Article VII of the General Agreement on Tariffs and Trade (GATT) Code of Valuation establishes that the primary method for determining the value of imported goods is the transaction value. Based on this agreement, the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988) were promulgated in India. These rules were later modified and replaced by the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR, 2007). According to Rule 3(1) of the CVR, 2007, the transaction value of imported goods shall be accepted subject to adjustments for costs and services specified in Rule 10. Rule 3(2) outlines exceptions to accepting the transaction value. It provides that the transaction value under Rule 3(1) shall be accepted only if certain conditions are met. There must be no restrictions on the use of the goods by the buyer, except for those imposed by law or by public authorities in India, or limitations on the geographical area where the goods may be resold, or restrictions that do not substantially affect the value of the goods. The sale or price must not be subject to conditions or considerations for which a value cannot be determined in respect of the goods being sold. No part of the proceeds of any subsequent resale, disposal, or use of the goods by the buyer should accrue directly or indirectly to the seller unless appropriate adjustments are made by the rules. The buyer and seller should not be related, or if they are related, the relationship should not have influenced the price. If the transaction value cannot be determined under Rule 3(1), the value must be determined by proceeding sequentially through Rules 4 to 9.
Transaction Value and Apex Court Judgment in the Eicher Tractors Case
In the landmark case of Eicher Tractors v. Commissioner of Customs (2000), the Supreme Court delivered an important judgment interpreting Rule 4 of the CVR, 1988, which corresponds to Rule 3 of the CVR, 2007. The Court observed that there is a legal mandate for authorities to accept the price paid or payable for the goods being assessed as the transaction value. However, this mandate is not absolute and is subject to exceptions specified in Rule 4(2). These exceptions include the absence of restrictions on the disposition or use of the goods by the buyer, except for those imposed by law or public authorities, restrictions on the geographical area where the goods can be resold, or restrictions that do not substantially affect the value of the goods. The sale or price must not be subject to conditions or considerations for which a value cannot be determined for the goods being valued. No part of the proceeds of any subsequent resale, disposal, or use of the goods by the buyer should accrue directly or indirectly to the seller unless appropriate adjustments can be made under Rule 9. Finally, the buyer and seller must not be related, or if related, the transaction value must still be acceptable for customs purposes under the rules. The Court concluded that unless the price paid for the particular transaction falls within the specified exceptions, customs authorities are bound to assess the duty based on the transaction value.
Eicher Tractors Judgment Followed under CVR 2007
The precedent set by the Eicher Tractors judgment has been consistently applied in subsequent cases and under the CVR, 2007. In Indian Farmers Fertiliser Co-operative Ltd. v. Commissioner of Central Excise, Customs and Service Tax, Bhubaneswar (2010), the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) reaffirmed that if the transaction value can be determined under Rule 3(1) of the CVR, 2007 and does not fall under any of the exceptions in Rule 3(2), there is no requirement to determine the value using subsequent rules. The Tribunal emphasized that the acceptance of transaction value is the primary rule unless there are specific and provable circumstances that justify deviation.
Price Paid or Payable
The interpretative note to Rule 3 clarifies that the price paid or payable refers to the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. This payment does not have to be in the form of a direct monetary transfer. It can include payments made by letters of credit, negotiable instruments, or other forms of settlement. Payment may be made directly to the seller or indirectly, such as by the buyer settling a debt owed by the seller. The Supreme Court in the Eicher Tractors case explained that the term payable, in the context of Rule 4(1) of the CVR, 1988, which corresponds to Rule 3(1) of the CVR, 2007, refers to the particular transaction under consideration. Payability includes situations where payment of the price is deferred, meaning the transaction value can still be determined even if payment is not made immediately. The underlying principle is that the declared transaction value should reflect the genuine consideration agreed upon between the buyer and seller for the goods being imported, provided it meets the conditions set out in the rules.
Transaction Value to be Accepted in the Absence of Conditions and Restrictions under Rule 3(2)
The Supreme Court in Eicher Tractors Ltd. v. Commissioner of Customs, 2000, while interpreting Rule 4(2) of the CVR, 1988, which is equivalent to Rule 3(2) of the CVR, 2007, clarified the legal position on accepting transaction value. The Court noted that the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, came into effect on 16 August 1988. Under Rule 3(1), the value of imported goods is the transaction value. The definition in Rule 2(f) referred to Rule 4 for determination. Rule 4(1) stated that the transaction value is the price paid or payable for the goods when sold for export to India, adjusted according to Rule 9. When Rules 3(1) and 4(1) are read together, it becomes clear that the authorities have a statutory mandate to accept the price paid or payable for the goods under assessment as the transaction value. However, this mandate is not unconditional. It is subject to exceptions outlined in Rule 4(2), which include situations where there are restrictions on the disposition or use of the goods by the buyer, except for those imposed by law or public authorities in India, geographical limitations on resale, or restrictions that do not significantly affect the value. It also covers cases where the sale or price is subject to considerations that cannot be valued, where any proceeds from resale, disposal, or use of the goods accrue to the seller without proper adjustment, or where the buyer and seller are related in a way that influences the price unless such a relationship does not affect the valuation for customs purposes. The Court explained that these exceptions expand and clarify the special circumstances under Section 14(1) of the Customs Act, 1962. The ruling emphasized that unless the transaction price falls within these exceptions, customs authorities must assess duty on the basis of the transaction value declared.
Eicher Case Judgment Followed as Precedent in Subsequent Cases
The legal principles from the Eicher Tractors decision have been applied in multiple subsequent rulings, strengthening the doctrine that the declared transaction value should be accepted unless proven otherwise under the exceptions.
Supreme Court in Commissioner of Customs v. Mahalaxmi Gems
In this case, the import involved rough diamonds. The appraiser’s valuation report and the trade panel report claimed the diamonds were overvalued. The Tribunal, however, rejected these findings, accepting the declared invoice value as the transaction value because the genuineness of the invoice was not in dispute and there was no contemporaneous evidence to prove that the declared price was incorrect. The Supreme Court upheld the Tribunal’s view, confirming that unless there is credible and contemporaneous evidence showing inaccuracy in the declared price, the transaction value must be accepted.
Supreme Court in Motor Industries Co. Ltd. v. Commissioner of Customs
This case concerned the import of second-hand machinery. The adjudicating authority rejected the declared value, but the Commissioner (Appeals) accepted it for valuation purposes. The Tribunal later allowed the Revenue’s appeal. The Supreme Court held that the Tribunal’s order was contrary to the principles in Eicher Tractors and therefore unsustainable. The decision reinforced the rule that the transaction value must be upheld unless the exceptions are established.
Tribunal in Prabhat Steel Traders Pvt. Ltd. v. Commissioner of Customs
This case involved a notification prescribing a minimum import price for certain goods under the Foreign Trade (Development and Regulation) Act, 1992, in conjunction with the Foreign Trade Policy, 2015-2020. The Tribunal ruled that the minimum import price could not be used to determine the customs valuation of imported goods. Such a price is not a tariff value under Section 14(2) of the Customs Act, 1962, nor a valuation made under the best judgment provisions of the CVR, 2007. It is intended solely to ensure that imports meet acceptable quality standards. Therefore, using it as a substitute for the transaction value was found to be without legal validity or propriety.
Price Paid or Payable and Its Scope
The interpretative note to Rule 3 of the CVR, 200,7 explains that the term price paid or payable refers to the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. This definition is broad and does not limit payment to a direct transfer of money. Payment can be made through various means, such as letters of credit, negotiable instruments, or any other agreed method. Importantly, the payment may also be made indirectly. An example of indirect payment is when the buyer settles a debt owed by the seller to a third party, effectively discharging the seller’s obligation. This amount would still form part of the transaction value for customs purposes.
The Supreme Court in the Eicher Tractors case clarified that the term payable must be understood in the context of the specific transaction being assessed. Payability includes scenarios where the price is agreed upon but payment is deferred. The valuation rules do not require immediate payment to accept a transaction value; what matters is that the payment obligation exists and is linked to the specific transaction. The guiding principle is that the declared transaction value should reflect the real consideration agreed upon between the buyer and seller, provided it meets the conditions of Rule 3 and does not fall under the exceptions of Rule 3(2).
Indirect Payments and Non-Monetary Considerations
In certain transactions, the consideration for imported goods is not fully monetary. It can involve partial payments in goods, services, or settlement of liabilities. For example, if a buyer imports machinery from a seller and, instead of paying the full amount in cash, provides spare parts or technical services in return, the value of such goods or services provided must be added to the monetary payment to arrive at the total transaction value. Similarly, if the buyer assumes responsibility for costs normally borne by the seller, such as advertising or design work done outside the importing country, these costs must be included in the transaction value as per Rule 10.
The purpose of including indirect payments and non-monetary considerations is to ensure that the customs value reflects the full economic value of the goods at the point of importation. This prevents undervaluation and ensures fair competition in the domestic market.
Adjustments to Transaction Value under Rule 10
Rule 10 of the CVR, 20,07 specifies additions to the price paid or payable to arrive at the customs value. These adjustments are necessary where certain costs or services related to the goods are not included in the invoice price. Such adjustments include commissions and brokerage (except buying commissions), the cost of containers that are treated as being one with the goods, the cost of packing, the value of materials, components, and parts incorporated in the goods supplied by the buyer free of charge or at a reduced cost, the value of tools, dies, moulds, and similar items supplied by the buyer for the production of the imported goods, and the value of engineering, development, artwork, design work, and plans undertaken outside India and necessary for the production of the imported goods.
Other adjustments include royalties and licence fees related to the goods being valued, as well as the value of any part of the proceeds of the resale, disposal, or use of the goods that accrues to the seller. Additionally, the cost of transport of the imported goods to the place of importation in India, loading, unloading, and handling charges associated with delivery to that place, and the cost of insurance must also be added where not already included.
These adjustments ensure that the transaction value reflects the total value of the goods as they arrive at the point of importation. The additions must be based on objective and quantifiable data. If the necessary data is not available, the transaction value cannot be determined under Rule 3, and the valuation must proceed to the next applicable method in the sequential rules.
Legal and Practical Importance of Transaction Value
The transaction value method is the cornerstone of customs valuation under the CVR, 2007, in alignment with international obligations under the GATT Valuation Agreement. Its primary advantage is that it is based on actual commercial transactions, providing a fair and transparent method for determining customs value. By relying on the price paid or payable, customs valuation reflects market realities and avoids arbitrary assessments.
However, this method depends heavily on the accuracy and completeness of the documentation provided by the importer. Commercial invoices, contracts, letters of credit, and other relevant records must be genuine and must fully reflect the transaction. Customs authorities have the right to verify the authenticity of such documents, and if there is reasonable doubt as to the truth or accuracy of the declared value, they may reject it under the exceptions in Rule 3(2) and proceed to the alternative methods.
Sequential Application of Alternative Valuation Methods
When the transaction value cannot be determined under Rule 3(1) of the CVR, 2007, due to the presence of exceptions under Rule 3(2) or because the declared price does not meet the necessary conditions, the customs value must be determined by moving sequentially through the alternative methods set out in Rules 4 to 9. This sequential approach ensures that the valuation process remains consistent, fair, and by the Customs Act, 196,2, and international commitments under the GATT Valuation Agreement.
The first alternative is the transaction value of identical goods under Rule 4. If goods of the same kind and quality, produced in the same country, and exported at or about the same time as the goods being valued are available, their transaction value can be used. Identical goods must be similar in every respect, including physical characteristics, quality, and reputation.
If such identical goods are not available, the next step is Rule 5, which uses the transaction value of similar goods. Similar goods are those that, while not identical, have like characteristics and component materials, enabling them to perform the same functions and be commercially interchangeable. Their quality, reputation, and the existence of a trade relationship are also considered.
When neither identical nor similar goods are available for comparison, Rule 6 applies the deductive value method. This method begins with the selling price in India of the imported goods or identical or similar goods, in the greatest aggregate quantity, and makes deductions for commissions, profit, and general expenses, transport and insurance costs within India, and customs duties and taxes.
If the deductive value cannot be determined, Rule 7 provides the computed value method. This method involves determining the customs value based on the cost of production, materials, and fabrication, plus an amount for profit and general expenses, as well as transport, insurance, and related costs to the place of importation in India. This method requires detailed production cost data, which may not always be accessible to customs authorities.
Finally, Rule 9 is the residual method, which allows the customs value to be determined using reasonable means consistent with the principles and general provisions of the rules and the GATT Valuation Agreement. This method must not be arbitrary and should be based on available data that reflects market realities.
Importance of Sequential Application
The rules require that valuation methods be applied in the prescribed sequence, moving from Rule 4 to Rule 9 only when the previous method cannot be applied. Skipping methods is not permitted unless the importer requests a reversal of the deductive and computed value methods under Rule 7(2) and the customs authorities agree. This sequential application ensures that customs valuation remains predictable, transparent, and compliant with both domestic law and international obligations.
Case Law Reinforcing Sequential Method
Indian judicial and quasi-judicial authorities have repeatedly emphasized the importance of following the sequential order of valuation methods. For instance, in various Tribunal rulings, customs assessments were set aside when authorities bypassed the transaction value method without proper justification or skipped directly to alternative methods without exhausting earlier options. Courts have held that such departures violate the legal framework of the CVR, 200,7, and undermine the principles of fairness and transparency in valuation.
Conclusion
The valuation of imported goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, is primarily based on the transaction value method, which reflects the price paid or payable for the goods when sold for export to India, adjusted for specified costs and services. This method is in harmony with the GATT Valuation Agreement and aims to provide a fair, transparent, and market-based system for customs valuation. The acceptance of transaction value is subject to conditions under Rule 3(2), and where these conditions are not met, valuation must proceed sequentially through Rules 4 to 9, covering identical goods, similar goods, deductive value, computed value, and residual methods.
Judicial precedents, particularly the Eicher Tractors judgment, have played a significant role in clarifying and reinforcing the application of these rules. The consistent theme across these rulings is that customs authorities must respect the statutory mandate to accept the transaction value unless there is credible evidence to invoke the exceptions. The inclusion of indirect payments, non-monetary considerations, and adjustments under Rule 10 ensures that the customs value captures the full economic value of imported goods.