By TIOL News Service

NEW DELHI, APR 20, 2015: THIS is a case relating to Customs Valuation in 1993 under the provisions of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.

The value for determining the Customs duty shall include loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation. These charges are statutorily fixed at one percent of free on board value of the goods.

A little background on Customs Valuation (as explained by the Supreme Court):these Rules are made to facilitate arriving at the valuation of goods in all the contingencies provided in sub-section (1) of Section 14. Rule 3 echoes the principle enshrined in sub-section (1) of Section 14 by mentioning that value of the imported goods would be the transaction value. Rule 4 reproduces the concept behind sub-section (1) of Section 14 by stipulating in no uncertain terms, that the transaction value shall be the price actually paid or payable for the goods when sold for exports to India. It is only in those cases where value of the imported goods i.e. transaction value cannot be determined, that we have to resort to Rules 5 to 8 of the said Rules. The purpose of these Rules is to fix the transaction value of the goods notionally. However, even when the fiction is applied, the scheme and spirit behind Rules 5 to 8 would amply demonstrate that the endeavour is to have closest proximity with the actual price. That is why Rules 5 to 8 are to be applied in a sequential manner, meaning thereby we have to first resort to Rule 5 and if that is not applicable only then we have to go to Rule 6 and in the case of inapplicability of Rule 6, we have to resort to Rule 7 and even if that is not applicable, then Rule 8 comes into play. In order to find out as to what would be the closest real value of the goods, Rule 5 mentions that transaction value of "identical goods" is to be taken into consideration. Thus, wherever the value of identical goods is available, one can safely rely upon the said value in the event transaction value of the goods in question is indeterminable. Value of the identical goods is most proximate. If that is also not available, next proximate value is provided in Rule 6 which talks of value of "similar goods". In the absence thereof, we come to the formula of applying the "deductive value" as contained in Rule 7. In those cases, where even deductive value cannot be arrived at, one has to resort to residual method provided in Rule 8 which prescribes that the value shall be determined using "reasonable means". This would indicate adopting "Best Judgment Assessment" principle. However, even while having best judgment assessments, Rule 8 reminds the authorities that such reasonable means or best judgment assessments has to be in consonance with the principles of general provisions contained in the Rules as well as sub-section (1) of Section 14 of the Act and also on the basis of data available in India.Rule 9 of the Valuation Rules pertains to costs and services. It categorically mentions the exact nature of those costs and services which have to be included like commission and brokerage, costs of containers, cost of packing or labour or material etc. Significantly, Clause (a) of sub-rule (1) of Rule 9 which specifies the aforesaid heads, cost whereof is to be added to the price, mandates that it is to be "to the extent they are incurred by the buyer". That would clearly mean the actual cost incurred. Clause (b) of sub-rule (2) of Rule 9 deals with loading, unloading and handling charges associated with the delivery of imported goods at the place of importation, which are to be included to arrive at the value of such imported goods.

In 1990 the rules were amended to stipulate that for loading, unloading and handling charges, 1% of the free on board value of the goods irrespective of the fact whether actual cost is ascertainable or not, has to be added to determine the value.

This arbitrary addition of 1% is the crux of dispute in this case.

The appellant is engaged in the manufacture and marketing of Mini and Micro Computer Systems and peripheral devices like printer, drivers etc. It, inter alia, imported various components including software from time to time. The appellant presented a Bill of Entry No.15020 dated 15.04.1993. The chargeable weight of the consignment was 315 kgs and the actual loading, unloading and handling charges amounted to Rs.65.40 paisa as per the tariff of the International Airport Authority of India, Madras. However, the Customs Authorities, on the basis of the impugned rule added a sum of Rs.15,214.69 paisa to the value of the goods as handling charges as the impugned provision entitles the authorities to add 1% of the F.O.B. value of goods on account of loading, unloading and handling charges. The actual duty charged, as a consequence of addition of the notional handling charges, amounted to Rs.16,209.20 paisa instead of Rs.69.98 paisa.

The Madras High Court in the impugned judgement after referring to various decisions of the Supreme Court, accepted the plea of the Government holding that rule making authority had the requisite power to make a provision of this nature by including landing charges for the purpose of valuation. The High Court held,

"For the purpose of determination of the value, rules have been made and taking into consideration the difficulties experienced in the past in fixing the handling charges on the actuals, it is fixed at one percent of the CIF value of the goods. When the statute confers the power to make rules for determination of the value, such determination of the value by imposition of the same as a percentage cannot at any stretch of imagination be considered as repugnant to Section 14(1) or discriminatory."

This is questioned in the Supreme Court.

The appellant argued : in the present case, where actual cost could be ascertained, the same had to be taken into consideration to determine the valuation of the goods for the purpose of custom duty and it is only in those cases where actual cost could not be arrived at the fictional formula should be made applicable. Making such a provision, even where the actual cost was known was clearly ultravires Section 14(1) and Section 14(1A) of the Customs Act. There was no rationale in adding one per cent of the F.O.B. value in such cases and this smacked of arbitrariness making it violative of Article 14 of the Constitution as well.

The Revenue defended the judgement of the High Court.

After referring to several decisions and extensively delving into the statutory provisions with their amendments, the Supreme Court observed,

Wherever actual cost of the goods or the services is available, that would be the determinative factor. Only in the absence of actual cost, fictionalised cost is to be adopted. Here again, the scheme gives an ample message that an attempt is to arrive at value of goods or services as well as costs and services which bear almost near resemblance to the actual price of the goods or actual price of costs and services. That is why the sequence goes from the price of identical goods to similar goods and then to deductive value and the best judgment assessment, as a last resort.

No doubt, rule making authority has the power to make Rules but such power has to be exercised by making the rules which are consistent with the scheme of the Act and not repugnant to the main provisions of the statute itself. Such a provision would be valid and 1% F.O.B. value in determining handling charges etc. could be justified only in those cases where actual cost is not ascertainable.

In the present case before us, the only justification for stipulating 1% of the F.O.B. value as the cost of loading, unloading and handling charges is that it would help customs authorities to apply the aforesaid rate uniformly. This can be a justification only if the loading, unloading and handling charges are not ascertainable. Where such charges are known and determinable, there is no reason to have such a yardstick. We, therefore, are not impressed with the reason given by the authorities to have such a provision and are of the opinion that the authorities have not been able to satisfy as to how such a provision helps in achieving the object of Section 14 of the Act. It cannot be ignored that this provision as well as Valuation Rules are enacted on the lines of GATT guidelines and the golden thread which runs through is the actual cost principle. Further, the loading, unloading and handling charges are fixed by International Airport Authority.

Proviso (ii) to sub-rule (2) of Rule 9 introduced vide Notification dated 05.07.1990 (adding 1% for loading, unloading and handling charges) is unsustainable and bad in law as it exists in the present form and it has to be read down to mean that this clause would apply only when actual charges referred to in Clause (b) are not ascertainable.

(See 2015-TIOL-79-SC-CUS)