facts, goods have been imported from a foreign supplier who is holding 40% equity in Importer Company.

Department has treated this import as a ‘related party transaction’ and has accordingly sought to reject the transaction value contending that value is influenced on account of relationship.

© DG Education (P) Ltd [Cus : Valuation of Goods] The issue for consideration before us is whether rejection of transaction value is proper in this case. As is evident from facts of case, department has sought to reject transaction value pressing allegation of its being influenced on

account of relationship. Under customs, parties are treated as ‘related person’ if one of them controls the other. The related issue is whether foreign supplier can be said to be controlling assessee importer on account of its holding 40% equity stake in importer company. In this context, Hon’ble SC in case of INITIATING EXPLOSIVES SYSTEMS (I) LTD- 2008- SC, held that ‘the word ‘control’ has been defined nowhere. It shall be understood in the ordinary sense. In ordinary sense, the control is established when one enterprise holds atleast 51% of the equity stake. Since, in this case equity holding is only 40%, so foreign supplier cannot be said to be controlling other. Further, control by other means has also not been established by the Department. That being so, parties cannot be treated as ‘related person’. When charge of ‘related party’ has failed in itself, then ‘transaction value’ is bound to be accepted.

In light of the above discussion, rejection of transaction value by department is not justified. ADDITION TO TV—RULE 10 13. Enumerate the various cost and service that are to be added to the ‘Transaction Value’, under Rule 10 of the Customs Valuation

Rule, 2007. (4 marks) Rule 10 prescribes the various adjustments which shall be made to the price in order to arrive at the assessable value. Rule 10 provides for the adjustments (addition) of following factors: (1) Selling Commission, Brokerage; [Rule 10(1)(a)] (2) Cost of Containers; [Rule 10(1)(a)] (3) Packing Cost; [Rule 10(1)(a)] (4) Materials, components, tools, dies, moulds and consumables used in production of imported goods, supplied by the buyer free of

charge or at reduced cost; [Rule 10(1)(b)] (5) Engineering, Development, art work, design work, plans and sketches undertaken elsewhere than in India and necessary for

production of imported goods, supplied by the buyer free of charge or at reduced cost; [Rule 10(1)(b)] (6) Royalties and license fees relating to imported goods that the buyer is required to pay as a condition for sale of imported goods;

[Rule 10(1)(c)] (7) Value of proceeds on subsequent resale, disposal or use of goods that accrues to the exporter seller; [Rule 10(1)(d)] (8) Any other payment made as a condition for sale of imported goods (payment may be either to the exporter seller or to a third

party to satisfy the obligation of the exporter seller); [Rule 10(1)(e)] (9) Cost of transport upto the place of importation; [Rule 10(2)] (10) Transit Insurance; [Rule 10(2)] (11) Landing charges (covering loading, unloading and handling charges associated with the delivery of goods at the place of

importation). [Rule 10(2)] 14. Rule 3 of the Customs Valuation rules, 2007 states that 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 10 with regard to costs and services. What is the benefit available to the importer with respect to the cost of transport for importation by air when the free on board value is ascertainable?

(3 Marks) As per IVR, 2007 “transaction value” of imported goods is acceptable as assessable value subject to adjustments as provided in Rule

10 in regard to certain goods and services. Rule 10(2), inter alia (*among other things), provides for the addition of cost of transportation up to the place of importation. The addition shall be of the actual cost of transport when such cost is ascertainable. However, in case of importation by air, addition on account of air fare has been restricted to 20% of the FOB (Free on Board) value of the goods. This restriction benefits the assessee since it prevents valuation of goods at unduly high amount on account of heavy air transportation cost.

15. Whether loading, unloading and handling charges associate with the delivery of goods at the place of importation shall form part of

TV? If yes, whether on actual basis or on notional basis? In terms of Sec 14 read with Import Valuation Rules, loading, unloading and handling charges associate with the delivery of goods at

the place of importation shall form part of TV.

In terms of Rule 10(2) of Import valuation Rules, 2007, such charges shall be added on notional basis. Rule 10(2) provides for uniform addition @1% of CIF.


.

Addition of landing charges on notional basis: validity thereof

Prior to 2007 Old Sec 14 Sec 14(1A) provides stipulates that price of goods shall be determined in accordance with rules made in this behalf.

Customs Valuation Rules, 1988, provides for addition of landing charges @1% [Rule 9]

Addition on notional basis challenged – SC held such addition invalid.

After 2007 New Sec 14 Proviso to Sec 14(1) provides 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.

Customs Valuation Rules, 2007, provides for addition of landing charges @1%. [Rule 10]

In view of more power contain in rules, SC refrained from setting aside/reading down similar provision in rule 10 of Valuation Rules, 2007.

Judgment under old law WIPRO LTD - 2015 - SC

Facts The appellant is engaged in the manufacture and marketing of Mini and Micro Computer Systems and peripheral devices like printer, drivers etc. It, inter alia, imported various components including software from time to time. The appellant presented a Bill of Entry No.15020 dated 15.04.1993. The chargeable weight of the consignment was 315 kgs and the actual loading, unloading and handling charges amounted to Rs.65.40 paisa as per the tariff of the International Airport Authority of India, Madras. However, the Customs Authorities, on the basis of the impugned rule added a sum of Rs.15,214.69 paisa to the value of the goods as handling charges as the impugned provision entitles the authorities to add 1% of the F.O.B. value of goods on account of loading, unloading and handling charges.

Issue Whether addition of landing charges on notional basis is arbitrary and thus, unsustainable? Held Yes [Arbitrary loading of 1% as unloading and handling charge, unsustainable - will apply only when actual charges are not

ascertainable] • Rules have to be consistent with the Act: No doubt, rule making authority has the power to make Rules but such power has

to be exercised by making the rules which are consistent with the scheme of the Act and not repugnant (contrary) to the main provisions of the statute itself. Price actually paid/payable for the goods shall be accepted in terms of Sec 14. Such a provision would be valid and 1% addition could be justified only in those cases where actual cost is not ascertainable.

• Rule providing for notional addition is unsustainable: Rule 9 is unsustainable and it has to be read down to mean that this clause would apply only when actual charges referred to in Clause (b) are not ascertainable .

Author: Aforesaid decision is applicable only for old provisions. PRACTICAL QUESTION

. IMPORTANT: Concept of ROUNDING OFF Sec 154-A Rounded off of duty, etc.

The amount of duty, interest, penalty, fine or any other sum payable, and the amount of refund, drawback or any other sum due, under the provisions of this Act

… shall be rounded off to the nearest rupee and, for this purpose, where such amount contains a part of a rupee consisting of paise then,

… if such part is fifty paise or more, it shall be increased to one rupee and … if such part is less than fifty paise it shall be ignored.

Author 1. Rounding off of Value

Sec 154 provides for rounding off of duty (&certain other sums) but not of value of goods. However, • ICAI Practice Manual has rounded off AV also in some questions (perhaps for ease of computation purposes). Thus,

students may also do rounding off of AV. [We have also rounded off AV following same approach]

2. Rounding off of Duty: Whether ‘individual duty to be rounded off (at computational stage)’ or ‘aggregate of duties to be rounded off (at payment stage)? • Sec 154-A envisages rounding off of duty payable under provision of Act. Thus, ‘aggregate of duties to be rounded off

(at payment stage)’ HOWEVER,


• ICAI Practice Manual has rounded off ‘individual duty (at computational stage)’ (again, perhaps for ease of computation purposes). Thus, students may also do rounding off of individual duty. [We have also rounded off AV following same approach]

16. T Ltd. imported some goods from LMP Inc. of United States by air. You are required to compute the VALUE for purposes of customs duty under the Customs Act, 1962 from the following particulars: CIF value US $ 6,000 Freight paid US $ 2,000 Insurance cost US $ 700

The bank had received payment from the importer at the exchange rate of US $ 1 = Rs 46 while the CBEC notified exchange rate on the relevant date was US $ 1 = Rs 45.50

(Make suitable assumptions where required and provide brief explanations to your answer) (Nov 2010 5 Marks)

STATEMENT SHOWING COMPUTATION OF VALUE OF SEC 14(1) VALUE US Dollars Amount Rs. FOB Value of Machine [CIF 6,000- 2,000- 700] Add: Freight charges 2,000 [Restricted to 20% of FOB= 660] [WN-1] Add: Transit Insurance

CIF Value Add: Landing Charges (1% of CIF Value)

3,300.00 660.00

700.00 4,660.00

2,12,030.00 2,120.30

ASSESSABLE VALUE (Sec 14(1) Value) (rounded off) = 2,14,150 Working Notes:

1) As per rule 10(2) of Custom Valuation Rules, 2007, the value of imported goods shall include cost of transportation of the imported goods upto the place of importation. The cost shall be includible on actual basis. But in case of import by air, such addition shall not exceed 20% of Value of FoB.

2) The applicable rate of exchange is the rate of exchange as notified by the CBEC for the purpose of valuation which prevails on the date of presentation of bill of entry - Sec 14(3), Hence, applicable rate has been taken as 1 USD = 45.50.

17. Liberty International Group has imported a machine by air from United States. Bill of entry is presented on 18.07.2008. However, aircraft arrived in India on 7.08.2008.

The relevant details of the transaction are provided as follows:- o CIF value of the machine imported $ 13,000 o Air freight paid $ 2,800 o Insurance charges paid $ 200 o Rate of exchange

As announced by As on 18.07.2015 As on 7.08.2015 CBEC 1 US $=Rs 66 1 US $=Rs 65.80 RBI 1 US $=Rs 66.10 1 US $=Rs 65.95

Calculate the assessable value (in rupees) for the purposes of levy of customs duty. Make suitable assumptions wherever necessary.

[ICAI RTP, JUNE 2009] STATEMENT SHOWING COMPUTATION OF ASSESSABLE VALUE

Particulars Dollars Amount (Rs) FOB Value [13,000 – 2,800 – 200] 10,000.00 Add : Air freight – Actual Amount = 3,000 [restricted to 20% of FOB= 20% of 10,000 = 2,000]

2,000.00

Add : Insurance (actual) 200.00 CIF Price 12,200.00 8,05,200.00

Add : Landing Charges @ 1% of CIF 8,052.00 Assessable Value 8,13,252.00

Working Notes: For the purpose of ascertaining the assessable value of imported goods:-

(1) Air freight shall not exceed 20% of the FOB value of the goods. Since, in given case, actual air freight paid is 28% of the FOB value, air freight is restricted to 20% of FOB value (20% of $10,000) i.e. $ 2,000.

(2) Landing charges at the rate of 1% of the CIF value of the imported goods shall be included. (3) The rate of exchange shall be the rate of exchange as in force on the date on which a bill of entry is presented u/s 46. CBEC notified rate

shall be used. Thus, applicable exchange rate is notified rate of CBEC as prevailing on date of presentation of bill of entry, i..e, 1USD = Rs 66.


18. Compute the assessable value based on the following information:

Particulars US $ i. Cost of the machine at the factory of the exporter 10,000 ii. Transport charges from the factory of exporter to the port for shipment 500 iii. Handling charges paid for loading the machine in the ship 50 iv. Buying commission paid by the importer 50 v. Freight charges from exporting country to India

Exchange rate to be considered : 1$ = Rs 60

1,000

STATEMENT SHOWING COMPUTATION OF ASSESSABLE VALUE Particulars Dollars Amount (Rs) FOB Value (WN-1) 10,550.00 Cost at factory gate of Exporter 10,000 $ Transport charges upto Shipment Port 500 $ Charges for loading upto shipment Port 50 $

Add : Freight Charges (WN-2) 1,000.00 Add : Insurance @ 1.125% of FOB (WN-3) 118.69

CIF Price 11,668.69 7,00,121.40

Add : Landing Charges @ 1% of CIF (WN-4) 7,001.21 Assessable Value 7,07,122.61

Working Notes: (1) FoB (Free on Board) value refers to total cost upto the place of dispatch port. Thus, it includes within -- Ex-factory Cost, transport upto

Shipment Port and charges for loading goods onto ship. (2) Freight upto India port (place of importation) is includible. Mode of transport being sea, sea/ocean freight is includible on actual basis. (3) Insurance charges have been included @ 1.125% of FOB value of goods. (4) Landing charges at the rate of 1% of the CIF value of the imported goods, shall be included. (5) Buying commission is not includible in the assessable value.

19. Compute the assessable value and total customs duty payable under the Customs Act, 1962 for an imported machine, based on the following information:

Particulars US $ i. Cost of the machine at the factory of the exporter 20,000 ii. Transport charges from the factory of exporter to the port for shipment 800 iii. Handling charges paid for loading the machine in the ship 50 iv. Buying commission paid by the importer 100 v. Freight charges from exporting country to India vi. Lighterage charges paid by the importer

5,000 200

vii. Ship demurrage charges viii. Freight incurred from port of entry to Inland Container depot

400 1,000

Date of bill of entry (20.01.2014) BCD - 20%; Exchange rate as notified by CBEC Rs.60 per US

Date of entry inward (25.03.2014) BCD-10%; Exchange rate as notified by CBEC Rs.65 per US $

Additional duty payable u/Sec 3(1) of the Customs Tariff Act, 1975

12.5%

Additional duty payable u/Sec 3(5) of the Customs Tariff Act, 1975

4%

[ICAI RTP- NOV 2014] STATEMENT SHOWING COMPUTATION OF ASSESSABLE VALUE

Particulars Dollars Amount (Rs) FOB Value (WN-1) 20,850.00 Cost at factory gate of Exporter 20,000 $ Transport charges upto Shipment Port 800 $ Charges for loading upto shipment Port 50 $


Add : Freight Charges (including lighterage charges and ship demurrage) (WN-2) 5,600.00 Add : Insurance @ 1.125% of FOB = 1.125% of 20,850 (WN-3) 234.56

CIF Price 26,684.56 16,01,073.60

Add : Landing Charges @ 1% of CIF (WN-4) 16,010.74 Assessable Value (Rounded off) 16,17,084/-

Notes: (1) FoB (Free on Board) value refers to total cost upto the place of dispatch port. Thus, it includes within -- Ex-factory Cost, transport upto

Shipment Port and charges for loading goods onto ship. (2) Ship demurrage charges and lighterage charges forms part of cost of transportation and are includible in the assessable value [Rule 10(2) of

Customs Valuation Rules, 2007]. However, freight incurred from port of entry to Inland Container depot is not includible [Rule 10(2) of Customs Valuation Rules, 2007]. (3) In the absence of availability of information as to cost of insurance, Insurance charges to be included @ 1.125% of FOB value of goods. (4) Landing charges at the rate of 1% of the CIF value of the imported goods, shall be included. (5) As per Sec 14 of Customs Act, 1962, rate of exchange notified by CBEC on the date of presentation of bill of entry is considered. Accordingly,

applicable exchange rate is 1$ = Rs 60.

Duty AV Rate Duty Amount (Rounded off) BCD Sec 14 Value (TV) = 16,17,084 10% [WN-1] 1,61,708.00 CVD Sec 14 Value + BCD = 17,78,792

12.5 2,22,349.00

EC BCD + CVD = 3,84,057 2% 7,681.00 SHEC BCD + CVD = 3,84,057 1% 3,841.00 Spl CVD Sec 14 Value + BCD+ CVD+ EC + SHEC

= 3,95,579 4% 80,507.00

Total (rounded off to nearest of rupee) 4,76,086.00 [WN-1] Rate of duty is the rate prevalent on the date of presentation of bill of entry (20 Jan, 2014) or the rate prevalent on the date of entry

inwards (25 Mar, 2014), whichever is later [Section 15 of the Customs Act, 1962]. Thus, relevant date for determination of applicable rate of duty is 25 Mar, 2015 and applicable duty rate of BCD is 10%..

20. From the following particulars, calculate ASSESSABLE VALUE and TOTAL CUSTOM DUTY payable:

(i) Date of presentation of bill of entry: 20.6.2015 [Rate of BCD 20%; Exchange Rate: Rs 61.60 and rate notified by CBEC Rs. 62]

(ii) Date of arrival of goods in India : 30.6.2015 [Rate of BCD 10%; Exchange Rate: Rs. 61.80 and rate notified by CBEC Rs 63]

(iii) Rate of Additional Customs Duty (CVD): 12.5%. (iv) CIF value 2,000 US Dollars; Air Freight 500 US Dollars, Insurance cost 100 US Dollars [Landing charges not ascertainable]. (v) Education cess(including SHEC) - 3%. (vi) Assume there is no special CVD. (May 2007 6 Marks)

Statement showing computation of Sec 14(1) Value Amount (USD) Amount (Rs) FOB Value [$ 2,000 - $500 - $ 100] Add: Freight Charges ---- Actual Charges : $ 500 (Restricted to 20% of the FOB, i.e., 1,400) Add: Transit Insurance

CIF Value Add: Landing Charges (1% of CIF Value)

1,400.00

280.00 100.00

1,780

1,10,360.00 1,103.60

ASSESSABLE VALUE (Sec 14(1) Value) (rounded off) 1,11,464.00 Working Notes:

1. The exchange rate relevant for determination of AV is the rate as notified by CBEC. 2. The applicable rate of exchange shall be rate of exchange as prevailing on the date of presentation of bill of entry. Thus, applicable rate of

exchange is Rs 62.

STATEMENT SHOWING COMPUTATION OF CUSTOMS DUTY LIABILITY Assessable value Applicable RoD Amount (Rounded off) Basic Customs Duty Sec 14(1) Value 10% 11,146.00


[BCD] = 1,11,464 Countervailing Duty [CVD]

Sec 14(1) Value + BCD = [1,11,464 + 11,146] = 2,22,924

12.5% (WN-2)

15,326.00

EC(on imported goods) BCD + CVD = [11,146+ 15,326] = 26,472

2% 529.00

SHEC(on imported goods) BCD + CVD = [11,146+ 15,326] = 26,472

1% 265.00

Special CVD Sec 14(1) Value + BCD + CVD + EC + SHEC = [1,11,464 + 11,146 + 15,326 + 529 + 265] = 1,38,730

Nil [Question has specifically stated

so]

0.00

Total Customs Duty Liability 27,266.00 Working Notes:

1. As per Sec 15(1)(a) read with proviso, the relevant date for determination of applicable rate of duty in relation to goods entered for home consumption u/s 46 is the date on which bill of entry is presented or the date arrival of aircraft, whichever is later. Accordingly, the relevant date is 30-06-2015 and the applicable rates of Basic Customs Duty shall be 10%

21. From the following particulars determine duty payable of the imported equipment: (i) ASSESSABLE VALUE of the imported equipment US $ 10,100. (ii) Date of Bill of Entry 25.4.2015 Basic Customs Duty on this date 10% and exchange rate notified by the CBEC US $ 1=Rs.65. (iii) Date of Entry inwards 21.4.2015 Basic Customs Duty on this date 20% and exchange rate notified by the CBEC US $ 1=Rs. 60. (iv) Additional duty payable under Section 3(1) of the Customs Tariff Act, 1975: 12.5%. (v) Additional duty under Section 3(5) of the Customs Tariff Act, 1975: 4%. (vi) EC @2% and SHEC @ 1%. Make suitable assumptions where required and show the relevant working and round off your answer to the nearest Rupee. (June 2009 - 5 Marks)

STATEMENT SHOWING COMPUTATION OF CUSTOMS DUTY LIABILITY Assessable value Applicable RoD Amount (Rounded off) Basic Customs Duty [BCD]

Sec 14(1) Value = (10,100 * 65) (WN-2) = 6,56,500

10% (WN-1)

65,650.00

Countervailing Duty [CVD]

Sec 14(1) Value + BCD = [6,56,500 + 65,650] = 7,22,150

12.5%

90,269.00

EC BCD + CVD = [65,650 + 90,269] = 1,55,919

2% 3,118.00

SHEC BCD + CVD = [65,650 + 90,269] = 1,55,919

1% 1,559.00 )

Special CVD Sec 14(1) Value + BCD + CVD + EC + SHEC = [6,56,500 + 65,650 + 90,269 + 3,118 + 1559] = 8,17,096

4%

32,684.00

Total Customs Duty Liability 1,93,280.00 Working Notes:

1) Bill of entry filed is normal bill of entry. Thus, applicable rate of BCD shall be as prevailing on the date of filing of this bill of entry, i.e., 10%. 2) So far as applicable rate of exchange is concerned, applicable rate is as prevailing on the date of filing of bill of entry. Thus, 1$= Rs 65 is the

applicable rate of exchange for valuation purposes.

State the admissible cenvat credit if importer is (a) Manufacturer (b) Service Provider Admissible Cenvat Credit (as per CCR, 2004) • Manufacturer= Cr of CVD and Spl CVD = (90,269 + 32,684) = 1,22,953 • Service provider= Cr only of CVD = 90,269

22. XYZ Industries Ltd, has imported certain equipment from Japan at an FOB cost of 2,00,000 Yen (Japanese).The other expenses

incurred by M/S XYZ industries in this connection are as follows: (i) Freight from Japan to Indian port 20,000 yen (ii) Insurance paid to Insurer in India Rs 10,000 (iii) Designing charges paid to consultancy firm in Japan 30,000 yen (iv) M/s XYZ Industries had expended Rs.1,00,000 in India for certain development activities with respect to the imported

equipment (v) XYZ Industries had incurred road transport cost From Mumbai port to their factory in Karnataka Rs. 30,000 (vi) CBEC had notified For purpose of section 14(3) of the Customs Act, 1962 exchange rate of 1 yen = Rs 0.63. The inter-bank

exchange rate was 1 yen = Rs 0.65


(vii) M/s XYZ Industries had effected payment to the Bank based on exchange rate 1 yen = Rs. 0.66 (viii) The commission payable to the agent in India was 5% of FOB cost of the equipment in Indian Rupees.

Arrive at the assessable value for purposes of customs duty under the Customs Act, 1962 providing brief notes wherever required with appropriate assumptions

(May 2008 -6 Marks) STATEMENT SHOWING COMPUTATION OF ASSESSABLE VALUE

Particulars Yen Amount (Rs) FOB Value 2,00,000.00 1,26,000.00 Addition as per Rule 10(1)

• Design & Development Charges 30,000.00 18,900.00

• Local Agency commission @ 5% of FOB (2,00,000 * 0.63) 6,300.00

Adjusted FOB 1,51,200 Addition as per Rule 10(2)

• Ocean freight 20,000.00 12,600.00

• Insurance 10,000.00

CIF Price 1,73,800.00

• Landing Charges @ 1% of CIF 1,738.00

Assessable Value Rs. 1,75,538.00 Working Notes:

(1) Applicable exchange rate is as notified by CBEC, i.e., 0.63. (2) Design and development work done in India and transport costs within India are not to be considered for purposes of ‘Customs Value'.

23. BSA & Company Ltd. have imported a machine from U.K. From the following particulars furnished by them, arrive at the assessable

value: (i) F.O.B. cost of the machine 10,000 U.K. Pounds (ii) Freight (Air) 3,000 U.K. Pounds (iii) Engineering and design charges paid to a firm in U.K. 500 U.K. Pounds (iv) License fee relating to imported goods payable by the buyer as a condition of sale 20% of F.O.B. cost (v) Materials and components supplied by the buyer free of cost Rs 20,000 (vi) Insurance paid to the insurer in India Rs 6,000 (vii) Buying commission paid by the buyer to his agent in U.K. 100 U.K. Pounds Other Particulars: (i) Inter-bank exchange rate as arrived by the authorized dealer: Rs 98 per U.K. Pound. (ii) CBEC had notified for purpose of Section 14 of the Customs Act, 1962, exchange rate of Rs 100 per U.K. Pound. (iii) Importer paid Rs 5,000 towards demurrage charges for delay in clearing the machine from the Airport. (Make suitable assumptions wherever required and show working with explanation)

(May 2013 - 5 Marks) STATEMENT SHOWING COMPUTATION OF ASSESSABLE VALUE

Particulars Pound Amount (Rs) FOB Value 10,000.00 10,00,000.00 Addition as per Rule 10(1)

• Engineering & Design Charges paid in UK 500.00 50,000.00

• License Fee related to imported goods (20% of FOB = 20% of 10,000) 2,000.00 2,00,000.00

• Materials & component supplied by the buyer free of cost 20,000.00

Adjusted FOB 12,70,000.00 Addition as per Rule 10(2)

• Air freight = Actual Amount (3,000 * 100)= 3,00,000 (Restricted to 20% of FOB Value= 20% of 12,70,000= 2,54,000)

--- 2,54,000.00

• Insurance 6,000.00

CIF Price 15,30,000.00

• Landing Charges @ 1% of CIF 15,300.00

Assessable Value Rs. 15,45,300.00


Working Notes: 1) Buying commission is not includible in AV. 2) Ship demurrage charges on chartered vessels are includible in AV as part of the cost of transport of the imported goods. However, port

demurrage (demurrage payable for delay in clearance of goods from airport) will not form part of AV. 3) Applicable rate of exchange is rate notified by CBEC. In question before us, the applicable rate of exchange is 100.

24. M/s. Foreign Trade International Ltd. Have imported one machine from England. They have given the following particulars: Particulars Amount (i) F.O.B. value of machine £ 8000 (ii) Air freight paid £ 2,500 (iii) Design and development charges paid in England £ 500 (iv) Commission @ 2% of FOB value paid to local agent in Indian Currency. (v) Date of Bill of Entry is 24-10-2015

[Rate of basic custom duty is 10%. Exchange rate as notified by C.B.E.C. is Rs. 100 per Sterling Pound]

(vi) Date of arrival of aircraft is 20-10-2015 when rate of basic custom duty was 20%, Exchange rate as notified by C.B.E.C. is Rs. 98 per Sterling Pound

(vii) CVD rate is 12.5% (viii) Rate of special CVD is 4% (ix) Insurance charges, though actually paid, details are not available.

Compute the assessable value and determine the customs duty payable by M/s. Foreign Trade international Ltd. Give brief notes also wherever necessary.

(Nov 2012 & June 2009 - 5 Marks) [May 2011 5 Marks] Computation of assessable value and duty payable thereon:

US $ Amount Rs. FOB Value of Machine Additions u/Rule 10(1) • Design and development charges (WN-1) • Selling Commission [2% of (£ 8000 x Rs. 100)] [WN-3]

Adjusted FOB Additions u/Rule 10(2) • Air Freight charges (2,500 * 100 = Rs 2,50,000)

[Restricted to 20% of FOB (8,66,000) = 1,73,200] [WN-4] • Transit Insurance [1.125% of FoB (8,66,000)] [WN-5]

CIF Value • Landing Charges (1% of CIF Value) [WN-6]

8000.00

500.00 8,500.00

8,50,000.00 [WN-3]

16,000.00 8,66,000.00

1,73,200.00

9,742.50

10,48,942.50 10,489.43

ASSESSABLE VALUE (Sec 14(1) Value) – rounded off 10,59,432/- Working Notes: 1) As per rule 10(1) of Import Valuation Rules, 2007, design and development charges paid outside India are includible in AV. 2) The applicable rate of exchange is the rate of exchange as notified by the CBEC for the purpose of valuation which prevails on the date of

presentation of bill of entry (Sec 14(3), Hence, applicable rate has been taken as 1 Pound = Rs. 100. 3) It has been assumed that local agent is the agent in India and is “Selling Agent” and accordingly, commission paid is in nature of “selling

commission”. It has been further assumed that these charges have been incurred by importer in addition to FOB value of Rs 8,000 and therefore, such commission has also been considered in valuation of goods.

4) As per rule 10(2) of Import Valuation Rules, 2007, the value of imported goods shall include cost of transportation of the imported goods up to the place of importation. The cost shall be includible on actual basis. But in case of import by air, such addition shall not exceed 20% of Value of FOB.

5) As per rule 10(2) of Import Valuation Rules, 2007, the value of imported goods shall include the cost of insurance. Such cost shall be includible on actual basis. But in case where such cost is not ascertainable, then 1.125% of FOB shall be added as “transit insurance”.

6) As per rule 10(2) of Import Valuation Rules, 2007, landing charges are includible in AV at notional rate of 1% of CIF.

STATEMENT SHOWING COMPUTATION OF CUSTOMS DUTY LIABILITY Assessable value Applicable RoD Amount (rounded off) Basic Customs Duty [BCD]

Sec 14(1) Value = 10,59,432

10% 1,05,943.00


Countervailing Duty [CVD]

Sec 14(1) Value + BCD = [10,59,432 + 1,05,943] = 11,65,375

12.5% (WN-2)

1,45,672.00

EC BCD + CVD = [1,05,943 + 1,45,672]= 2,51,615

2% 5,032.00

SHEC BCD + CVD = [1,05,943 + 1,45,672]= 2,51,615

1% 2,516.00

Special CVD Sec 14(1) Value + BCD + CVD + EC + SHEC = [10,59,432 + 1,05,943 + 1,45,672 + 1,06,626 + 5,032

+ 2,516] = 13,18,595

4%

52,744.00

Total Customs Duty Liability 3,11,907.00 Working Note:

1) Since ‘bill of entry’ has been filed after arrival of aircraft in India, the applicable rate of duty shall be rate prevailing on date of presentation of bill of entry [Sec 15(1)(a)]. Thus, BCD @10% shall be payable.

25. XY Ltd, imported a machine at an invoice price of Rs. 17,00,000. This sum includes Rs. 2,00,000 attributable to post–importation

activities to be carried out by the seller. XY Ltd. had supplied raw material worth Rs. 5,00,000 to the seller for the manufacture of the said machine. The goods were imported by vessel and actual cost of transport is Rs. 80,000. The importer has also paid demurrage charges Rs. 5,000 and lighterage and barge charges Rs. 15,000, in addition to said Rs. 80,000, the importer also paid Rs. 25,000 for transportation of goods from port of entry to Inland Container Depot. The actual cost of insurance is Rs. 50,000. Compute assessable value.

COMPUTATION OF ASSESSABLE VALUE Particulars (Amount in Rs.) Invoice Price 17,00,000.00 Add: Adjustment under Rule 10(1) for raw material supplied by XY Ltd. 5,00,000.00 Less: Amount attributable to post–importation activities 2,00,000.00

Adjusted FOB 20,00,000.00 Add: Actual cost of transport (80,000 + 5,000 + 15,000) 1,00,000.00 Add: Actual cost of insurance 50,000.00

CIF Value 21,50,000.00 Add: Landing Charges @ 1% 21,500.00

Assessable Value 21,71,500.00 Working Notes:

(1) It has been assumed that the amount attributable to post–importation activities is not payable as a condition of the sale of imported goods and hence, the same is not includible in assessable value.

(2) Demurrage charges, lighterage and barge charges form part of cost of transport in view of Explanation to Rule 10(2) and are, therefore, includible in assessable value. However, cost of transportation front port of entry to Inland Container Depot do not from part of cost of transport as per Rule 10(2).

26. Examine the validity of the following statements with reference to the Customs Act, 1962 giving brief reasons. Element Inclusion / Exclusions (i) Buying commission;

[CS Final, Dec 2002 – 3 marks] Rule 10(1)(a) of the CVR, 2007 provides for inclusion of commission and brokerage to the sale price to arrive at the assessable value. However, it specifically provides that buying commission shall not be includible. Thus, any payment made as buying commission to the agent appointed by the buyer shall not be includible.

(ii) Interest on delayed payment [CS Final, Dec 2002 – 3 marks]

Charges for interest under a financing arrangement entered into by the buyer and relating to the purchase of imported goods shall not be regarded as part of the customs value provided that: a) the charges are distinguished from the price actually paid or payable for the goods; b) the financing arrangement was made in writing; c) where required, the buyer can demonstrate that:

(i) such goods are actually sold at the price declared as the price actually paid or payable; and

(ii) the claimed rate of interest does not exceed the prevailing rate of interest for such transactions at the time when and in the country where the financing was provided.

(iii) Warranty Charges Warranty is a guarantee that the goods will be free from defects. It attaches to the goods and is an integral part of the goods. Payments made for warranty are part of the consideration paid for the goods and therefore are part of the price actually paid or payable.

© DG Education (P) Ltd [Cus : Valuation of Goods] 27. Examine the validity of the following statements with reference to the Customs Act, 1962 giving brief reasons.

(i) Service charges paid to canalizing agent are not includible in the assessable value of imports. (May 2013- 3 Marks) (Nov 2007- 3 Marks)

(ii) Design and engineering charges are includible in the assessable value of the imported goods if the goods imported are specifically manufactured on the basis of the design and engineering specifications provided by the importer.

(Nov 2007- 3 Marks) (iii) Inspection charges are not includible in the assessable value of the imported goods, if contract does not specify for certification

by an independent agency. (May 2013- 3 Marks) (Nov 2007- 3 Marks)

(i) Rule 10(1)(a) of the Customs Valuation Rules, 2007 provides for exclusion of buying commission from the assessable value. Thus, any payment made as buying commission to the agent appointed by the buyer shall not be includible. In this context, Hon’ble Apex Court in case of HYDERABAD INDUSTRIES – 2001, has held that services charges paid to canalizing agency cannot be said to be in nature of buying commission as that agency imported the goods on its own and then re-sell such goods on high sea sales basis to other person. Since such charges are not in nature of buying commission, their exclusion cannot be claimed in terms of said rules. Thus, the given statement is invalid.

(ii) In terms of newly formulated Customs Valuation Rules, 2007, design and engineering charges are includible in assessable value of imported goods if the goods are specifically manufactured on the basis of design and engineering specifications provided by the importer [Rule 10(1)(b)]. Thus, the given statement is valid.

(iii) Inclusion of “inspection charges” shall be decided with reference to Rule 10(1)(e) of the Customs Valuation Rules, 2007 which provides for inclusion of “residuary payments”. It provides that any payment shall be includible is such payment is made by buyer either to seller or to a third party on behalf of seller as a condition of sale of imported goods. In the given case, payment of inspection charges cannot be said to be made as a condition for sale of imported goods between supplier exporter and him. The importer has incurred such charges on his own account. Further, payment has been made to an independent certification agency (unrelated to supplier exporter) and thus, direct or indirect benefit can be said to be passed on the supplier exporter. Thus, no inclusion can be made for such charges. Thus, the given statement is valid. [BOMBAY DYEING & MFG. - 1997 - SC].

28. Explain briefly, how the following would be treated for purposes of valuation under section 14 of the Customs Act, 1962 and the

Customs Valuation Rules, 2007. i. “Dismantling charges” paid by the importer of a machine to the foreign supplier for removal of the machine before shipment at

the foreign supplier’s place. ii. “Demurrage charges” actually incurred by the importer of goods. (3 marks each)

Provisions relating to valuation of goods for purposes of customs duty are contained in Sec 14(1) read with CVR, 2007. CVR, 2007

provides for acceptance of “transaction value” as assessable value subject to adjustments provided in Rule 10. Rule 10 states the various factors for which addition can be made while determining assessable value. No addition can be made for factors other than those stated in Rule 10.

The treatment of given items has been discussed below keeping in mind the provisions of Rule 10:

(i) “Dismantling charges” for removal of the machine before shipment: Rule 10(1)(e) is the “residuary provision” which provides for any payment made by buyer as a condition for sale of imported goods when such payment is directly to the exporter or to a third party to satisfy an obligation of the exporter seller. Rule 10(1)(e) will cover up “dismantling charges” in the given situation.

In case of ESSAR GUJRAT.- 1996, SC held that in case of purchase of old machinery, all expenses connected with the dismantling of old machinery, and making it ready for being transported are includible.

Tutorial Note: Payment of dismantling charges in the given situation satisfies both the condition of Rule 10(1)(e) as explained below: i) The importation of machinery into India is not possible without first dismantling it and hence, dismantling is a condition for sale of

imported goods; ii) The dismantling has been done or arranged by the exporter seller and importer has made payment to the exporter seller directly. It shall also be noted that dismantling is pre-importation expenditure and thus, includible in AV.

(ii) “Demurrage charges”: Demurrage (ship demurrage) becomes payable on when goods could not be unloaded within the specified time. Ship demurrage is payable in addition to the normal contracted freight.

Rule 10(2) of said rules provides for addition of “cost of transportation upto the place of importation”. The issue is whether “demurrage charges” can be considered as a part of freight cost thereby justifying their inclusion in the assessable value (transaction value).

Explanation to Rule 10(2) specifically provides that such charges shall be includible as a part of “cost of transport” of imported goods. However, this shall be applicable only in respect of ‘demurrage of charted vessels.


Tutorial Note: 1. Earlier, there was a SC decision, namely, INDIAN OIL CORPORATION – 2004-SC, which held that such charges are not includible in

AV. Now, that decision stands overruled in view of specific provision made in the new valuation rules. 2. It shall be noted that there is another kind of demurrage also --- Demurrage that is payable to the Port Trust Authority (Custodian) on

account of failure on the part of importer to clear the goods within the prescribed time. The objective of levying this demurrage is to ensure speedy clearance of goods from port thereby avoiding blockage at port. This demurrage is payable as “custodian charges” or “port dues” to the custodian. So far as inclusion of this demurrage in the assessable value is concerned, on the same logic this is not includible. Further, this demurrage forms part of “landing charges” which are always included on a notional basis, a fixed 1% of the CIF Value and thus, dispute regarding inclusion of this demurrage never arises.

29. ‘A’ had imported goods from Finland. Due to deep draught at the port, such goods were not taken to the jetty in the port but were

unloaded at the outer anchorage. The charges incurred for such unloading and transport of the goods from outer anchorage to the jetty in barges (small boats) were RS 1,35,000. ‘A’ claims that such charges form part of the loading and unloading charges and should be deemed to be included in the addition of 1% of the CIF value of such goods, made under rule 10(2)(b) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Discuss the tenability of ‘A’s’ claim.

Rule 10(2)(a) stipulates that for the purposes of section 14(1) of the Customs Act, 1962 and Valuation rules, value of imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include the cost of transport of the imported goods to the place of importation. The ‘place of importation’ means the place where the imported goods reach the landmass of India in the customs area of the port, airport or land customs station. Further, ‘Explanation’ to rule 10(2) clarifies that the cost of transport of the imported goods includes, inter alia, barge charges. This Explanation is to take care of cases of imports by bulk carriers discharging goods on high seas needing additional expenditure for delivery of the goods at the ‘place of importation’ mentioned in rule 10(2). Therefore, in cases where the big mother vessels cannot enter the harbour for any reason and goods are brought to the docks by smaller vessels like barges, the cost incurred by the importer for bringing the goods to the landmass or place of consumption, such as barge charges will also be included in the cost of transportation. Therefore, ‘A’s claim is not tenable in law.

30. M/s H.R.C. importer a consignment of computer software and manuals valued at U.S.$ 42 lakhs and contended that the actual value

was only U.S.$ 10 lakhs while the balance amount represented license fee for using the software at multiple location and as such customs duty is payable only on the actual value of U.S.$ 10 lakhs. Is the contention raised by M/s H.R.C. correct? Discuss.

(4 marks) As per the facts of the given case, M/s H.R.C. has imported computer software and manuals for US $ 42 lacs. Importer has contended

that basic value of the software and manuals is US $ 10 lacs only, and the balance amount represents license fee for use of software at multiple locations which is nothing but charges for right of reproduction of software only which shall not form part of assessable value.

The issue for consideration before us is whether the amount of US $ 32 lacs shall form part of the assessable value or not. In simple words, whether customs duty is payable only on the cost of the Manuals, Software Diskettes and the license fee for use at single site (US $ 10 lacs) and no duty is payable on the license fee for the use of software countrywide (US $ 32 lacs).

Provisions relating to valuation of goods for purposes of customs duty are contained in Sec 14(1) read with CV(DVIG)R, 2007. Rule 3 of CV(DVIG)R, 2007 provides for acceptance of “transaction value” as assessable value subject to adjustments provided in Rule 10. Rule 10, inter alia, provides for addition of “royalties and license fees” to the transaction value to arrive at assessable value. However, Interpretative Note to Rule 9 specifies that no charges for the right of reproduction of imported goods in the country of importation are to be included in the assessable value of the imported goods. M/s H.R.C. has contended that amount of US $ 32 lacs is basically of nature of “charges of right of reproduction” and hence, not includible in terms of interpretative notes to Rule 10.

On identical facts, Hon’ble SC in case of STATE BANK OF INDIA -2000, hold out that “the countrywide use of the software and reproduction of software are two different things. Therefore Licence Fee for countrywide use cannot be considered as the charges for the right to reproduce the imported goods. Accordingly, the total cost incurred, including the license fee for countrywide use would be the transaction value on which customs duty was to be charged”.

In light of the above discussion, contention of M/s H.R.C. regarding non-inclusion of US $ 32 in the assessable value is not maintainable.

Tutorial Note: ] The SC makes the following observation: “The term “reproduction” is a term of art and used in commercial sense. Right to reproduce is not for convenience of user but for the purpose of distribution” Thus, Duplication + Right of sale of Duplicate Copies = Right of Reproduction. Duplication + Right of use duplicate copies ( no right of sale) ≠ Right of Reproduction.

© DG Education (P) Ltd [Cus : Valuation of Goods] MISCELLANEOUS ON RULE 3 31. Discuss briefly with reference to decided case laws as to how the value shall be determined under section 14 of the Customs act,

read with custom valuation rules in the following cases:- (i) There has been a price rise between date of contract and date of importation. The contract was over 6 months before date of

shipment. Concept of PRICE RISE: For sake of example, let’s say, Mr E (USA) entered into contract with Mr I (India) for sale of 5,000 units of article A at a price of US $10 p.u. The said contract is entered into as on 1stJan, 2006. Upon receipt of letter of credit from the buyer, goods are shipped. The goods reach India as on 20thFeb, 2006. Meanwhile, as on 10thJan, 2006, Mr E (USA) has increased the sale price of goods to US $ 15 p.u. and same quantity of goods has been sold but at increased price to another importer Mr M (India). The said goods also reached India on 20thFeb, 2006. Now, the issue is regarding valuation of goods sold to Mr I (India) – whether these shall be valued at the originally contracted price (which is also the price actually paid for), i.e., US $ 10 p.u.; or shall these be valued at a notional value of US $ 15 p.u., the price prevailing as on the date of importation (20th Feb) in India.

.

(ii) The goods are purchased on high seas. Concept of HIGH SEAS SALE: Let’s understand the concept of high sea sales in details: High-Sea Seller High Sea Sale High Sea Purchaser Mr Bill ------------------ Invoice -------------- Mr Ram -------------------- Invoice ------------------------------ Mr Shyam (USA) (Rs 100 p.u.) (India) (Rs 103 p.u.) (India)

Mr Shyam files “Bill of Entry for Home Consumption” in his own name ----- he is importer in terms of Customs Act, 1962

Issue for consideration is : what should be the assessable value in such situation? -- Whether Rs 100/- p.u. (the price charged by the foreign supplier to the original importer) or -- Whether Rs 103/- p.u. (the price charged by the original importer from the Indian buyer) SC has held that service charges recovered by high-sea seller shall remain includible in the assessable value in the hands of the importer (high-sea purchaser). Thus, AV shall be taken as Rs 103/- per unit. Mr Shyam can’t claim exclusion of service charges. It shall be noted though valuation provisions (Rule 10(1)(a)) provides for exclusion of buying commission from assessable value, service charges paid to high-sea seller can’t be equated with “buying commission” since high sea seller is making an independent sale, raising his own invoice to the high-sea purchaser (Mr Shyam).

(i) Sec 14 read with Rule 3 of said rules provides for acceptance of “declared transaction value” (subject to adjustments referred to in

Rule 10) if: i) All the valuation conditions as stipulated in Rule 3(2) are satisfied; and ii) PO is satisfied as to truth and accuracy of declared value

The given transaction is satisfying all the valuation conditions so declared transaction value cannot be rejected on that count. Further, though price rise has taken place but that is not applicable to importer. Importer has paid nothing over and above the contracted price which he has declared in the valuation declaration and thus, value declared by him is genuine. That being so, declared transaction value is acceptable and any subsequent rise in price by the seller can not have any impact on the valuation of transaction contracted for and taken place at old prices.

(ii) High Sea sale refer to that sale which is made by original importer to an Indian buyer while the goods have still not reached their

destination place of importation in India. The price which is charged by the original importer from the Indian buyer in pursuance of such high-sea sales contract is normally more than the price at which the original importer has himself purchased the goods from the foreign exporter supplier. Generally, difference is on account of service charge/high sea-sale commission charged by the original importer from the Indian Importer.

Hon’ble Supreme Court, in the case of M/S. HYDERABAD INDUSTRIES LIMITED – 2000 has held that the service charges/high-seas-sales-commission are includable in the CIF value of imported goods (such charges being not in nature of buying commission meriting exclusion from assessable value). Therefore, it is clarified that the actual high-seas-sale-contract price paid by the Indian buyer would constitute the transaction value under Rule 3 of Customs Valuation Rules, 2007.

Tutorial Notes: 1. Crux of the matter: In case of high-sea sales, high seas sale price as the transaction value. (Thus, all expenses incurred by

high seas seller in connection with the importation of goods will form part of the assessable value as these charges are recovered from the high seas buyer. The service charges collected by the canalizing agency in the case of the import of canalised items sold at high seas will form part of the assessable value).

[Note: If the purchase is on high seas, the selling price will be naturally higher than the price at which the original importer Imported these goods. However, even if price is lower, the assessable value will be the price at which goods are sold on high seas basis to the Indian buyer (the final importer)

2. Valuation in case of more than one high-sea sales: Even if there are more than one high-sea sales, the last sale price shall be taken for the purposes of valuation, as that is the price at which final importation has been caused.

© DG Education (P) Ltd [Cus : Valuation of Goods] TRANSACTION VALUE OF IDENTICAL GOODS – RULE 4 32. Explain the meaning of : Identical Goods. (3 Marks)

Identical Goods: “Identical goods” have been defined in Rule 2 of CVR, 2007 to mean imported goods fulfilling 3 conditions: i) Goods shall be same in all respects (including physical characteristics, quality & reputation) to the goods being valued. However,

minor differences in appearances may be ignored. ii) The “country of origin (the country of production/manufacture)” shall be same as of goods being valued. iii) The manufacturer shall also be same. However, in case goods of same manufacturer are not available, then goods of different

manufacturer may be considered. However, if the importer gets the related engineering, development work, art work, design work, plan or sketch undertaken in India

and then supplied these free of charge or at reduced cost for use in connection with production and sale for export of imported goods, then such goods shall not be considered as “identical goods”.

AUTO STORES – 2014 - SC Import of Unbranded / duplicate goods - Branded goods cannot be considered as 'identical / similar goods' -- TV of unbranded goods cannot be rejected by comparing with TV of branded goods.

Facts : Assessee imported unbranded and duplicate auto parts from China. Department rejection value and determined value on basis of MRP of well known brands at authorised service centres.

Held : Price of imported goods was not comparable on price of branded goods as there was difference in quality, brand name value of other relevant factors. Hence, reassessment by Department was set aside.

33. Explain whether the costs and services as given in Rule 10 of the Customs Valuation Rules, 2007 are to be added to the value of the

identical goods or similar imported goods under Rule 4 & 5 respectively. (3 Marks)

Rule 4 of the Customs Valuation Rules, 2007 provides for acceptance of Transaction Value of Identical goods as assessable value of the imported goods. “Transaction value of identical goods” has been defined (in the Interpretative Notes to these rules) to mean a value adjusted for differences in commercial and quantity factors and cost adjustments and which has already been accepted under Rule 3 of the said Valuation Rules. By implication, transaction value of identical imported goods is acceptable only when at time of their importation, their valuation was done under Rule 3 of the Valuation Rules, 2007. Whenever valuation is done in terms of Rule 3 of the Valuation Rules, 2007, all the adjustments as stated in Rule 10 (regarding cost of goods and services) shall be made. Thus, it is clear that the costs and services as given in Rule 10 of the Customs Valuation Rules, 2007 are to be added to the value of the identical goods under Rule 4 respectively.

As regards similar goods, Rule 5 also provides same provisions as to ‘similar goods’. Thus, the costs and services as given in Rule 10 of the Customs Valuation Rules, 2007 are also to be added to the value of the similar goods under Rule 5 respectively.

34. Appellant, who are traders in ball bearings in Goa, imported ball bearings of ‘YEN’ brand from a trader firm based in Indonesia who

had earlier imported from another party from Singapore. Appellant filed a ‘bill of entry’ for clearance of goods for warehousing and subsequent removal on payment of duty. The assessable value declared was Rs.50 lakh based upon the supplier invoice. The assessing officer compared the ‘YEN’ brand ball bearings with of another ‘LTN’ brand of Korea and also relying on the opinion of the merchants association who certified that all bearings are qualitatively comparable and at par valuation, took the price of ‘LTN’ brand ball bearings, and increased the assessable value from Rs.50 lakh to Rs.60 lakh after allowing certain discount. The assessing officer also observed that value declared for certain varieties of’ YEN’ brand ball bearings imported at Kolkata were higher though the quantities that the imported were lower and that what he had adopted was correct. Appellant pleaded that the contention of the assessing officer was wrong and that invoice price alone to be considered under Section 14 of the Customs Act 1962. Discuss the validity of contention of the appellant with reference to the provision of the Act and customs valuation rules and also referring to case laws.

[CS Final, Dec 2002 – 6 marks] Analysis Chart(((it shall not form part of your answer)

Charact-eristics

Country of Origin

Manufacturer Time of Importation

Adjustment Factors Quantity

Level Commercial

Level Rule 9(2) Adj

Goods Being Valued [Imported Goods]

TV = 50 lacs [CIF presumed]

Ball Bearings [YEN Brand]

Singapore

(the trading firm is in Indonesia from whom it has purchased—so, Indonesia is just country of export and not country of origin)

Not Given (let’s say Company A )

Not given

Not Given

Trader to Trader (As seller is trader & buyer is also a trader)

Not given


Goods Used for comparison by officer TV = 60 lakhs

Ball Bearings [LTN Brand]

Korea

Not Given (let’s say Company B )

Not given

(lets presume

them contempora

neous)

Not Given

(but it must have been higher as officer has allowed certain discount)

Not Given

(let us presume it to be same)

Not given

As per the given facts, the customs officer has rejected the “transaction value” for the goods declared by the importer assessee. The

reasons for rejection were the existence of import transaction of same brand of ball bearings at a much higher value. His action of rejection of declared transaction value seems to be improper as he himself has admitted that those transactions were of lower quantities and for import at a different place of importation. It’s a well-known fact that prices may differ on account of difference in quantity of imported goods and also on account of differences on account of transportation costs. Officer seems to have made no adjustment on account of these factors before using the other transactions of “Yen Brand” for comparison purposes. Incomparable values can’t form the base for doubting the truth and accuracy of the declared transaction value. Since, no reason to doubt the truth and accuracy of declared value can be said to be present as to justify rejection of transaction value, rejection is not valid.

Further, the officer after rejecting transaction value have sought to determine the assessable value of goods in terms of Rule 5 of the CVR, 2007, i.e., on the basis of comparable transaction value of the “similar goods”. He has considered Korean based “LTN brand ball bearings” as similar goods and has accepted their transaction value as assessable value. CVR provides for acceptance of transaction value of similar goods as assessable value and Rule 2 specifically defines “similar goods” for this purpose. As per the definition of “similar goods”, any imported goods can be considered as similar goods only if country of origin is same as that of goods being value. The “LTN brand of ball bearings” are of Korean origin while the “Yen Brand ball bearings” are of Singapore Origin and thus, LTN brand ball bearings can’t be considered as similar goods. That being so, their transaction value can’t be adopted as assessable value of “Yen brand ball bearing”.

In nutshell, it can be said that under the given facts the contention of the appellant regarding acceptance of transaction value of Yen Brand of ball bearing is acceptable.

35. A consignment of 800 MT(Metric Tons) of edible oil of Malaysian origin was imported by a charitable organization in India for free

distribution to below poverty line citizens in a backward area under the scheme designed by the Food and Agricultural Organization.. This being a special transaction, a nominal price of US $10 per MT was charged for the consignment to cover freight and insurance charges. The Customs Department found out at or about the time of importation of this gift consignment there were the following imports of edible oil of Malaysian Origin:

S. No. Quantity imported Unit price in In Metric Tons US$ C.I.F. 1 20 260 2 100 220 3 500 200 4 900 175 5 400 180 6 780 160

The rate of exchanges on the relevant date was 1 US$ = Rs. 43 and the rate of BCD was 15% ad valorem. There is no CVD and Special CVD. Calculate the amount of duty leviable on the consignment under the Customs Act, 1962 with appropriate assumptions and explanations where required.

(May 2008 5 marks) Author’s Note : Comparison table for fast analysis[Shall not be reproduced as part of answer]

Characteristics Country of Origin

Mfrer Time of Import Adjustment Factors Q Ll C L Rule 9(2) Adj

Goods Being Valued[Imported Goods]

US $ 10 CIF

Edible Oil Malaysian Not given Not given 800 MT Not given No info given

Other Imported Goods T-1: US $ 260 CIF T-2: US $ 220 CIF T-3: US $ 200 CIF T-4: US $ 175 CIF

Edible Oil Malaysian Not given (presumed to be same)

Not given (but question stated is contemporaneous import)

20 MT 100 MT 500 MT 900 MT

Not Given (presumed to be same)

No info given (presumed to be same)


T-5: US $ 180 CIF T-6: US $ 160 CIF

400 MT 780 MT

.

Following points are relevant: 1) Rule 3 which provides for acceptance of TV is not applicable as there is no TV: A nominal price of US $10 per MT has been

charged but that is too for recovery of freight and insurance charges. Hence, there is no TV of imported goods.

2) Rule 4 which provides for valuation at TV of identical imported goods shall be applicable. Since Rule 3 is inapplicable, hence, value shall be determined proceeding sequentially to other rules, Rule 4 provides for valuation of goods at TV of identical imported goods in past. Since data as regards import of edible oil of Malaysian origin at or about the same time is available, hence Rule 4 shall be applied. (a) Same commercial level and same quantity: The sales of 20 MT, 100 MT, 500 MT and 400 MT cannot be regarded as sales at

commercial level and in substantially same quantity. However, sales at 780 MT (at price of $160) and 900 MT (at price of $175) are at substantially same commercial and quantity level.

(b) Selection of lowest out of multiple TV: Since more than one TV of identical imported goods have been found (i.e., $160 and $175), the lowest of 2, i.e., $160 shall be taken under Rule 4.

The relevant computation of AV and customs duties are as follows:

CIF value of consignment = 800 MT * US $ 160 per MT = US $ 1,28,000 = 1,28,000 * Rs 43 = Rs.55,04,000 /-

Customs Assessable Value = CIF Value + 1% = (Rs.55,04,000 + 1%) = Rs. 55,59,040/-

Customs Duty liability = (Rs.55,59,040 * 15.45%) = Rs. 8,58,872/- TRANSACTION VALUE OF SIMILAR GOODS – RULE 5 36. Explain the meaning of: Similar Goods (3 Marks)

Similar Goods: “Similar goods” have been defined in Rule 2 of CVR, 2007 to mean imported goods fulfilling 3 conditions: i) Goods although not same in all respects but still having like components and materials which enable them to perform same

function and be commercially inter-changeable having regard to physical characteristics, quality & reputation. ii) The “country of origin (the country of production/manufacture)” shall be same as of goods being valued. iii) The manufacturer shall also be same. However, in case goods of same manufacturer are not available, then goods of different

manufacturer may be considered. However, if the importer gets the related engineering, development work, art work, design work, plan or sketch undertaken in

India and then supplied these free of charge or at reduced cost for use in connection with production and sale for export of imported goods, then such goods shall not be considered as “similar goods”.

37. Explain the differences between ‘Identical goods’ and ‘Similar goods’ with reference to Customs Valuation (Determination of Value

of Imported Goods) Rules, 2007. (4 marks)

“Identical goods” have been defined in Rule 2 of CV(DVIG)R, 2007 to mean imported goods fulfilling 3 conditions: i) Goods shall be same in all respects (including physical characteristics, quality & reputation) to the goods being valued. However,

minor differences in appearances may be ignored. ii) The “country of origin (the country of production/manufacture)” shall be same as of goods being valued. iii) The manufacturer shall also be same. However, in case goods of same manufacturer are not available, then goods of different

manufacturer may be considered.

“Similar goods” have also been defined in Rule 2 of CV(DVIG)R, 2007. For being similar goods also, goods shall be imported goods with same country of origin and same or different producer or manufacturer. However, for being similar goods, the goods need not be same in all respect. The only requirement is that they should have like characteristics and component materials which enable them to perform the same functions and to be commercially interchangeable with the goods being valued. While deciding commercial interchangeability, due regard shall be given to the quality aspect, reputation and existence of trade mark.

© DG Education (P) Ltd [Cus : Valuation of Goods] DEDUCTIVE VALUE – RULE 7

COMPUTED VALUE – RULE 8 38. Briefly explain with reference to the Customs Valuation (Determination of value of Imported Goods) Rules, 2007:

(1) Computed value. (June 2009- 3 Marks)

“Computed Value” mean value of imported goods as determined in accordance with Rule 8. Thus, it shall be a value which shall include:

a) Cost/ value of Material, Labour and processing; b) Profits and general expenses **; and c) All other expenditures as referred in Rule 10(2), i.e, cost of transport, transit insurance and landing charges.

** Note 1. Addition on account of profits and general expenses shall be equal to an amount that is usually reflected in sales of goods of the same

class or kind as the goods being valued which are usually made by producers in the country of exportation for export to India.

. GOODS OF THE SAME CLASS OR KIND, means imported goods that are within a group or range of imported goods produced by a particular industry or industrial sector and includes identical goods or similar goods

. BEST JUDGEMENT VALUE – RULE 9 39. Write a brief note on the ‘residual method’ of determination of value of imported goods under the Customs Valuation

(Determination of Value of Imported Goods) Rules, 2007. (June 2009 -2 Marks)

Rule 9 of the Customs Valuation Rules, 2007 is known as “residual method of valuation”. The reason being that it is applicable when valuation of goods is not possible by application of other valuation rules as specified in Rule 3 to Rule 9.

Under this method, valuation shall be done keeping in mind the principles and general provisions of Sec 14(1) and other valuation rules. It also stipulates usage of data available in India only. However, the value determined under this rule shall not exceed the price at which identical or similar imported goods are sold for importation into India in transactions to unrelated buyers.

Rule 9 specifically prohibits adoption of following basis: 1) Selling price in India of the goods produced in India; 2) Price of the goods on the domestic market of the country of exportation; 3) Price of the goods for the export to a country other than India; 4) Cost of production of identical or similar goods if not computed as per provisions of Rule 8; 5) Highest of the two alternative values; 6) Minimum customs values; or 7) Arbitrary or fictitious values.

40. C and Co. imported second hand machinery and declared the transaction value (self-assessed) in the Bill of Entry filed for purposes

of assessment to import duty. The Assistant Commissioner of Customs ignored the transaction value and based on Chartered Engineer’s certificate showing that the machinery was in working condition and had a residual life of 10 years he completed the assessment under Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 after allowing maximum depreciation of 70%. Discuss briefly giving reasons whether the action of the Assistant Commissioner is valid in law.

(3 Marks) As per the given facts, assessee company imported second-hand machinery for clearance of which it filed bill of entry declaring

transaction value therein (self-assessed value). The declared transaction value of second-hand machinery has, however, been rejected by the AC. Instead of accepting the transaction value of the second-hand machinery, the AC determined the “depreciated value” which he accepted as “best judged value” in terms of Rule 9 of CVR, 2007.

The issue for consideration before us is whether the rejection of “transaction value” due to imported goods being second-hand goods is proper.

On facts identical to the case before us, SC in case of TOLIN RUBBER (P) LTD. – 2004- SC has ruled out the landmark judgment concerning valuation of second-hand machinery. In this landmark case, the Apex Court held that the value of imported goods (whether new or second hand) shall first be determined under Rule 3(1) and its only when that there exists any exceptional


circumstances as specified in Rule 3(2) that transaction value shall be rejected and further valuation rules shall be considered for valuation purposes.

From the facts posed (presented) before us, no apparent reasons seems to be present which can justify rejection of the declared transaction value and therefore, transaction value should have been accepted. Therefore, action of AC regarding rejection of “transaction value” and acceptance of value computed under Rule 9 of CVR, 2007 is not legally sustainable.

Customs - Valuation - Import of second hand equipment/ machinery

1. Principally, TV shall be acceptable in terms of Rule 3 of Valuation Rules, 2007. 2. If due to any valid reason TV is not acceptable, then its vlaution shall be considered under other rules, which are to be applied sequentially. 2. If no other rule is found to be applicable, then best judgment valuation shall be made under Rule 9.

Depreciation method acceptable under Rule 9 M/s U P STATE BRIDGE CORPORATION LTD – 2015- SC The valuation of the imported goods is to be arrived at by ascertaining the price at which such or like goods are ordinarily sold or offered for sale for delivery at the time and place of importation or exportation. Therefore, the method to be employed, as per the aforesaid provision, is to ascertain as to how much would be the price of such goods if they are to be ordinarily sold or offered for sale. It cannot be denied that one of the reasonable method consistent with the principles of valuation would be the depreciation method.

In order to ensure that in employing the method of depreciation the authorities do not take divergent views and apply a uniform

method, CIRCULAR (dated 19.11.87) has been issued. Subject: Valuation of second-machinery and fixation of Scale of depreciation.

1. The question of prescribing a fixed scale of depreciation to be allowed for valuation of imported second-hand machinery has been under consideration of the Ministry. This is considered necessary so as to avoid dispute in the valuation of imported second-hand machinery and consequent delays in their clearance.

2. It has been decided that depreciation may be allowed for arriving at the assessable value of second-hand machinery on the following scale:

(i) For every quarter during first year 4% (ii) For every quarter during 2nd year 3% (iii) For every quarter during 3rdyear 2.5% (iv) For every quarter during 4th and subsequent years 2%

[the overall limit of admissible depreciation shall be 70%] . The depreciation will be calculated on the original value of the machinery under import.

. Circular No 25/2015: Valuation of Second Hand machinery Imports to be accompanied by inspection report of overseas chartered engineer in Form A • All imports of second hand machinery / used capital goods shall be ordinarily accompanied by an inspection / appraisement report issued

by an overseas chartered engineer or equivalent, prepared upon examination of the goods at the place of sale. • The report of the chartered engineer or equivalent should be as per the Form A annexed to this circular. If not accompanied by inspection report of overseas chartered engineer in Form A, then it shall be prepared by Indian agencies in Form B • In the event of the importer failing to procure an overseas report of inspection / appraisement of the goods, he may have the goods

inspected by any one of the agencies in India, as are notified by the DGFT (para 2.59 of Handbook of Procedures 2015-20 refers), • At customs stations where agencies notified by DGFT are not present, importers may continue to avail of the services of locally empaneled

chartered engineers. • In cases where the report is to be prepared by the agencies in India notified by DGFT or the chartered engineers empaneled by Custom

Houses, the same shall be in the Form B annexed to this circular. TV acceptable if conditions of valuation rules fulfilled, else other valuation rules shall be considered. • The value declared by the importer shall be examined with respect to the report of the chartered engineer Similarly, the declared value shall

be examined with respect to the depreciated value of the goods determined in terms of the Circular No. 493/124/86-Cus VI dated 19/11/1987. If such comparison does not create any doubt regarding the declared value of the goods, the same may be appraised under rule 3 of the CVR, 2007.

• If there are significant differences arising from such comparison, Rule 12 of the CVR, 2007 requires that the proper officer shall seek an explanation from the importer justifying the declared value, The proper officer may then evaluate the evidence put forth by the importer and after giving due consideration to factors such as depreciation, refurbishment or reconditioning (if any), and condition of the goods, determine whether the declared transaction value conforms to Rule 3 of CVR, 2007. Otherwise, the proper officer may proceed to determine the value of the goods, sequentially, in terms of rule 4 to 9.

© DG Education (P) Ltd [Cus : Valuation of Goods] SPECIAL CASE STUDIES 41. Appellant imported hardware and related software required for the GSM Network from Ericsson AB, Sweden who is a manufacturer

of telecom equipment under different contracts. Hardware attracts import duty but duty on software is Nil. Appellant imported software into separate CD/Floppy and claimed their clearance at Nil rate.

The Department of view that software in question is ‘firmware’ and the same was already preloaded by Ercisson AB, Sweden at their factory in Sweden and the import of software by BAL separately in CDs/ODs/Floppies was only with a view to apportion a part of the hardware value to software in order to evade payment of customs duty on that part of the value claimed to represent the value of software imported. Discuss whether view of Department is legally sustainable. (6 Marks)

Department’s view is legally sustainable and is supported by recent judgment of Tribunal in case of BHARTI AIRTEL LTD- 2012.

On identical facts, in case of BHARTI AIRTEL, TRIBUNAL held that value of the firm software shall be added to the value of hardware on account of following reasons: 1) Without the preloaded software, the imported equipments cannot get the identity as telecom equipments and cannot serve the

purpose. The preloaded software has to be considered as essential for its functioning and not meant for enhancing the efficiency. The software preloaded in the equipments imported and which is undisputedly essential not only for its functioning but for giving identity to the equipments cannot be treated as "presented with the equipments". It was not as if some CDs/ODs containing the software were "presented with the equipments". There is absolutely no justification to disintegrate the preloaded software from the imported equipment and grant it separate status and to classify it under Chapter sub-heading 85.24 and to exclude its value (which was artificially split from the composite value of the equipment) to arrive at the value of the equipment.

2) Further, what was preloaded was not even declared and claimed for separate classification. This shows clearly the intention of assessee to evade duty payment.

VALUATION FOR COUNTERVAILING DUTY 42. Assessable value of certain goods imported from USA is Rs. 10,00,000. The packet contains 10,000 pieces with maximum retail

price Rs. 200 each. The goods are assessable under Section 4A of the central Excise Act, 1944, after allowing an abatement of 40%. The excise duty rate is 12% ad-valorem. Calculate the amount of additional duty of Customs Under Section 3(1) of the Customs Tariff Act, 1975: assuming basic customs duty @ 10% advalorem.

(June 2009 4 Marks) Sec 3(1) of Customs Tariff Act, 1975 provides for levy of CVD on imported goods. this duty is levied with an objective of counter-

balancing the excise duty which is leviable on like articles when produced or manufactured in India. It further provides that where excise duty is chargeable on like product based on their MRP, then even in respect of imported goods, valuation for levy of CVD shall be done on MRP basis. That being so, value for purposes of CVD shall be = [200- 40% abatement] i.e., Rs 120 per unit. Thus, total AV of entire consignment is Rs 12,00,000 (10,000 units * 120 per unit). And accordingly, ED liability on this consignment shall be Rs1,44,000 (Rs 12,00,000 * 12% (EC and SHEC components of CVD exempted)

43. An actual user imports the following goods from England:

Tariff Heading Value FOB 1. Lathe machine 84.5811 £1,000 2. AC motors 85.0110 £500 1) Other relevant data are:

Exchange rate £ 1 = Rs. 80 Freight £ 150 Insurance £ 25

2) It is found that the LATHE MACHINE is undervalued. It is proposed to load the FOB value of the lathe machine by 25 %. Party does not want show cause notice and personal hearing.

Compute Assessable value. Since the party doesn't want show–cause notice and personal hearing in connection with under–valuation, hence, the value of the lathe machine shall be loaded by 25%. Accordingly, the calculation of assessable value and the total customs duty payable shall be as follows – Lathe Machine (£)* AC Motor (£) Total (£) FOB value 1250

(* 1000 + 25% loading) 500 1750


Add: Insurance and Freight (apportioned between the lathe machine and the AC motors in ratio of their value)

125 (175 * 1250 ÷ 1750)

50 (175 * 500÷ 1750)

175 (£150 + £25)

CIF value 1375 550 1925

CIF value in Rupees (Exchange Rate £ 1 = Rs. 80) Rs 110,000.00 Rs 44,000.00 Rs 154,000.00

Add: Landing charges @ 1% 1,100.00 440.00 1,540.00 Assessable value 111,100.00 44,440.00 155,540.00

SPECIAL VALUATION CASES – MACHINE + ACCESSORY [SEC 19] 44. Compute the assessable value for purpose of determination of Customs duty from the following data:

Machinery imported from USA by air (FOB price) $ 5,000 (inclusive of accessories worth Rs 1,000 compulsorily supplied along with the Machinery) Air Freight $ 1,200 Insurance charges Actuals not available Local agent’s commission to be paid in Indian Currency Rs. 9,300 Transportation from Indian Airport to Factory Rs. 4,000 Exchange rate US $ 1 = RS. 65 Provide explanation where necessary.

[CA (Final), May 2010 (Adapted)]

STATEMENT SHOWING COMPUTATION OF ASSESSABLE VALUE Particulars $ Amount (Rs) FOB Value 5,000.00 3,25,000.00 Addition as per Rule 10(1)

• Local Agency commission 9,300.00

FOB value (adjusted) 3,34,300.00 Addition as per Rule 10(2)

• Air freight – Actual Amount ($1,200 *65)= 78,000 [restricted to 20% of FOB = 20% of 3,34,300 = 66,860

66,860.00

• Insurance [=1.1.25% of FOB= 1.125% of 3,34,300] [WN-4] 3,760.86

CIF Price 4,04,920.86

• Landing Charges @ 1% of CIF 4,049.21.00

Assessable Value (rounded off) 4,08,970/- Working Notes: (1) Sec 19 of Customs Act provides that in cases where accessory is compulsorily supplied alongwith the goods, then accessory cannot be

assessed separately. Thus, its value has been clubbed with the value of machine. (2) Air freight addition has to be restricted to 20% of FOB value thereof. [Rule 10 of Import Valuation Rules, 2007] (3) Transportation from Indian airport to factory is post-importation expenditure shall not form part of AV. (4) Transit insurance has to be added @1.125% of FOB value when actual cost is not ascertainable. (5) Local Agent commission has been presumed to be selling commission and hence, shall be added to the AV. (6) Even if there is no information as to landing charges, still they shall be added @1% of CIF price.

45. Compute the assessable value for purpose of determination of Customs duty from the following data:

Machinery imported from USA by air (FOB price) $ 4,000 Accessories compulsorily supplied along with the Machinery $ 1,000 Air Freight $ 1,200 Insurance charges Actuals not available Local agent’s commission to be paid in Indian Currency Rs. 9,300 Transportation from Indian Airport to Factory Rs. 4,000 Exchange rate US $ 1 = RS. 65 Provide explanation where necessary.

[CA (Final), May 2010- 5 Marks]


STATEMENT SHOWING COMPUTATION OF ASSESSABLE VALUE Particulars Machinery Accessory FOB Value ($) $ 4,000.00 $ 1,000 FOB Value (Rs) Rs 2,60,000.00 Rs 65,000.00 Addition as per Rule 10(1)

• Local Agency commission [Allocated on pro-rata basis] [WN-5] Apportioned Amount Machine Accessory [9,300 * 4,000/5,000] [9,300 * 1,000/5,000]

Rs 7,440.00 Rs 1,860.00

FOB value (adjusted) Rs 2,67,440.00 Rs 66,860.00 Addition as per Rule 10(2)

• Air freight – Actual Amount $ 1,200 Machine Accessory

Actual Amount (apportioned) ($ 960 * 65) = 62,400 ($ 240 * 65) = 15,600

Restricted to 20% of FoB (20% of 2,67,440) = 53,488

(20% of 66,860) = 13,372

.

Rs 53,488.00

Rs 13,372.00

• Insurance [=1.1.25% of FOB] [WN-4] Machine Accessory

1.125% of FoB (1.125% of 2,67,440) = 3,008.70

(1.125% of 66,860) = 752.18

.

Rs 3,008.70

Rs 752.18

CIF Price Rs 3,23,936.70 Rs 80,984.18

• Landing Charges @ 1% of CIF 3,239.37 809.84

Assessable Value (rounded off) 3,27,176/- 81,794/- Working Notes: (1) Sec 19 of Customs Act provides that accessory shall be chargeable to same rate at which main article is taxable if it fulfills 2 conditions are

satisfied – it is compulsorily supplied alongwith main article and its price is included within the price of main article. In the given case, although accessory has been compulsory supplied but its price is available separately, so it shall be chargeable separately. Thus, AV of both has been computed differently.

(2) Air freight has been apportioned in ratio of value of machinery. Its addition has to be restricted to 20% of FOB value thereof. (3) Transportation from Indian airport to factory is transportation within India (post-importation expenditure) shall not form part of assessable

value. (4) Transit insurance has to be added @1.125% of FOB value when actual cost is not ascertainable. (5) Local Agent commission has been presumed to be selling commission and hence, shall be added to the assessable value. It has been

apportioned in the ration of FOB Value. (6) Even if there is no information as to landing charges, still they shall be added @1% of CIF price.

[B] EXPORT VALUATION

46. Briefly explain the methodology for calculation of EXPORT DUTY after the introduction of the ‘Transaction value’ concept under section 14 of the Custom Act, 1962.

(May 2010 -4 Marks) Valuation of EXPORT GOODS is governed by Sec 14 of Customs Act, 1962 read with Export Valuation Rules, 2007. The brief

methodology for valuation of such goods is as follows: Method-1: The export goods shall be valued at the transaction value, i.e., price at which it has actually been sold to the foreign buyer.

The transaction value shall be the actual FOB value of goods sold. [Rule 3] While applying this method, it shall be ensured that following conditions stand fulfilled: i) The proper officer shall not have any doubt as to the truth and accuracy of the declared FOB value (i.e., he shall be

satisfied that value is not over-inflated). ii) The transaction shall not be between related persons. And if it is between related person, than it shall not be influenced

on account of relationship.

Method-2: If on account of any reason, method-1 is found to be inapplicable, then export goods shall be valued on the basis of transaction value of goods of like kind or quality. [Rule 4]

Method-3: If on account of any reason, method-2 is also found to be inapplicable, then export goods shall be valued on basis of ‘computed value’. Under this method, cost of production, processing and profits shall be aggregated. [Rule 5]

Method-4: If on account of any reason, even method-4 is not found to be inapplicable, then export goods shall be valued by PO at any reasonable value. But it shall be remembered that it is not necessary that ‘indian local market price’ is the only reasonable value. [Rule 6]

© DG Education (P) Ltd [Cus : Valuation of Goods] 47. Compute EXPORT DUTY from the following data :

I. FOB price of goods : US $ 1,00,000. II. Shipping bill presented electronically on 26-02-2013.

III. Proper officer passed order permitting clearance and loading of goods for export on 04-03-2013. IV. Rate of exchange and rate of export duty are as under :

Rate of Exchange Rate of Export Duty On 26-02-2013 1 US $ = Rs. 55 10% On 04-03-2013 2 US $ = Rs. 56 8%

V. Rate of exchange is notified for export by Central Board of Excise and Customs (Make suitable assumptions wherever required and show the workings). (Nov 2013 - 5 Marks)

Computation of export duty Particulars Amount (US $) FOB price of goods [Note 1] 1,00,000.00 Amount (`) Value in Indian currency (US $ 1,00,000 × ` 55) [Note 2] 55,00,000.00

Export duty @8% [Note 3] 4,40,000.00 Note :

1. Sec 14 of Customs Act, 1962 provides for valuation of imported goods as well as export goods. In context of ‘export goods;, it provides that export goods shall be valued at price at which there are sold for delivery at time and place of exportation. The place of exportation is Indian customs station. Thus, AV for export goods is ‘FOB Value’

2. As per section 14, AV has to be calculated with reference to the rate of exchange notified by the CBEC on the date of presentation of Shipping Bill. (Third proviso to section 14(1)). Thus applicable exchange rate shall be 1$ = Rs 55.

3. So far the rate of export duty is concerned, Sec 16 of the Customs Act, 1962 provides that applicable rate shall be the rate in force on the date on which order permitting clearance and loading of goods is issued, i.e., date of issuance of let export order u/s 51. Thus, applicable rate of export duty is 8%.

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