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Customs (Import) Valuation rules 2007

Customs (Import) Valuation rules 2007

 

Goods are assessed to duty based on the value as prevailing at the time of imports.  Of course, in some cases, rate of duty is fixed on the basis of quantity.  Customs Valuation Rules 2007 succeeds Rules 1988.  These rules together with Section 14 of the Customs Act 1962 provide well-defined framework for valuing the imports.  These rules assume significance as quite often authorities are presented with situations where both the buyer and seller are related.  Multinational National Companies (MNC) operate across continents and buy and sell among themselves.  Naturally, the valuation of sales and purchase occupy the minds of authorities.  In fact, out of concern and experience in valuing such transactions, these rules have been framed and endorsed by all nations world over.  India is signatory to such endorsement.

While Valuations rules are from the customs side, Transfer pricing regulations are from the income tax.  The Organization for Economic Cooperation and Development (OECD) made a serious study in finding points of convergence for Valuations rules and transfer pricing regulations and these are available in the form of their report.

So, valuation of goods imported present two scenarios, one value if the both buyer and seller are not related and the two, if they are related.  Section 14 of Customs Act 1962 deals with the first one and leaves the second scenario to the valuation rules.  Besides, valuation rules also provide clear-cut directions to add the relevant costs to the value for assessment.

Section 14 of the Customs Act, 1962

Section 14 very clearly defines value of any goods as that of transactions value as

the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf :

            Provided 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:  

            Provided further that the rules made in this behalf may provide for,-

(i)   the circumstances in which the buyer and the seller shall be deemed to be related;

(ii)   the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case;

(iii)  the manner of acceptance or rejection of value declared by the importer or exporter, as the case may be, where the proper officer has reason to doubt the truth or accuracy of such value, and determination of value for the purposes of this section :

The above provision makes it quite clear that where the buyer and seller are not related, the transaction value can be accepted when three conditions namely, time, place and no relationship between buyer and seller exist.  Further, it makes an exception to this provision by referring to the rules to determine the value if both buyer and seller are related.

Customs (Import) Valuation rules 2007

 Therefore, the rules begin with defining relationship and then proceed to determine the value in 6 methods.  It is to be remembered that the methods of valuation are to be attempted only sequentially, that is one after the other.  Only if the first method fails to provide the desired result, the next one is to be tried.  However, in the case of two last methods, depending upon the situation and mutual agreement between the assesse and the investigating authority, they can be interchanged.

Rule 2 defines the type of relationship that deems existence of relationship with the buyer and seller.  They are:

  (i) they are officers or directors of one another’s businesses;

                      (ii) they are legally recognized partners in business;

                      (iii) they are employer and employee;

               (iv) 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;

                      (v)    one of them directly or indirectly controls the other;

               (vi)                   both of them are directly or indirectly controlled by a third person;

               (vii)       together they directly or indirectly control a third person; or

               (viii)       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.

 

Methods of valuation

Once the relationship is established, it is deemed that transactions are subject to investigation to prove whether such relationship influenced the pricing or not.

 

Rule 3(3)(a) provides a method to accept the value if the circumstances surrounding the sale prove that transaction is at arm’s length and hence the relationship did not influence the price.

Rule 3(3)(b) provides for situations where such examination of circumstances surrounding the sale do not yield the desired result; and therefore provides another way to come to the conclusion. The rule states as under:

              (b) In a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value of the goods being valued closely approximates to one of the following values ascertained at or about the same time.

                 (i) the transaction value of identical goods, or of similar goods, in sales to unrelated buyers in India;

                     (ii)          the deductive value for identical goods or similar goods;

                       (iii)          the computed value for identical goods or similar goods:

       Provided that in applying the values used for comparison, due account shall be taken of demonstrated difference in commercial levels, quantity levels, adjustments in accordance with the provisions of rule 10 and cost incurred by the seller in sales in which he and the buyer are not related;

           (c) substitute values shall not be established under the provisions of clause (b) of this sub-rule.

So, we need to find out values of identical or similar goods or deductive or computed values for identical or similar goods to arrive at value for assessment purpose.  Of course, these values must be as obtaining at or about the same time of import.  The time factor is repeatedly stressed in these rules, since with the passage of time, values tend to change.

Identical goods

The rule provides for value of identical goods to be taken for comparison and arriving at the assessable value for the import goods. Then the question arises, what is an identical good?  The rule defines identical goods as below:

“identical goods” means imported goods –

                  (i) which are same in all respects, including physical characteristics, quality and reputation as the goods being valued except for minor differences in appearance that do not affect the value of the goods;

                  (ii) produced in the country in which the goods being valued were produced; and

   (iii)    produced by the same person who produced the goods, or where no such goods are available, goods produced by a different person,

but shall not include imported goods where engineering, development work, art work, design work, plan or sketch undertaken in India were completed directly or indirectly by the buyer on these imported goods free of charge or at a reduced cost for use in connection with the production and sale for export of these imported goods;

(e)     “produced” includes grown, manufactured and mined.

In applying this rule, care should be taken to ensure that the values compared are obtained at the comparable commercial level and at the quantity levels.  Obviously, one cannot compare a price at the wholesale level with that of one at the retail level, isn’t it?

 Similar goods

If identical goods values are not available, then values of similar goods can be taken.  Then what are ‘similar goods’? 

(f)  “similar goods” means imported goods –

                        (i) which although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable with the goods being valued having regard to the quality, reputation and the existence of trade mark;

                          (ii) produced in the country in which the goods being valued were produced; and

                        (iii) produced by the same person who produced the goods being valued, or where no such goods are available, goods produced by a different person,

                        but shall not include imported goods where engineering, development work, art work, design work, plan or sketch undertaken in India were completed directly or indirectly by the buyer on these imported goods free of charge or at a reduced cost for use in connection with the production and sale for export of these imported goods; 

Just as in the case of identical goods, one should ensure that values compared are of the same commercial and quantity levels.

Situations where transaction value of identical or similar goods do not exist:

The rules provide for arriving at the value of identical or similar goods through 3 other methods if transaction values of such goods are not available. These methods are: 

Deductive value:

True to its very word, deductive, this method envisages working back the value from the selling price as available in India.  Providing such costs from selling point to the point of import, these costs are deducted from the selling price and value at the time import is arrived.  Only this value is to be taken for comparison purpose and transaction value is accordingly arrived.

Such costs to be deducted are: 

               (i)      either the commission usually paid or agreed to be paid or the additions usually made for profits and general expenses in connection with sales in India of imported goods of the same class or kind;

               (ii)   the usual costs of transport and insurance and associated costs    incurred within India;

               (iii)         the customs duties and other taxes payable in India by reason of importation or sale of the goods.

Of course, such a selling price must be the one at which the subject goods are sold in greatest aggregate quantity.  It is to be noted here that time and place are also the factors to be considered in the choice of goods for comparison. 

Computed Value

If deductive value is not available, then we have to find out the computed value of identical or similar goods.  If deducted value is working back from selling price, computed value is working forward from the cost of raw material, production cost in the producing country and then shipping cost to the port of discharge.

The valuation rule 8 defines such costs as:

                        (a)        the cost or value of materials and fabrication or other processing employed in producing the imported goods;

                        (b)        an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to India;

(c) the cost or value of all other expenses under sub-rule (2) of rule 10.

 

Residual method of valuation

If all the aforesaid methods fail to provide a solution, then this method can be adopted. But such value shall be determined using reasonable means consistent with the principles and general provisions of these rules and on the basis of data available in India;

The rule 9 provides certain directions beyond which neither department nor the assesse can traverse to find out value.  These directions are:

No value shall be determined under the provisions of” this rule on the basis of –

       (i)     the selling price in India of the goods produced in India;

       (ii)    a system which provides for the acceptance for customs purposes of the highest of the two alternative values;

        (iii)   the price of the goods on the domestic market of the country of exportation;

        (iv)  the cost of production other than computed values which have been determined for identical or similar goods in accordance with the provisions of rule 8;

        (v)   the price of the goods for the export to a country other than India;

        (vi)       minimum customs values; or

        (vii)       arbitrary or fictitious values

 

Costs to be added in certain circumstances:

Rule 10 provides for certain costs to be added in certain circumstances.  But it also means any arbitrary addition is to be avoided as these are outside the scope of the rule.

The costs to be added are: 

          (a)   the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

                (i)       commissions and brokerage, except buying commissions;

          (ii) the cost of containers which are treated as being one for customs purposes with the goods in question;

               (iii)       the cost of packing whether for labour or materials;

            (b)   The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:-

                 (i) materials, components, parts and similar items incorporated in the imported goods;

                       (ii)    tools, dies, moulds and similar items used in the production of the Imported goods;

                       (iii)       materials consumed in the production of the imported goods;

       (iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;

            (c)        royalties and licence fees 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, to the extent that such royalties and fees are not included in the price actually paid or payable;

            (d)   The 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;

             (e)   all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. 

Since value as at the time and place of importation is the value for assessment, if the value does not include cost of transport and insurance, then, such costs are to be added as provided below in the rules:

(a)       the cost of transport of the imported goods to the place of importation;

               (b) loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation; and

               (c)       the cost of insurance :

                Provided that –

               (i) where the cost of transport referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods;

               (ii) the charges referred to in clause (b) shall be one per cent of the free on board value of the goods plus the cost of transport referred to in clause (a) plus the cost of insurance referred to in clause (c);

               (iii) where the cost referred to in clause (c) is not ascertainable, such cost shall be 1.125% of free on board value of the goods;

    Provided further that in the case of goods imported by air, where the cost referred to in clause (a) is ascertainable, such cost shall not exceed twenty per cent of free on board value of the goods:

      Provided also that where the free on board value of the goods is not ascertainable, the costs referred to in clause (a) shall be twenty per cent of the free on board value of the goods plus cost of insurance for clause (i) above and the cost referred to in clause (c) shall be 1.125% of the free on board value of the goods plus cost of transport for clause (iii). 

The place of importation is either seaport or airport but not the Inland container depot (ICD) or container freight station (CFS). If ICD or CFS is the place of import, then the costs of carriage from port to such inland destinations are not to be added.

Ship demurrage charges on charted vessels, lighterage or barge charges are includable in the value for assessment.  This follows the decision in the case of IOC vs. Commissioner of Customs on the includability of demurrage charges in the assessable value.

No addition of costs on the value if objective or verifiable data do not exist.  This is a safety mechanism built to protect the interests of trade.

Latest development on the issue of adding 1% landing charges

In terms of Notification No. 91/2017 –Customs (N.T.) dated 26 September, 2017 CBEC has issued a Circular No. 39/2017-Cus dated 26 September, 2017 clarifying that

  • loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation, shall no longer be added to the CIF value of the goods. This is in line with the provisions of WTO agreement relating to valuation on which CVR 2007 is based.
  • Therefore, the arbitrary fixation of 1% on the value for accounting loading and unloading charges is done away with.

A distinction has been made between charges to the place of importation and at the place of importation.

 

By

R R Padmanabhan

Chairman,

Foreign Trade Sub Committee

Andhra Chamber of Commerce

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