Key changes in Customs valuation

SERVICE TAX

Budget 2007 has laid down significant changes in the provisions relating to Customs valuation. This article addresses these changes as also the draft Customs Valuation Rules 2007 (CVR) which have also been issued concurrently by the government for public comment.

Existing sub-section (1) of Section 14 of the Customs Act, 1962, in relation to valuation, was based on the concept of the "deemed value" of goods, whereas sub-section (1A) of Section 14 mandated that the price in respect of imported goods would be determined in terms of the rules formulated thereunder. The existing CVR were based on the concept of "transaction value" (TV), as enshrined in the WTO Valuation Agreement. The question of whether to give primacy to the wordings of the Section 14(1), which referred to "deemed value", or to the CVR which prescribed TV gave rise to practical difficulties for importers as the department rejected the transaction value in instances where the invoices indicated values which were lower than those of contemporaneous imports or were below the ruling market prices of such goods. While some decisions of the Courts regarded Section 14(1) as primary and hence held that the TV must meet all the conditions of deemed value, other decisions have upheld the TVs as declared by the importers. The issue was finally settled by the Apex Court in the case of Eicher Tractors Ltd. Vs. Commissioner of Customs, Mumbai (2000 (122) ELT 321), wherein it held that subject to the three conditions laid down in Section 14(1); namely those of time, place and absence of special circumstances, the price of imported goods was to be determined under Section 14(1A) in accordance with the CVR framed for the purpose. The Supreme Court clarified that while the CVR framed under Section 14(1A) were subject to the condition of Section 14(1), nevertheless, unless the transaction fell within the exceptions specified in the CVR, the Customs authorities were bound to assess the duty on the basis of the declared TV.

Budget 2007 has replaced existing Section 14 in its entirety. The replaced Section states that the value of both imported and exported goods shall be the TV of such goods as determined in accordance with the separate rules made for the purpose.

Draft rules have been issued laying down independent principles for valuation of imported and exported goods. More importantly however, revised Section 14 now states that the TV of imported goods shall include, besides the price paid or payable for goods when sold for export to India, costs and services which the buyer is liable to pay, in addition to the above price. Thus, the TV is now to be determined in relation to the price of imported goods when sold for export to India, as opposed to the erstwhile provision which required the TV to be determined based on the price of such goods for delivery at the time and place of importation. This shift in the basis of determination of the TV is further reinforced by the corresponding provisions of Rule 4 of the draft rules for imported goods.

However, Rule 11 thereof seems to contradict this position and suggests that the status quo in relation to determination of the TV on the basis of the price for delivery at the time and place of importation remains in effect. The better view here is that the position in law has now indeed changed. This is a significant amendment and ensures that the Indian Customs valuation provisions are fundamentally in line with the WTO Agreement. However, the Section also now holds that additional costs and charges payable by the buyer are to be included in the value and these illustratively extend to commissions, assists, engineering and design work and royalty and license fees. The problem is that these costs and charges are supposedly to be included automatically without any condition, as long as the buyer incurs them. If this be so, it would very importantly change the manner of valuation that is laid down under the WTO Agreement. However, if the provisions of Rule 11 of the draft rules, in relation to various costs paid by the buyer, were to be analysed, it would be seen that the erstwhile conditions underlying the inclusion of such costs in the TV continue to remain.

There thus appears to be a direct contradiction between revised Section 14 and the draft rules. This point is valid in relation to commission, engineering and design work and royalty and license fees.

The most significant concern is in relation to royalty and license fees, which are only to be included in the TV, if they are required to be paid as a condition of the sale of imported goods. Given the extensive litigation currently prevalent, it is imperative that the government clarify that the inclusion of royalty and fees in the TV continues to be governed by this fundamental condition.

This will also be the correct view, in view of the harmonised way in which these provisions are to be interpreted. An independent point in relation to royalties is however that the explanation that is now sought to be inserted in Rule 11 would suggest that as long as such royalty or license fees are a condition of sale of the imported goods, they would nevertheless be added to the TV, even if they were to relate to a process which would be carried out in relation to the imported goods, subsequent to importation. This amendment is perhaps of equal significance but is unexceptionable.

Another important amendment relates to Rule 13, which corresponds to erstwhile Rule 10A, pertaining to rejection of a declared the TV. An explanation to his revised rule now clearly states that it cannot be used to determine the TV but only provides a mechanism and procedure for rejection of the declared the TV in certain situations. Thereafter, in any event, the TV has to be determined by proceeding sequentially through Rules 5 to 10 of the draft rules. This is a salutary amendment as erstwhile Rule 10A was substantially misused by the departmental authorities.

The TV of export goods will now be the price for the goods when sold for export from India for delivery at the place of exportation provided the sale is under fully competitive conditions and where price is the sole consideration. In case the value cannot be determined as above, the draft rules state that the TV must then be determined by a process of sequentially proceeding through Rules 4 to 6. Special mention must be made here of the range of adjustments that the authorities are required to make, specially those in relation to the present market value of the goods, the maximum retail price printed on such goods, if any, and the domestic price of the goods, as per the exporter's price list/ catalogue.

To conclude, significant amendments to the Customs valuation provisions in relation to both imported and export goods are proposed. While ostensibly these amendments are being made to bring the Indian Customs valuation principles in line with the WTO Agreement, there are several significant deviations which are required to be urgently addressed before these provisions become law.

The writer is leader, indirect tax practice, PricewaterhouseCoopers