Customs duty is payable as a percentage of the value, often referred to as the assessable value or customs value. This value may either be the value as defined in section 14(1) of the Customs Act or the tariff value prescribed under section 14(2) of the Customs Act.
Tariff value can be fixed by the Central Board of Indirect Taxes and Customs for any class of imported goods or export goods. While fixing tariff value, the board considers the trend of the value of such or like goods. Once the tariff value is fixed, duty is payable as a percentage of this value as prescribed in the Customs Tariff Act. Although fixing tariff values is not permitted under the GATT convention, this provision has been retained in Indian law. Once the tariff value is notified, customs duty cannot be paid based on the transaction value.
Under section 14(1) of the Customs Act, the value of imported and export goods will be the transaction value of such goods. This refers to the price paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or for export from India for delivery at the time and place of exportation, provided the buyer and seller are not related and the price is the sole consideration for the sale. The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, and Customs Valuation (Determination of Value of Export Goods) Rules, 200,,7 apply to this provision.
The Supreme Court has clarified that the objective of section 14 is to accept the actual cost paid or payable for customs valuation. Any fictional charges, such as landing charges, insurance, or freight, can only be added when the actual cost is not ascertainable. The intention is to levy customs duty on the price paid or payable for the goods.
The first proviso to section 14(1) states that in the case of imported goods, the transaction value shall include, in addition to the price, any amount the buyer is liable to pay for costs and services such as commissions, brokerage, engineering, design work, royalties, licence fees, costs of transportation to the place of importation, insurance, and loading or unloading charges, to the extent and in the manner specified in the rules. Only those expenses relating to imported goods can be added.
The third proviso to section 14(1) states that such price shall be calculated concerning the rate of exchange as in force on the date on which a bill of entry is presented under section 46 or a shipping bill or bill of export is presented under section 50. The rate of exchange will be determined by the Central Board of Indirect Taxes and Customs or ascertained in a manner it may direct.
Section 14(2) empowers the board to fix tariff values of imported or export goods by notification. If the transaction value is not determinable, the value will be determined under the Valuation Rules. These rules apply only if the value is not determinable under section 14(1). The Supreme Court has held that a reasonable nexus between the measure and the nature of the levy of tax is sufficient, and a direct relation between them is not necessary.
Valuation for Countervailing Duty when Goods are under MRP Provisions up to 30 June 2017
For certain consumer goods, excise duty was payable based on the Maximum Retail Price printed on the packaging. If such goods were imported, a countervailing duty was payable based on the printed MRP. However, after 1 July 2017, Integrated GST is payable on the basis of transaction value only.
Valuation Based on Condition at the Time of Import
Countervailing duty should be levied on goods in the condition in which they are imported. Any subsequent processing of the goods is not relevant for valuation. If goods are imported as a set, they should be assessed as a set rather than as individual components.
The transaction value on the date of filing of the bill of entry will be the basis for assessment. Subsequent depreciation after import is not permissible. Only depreciation up to the date of import is allowed, even if the goods are cleared much later while lying with customs.
Imported goods should be assessed in the form in which importation occurs. What happens to the goods afterward is not relevant unless specified by the tariff.
Sale to a Related Person
Transaction value is not acceptable if the buyer and seller are related. The definition of a related person is identical in the Customs Valuation Rules for imported and export goods. In such cases, valuation will not be based on the declared transaction value but will follow the rules for determining value.
Transaction Value at the Time and Place of Importation
The price for customs valuation should be considered at the time and place of importation. The place of importation refers to the customs station where the goods are brought for clearance for home consumption or removal to a warehouse. This definition is given in rule 2(da) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2017.
The value at the place of importation does not mean that only expenses until the goods enter Indian territorial waters are to be included. Import is an integrated process that concludes when goods land on the landmass of India,, so they can enter the domestic market. Therefore, all expenses up to the destination port, including freight, transit insurance, unloading, and handling charges, must be included in the assessable value.
It has been clarified that the landmass of India,, where unloading occurs, typically a wharf or jetty, is considered the place of importation. All costs incurred to bring the goods to this location are included in the value. Additionally, one percent landing charges for loading, unloading, and handling at the port are also to be included in the assessable value.
Price Must Be the Sole Consideration
The price paid for the goods should be the sole consideration for the sale. If there is any other consideration involved in the transaction, its value should be added to the transaction value.
For example, where a licence fee related to know-how embedded in a machine is connected to the sale, it must be included in the assessable value. Even if the licence fee is not directly charged, but there is an agreement that it will be payable unless certain conditions are met, it forms part of the consideration and is addable.
In the case of goods containing intellectual property, the valuation must reflect the value of that intellectual property. A software product cannot be valued merely based on the price of the CD on which it is stored. Similarly, video cassettes cannot be valued only by material cost and recording charges; the value of the recorded serial or program must also be considered.
Price in Case of High Sea Sale
The relevant price for customs valuation under section 14(1) is the price for delivery at the time and place of importation. A high sea sale refers to the sale of goods by transfer of documents before the goods are cleared from customs.
In high sea sales, the price charged by the high sea seller to the final importer forms the assessable value, not the original invoice from the foreign supplier. This means that even if the high sea sale price is higher or lower than the original import price, the duty is payable on the price at which the goods are finally sold on a high sea basis.
If the high sea sale price is higher due to factors such as service charges for tender negotiations, participation in bidding, bank charges, facilitation fees, demurrage, or survey fees, these must be included in the assessable value. The law requires consideration of only the actual cost incurred by the ultimate buyer, and notional commissions cannot be added after the 2007 amendment.
The Central Board of Indirect Taxes and Customs has clarified that the valuation should be based on the last sale price. If there are multiple high sea sales, the final sale price should be taken for valuation purposes, as it is the price at which the final importation occurred. If the importer cannot produce original invoices or high-sea sale contracts to establish the transaction chain, valuation can be done under the Valuation Rules.
When Transaction Value is Not Determinable
The Customs Act provides that if the transaction value cannot be determined under section 14(1), the valuation must follow the methods laid down in the Customs Valuation (Determination of Value of Imported Goods) Rules or the corresponding rules for export goods. Such situations arise when there is no sale, the buyer and seller are related, or the price is not the sole consideration for the sale.
In these cases, customs officers cannot rely on arbitrary figures. The law requires that valuation be done by prescribed rules, ensuring uniformity and fairness in the assessment process. This is to maintain transparency and compliance with international trade practices.
Sequential Application of Valuation Methods
The valuation rules specify that methods should be applied sequentially until the value can be determined. The main methods include transaction value of identical goods, transaction value of similar goods, deductive value method, computed value method, and residual method.
The transaction value of identical goods means using the customs value of goods that are the same in every respect, including physical characteristics, quality, and reputation. They must be produced in the same country and by the same manufacturer.
Transaction value of similar goods refers to goods that, while not identical, have like characteristics and component materials, enabling them to perform the same functions and be commercially interchangeable. Factors such as quality, reputation, and trademark are considered.
The deductive value method is based on the price at which the imported goods or identical or similar goods are sold in India after importation, with deductions made for certain expenses such as commissions, profit margins, inland freight, and duties.
The computed value method is based on the cost of production, materials, fabrication, profit, and other expenses in the country of export. This method is often used when the manufacturer’s production details are available and verifiable.
The residual method is applied when none of the above methods can be used. It relies on reasonable means consistent with the principles and general provisions of the valuation rules and section 14 of the Customs Act, but cannot be based on the selling price of goods in India or on arbitrary or fictitious values.
Special Considerations in Valuation
When using alternative valuation methods, customs authorities must ensure that adjustments are made for differences in commercial levels, quantities, or conditions of sale. Exchange rate fluctuations are also considered based on the date of presentation of the bill of entry or shipping bill.
The process is designed to ensure that valuation reflects a fair and accurate representation of the value of the goods at the time and place of import or export. Any adjustments for costs such as freight, insurance, commissions, and royalties must be documented and supported by evidence.
Importance of Documentation
Proper documentation is essential for accurate customs valuation. Invoices, contracts, shipping documents, insurance certificates, and proof of freight charges are critical in establishing the correct value. Without supporting documents, customs authorities may reject the declared value and determine the value under the rules.
Importers and exporters are therefore required to maintain complete and accurate records of all transactions, including any related agreements that may influence the price. Non-disclosure or misrepresentation can lead to penalties, confiscation of goods, and other legal consequences.
Valuation Principles in Practice
In practical application, customs valuation is not merely a theoretical exercise but a process that directly impacts the amount of duty payable. The declared value of goods forms the basis for the calculation of customs duty, Integrated GST, and other applicable charges. Incorrect valuation can lead to short payment or overpayment of duty, both of which can have serious consequences.
Importers must ensure that the declared value reflects the actual transaction value, including all costs that are legally required to be added. These costs can include freight, insurance, loading, unloading, handling charges, commissions, royalties, and licence fees, provided they relate directly to the imported goods. The principle is that the assessable value should represent the complete landed cost of the goods at the place of importation.
Judicial Interpretations of Valuation Provisions
Courts and tribunals have played a significant role in clarifying valuation rules. Judicial pronouncements have consistently emphasised that valuation must be fair, transparent, and by the statutory provisions. They have rejected attempts to artificially inflate or deflate the assessable value to evade duty or gain undue advantage.
It has been held that where goods are imported as a set, valuation should be done for the set as a whole, not for individual items unless the law specifically provides otherwise. Similarly, depreciation of goods after the date of import cannot be considered in valuation, as the relevant date is the date of presentation of the bill of entry.
Judicial rulings have also confirmed that where buyers and sellers are related, the transaction value may not be acceptable unless it can be proven that the relationship did not influence the price. In such cases, the customs authorities must follow the sequential methods prescribed in the valuation rules.
Impact of Valuation on Customs Duty Liability
Valuation directly determines the amount of customs duty payable. A higher assessable value results in higher duty, while a lower value reduces the duty liability. Therefore, valuation has a financial impact on both the importer and the revenue authorities.
For the importer, correct valuation ensures compliance with the law, avoids penalties, and facilitates smooth clearance of goods. For the customs department, accurate valuation prevents revenue loss and maintains the integrity of the tax system. The balance between these interests is achieved by applying the principles of section 14 of the Customs Act and the valuation rules.
Compliance and Best Practices
To ensure correct valuation, importers and exporters should follow certain best practices that promote transparency, accuracy, and compliance with customs regulations. A foundational step is to maintain comprehensive and accurate documentation for every transaction. This includes commercial invoices, purchase orders, contracts, and detailed records of freight and insurance costs. Each document serves as crucial evidence supporting the declared value of goods and related charges. Proper record-keeping not only facilitates smooth customs clearance but also provides a reliable audit trail in case of post-clearance reviews or disputes.
It is equally important to disclose any additional payments that impact the assessable value of imported goods. These payments may include royalties, licence fees, packing costs, assists, or other amounts paid directly or indirectly as a condition of sale. Supporting agreements or contracts should accompany these disclosures to substantiate their inclusion in the customs valuation. Without clear documentation, such payments may be overlooked, leading to undervaluation and potential penalties.
In situations involving high sea sales, where goods are sold while in transit on the high seas, specific precautions are necessary. Agreements governing these sales should be properly executed and dated to establish the timing and terms of the transaction. All charges related to such sales—including freight, insurance, and commissions—must be transparently incorporated into the assessable value. Accurate reflection of these costs ensures that customs duties are calculated fairly and prevents disputes arising from undervaluation or omitted charges.
Another critical aspect to monitor is exchange rate fluctuations. Since customs valuation often requires conversion of foreign currency amounts into Indian rupees, importers and exporters must track exchange rates closely. The applicable exchange rate on the date specified by customs regulations—usually the date of import or the date of presentation of goods—should be applied consistently. Failure to use the correct rate can lead to inaccurate valuation, underpayment or overpayment of duties, and subsequent compliance issues.
Engaging in open and proactive communication with customs authorities is a best practice that can greatly reduce the risk of misunderstandings, delays, or disputes. Promptly responding to queries, providing requested documentation, and cooperating fully during customs inspections help build trust and demonstrate good faith. This approach facilitates faster clearance and minimizes the potential for costly penalties or shipment holds.
For complex or unusual transactions, importers and exporters may consider seeking advance rulings from customs authorities. Advance rulings provide binding decisions on valuation or classification issues before the importation of goods, offering certainty and reducing the risk of post-importation disputes. Utilizing advance rulings can be particularly beneficial for new products, transactions involving related parties, or cases with intricate pricing structures.
Conclusion
Valuation under the Customs Act is a fundamental aspect of import and export operations. It determines the basis on which customs duties and taxes are calculated and directly affects trade costs. By adhering to the statutory provisions, maintaining proper documentation, and applying the valuation rules correctly, both importers and customs authorities can ensure a fair, transparent, and efficient system. Accurate customs valuation not only safeguards government revenue but also facilitates smooth international trade by reducing the likelihood of disputes and delays at the border.
The Customs Act provides a comprehensive framework for the determination of the value of imported goods. The primary method prescribed is the transaction value, which is the price paid or payable for the goods when sold for export to the importing country, adjusted to include certain costs such as commissions, packing, royalties, and transportation charges up to the port of importation. This approach emphasizes the importance of the real commercial price between buyer and seller as the starting point for customs valuation.
Judicial interpretations have reinforced the importance of the actual transaction value as the preferred basis for valuation, provided it can be reliably established and supported by documentary evidence. Courts have consistently emphasized that valuation must reflect the true economic value of the goods, and any artificial or manipulated prices intended to evade customs duties should be disregarded. This legal backing strengthens the integrity of the customs valuation system and discourages undervaluation or overvaluation practices that distort trade.
Moreover, the inclusion of all relevant costs in the valuation process is critical to ensure a comprehensive assessment of the landed cost of goods. Importers must disclose additional charges such as packing costs, loading and unloading fees, royalties, license fees, and any other payments made directly or indirectly as a condition of the sale. Failure to account for these costs can lead to incorrect valuation, penalties, and disputes with customs authorities. Maintaining transparent records and invoices is therefore essential for both compliance and audit purposes.
The Customs Act also provides alternative methods of valuation when transaction value cannot be determined, such as the value of identical or similar goods, deductive value, computed value, and fallback methods. These hierarchical approaches are designed to provide a fair estimate of value in the absence of transaction data, ensuring consistency and predictability in customs assessments.