LET us now turn to the challenges faced by the Indian Customs in implementing GATT Valuation Code in the last 30 years. India is a founding member of the GATT. India, Argentina and Brazil are the only three developing countries to sign GATT Valuation Agreement on its birth. As discussed, India had been actively involved right through the Tokyo Round Negotiations which developed the ‘Agreement on Customs Valuation'. In July, 1980, India accepted the ACV, also known as GATT Valuation Code, which later came to be known as WTO Valuation Agreement, and implemented it from August, 1988. Before the introduction of the GATT Valuation Code in the valuation system in India, the Customs valuation system was broadly based on the Brussels Declaration of Value (BDV) and Article VII of the GATT. Section 14 of the Customs Act, 1962 contained the Valuation provisions which were supported by Customs Valuation Rules of 1963. The new Customs Valuation System based on GATT Valuation Code was introduced in India with the amendment of Section 14 of the Customs Act, 1962 and bringing into force the Customs Valuation (Determination of Price of Imported Goods) Rules 1988 with effect from 16.8.1988. The Valuation Rules of 1988 were adoption of the GATT Valuation Code with minor changes in structure and lay out and with reservations of application of certain articles. Prior to 16.8.1988 the position was very clear that the value under Section 14 (1)(a) of the Customs Act was "deemed value" and that this value was not necessarily the transaction price or the price agreed upon between the parties. However, with the amendment of Section 14 and introduction of the new Valuation Rules of 1988 the position changed. The old valuation system had generally adopted the practice that under the same commercial circumstances in respect of time and place of importation, quantity, commercial level, etc., a particular imported item would have only one correct assessable value. But the transaction value method introduced in Valuation Rules rejected these concepts by asserting that each shipment will be valued according to its own price i.e. the price paid or payable as agreed upon between the parties for that particular transaction. The basic idea of transaction value method was that if the price is acceptable to the buyer and the seller, it should be acceptable to Customs also unless there are reasons as specified in Rule 4 of the Valuation Rules of 1988 for departing from the price agreed upon by the buyer and the seller. After the amendment of Section 14 of the Customs Act, the sub-section 1 of Section 14 retained the original text of pre-amendment sub-section 1 and its clause (a). This gave the impression that the value of the imported goods would continue to be deemed to be the price described in sub section 1 of amended section 14, but that price would now be determined only in accordance with the new Valuation Rules of 1988 which stipulated the transaction value method. This was so because of the use of the clause "subject to the provisions of sub section 1" in the sub-section (1A) of the amended section 14. At the initial stage of implementation of the GATT Valuation Code in 1988 itself, a question therefore arose as to which one would have the overriding effect in the case of conflict between the two i.e. deemed value concept of section 14(1) and transaction value concept of the Valuation Rules, 1988. The conflict was basically between the ‘price' as is authorized to be determined under the new rules of 1988 and the concept of ‘normal price' stemming out of sub-section 1 of the amended section 14.

After a catena of judicial pronouncements, certain settled views emerged broadly on the following lines. Normally transaction value would be accepted, unless it can be shown that it does not satisfy the parameters of value as are set out under section 14(1). The aforesaid parameters under section 14(1) will be considered to be not satisfied when the Customs produced unassailable evidences of contemporaneous importation of comparable goods in a comparable transaction at a higher price; and in such a situation transaction value under Rule 4 (corresponding to Article I of the Code) could be rejected. Strict standards were set for determining whether the reference importations relied upon for rejecting transaction value were indeed contemporaneous and comparable. Further, transaction value could also be rejected when there is misdeclaration by the importer or when there is fraudulent documentation.

It may be recalled, during the Uruguay Round of Negotiations (1986-94), the issue of shifting the burden of proof from the Customs to the Importer was discussed at length. As a culmination of these negotiations on the issue of shifting the burden of proof, the WTO Valuation Committee at its first meeting in 1995 gave a decision, known as Decision 6.1, regarding Customs Administration's course of action in cases where Customs Administrations have reasons to doubt the truth or accuracy of the declared value. In India, the above said Decision 6.1 has been incorporated as a new rule in the ‘Valuation Rules' in February, 1998 by virtue of which the Customs officer has been authorized to reject the declared value under certain situations after following certain procedures.

Reconciling ‘Deemed Value' concept with that of ‘Transaction Value – Apex Court judgements

While one thought that the issue of reconciling the deemed value concept of Section 14 (1) of the Customs Act with the transaction value concept of the Valuation Rules of 1988 was settled by different judicial prouncements, the ghost of the conflict between the ‘price' of the Valuation Rules of 1988 and the concept of ‘normal price' stemming out of sub-section (1) of Section 14 rose from the ashes like the proverbial phynix with the Apex Court judgement in the case of M/s Ispat Industries Limited in September 2006 on the issue of includibility in the assessable value of transportation charges from the mother ship anchored at a distance to the jetties. After examination of the legal provisions of the Act and the Rules, the Apex Court observed as follows "The most important provision for the purpose of valuation of the goods for the purpose of assessment is Section 14 of the Customs Act, 1962"……………….. "In Section 14 (1) we are not to see the actual value of the goods, but the value at which such goods or like goods are ordinarily sold or offered for sale for delivery at the time of import"………….. "We have to see the value of the goods not for each specific transaction, but the original value which it would have in the course of international trade at the time of its import"……………… "Hence while determining the value of Section 14 we must never lose sight of the fact that Section 14(1) is a deeming provision which creates a legal fiction". While interpreting Rule 9(2)(a) of the Valuation Rules which deals with the includibility of transportation charges in the assessable value under certain situations, the Apex Court observed "If we read Rule 9(2) of the Rules independently without considering it along with Section 14 of the Act then, of course, submission of the learned Counsel for the Revenue could be sustained. However, in our opinion Rule 9(2) has to be read along with Section 14 and it can not be read independently". The Apex Court further proceeded to observe, - "In our opinion if there are two possible interpretations of a rule – one which subserves the object of a provision in the parent statute and the other which does not, we have to adopt the former because adopting the latter will make the rule ultra vires the Act"………….. " "The object of Section 14 is ‘primary' whereas the conditions in Rule 9(2) are the ‘accessories'. The ‘accessory' must, therefore, serve the ‘primary".

The law as laid down in the aforesaid judgement was further reiterated by the Apex Court in the case of M/s J.K. Corporation vide its Order dated 02.02.2007. The issue in this case was includibility of the fees paid for technical knowhow and purchase of license, in the assessable value of the goods. In this case the Apex Court reiterated that "the Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Section 14 and 14(1)(a) are clear and explicit. The Rules and the Act, therefore, must be construed having regard to the basic principles of interpretation in mind".

Thus the aforesaid two Apex Court judgements which held unequivocally that the deemed value concept of the Act will prevail over the transaction value concept of the Rules shook the roots of the new valuation system in India based on GATT/WTO Valuation Code. Being a signatory to the GATT/WTO it was mandatory for India to adopt and implement the GATT/WTO Valuation Code. On the other hand, an Apex Court judgement lays down the law of the land on a particular issue. Therefore, the only course open to the Indian Customs Administration was to amend the concerned section of the Customs Act which dealt with the deemed value concept i.e.Section 14.

Before proceeding further on this, it may be of interest to explore the reasons why the Indian Customs chose in the first place to go in for dichotomy of the Customs valuation concept in 1988. As discussed, before the Transaction Value concept of the GATT/WTO Valuation Code was enshrined in the Customs Valuation Rules, 1988, the Valuation provisions were in terms of the deemed value concept of Section 14 of the Customs Act, which was again in accordance with the provisions of Article VIIof the GATT dealing with Custom valuation. At that time, there was a major apprehension in the minds of the Indian Customs officials that the introduction of the Transaction Value concept would lead to massive undervaluation and drastic fall in Customs revenue. It may please be recalled that in the eightees the Government revenues were rather heavily dependable on the Customs revenue. Perhaps out of this apprehension, the law makers thought it prudent to continue with the deemed value provisions in Section 14(1) while describing the ‘value', even as stipulating in Section 14(1A) that the value shall be determined in accordance with the Valuation Rules which was based on Transaction Value concept of GATT Valuation Code. Naturally therefore, controversy arose subsequent to August, 1988 when the new Valuation Rules were made effective, and finally various judicial pronouncements including some from the apex court stabilized the situation and certain settled views emerged, as discussed hereinbefore. But the aforementioned two Apex Court judgements totally unsettled the settled views by making precedence of deemed value concept over the transaction value concept in the context of the provisions of the Act and the Rules.

Significant changes in valuation system – from 10.10.2007

In the circumstances, it was felt that the provisions of Section 14(1) of the Customs Act had served its purpose in taking care of the teething problems in implementation of the GATT Valuation Code, and that it was time to do away with the deemed value concept as propounded in Section 14(1), and make it clear that the Customs value for imported goods shall be determined in terms of the Transaction Value concept of the Customs Valuation Rules only. Accordingly Section 14 of the Customs Act, 1962 was substantially amended through the Finance Act of 2007. The basic features of the amended Section 14 of the Customs Act, 1962 which deals with valuation are discussed below.

It is clearly laid down in Clause (1) of Section 14 that the value of the imported goods and export goods shall be the transaction value of such goods. Transaction value is defined in Section 14 itself unlike the pre-amendment situation where the definition of Transaction Value found place only in the Rules. Transaction value has been defined as the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf. What other conditions may be provided in the Rules have also been outlined in Section 14 itself. The basic elements of cost and services which would be included in the value have also been illustrated. These are commission and brokerage, engineering, design work, royalties and license fees, cost of transportation to the place of importation, insurance, loading, unloading and handling charges.

The Note on the relevant clause in the Finance Bill of 2007 relating to this amendment clarifies the reasons for such amendment as follows:

It "seeks to amend section 14 of the Customs Act, 1962 which relates to valuation of goods for the purposes of assessment. The existing sub-section (1) of section 14 is based on concept of the deemed value of goods, but sub-section (1A) of section 14 mandates that the price in respect of imported goods shall be determined in terms of the rules made in this behalf and the rules framed thereunder are based on the concept of ‘transaction value' as enshrined in the World Trade Organization Valuation Agreement. Because of the inherent contradiction in the two concepts of ‘deemed value' and ‘transaction value', practical difficulties are being faced in implementation of the valuation provisions of the Customs Act. There has been felt a need to substitute the concept of ‘deemed value' with the concept of ‘transaction value'.

Accordingly, it is proposed to substitute section 14 of the said Act with a view to provide that the value of the imported goods and export goods shall be the transaction value of such goods, as determined in accordance with the rules made in this behalf. It is further proposed to provide that the transaction value in the case of imported goods specified in sub-section (1) shall include any amount that the buyer is liable to pay for costs and services, including commissions and brokerage, assists, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, and handling charges. It is also proposed to provide that where there is no sale or the transaction value of the imported goods or export goods is not determinable, the value of such goods shall be determined in accordance with the rules made in this behalf."

With the amendment of Section 14 of the Customs Act, need also arose for amendment of the Valuation Rules for imported goods in the light of the fact that certain elements of the existing Valuation Rules were included in the Section 14 itself. For example, transaction value was defined in the Section 14 itself. Further, certain basic elements of goods and services were clearly spelt out in Clause (1) of the Section 14. This apart, in the aforementioned two judgements the Apex Court laid down the law regarding non-includibility of transportation cost and that of royalty and license fee under certain situations in the assessable value. Under the circumstances, the Government decided to amend the existing Valuation Rules. While undertaking the process of amendment, attempts were also made to make the Rules compact and self-sufficient by incorporating certain provisos and explanations and also by renumbering the existing Rules. Finally the new Valuation Rules called the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 came into effect from 10.10.2007. This brought the dichotomy of ‘deemed value' and ‘transaction value' to an end in the Indian Customs valuation system.

(The Three-Part Series is Concluded)

[The author is a member of the Indian Customs & Central Excise Service, and the views are his personal]

Thirty years of GATT/WTO Valuation Agreement - 'Looking Back - Looking Ahead' - Part I

Thirty years of GATT/WTO Valuation Agreement - 'Looking Back - Looking Ahead' - Part II