Introduction

The Supreme Court(1) recently declared that Rule 9(2)(ii) of the Customs Valuation (Determination of Price of Imported Goods) Rules 1988 is arbitrary to the extent that it seeks to introduce a fiction for arriving at the purported cost of loading, unloading and handling charges, even where the actual charges paid are available and ascertainable. The rule should be read to mean that it applies only where the actual cost of such services is not ascertainable.

The court also held that the aim of the valuation rules is to arrive at an assessable value "having closest proximity with the actual price", and that when costs are to be added to the price, it must be "to the extent they are incurred by the buyer" (ie, the actual costs incurred).

Facts

The appellant engaged in the manufacture and marketing of mini and micro-computer systems and peripheral devices and the import of various components, including software. It presented a bill of entry (dated April 15 1993) for assessment in Madras for a consignment with a chargeable weight of 315 kilograms.

The Madras International Airport Authority's tariff for the actual loading, unloading and handling charges was Rs65.40. However, the tax authorities added Rs15,214.69 to the value of the goods as handling charges on the basis of Rule 9(2)(ii) (as amended by Notification 39/90, July 5 1990), which entitled them to add 1% of the free-on-board value of goods as loading, unloading and handling charges. As a consequence of the additional notional handling charges, the actual duty charged was Rs16,209.20 instead of Rs69.98.

The appellant challenged the validity of Rule 9(2)(ii) before the Madras High Court on the premise that it was not only beyond the scope of Section 14(1) and Section 14(1-A) of the Customs Act, 1962, but also violated Article14 and Article 19(1)(g) of the Constitution of India.

The Madras High Court dismissed the appellant's writ petitions, holding that, among other things:

"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."

The importer filed a special leave petition before the Supreme Court.

Decision

The Supreme Court ruled in favour of the respondent and held that Rule 9(2)(ii) is contrary to and beyond the scope of Section 14 of the Customs Act, insofar as it seeks to introduce a fiction for the addition of loading, unloading and handling charges, even when the actual cost is available for consideration. To that extent, Rule 9(2)(ii) does not conform with the objectives of the valuation rules.

If the actual costs of goods or services are available, these should be the determinative factor. It is only in the absence of actual costs that notional cost may be adopted. The aim is to arrive at the value of goods or services as well as the costs and services which most closely resemble the actual price of goods, costs and services. This is demonstrated by the fact that in the valuation rules, the sequence goes from the price of identical goods to similar goods and then to deductive value, with a best judgement assessment as a last resort.

The rule-making authority has the power to make rules, but such power must be exercised by ensuring that the rules are consistent with the Customs Act and not incompatible with the main provisions of the statute, as is the case with Rule 9(2)(ii) (amended in 1990).

Referring to Garden Silk Mills v Union of India(2) the Supreme Court observed that the decision was delivered in the context of a factual situation where the actual cost was not ascertainable (before the 1990 amendment). The court further relied on Kunj Behari Lal v State of Himachal Pradesh(3) to emphasise that a delegated power to legislate by making rules "for carrying out the purposes of the Act" is a general delegation, without laying down any guidelines; it cannot be exercised so as to bring into existence substantive rights or obligations or disabilities not contemplated by the provisions of the act itself.

Even though notional fixation of loading, unloading and handling charges at 1% of the free-on-board value of goods would help customs authorities to apply the rate uniformly, it would not qualify as a reasonable yardstick where such charges are known and ascertainable. The relevant proviso (enacted according to General Agreement on Tariffs and Trade guidelines) ought to adhere to the actual cost principle.

Comment

The decision re-emphasises the settled principle of law relating to customs valuation that the transaction value of goods (ie, actual cost paid or payable) is sacrosanct, and that the price can be disregarded only in circumstances stipulated by law. It also spells out that the role of a deeming fiction in law should be restricted to the contour of the law in the context of which it was created, and cannot override or transcend it.

The text of Rule 9(2)(ii) is on the same subject and identical to that used in Rule 10(2)(ii) of the existing Customs Valuation (Determination of Value of Imported Goods) Rules 2007. Accordingly, the decision will have a bearing on pending issues before various judicial and quasi-judicial forums in the context of the valuation rules of both 1988 and 2007.

While importers of high-value goods of low or limited weight will benefit from this judgment, it may increase the assessable value in respect of goods which may not necessarily be high value, but have a higher chargeable weight. Importers of such goods are advised to consider the increased customs duty while negotiating supplier contracts.

For further information on this topic please contact Ranjeet Mahtani or Divya Jeswant at Economic Laws Practice by telephone (+91 22 6636 7000) or email (ranjeetmahtani@elp-in.com or divyajeswant@elp-in.com).

Endnotes

(1) Wipro Limited v Assistant Collector of Customs, Civil Appeals 9766-9775, 2003 with Civil Appeals 1950-1951, 2004 (April 16 2015).

(2) [(1998) 8 SCC 744].

(3) [(2000) 3 SCC 40].

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