Day 2 — CUSTOMS VALUATION & TARIFF CLASSIFICATION LEGAL COMPENDIUM

30-Day Series on the Customs Act 1962 and FTP 2023 – an initiative of Author CA NAVJOT SINGH where the author will dissect core provisions, recent jurisprudence and practical compliance strategies under the Customs Act 1962 and the Foreign Trade Policy 2023.

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Expanded guide to Customs valuation: law, landmark judgments, and extra real-life examples for every valuation rule.

1. Executive précis

Instrument	Key Provision(s)	Ratio / Practical Import
Customs Act, 1962	Section 12 (charge), Section 14 (transaction value), Section 17-18 (assessment)	Section 14 is a self contained code for valuation — Eicher Tractors Ltd. (SC)
Customs Valuation Rules, 2007	Rules 1-10; Rule 10 lists mandatory “additions”	Rules are sequential & exhaustive — Collector v. Austin Engineering (SC)
Customs Tariff Act, 1975 & HSN (2022)	First Schedule + GIR 1-6	GIRs have statutory force — Wood Polymers (SC)
FTP 2023 & Handbook Vol. 1	Paras 2.50, 4.15-4.37 (AA), 5.01-5.23 (EPCG)	Duty-saved value dictates Export Obligation (EO)
Income-tax Act, 1961 (Ch. X)	Section 92-94B, Rules 10A-10EB	ALP persuasive but not binding on Customs — Samsung India (HC)
WTO CVA (Art. VII GATT 1994)	Adopted via Section 14 & 2007 Rules	Domestic valuation must be CVA-consistent — Ferodo India (SC)

2. GENERAL RULES OF INTERPRETATION (GIR 1-6) — FORENSIC
APPLICATION

“Classification is a mixed question of law and fact; the law supplies the test, the facts supply the answer.” — Mahindra & Mahindra (SC)

GIR	Statutory Text (condensed)	Judicial Tests / Practical Tips	Example	Precedent
1	Titles illustrative; rely on heading text & Notes.	Open Section & Chapter Notes before deciding.	Lithium-ion EV battery → 8507	Wood Polymers (SC)
2(a)	Unfinished article having essential character of finished one.	Check intended use, minor finishing, disassembly for transit.	KD bicycle kit → 8712	Sharp Business Machines (SC)
2(b)	Sets classified by component giving essential character.	Apply value/volume/role triad.	Coffee-maker beans gift pack → 8516	Seiko Watch India (SC)
3(a)	Detailed description prevails over generic.	Burden on Revenue to show greater specificity.	Plastic infant bottle v plastic article.	Godrej & Boyce (SC)
3(b)	If 3(a) fails, classify by essential character.	Used for multifunction devices.	Printer scanner- fax: 8443.	Canon India (SC)
3(c)	Fallback when 3(a)/(b) indeterminate.	Demonstrate why (a)/(b) fail.	Ceramic-glass figurine → 7013.	Pepsico India (HC)
4	Pick heading to which goods are most akin in character.	Functional & material affinity.	Pre-code smart-watch → 9102.	Bakeman’s (SC)
5	Normal packing follows goods; durable, reusable packs may be separate.	Evaluate independent commercial identity.	Oak wine chest → 4416.	Hindustan Lever (SC)
6	Apply Rules 1-5 mutatis mutandis at 6/8-digit level.	Restart analysis after 4-digit heading fixed.	Laptop battery 8473 30 00.	–

3. RULE-BY-RULE COMMENTARY ON THE 2007 VALUATION RULES

3.1 RULE 3 — TRANSACTION VALUE (DEFAULT METHOD)

Element	Evidence	Leading Authority
Price actually paid/payable	Commercial invoice, LC, SWIFT remittance	Eicher Tractors (SC 2000)
Sale for export to India	Contract, shipping docs	SanDisk International (HC 2023)
Relationship did not influence price	TP study, shareholding chart	Samsung India (HC 2023)
Price freely disposable	Terms of sale, no resale proceeds to seller	–

MANDATORY ADDITIONS — RULE 10(1)

Selling commission	Royalties/licence fees	Assists	Resale proceeds	Packing
Yes	Dual test — Sony India (SC 2008)	Ferodo India (SC 2008)	Rule 10(1)(d)	Dutiable

3.2 RULE 4 — IDENTICAL GOODS

Rule 4 of the 2007 Valuation Rules permits Customs to adopt the transaction value of identical goods that were imported “at or about the same time” as the consignment under assessment. “CBIC Circular No. 6/2008-Cus, dated 28 April 2008, operationalises this by prescribing a look-back / look-forward window of 90 days from the date of filing the Bill of Entry.” Thus, only invoices for identical goods cleared within 90 days before or 90 days after your transaction can be used as valid comparables. Anything outside that range is normally treated as non-contemporaneous and fit for Rule 5 (similar goods) or later rules.). Case: Phoenix International (214 ELT 19 SC).

3.3 RULE 5 — TRANSACTION VALUE OF SIMILAR GOODS

“Similar goods” are goods which—although not alike in all respects—have like component materials, like characteristics, perform the same functions, and are commercially interchangeable with the goods being valued (Rule 2(f)). They must also be produced in the same country of origin and, wherever possible, by the same manufacturer.

How Rule 5 is triggered

1. Rule 4 exhausted: No contemporaneous identical import (± 90 days) is available.
2. Similarity test passed: Technical datasheets, catalogues, and expert affidavits establish commercial interchangeability.

The “Commercial Interchangeability” Grid

Factor	Documentary proof
Origin & manufacturer	Certificate of origin; factory licence.
Component materials/ grade	Independent lab reports; ASTM/IEC specs.
Physical characteristics	Photographs, product datasheets.
Functional performance	Test certificates, client acceptance reports.
Trade perception	Quotations from independent distributors.
Quantity & commercial level	Purchase orders showing bulk/retail parity.
Delivery terms & Incoterms	Copies of contracts—must match or be objectively adjustable.

Price adjustments

If differences in quantity or commercial level exist, Rule 5(1)(b) allows objective, databacked adjustments up or down. CBIC instructs that adjustments must be arithmetically demonstrable—mere “thumb rules” will not pass muster.

Jurisprudential compass : Century Metal Recycling v. UOI (2019 SCC OnLine) and Commissioner v. Gravita India Ltd. (Del HC 2024) reiterate that Customs must prove both similarity and contemporaneity; failure to do so vitiates the assessment.

3.4 RULE 6 — DEDUCTIVE VALUE METHOD

When is Rule 6 applied?

• Rules 3-5 fail or cannot be used because:
• comparable import data are unavailable, or
• supplier refuses cost disclosure.
• Importer is able to document domestic resale prices of the imported goods (usually consumer goods).

Stepwise deduction formula

A. Retail / ex-factory selling price in India
B. Less: Domestic indirect taxes (GST, cess) actually payable
C. Less: Post-import costs (freight, insurance, inland transport, warehousing)

D. Less: Commissions and usual profit & general expenses (Rule 6(1)(c))

————————–

Assessable CIF value = A – (B + C + D)

The “usual profit” must be evidenced by audited financials or trade-association benchmarks—see Board Circular 6/2008-Cus. A “flat 10 %” deduction without proof is routinely struck down.

Evidentiary burden: In Hanuman Prasad & Sons v. Commissioner of Customs, 2024 (Del HC) , the Court upheld Customs’ rejection of Rule 6 because the importer produced only self-generated spreadsheets, not audited statements, to substantiate warehousing and margin deductions.

Practical safeguards

1. Obtain CA-certified costing sheets for post-import expenses.
2. Preserve GST returns / GSTR-1 showing actual output tax.
3. Reference industry margin studies (e.g., CARE Ratings, CRISIL) to establish “normal profit.”

3.5 RULE 7 — COMPUTED VALUE METHOD

Concept

The assessable value is the sum of:

Component	Typical evidence
(i) Cost of materials and fabrication of the imported goods	Supplier’s cost audit, costed BoM, CA-attested.
(ii) Profit and general expenses equal to that normally reflected in sales of goods of the same class or kind (often 8-10 %)	Audited financials of the overseas manufacturer; independent industry margin reports.
(iii) Assists—value of design, engineering, moulds, etc., supplied free or at reduced charge by the buyer	Contract, invoices for tooling, amortisation schedule.
(iv) Packing costs suitable for shipment to India	Packing invoices.

Procedure

1. Importer secures a producer’s cost-sheet—frequently verified by a Big-4 or equivalent.
2. Customs may request cost-audit working papers; refusal by the foreign producer usually forces a shift to Rule 8, so cooperation is crucial.
3. Forex conversion at RBI reference rate on BoE date (Rule 2(2)).

Case-law anchor

Ferodo India Pvt Ltd. v. CC (2008) 231 ELT 3 (SC) held that a foreign CA-certified cost sheet is credible primary evidence; Customs cannot reject it merely due to higher margin vis-à-vis Indian norms unless it disproves bona fides.

Best practice

• Embed a Confidentiality Undertaking: allows Customs to inspect but not copy sensitive cost data.
• Keep assists amortisation aligned with actual production quantity to avoid later duty top-ups.

3.6 Rule 8 — Residual Method (“Reasonable Means”)

Statutory premise

Where value cannot be determined under Rules 3-7, it is determined “using reasonable means consistent with the principles and general provisions of § 14 and the Rules.”

Two indispensable conditions

1. Sequential exhaustion: The order-sheet must record why each prior Rule was inapplicable.
2. Speaking order: Fiat India Automobiles Ltd. v. CCE (2012) 283 ELT 161 (SC) mandates a reasoned analysis—mere citation of “reasonable means” is jurisdictionally inadequate.

Acceptable “reasonable means”

Methodology	Acceptability test
Weighted average of partially comparable imports plus objective adjustments	Only if identical/similar imports differ in a specific parameter (quantity, Incoterms).
Industry list prices minus verifiable trade discounts	Must be backed by manufacturer price lists and actual sales data.
Production cost data from a comparable producer in another country, adjusted for freight/origin	Adjustments must be transparent and arithmetically shown.
Global commodity indices (e.g., LME for metals) plus documented premium	Index source and premium calculation must be annexed.

Red lines

• NIDB / database prices alone are never sufficient; Eicher Tractors logic applies.
• Circular assumptions (“add 10 % to Taiwanese cost for US origin”) are arbitrary and collapse on appeal.

Practical checklist before Rule 8 invocation

1. Attach a Rule-by-Rule rejection matrix to the draft order.
2. Cross-reference every numeric adjustment to a document on file.
3. Provide the importer an opportunity to rebut the proposed “reasonable means” (natural justice).

4. RELATED-PARTY IMPORTS & TRANSFER-PRICING INTERFACE

Customs Valuation Concern	TP Parallel	Mitigation Strategy
Related party (Rule 2(2))	ALP benchmarking (CUP, TNMM, etc.)	File TP Local/Master Files with BoE; obtain SVB order.
Royalty inclusion test (Dual)	Royalty separately benchmarked	Align clauses; avoid overlap.
Resale-linked proceeds (Rule 10(1)(d))	TP treats as operating expense	Disclose in SVB questionnaire.

Global Wines (Del HC 2024) accepted TP study to negate price influence.

5. SECTOR-SPECIFIC VALUATION PITFALLS

Sector	Recurring Issue	Legal Handle / Rule
Automotive CKD/SKD	Whether kit is “essentially complete”	GIR 2(a); Sharp Business Machines.
ICT Hardware	Bundled software royalty	Rule 10(1)(c); Nokia India (Del HC 2014).
Alcohol / State Excise	Free promotional items → assists	Declare under Rule 10.
EPCG Projects	Over-valuation inflates duty-saved	FTP Para 5.11; reconcile invoices.
Pharma APIs	Pre-shipment testing fees	Dutiable as assists (Rule 10).

6. INTER-LINKS WITH FTP, SEZ, GST & STATE EXCISE

Customs Event	Parallel Statute	Compliance Impact
Provisional assessment ups valuation	GST ITC reversal (Sec. 16 CGST)	Pay via DRC-03 within 30 days.
DTA clearance from MOOWR warehouse	CGST Sch. II (deemed supply)	Use higher of transaction or computed value.
Under-valuation detected	DGFT may recast EO, levy compo-fee	File Valuation Reconciliation Statement.

7. PROCEDURAL ARSENALS

1. Provisional Assessment (Section 18): PD Bond + 1 % BG; finalise within 6 months.

2. Special Valuation Branch (SVB): File Annexure-A in 60 days; reference TP order for fast-track.

3. Appeals:

– Commissioner (Appeals) → 7.5 % pre-deposit.

– CESTAT → additional 10 %.

4. Refund of Excess Duty: Claim within 1 year of finalisation; produce unjust-enrichment
certificate.

8. LANDMARK JURISPRUDENCE DIGEST (SC / HC)

Issue	Citation	Ratio
NIDB / data-bank v invoice	Eicher Tractors Ltd. v. CC (SC)	DB price cannot override bona-fide invoice.
Sequential application mandatory	Austin Engineering (SC)	Skipping rules vitiates assessment.
Royalty dual test	Sony India (SC)	Must relate to goods and be condition of sale.
Assists apportionment	Ferodo India (SC)	Spread over actual quantity imported.
TP study as ALP evidence	Samsung India (HC)	ALP rebuts presumption of influence.
Acceptance of assessment ≠ bar to appeal	Niraj Silk Mills (HC)	Statutory right survives.

9. PRACTITIONER’S COMPLIANCE TOOLKIT & FIVE-MINUTE
CHECKLIST

Document / Control	Core Contents	Retention
GIR Memorandum	Step-wise GIR analysis + images	5 yrs (Section 127E).
Valuation Reconciliation Statement (VRS)	Invoice → Rule 10 additions → CIF → duty	Annual; annex to DGFT files.
Related-Party Matrix	Shareholding, TP method, SVB status	Update on every change.
Assists Register	Description, cost, amortisation	Life of assist + 5 yrs.
Royalty Tracker	Contract abstract, linkage test	Term + 8 yrs (IT Act).

Five-Minute Audit Sweep

☑ GIR memo in file
☑ TP study attached
☑ RBI reference rate printout
☑ Royalty & assists quantified
☑ FTP duty-saved tally sheet

10. ANNEX — WORKED EXAMPLES (₹ / US$)

Rule Applied	Computation	Assessable Value
Rule 3 (TV)	FOB US$ 1,000 + Freight 80 + Insurance 20 = CIF US$ 1,100 × ₹ 83.00	₹ 91,300
Rule 4 (Identical)	Identical CIF US$ 1,050 (date-adjusted) × ₹ 83.00	₹ 87,150
Rule 6 (Deductive)	Retail ₹ 10,000 – GST 1,525 – Margin 1,062 – Logistics 600	₹ 6,813
Rule 7 (Computed)	Cost US$ 650 + Profit 10% + Assists 30 = US$ 755 × ₹ 83.00	₹ 62,765

CLOSING OBSERVATION

Across decades, the Supreme Court’s lodestar remains unchanged: customs valuation is an evidence-based exercise performed strictly in the statutory sequence. A contemporaneous paper-trail — GIR memo, VRS, TP corroboration — is your best prophylactic against re-assessment, interest and penalty.

Engagement Corner — Valuation Brainteasers for Practitioners

Scenario	Your Challenge
Royalty Riddle	An Indian importer of branded sports shoes pays a 5% ad-valorem marketing royalty to the overseas brand owner after the goods are cleared and resold in India. The royalty agreement does not mention it as a condition of sale. Should the royalty be included in the assessable value under Rule 10(1)(c)? State reasons with case-law.
Post-Shipment Discount Puzzle	A supplier issues a post-shipment debit note reducing the invoice price by 3 % to compensate for quality defects discovered before assessment. Can the importer claim the lower price as the transaction value, or must Customs ignore the debit note? Cite the correct rule and precedent.
Composite-Goods Conundrum	A boxed “Home-Office Kit” contains a laser printer (value ₹ 12 000), a ream of paper (₹ 400) and a USB cable (₹ 200). Applying GIR 2(b) and GIR 3(b), what heading and 8-digit code should you declare—and why?
Assists Allocation Dilemma	A mould valued at US$ 20 000 (supplied free-of-charge by the buyer) is used to manufacture 50 000 plastic casings, shipped in five equal consignments. How much of the mould’s value should be added to each Bill of Entry, and under which rule?
Identical-vs- Similar Showdown	Customs rejects your transaction value and invokes Rule 4 using a contemporaneous import of the same model but from a different country of origin. You argue Rule 5 (similar goods) is the correct fallback. Who is right, and why?

Feedback /suggestions welcome at CA Navjot Singh | [email protected] | +91 9953357935