Valuation under Customs

The treatment of royalty and license fees for customs valuation is governed by Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. This rule mandates the inclusion of royalties and license fees in the assessable value of imported goods, provided two crucial conditions are met:

1. Related to the Imported Goods: The royalties and license fees must relate to the goods being valued. This means the payment should be for the right to use intellectual property (like patents, trademarks, copyrights, designs) that is embodied in, or directly associated with, the imported goods.
2. Condition of Sale: The buyer must be required to pay these royalties and license fees, either directly or indirectly, as a condition of sale of the goods being valued. This implies that without the payment of such fees, the buyer would not be able to purchase or use the imported goods.
   It is important to note that payments for the right to reproduce the imported goods in India are generally not included in the assessable value. Also, if the royalty or license fee is for a general right to manufacture or sell, and not specifically linked to the imported goods as a condition of their sale, it may not be includible. The determination often involves examining the terms of the licensing agreement and the nature of the payment to ascertain its nexus with the imported goods and its character as a condition of sale.

The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, primarily focus on additions to the transaction value to arrive at the assessable value. There are generally no specific 'deductions' allowed from the transaction value itself. However, Rule 10(2) specifies certain charges that are not to be included in the assessable value if they are distinguished from the price actually paid or payable. These include charges for construction, erection, assembly, maintenance, or technical assistance undertaken after importation; and the cost of transport and insurance after importation. It's crucial to note that these are exclusions from the assessable value, not deductions from the transaction value.

When the transaction value cannot be accepted for valuation, the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, prescribe a strict sequential hierarchy of alternative methods: (1) Rule 4: Transaction Value of Identical Goods – based on the transaction value of identical goods sold for export to India at or about the same time. (2) Rule 5: Transaction Value of Similar Goods – based on the transaction value of similar goods sold for export to India at or about the same time. (3) Rule 7: Deductive Value Method – based on the unit price at which the imported goods, or identical or similar imported goods, are sold in the greatest aggregate quantity in India to unrelated buyers. (4) Rule 8: Computed Value Method – based on the cost of production of the imported goods, plus an amount for profit and general expenses. (5) Rule 9: Residual Method – where none of the preceding methods can be applied, the value is determined using reasonable means consistent with the principles and general provisions of Section 14 and the Rules, based on data available in India.

The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, are of paramount significance as they provide the detailed operational framework for implementing Section 14 of the Customs Act, 1962. While Section 14 lays down the broad principle of transaction value, the Rules elaborate on the methods to be employed for determining the assessable value when the transaction value is acceptable, and the sequential alternative methods to be followed when it is not. These rules are aligned with the WTO Agreement on Customs Valuation, ensuring consistency with international trade practices and providing clarity and certainty to importers regarding the calculation of customs duty. They cover aspects like additions, related party transactions, and the hierarchy of valuation methods, which are crucial for practical application.

The valuation of imported goods under the Customs Act, 1962, is primarily governed by Section 14 of the Act and the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. The fundamental principle is to determine the 'transaction value', which is the price actually paid or payable for the goods when sold for export to India, subject to certain adjustments. This approach aligns with the World Trade Organization (WTO) Valuation Agreement, aiming for a fair, uniform, and neutral system of valuation. The valuation methods are applied in a sequential hierarchy, starting with the transaction value.

The relationship between the buyer and seller is a critical factor in determining the acceptance of transaction value under the Customs Act, 1962. As per Rule 3(2)(a) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, if the buyer and seller are related, the transaction value shall be accepted only if the relationship did not influence the price. The Rules provide safeguards to address situations involving related parties:

1. Circumstances of Sale Examination: Even if the buyer and seller are related, the transaction value can be accepted if an examination of the circumstances surrounding the sale shows that the relationship did not influence the price. This involves looking at how the buyer and seller organize their commercial relations and how they arrive at the price.
2. Test Values: The transaction value between related parties shall be accepted if the importer demonstrates that such value closely approximates one of the 'test values' occurring at or about the same time:
   • The transaction value of identical or similar goods in sales to unrelated buyers in India.
   • The deductive value for identical or similar goods.
   • The computed value for identical or similar goods.
     These test values are used for comparison purposes only and do not establish alternative values. The objective is to ensure that the declared price between related parties is comparable to prices that would be charged between unrelated parties under similar commercial conditions. If the proper officer still has doubts about the truth or accuracy of the declared value, despite these safeguards, the transaction value may be rejected, and valuation would proceed under the sequential methods.

The transaction value can be rejected by the proper officer if the conditions laid down in Rule 3(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, are not satisfied, or if there are reasonable doubts about the truth or accuracy of the declared value (Rule 12). When the transaction value is rejected, the valuation of imported goods must be determined by applying the following methods sequentially, as per Rule 3(2) and the subsequent rules:

1. Rule 4: Transaction Value of Identical Goods: The value is based on the transaction value of identical goods sold for export to India at or about the same time, at the same commercial level, and in substantially the same quantity.
2. Rule 5: Transaction Value of Similar Goods: If identical goods' value cannot be determined, the value is based on the transaction value of similar goods sold for export to India under similar conditions.
3. Rule 6: Deductive Value Method: If values under Rule 4 and 5 are not available, the value is determined by deducting certain costs (like commissions, profits, transport, insurance, duties) from the unit price at which the imported goods, or identical or similar imported goods, are sold in India in the greatest aggregate quantity to unrelated persons.
4. Rule 7: Computed Value Method: If the deductive method is not applicable, the value is determined by computing the sum of the cost or value of materials and fabrication, profit and general expenses, and the cost of transport, insurance, and handling charges.
5. Rule 8: Residual Method: If none of the above methods can be applied, the value is determined using reasonable means consistent with the principles and general provisions of Section 14 of the Customs Act, 1962, and the Customs Valuation Rules, 2007, based on data available in India.

Rule 10(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, mandates certain additions to the price actually paid or payable for the imported goods to arrive at the assessable value, provided these amounts are not already included in the price. These additions include:

1. Commissions and Brokerage: Except buying commissions.
2. Cost of Packing: The cost of containers and packing, whether for labour or materials.
3. Assistance by Buyer: The value, apportioned as appropriate, of certain goods and services supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods. This includes materials, components, tools, dies, moulds, and engineering, development, artwork, design work, and plans and sketches undertaken elsewhere than in India.
4. Royalties and License Fees: Royalties and license fees related to the imported goods that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued.
5. Proceeds of Resale: 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.
6. Cost of Transport, Insurance, and Loading/Handling: The cost of transport of the imported goods to the place of importation, insurance, loading, unloading, and handling charges associated with the transport of the imported goods to the place of importation. These additions ensure that the assessable value reflects the true economic value of the goods at the time of importation.

Transaction value is defined as the price actually paid or payable for the goods when sold for export to India. It is the primary method of valuation under Rule 3(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. For the transaction value to be accepted, several conditions must be met: there should be no restrictions on the disposition or use of the goods by the buyer (other than those imposed by law, geographical restrictions, or those not substantially affecting the value); the sale or price should not be subject to conditions or considerations for which a value cannot be determined; no part of the proceeds of any subsequent resale, disposal, or use of the goods by the buyer accrues directly or indirectly to the seller, unless an adjustment can be made under Rule 10; and the buyer and seller should not be related, or where they are related, the transaction value is acceptable under Rule 3(3).

Under Section 14(1) of the Customs Act, 1962, the value of imported goods is ordinarily the 'transaction value'. This is defined as the price actually paid or payable for the goods when sold for export to India, subject to adjustments specified in Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. For the transaction value to be accepted as the assessable value, Rule 3(1) of the Customs Valuation Rules, 2007, stipulates several conditions:

1. There must be a sale for export to India.
2. The buyer and seller should not be related, or if they are related, the relationship should not have influenced the price.
3. There should be no restrictions on the disposition or use of the goods by the buyer, other than restrictions imposed by law, geographical restrictions, or restrictions that do not substantially affect the value of the goods.
4. The sale or price should not be subject to conditions or considerations for which a value cannot be determined.
5. No part of the proceeds of any subsequent resale, disposal, or use of the goods by the buyer accrues directly or indirectly to the seller, unless an appropriate adjustment can be made under Rule 10. If any of these conditions are not met, or if the proper officer has doubts about the truth or accuracy of the declared value, the transaction value may be rejected, and valuation would proceed under the subsequent rules.

Transactions between related parties are a critical area in customs valuation. Under Rule 3(2)(a) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, the transaction value shall not be accepted if the buyer and seller are related, and the relationship influenced the price. However, the mere fact of being related is not sufficient for rejection. Rule 3(3) provides conditions under which the transaction value can still be accepted even if the parties are related: (a) if an examination of the circumstances of the sale indicates that the relationship did not influence the price; or (b) if the importer demonstrates that the declared value closely approximates 'test values' such as the transaction value of identical or similar goods sold to unrelated buyers in India, or the deductive value or computed value for identical or similar goods.

According to Section 14(3) of the Customs Act, 1962, for the purpose of customs valuation, the rate of exchange for conversion of foreign currency into Indian currency (or vice versa) shall be the rate 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, as the case may be. This rate is notified by the Central Board of Indirect Taxes and Customs (CBIC) from time to time. Importers must use the exchange rate specified by the CBIC, not the market rate or bank rate, for calculating the assessable value in Indian Rupees.

Provisional assessment is provided under Section 18 of the Customs Act, 1962, when the proper officer is unable to determine the assessable value of imported goods immediately. This typically occurs when the importer is unable to produce documents or furnish information necessary for valuation, or when the value declared is under dispute. The procedure involves the importer making a request for provisional assessment, executing a bond for the payment of the difference between the provisionally assessed duty and the final duty, and furnishing a security (e.g., bank guarantee) as deemed fit by the proper officer. Once the necessary information is available or the dispute is resolved, the assessment is finalized, and any differential duty is either paid by the importer or refunded by the department.

The valuation of imported software is a complex area. When software is imported on a carrier medium (like a CD-ROM or DVD), the valuation generally includes the value of the carrier medium itself. However, the value of the intellectual property (IP) embedded in the software, if separately declared and distinguishable, may be treated differently. CBIC Circulars (e.g., Circular No. 15/2013-Customs) have clarified that the assessable value for packaged software imported on a medium should include the cost of the medium and the cost of the software recorded on it. For electronically transmitted software (downloaded), customs duty is generally not leviable as there is no 'importation' of goods in the physical sense, subject to specific clarifications and legal interpretations. The focus is on whether there is a 'good' that crosses the customs frontier.

Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, mandates the addition of certain costs and charges to the price actually paid or payable. These include: (a) commissions and brokerage (excluding buying commissions); (b) the cost of containers and packing; (c) the value of goods and services supplied by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods (e.g., materials, tools, dies, moulds, engineering, development work); (d) royalties and license fees related to the imported goods that the buyer must pay as a condition of sale; (e) 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; and (f) the cost of transport, insurance, loading, and handling charges associated with the imported goods to the place of importation.