CA Final Paper 8 (Chapter5) Indirect Tax Laws

Valuation under Customs

Gajendra Maheshwari BCom(H), ACA, ICWA, LLM

Legal Framework

Customs Valuation: Background Specific provisions under Customs law for valuation of goods

imported and exported into/ from India, respectively India adopted the ‘Agreement to Implement Article VII of

General Agreement on Tariffs and Trade’ (‘GATT valuation code’) in the year 1988

On the basis of GATT valuation code, Customs Valuation

(Determination of Price of Imported Goods) Rules, 2007 introduced w.e.f. 10 October 2007 along with Rules for Interpretation

Customs Valuation: Background Thus, ‘transaction value’ concept was introduced with effect

from 10 October 2007 Prior to the incorporation of GATT valuation code, the

valuations were based on the Brussels Definition of Value (BDV) and Article VII of GATT

BDV was based on the concept of the ordinary price at which

the goods are sold in the course of international trade

Custom Valuation - Import

Value of the imported goods is generally ‘Transaction Value’, i.e. ‘price’ for ‘delivery at the time and place of importation’ [Section 14(1)] i.e. Cost, Insurance, Freight (C.I.F.) value plus loading/ unloading charges at the port of importation (generally assumed to be 1% of C.I.F. Value)

Valuation can also be on the basis of ‘Tariff Value’ in some

cases [Section 14(2)] Transaction value may not be accepted in specified situations

(e.g., related party transactions, non-sale transactions, where price is not sole consideration etc.)

Customs Valuation of Imported Goods Section 14 of the Customs Act 1962 and the Customs Valuation

(Determination of Price of Imported Goods) Rules, 2007

Section 14(2) – Tariff Value

Section 14(1) Read with Valuation Rules 2007

Rule 3(4) - Transaction Value is not acceptable

Rule 4 Transaction Value of Identical Goods

Rule 5 Transaction Value of Similar Goods

Rule 7 Deductive Value

Rule 8 Computed Value

Rule 9 Residual Method (fallback Method)

Rule 6

Rule 3(1) Acceptance of Transaction Value

Rule 12 (Alarm)

Actual price Determined Value

Rule 10 Addition of Cost & Services

Assessable Value

This rule is generally applied in cases where seller is ready to provide information regarding the costs involved in producing the goods that are supplied to India. This cost comprise of manufacturing cost plus representative profit and transportation etc. expenses

RULE 12: FACTORS THAT COULD LEAD TO ENQUIRY:

- significantly higher comparable values - abnormal discounts/reductions - special discounts limited to exclusive agents - mis-declaration in parameters - non-declaration of parameters - fraudulent or manipulated documents

Subject to Rule 3(2)(a) to 3(2)(d) – Exceptions to acceptance of

Transaction Value and Rule 3(3)

RULE 3(2): TRANSACTION VALUE is acceptable provided that: i. There are no restrictions as to the

disposition or use of the goods by the buyer

ii. Sale or price is not subject to some condition or considerations

iii. No part of the proceeds of any subsequent resale, disposal or use of goods by the buyer will accrue directly or indirectly to the seller

iv. Buyer and seller are not related RULE 3(3) Even where the buyer and seller are related, the transaction value is accepted, provided its proven that their relationship did not influence the price Importer can demonstrate that relationship did not influence the price on the following basis (e.g.,): - The price was settled in accordance with

normal industry pricing practice - The price is consistent with the way seller

settles price for sales to buyers who are not related to it and is an arms length price

- Goods same in all respect, including physical characteristics, quality and reputation (except minor difference in appearance that do not affect he value of the goods). - Should be produced in the country in which the goods being valued are produced - Should be produced by same manufacturer; other manufacturer’s price only if above is not available - Should be imported from same country - Difference in quantity/ commercial factors to be adjusted

- Goods alike in all respect, having like characteristics - Should be commercially inter-changeable having regard to quality, trademark, reputation etc. - Should be produced in the country in which the goods being valued are produced - Should be produced by same manufacturer; other manufacturer’s price only if above is not available - Difference in quantity/ commercial factors to be adjusted

- Deductive value can be used where it is possible to work backwards from the re-sale price in India to an unrelated person (i.e. deducting profit margins, general expenses, freight and insurance, duties/ taxes, etc.) - Price at or about the time of import is considered, subject to permissible deviations - Profit margin should be consistent/ as prevalent in Industry

Where the value of imported goods cannot be determined under the provisions of any of the preceding methods, the value shall be determined using reasonable means consistent with the principles on the basis of data available in India

Definition of Related persons

Rule 2(2) For the purpose of these rules, persons shall be deemed to be "related" only if – they are officers or directors of one another's businesses; they are legally recognised partners in business; they are employer and employee; any person directly or indirectly owns, controls or holds five

per cent or more of the outstanding voting stock or shares of both of them;

Definition of Related persons (contd.)

one of them directly or indirectly controls the other; both of them are directly or indirectly controlled by a third

person; together they directly or indirectly control a third person; or they are members of the same family Explanation I. - The term "person" also includes legal persons Explanation II. - Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other shall be deemed to be related for the purpose of these rules, if they fall within the criteria of this sub-rule

Indenting agent is not a related party

Specific Additions [Rule 10(1)] Expenses incurred by buyer is to be included in price

which is not already included in the price: commission and brokerage (except buying commission) cost of containers cost of packing (whether labour or material)

Goods and services supplied by buyer free of charge or at a

reduced cost for use in connection with the production and sale of imported goods: Materials, components, parts and similar items Tools, dies, moulds and similar items Materials consumed in the production of imported goods Engineering, development, art work, design work, and

plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods

Specific Additions [Rule 10(1)] Royalties and license fee related to the imported goods that

the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued (Fee is related to pre importation activity or post importation activity)

Value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods, that accrues, directly or indirectly to the seller

All other payments actually made or to be made as a condition of sale of the imported goods, by buyer to seller or by the third party, to satisfy an obligation of the seller

However, payments made by the buyer (importer) for the right to distribute or resell the imported goods shall not be included (provided such payment is not a condition)

Specific Additions [Rule 10(2)]

Type of Expense Actual Ascertainable Actual not ascertainable

Cost of Transport Actual (In case of import by Air, addition can not exceed 20% of F.O.B value)

20% of F.O.B value

Proviso: In case of goods imported by sea stuffed in a container for clearance at an Inland Container Depot (‘ICD’) or Container Freight Station (‘CFS’) the cost of freight incurred in the movement of container from the port of entry to the ICD or CFS shall not be included in the cost of transport

Explanation: Cost of transport includes ship demurrage charges on chartered vessels, lighterage charges or barge charges

Specific Additions [Rule 10(2)]

Type of Expense Actual Ascertainable Actual not ascertainable

Cost of Insurance Actual 1.125% of F.O.B value

Loading, Unloading and handling charges

1% of C.I.F Value [Stevedoring and unloading charges are not to be added, when landing charges are assessed on a percentage basis – Coromandal Fertilizer Ltd. Vs. Collector of Customs (2000)]

Custom Valuation – Used Goods In case of import of second-hand machinery, Customs duty is

payable on cost less depreciation computed on straight line method

The percentage of depreciation is subject to overall limit of 70%, and varies depending on the age of machinery, the prescribed slabs for depreciation are: For every quarter during first year – 4% For every quarter during second year – 3% For every quarter during third year – 2.5% For every quarter during fourth year onwards – 2%

Custom Valuation – Used Goods In addition to above, importers are required to submit: Certificate issued by an independent Chartered Engineer

or any equivalent in the country of supply; and NOC/Certificate from Ministry of Environment and Forest

stating the machinery does not qualify as e-waste The content of Chartered Engineer’s Certificate should

indicate : Price of new machinery as in the year of its manufacture Current CIF value of new machinery if purchased now Year of the manufacture of machinery Sale price of the supplier Present condition of machinery Nature of reconditioning or repairs carried out, if any, and

the cost (including the dismantling cost, if any) thereof Expected life span

Relevant Date for Rate and Valuation

• On the date on which bill of entry for home consumption is presented

Goods entered for home consumption under Section 46

• On the date on which bill of entry for home consumption is presented

Goods cleared for warehouse under Section 68

• On the date of payment of duty

Other cases (Example: clearance of good as sample from warehouse)

BOE shall be deemed to have been presented on the date of such entry inwards or the arrival, as the case may be. i.e. date of BOE or date of entry inward of vessel/arrival of

aircraft which ever is later

Relevant Date for Rate and Valuation

• Date on which the proper officer (‘PO’) makes an order permitting the clearance and loading of goods under Section 51

Goods entered for export under Section 50 [Section 16]

• Date on which the declaration is made in respect of such baggage under Section 77

Clearance of baggage [Section 78]

• Date on which the postal authorities present to the Custom Officer of Customs a list containing the particulars of goods for assessment

Import through post [Section 83]

Relevant Date for Rate and Valuation

•Applicable foreign exchange rate for the determination of assessable value is the rate of exchange notified by CBEC as prevalent on the relevant date (i.e., date of

filing of bill of entry/ shipping bill)

Foreign exchange rate

Value of the exported goods is generally ‘Transaction Value’, i.e. ‘price’ for ‘delivery at the time and place of exportation’ [Section 14(1)] i.e. Free on Board (F.O.B) value

Rule for the Export of goods known as Customs Valuation

Determination of value of Export Goods), Rules, 2007 (‘Export CVR’)

Main purpose of introducing the Export CVR is to: provide for a sound legal basis for the valuation of export

goods check deliberate overvaluation of export goods and mis-

utilization of value based export incentive schemes

Custom Valuation - Export

If transaction value is not accepted, valuation is made on the basis of other specified rules (i.e., value of identical/ similar goods, deductive value etc.)

Certain cost and services may be added (Rule 10) to the

value determined

Custom Valuation - Export

Assess yourself

Question 1 From the particulars given below, find out the assessable value of the

imported goods under the Custom Act, 1962

S. No

Description

US $

1 Cost of machine at the factory of the exporting country 10,000

2 Transport charges incurred by the exporter from his factory to the sea port for shipment

500

3 Handling charges paid for loading the machine in the ship 50

4 Buying commission paid by importer 50

5 Freight charges from exporting country to India 1,000

6 Exchange rate to be considered 1 $ = Rs 45

Answer 1 Computation of assessable value

Description US $ Cost of machine at the factory of the exporting country 10,000 Add: Transport charges incurred by the exporter from his factory to the port for shipment

500

Add: Handling charges paid for loading the machine in the ship 50 FOB value 10,550

Add: Freight charges from exporting country to India 1,000 Add: Insurance Charges (1.125% of F.O.B value) 118.69 C.I.F value 11,668.69 Landing charges (11,668.69*1%) 116.6869

Assessable value (11,668,69+116.6869)*45

530342

Question 2 Whether the assessable value of the warehoused goods which are sold before being cleared for home consumption should be taken as the price at which the foreign supplier has sold the goods to seller or at the price at which the goods are sold by seller to ultimate buyer

Answer 2 Circular No. 11/2010 dated 03.06.2010 Transaction is defined to mean the price actual paid or

payable for the goods when sold for export to India for delivery at the time and place of importation

The goods are sold after being warehoused, therefore it can not be said that the export of goods is not complete

Hence, price at which imported goods are sold after warehousing them does not qualify to be transaction value as per Section 14

Therefore, the assessable value shall be the price at which the goods are sold by the foreign supplier to the Indian seller

Question 3 Miss Aditi imported certain goods weighting 1,000 Kgs. With CIF value US $ 40,000. Exchange rate was 1 US$ = Rs. 45 on the date of presentation of bill of entry. Basic custom duty is chargeable @ 10% and education cess as applicable. There is no excise duty payable on these goods, if manufactured in India. As per notification issued by the Government of India, anti dumping duty has been imposed on these goods. The anti-dumping duty is equal to difference between amount calculated @ US $ 60 per kg and ‘landed value’ of goods. You are required to compute anti-dumping duty payable by Miss Priya.

Answer 3

Computation of Anti dumping duty

CIF Value US $ 40,000 Assessable value =40,000+(40,000*1%)=40,400

Exchange Rate Rs 45

Assessable Value =40,400*45=18,18,000

Basic Custom Duty @10% =18,18,000*10%=1,81,800

EC and SHEC @3% (1,81,800)*3% 5,454

Landed value of imported goods (18,18,000+1,81,800+5,454)

20,05,254

Value of goods in INR as per Notification (1000Kgs*US$60*45)

27,00,000

Less: Landed value of goods 20,05,254

Anti Dumping duty payable 6,94,746

Question 4 M/s IES Ltd. (assessee) imported certain goods at US $ 20 per unit from an exporter who was holding 30% equity in 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 import at reduced rate were effected pursuant to this 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 earlier imports i.e. at US $ 20 per unit under rule 4 of the Custom Valuation (Determination of Value of Imported Goods) Rules, 2007, viz. transaction of identical goods. State briefly, whether the Department’s action is sustainable in law, with reference to decided cases, if any.

Answer 4 No, the department’s action is not sustainable in law. Persons deemed to be related if one of them directly or indirectly controls the other. The word ‘control’ has not been defined under the said rules. As per common parlance, control is established when one enterprise holds at least 51% of the equity shareholding of the other company. The fact that assessee had made bulk imports could be a reason for reduction of import price. In the given case, the exporter holds only 30% of equity shares in the company of importer. Therefore, the importer and exporter can not be said to be the related parties

Question 5 On 18th June 2012, MIL entered into a contract with foreign suppliers viz M/s. Jennifer Trading Pvt. Ltd., USA, for import of 1,000 metric tons of crude sunflower seed oil at the rate of USA $ 565 CIF/ metric ton. Under the contract, the consignment was to be shipped in the month of July 2012. However, the mutually agreed time for shipment was extended to ‘mid September 2012’. Thus, the goods were actually shipped on 5th September 2012 at the price prevailing at the contract date

Question 5 The revenue contended that when actual shipment took place, after the expiry of the original shipment period, the international market price of crude sunflower seed oil had increased drastically and reached US $ 900 CIF/ metric tone. Therefore, the contract price could not be accepted as the ‘transaction value’ and hence, the duty should be imposed on the increased prices Examine, with the help of decided case law, if any, whether the contention of Revenue is correct.

Answer 5 No, the contention of the revenue is not correct. The facts are similar to the case of Commissioner of Cus. Vishakhapatnam vs Aggarwal Industries Ltd. 2011 E.L.T 641 (S.C). The SC held that in the instant case, the contract for supply of crude sunflower seed oil was entered into at a certain agreed price. The contract could not be performed on time because of which extension of time for shipment was agreed between contracting parties. It is true that the commodity involved had volatile fluctuations in its price in the international market, but having the shipment; the supplier did not increase the price of the commodity even after increase in its price in the international market.

Answer 5 There was no allegation of the supplier and importer being in collusion or related. Thus, the appeal was allowed in the favour of the assessee and contract price was accepted as the transaction value Even otherwise, these goods are not at same commercial level. Therefore, goods can not valued at price in international market

Question 6 RL imported certain goods from Germany. Their assessable value is Rs. 20,00,000. The packet contain 20,000 pieces with maximum retail price of Rs. 400 each. The goods are assessed 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 Custom Tariff Act, 1975

Answer 6

Particulars Amount in Rs.

Maximum retail price (20,000*Rs 400) (A) 80,00,000

Less: Abatement 40% (B) 32,00,000

Assessable value under proviso to Section 3(2) of the Custom Tariff Act (A-B)

48,00,000

Additional duty of customs @ 12% 5,76,000

Additional custom duty payable 5,76,00

Question 7 Question Import Manifest filed on 28.09.2010 Bill of Entry filed on 27.10.2010 Rate notified by CBEC effective from 25.9.2010, 25.10.2010 and 25.11.2010 Goods cleared for home consumption on 26.11.2010 Which rate shall apply for computing the assessable value in Rupees

Answer 7 Answer Third proviso to Section 14(1) CBEC notified rate of exchange as in force on the date on which bill of entry is presented under section 46, is applied for the computation of assessable value in Rupees The bill of entry was filed on 27.10.2010. Therefore, the rate of exchange for computing the assessable value will be the notified rate effective from 25.10.2010

Question 8 Computer the Assessable value and also calculate the duty amount 1 F.O.B value of machine 8,000 UK Pounds 2 Freight paid (Air) 2,500 UK Pound 3 Design and development charges

paid in UK 500 UK Pounds

4 Commission payable to local agent @2% of F.O.B, in Indian Rupees

5 Date of Bill of Entry 24.10.2012 (Rate BCD 20%; Exchange rate as notified by CBEC Rs. 68 per UK Pound)

6 Date of entry inward 20.10.2012 (Rate of BCD 18%; Exchange rate as notified by CBEC Rs. 70 per cent UK Pound)

7 C.V.D is payable @ 12% and Special C.V.D as applicable 8 Insurance charges have been actually paid but details are not available

Answer 8(1)

Particulars Amount FOB value 8,000 Design and Development work 500 Air freight {Air freight can not exceed 20% of FOB value) =8,000*20%=1,600

Insurance charges (Refer Rule 10(2) of Import CVR) =8,000*1.125%=90 Total value (UK Pound) 10190 Rate of Exchange notified by CBEC on date of filing of BOE

68

Total in Rupees (Total CIF Value*Rate of Exchange on date of BOE)

10190*68=692920

Local Agency Commission (8000*2%*68) (in Rupees) 10880 CIF value (692920+10880) (in Rupees) 703800 Landing charges @1% of CIF value 7038 Assessable value (703800+7038) 710838

Answer 8(2)

Particulars Amount

Computation of Duty

Assessable Value 7,10,838

BCD (7,10,838*20%) Note: Rate on date of BOE or Entry inward whichever is later

1,42,167.60

Total (7,10,838+1,42,167.60) 8,53,005.60

CVD @12% (8,53,005.60*12%) 1,02,360.67

EC and SHEC @3% (1,42,167.60+1,02,360.67)*3% 7,335.85

Total for SAD 9,62,702.12

SAD @4% (9,62,702.12*4%) 38,508.08

Total Duty payable (1,42,167.60+1,02,360.67+7,335.85+38,508.08)

2,90,372.2

EC and SHEC on CVD has been exempted vide Notification 13/14 (2012) dated 17.03.2012

Question 9 A had imported a lift from Finland. Due to safety reasons, the lift was not taken to the jetty in the port but was unloaded at the outer anchorage. The charges incurred for such unloading amounting to Rs. 18,000 and the cost incurred on transport of lift from outer anchorage to jetty was Rs. 3,500. 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 the lift, made under Rule 10(2)(b) of the Custom Valuation Rules. Discuss the tenability of ‘A’s claim with reference to recent Circulars, if any

Answer 9 The place of importation as observed by the SC in the case of Garden Silk Mills Ltd. versus Union of India 1993 (113) E.L.T 358 (S.C) means the place where the imported goods reach the landmass of India in the Customs area of port, airport or land customs station, or if they are consumed before reaching the landmass of India, the place of consumption. Therefore, in cases where ship demurrage charges are paid by the importer for detention of the ship in the harbour before touching the landmass at the docks or at the place of consumption, these charges would be includible in the cost of transportation

Answer 9 Similarly, in cases where big mother vessel can not enter the harbour for any reason and goods are brought to the docks by smaller vessels like barges, small boats etc., the cost incurred by the importer for bringing the goods to the landmass or place of consumption, such as lighterage charges, barge charges will be included in the cost of importation. Therefore, A’s claim is not tenable in law

Question 10 Explain whether the costs and services as given in Rule 10 of the Custom Valuation Rules, are to be added to the value of the identical goods or similar imported goods under Rule 4 and 5 respectively

Answer 10 As per Rule 4(1)(c) of the Custom Valuation Rules, 1988 where imported goods are being valued as per the Rule 4 of the value of identical goods is adjusted to take into account the difference attributable to the commercial level or to the quantity or both. According to Rule 4(2) where costs and charges referred to in Rule 10 are included in the value of identical goods, adjustment has to be made of the difference in such costs and charges between the imported goods and identical goods. Therefore, if the value of identical goods does not include certain specific cost and charges related to imported goods, these are to be included as per Rule10

Question 11 Question Mother Mary Hospital and Research Centre imported a machine from Delta Scientific Equipments, chicago (‘Delta’) for in house research. The price of the machine was settled at US $ 5000. The machine was shipped on 10.01.2010. Meanwhile, the Hospital Authority negotiated for reduction in the price. As a result, Delta agreed to reduce the price to $ 4150 under a telex dated 15.01.2010. The machine arrived in India on 18.01.2010. The Commissioner of Customs has 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? Given reasons in support of your answer.

Answer 11 No, the commissioner’s approach is not correct in law. As per Section 14 of the Custom Act, the transaction value of the goods is the value at the time and place of importation. It was decided in Garden Silk Mills v. UOI that importation is completed only when the goods become the part of mass of goods within 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 should be valued as per the reduced price, which was the price at the time of importation Gujarat Heavy Chemicals Ltd. Vs Commissioner of Customs, Ahmadabad 2004 (163) E.L.T 448 (Tri. – Mumbai)

Thank you