Custom valuation rules for imported goods operate sequentially-Supreme Court

Custom valuation rules for imported goods operate sequentially-Supreme Court. Once statutory Rules exist and provide for sequential implementation, the assessing authority has no option but to proceed accordingly.

ABCAUS Case Law Citation:
ABCAUS 2888 (2019) (04) SC

Important Case Laws Cited/relied upon by the parties
Collector of Customs, Bombay v. Swastic Woollens (P) Ltd. & Other 1 1988 Suppl. SCC 796

The instant appeal was filed by the appellant against the impugned order of the Principal Commissioner of Customs (Preventive) and the order of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) sustaining the order of the Original Authority, revaluing the import consignments of the appellant.

The appellant was a importer and filed a bill of entry for clearance of import consignments under twi brands.  The enquiry proceeded to ascertain whether the goods had been correctly valued for the purposes of customs duty.

On completion of the enquiry, proceedings were initiated for revaluing the current import consignment, as well as past consignments within the aforesaid window, apart from the proposal for confiscation of goods and imposition of penalties under the provisions of the Customs Act, 1962 (the Act).

A show cause notice was issued under Section 28 of the said Act, providing for recovery of duties not levied or short-levied or erroneously refunded, for any reason other than collusion or any wilful mis-statement or suppression of facts.

In substance, there were two grounds for the show cause notice:

(a) that the appellant, knowingly, did not declare the brand of imported goods, and undervalued the same with the intent of evading customs duty;

(b) that the appellant had imported the branded goods from its related party, and had undervalued the same to evade customs duty.

An adverse order was passed against the appellant by the authorities, resulting in the imposition of differential duty for the consignment in question, and also for the past consignments. The goods were held liable for confiscation, and were ordered to be released on payment of redemption fine, with the levy of penalty on the directors of the company.

As per the said order, valuation of the goods had been made under Rule 7 and Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (the Rules) which was sought to be assailed by the appellants on a reasoning that the scheme of the Rules had not been correctly understood and implemented by the competent authority.

The Hon’ble Supreme Court noted the definition clauses under Rule 2, where, the expressions ‘identical goods’ and ‘similar goods’ have been defined. It was also noted that Rule 3 provides for the value of imported goods to be the transaction value adjusted in accordance with the provisions of Rule 10. In cases where buyers and sellers are related, as alleged in the present case, the transaction value can be accepted if the relationship did not influence the price.

The Hon’ble Supreme Court noted that very importantly, Rule 3(4) clearly provides that the scheme of Rules 4 to 9 is to operate “sequentially”.

It was observed that the Rule 4 deals with the transactional value of identical goods, envisages that the transaction value of identical goods imported at the same time as the goods valued, can be applied. It is also clarified that they should be substantially of the same quantity, as there can be variation in pricing, depending on the size of the consignment. In case identical goods sold are not found in respect of the same quantity, different quantities of identical goods can be taken into account, with adjustments made on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracies of adjustment. The difference in distance, having implication on the transport cost, is another factor mentioned under the Rules. It is lastly clarified that the lowest of such value is to be used to determine the value of the goods

It was further observed that on the identical goods not being available, Rule 5 has to be invoked, which is transaction value of similar goods. Also in case determination is not possible under Rules 3 to 5, the determination would have to be made under the provisions of Rule 7 or Rule 8, as per Rule 6, provided that, at the request of the importer, the order of application of Rules 7 and 8 could be reversed. Rule 7 refers to Deductive Value, while Rule 8 refers to Computed Value. Whereas the Rule 9 is related to Residual method which is to be applied when the value of imported goods could not be determined under the provisions of any of the preceding rules.

As per the appellant, in the instant case, there were twenty one consignments which were not imported from one source, but three different sources. Out of the three different sources, the competent authority came to the conclusion that the import from United Kingdom was liable to be construed as import from a related party. Though this was disputed, but even assuming that to be correct, it was contended that there were imports available from two other sources, from China and Spain. These suppliers were not found to be related parties. Thus, the pricing from these two sources, with requisite adjustments for the distance or any other parameter, could always be taken as the transactional value for all the goods forming part of the twenty one consignments.

It was a submission that the sequential application of Rules required the valuation to be done in accordance with Rules 3 to 5, before proceeding to the subsequent Rules, and it was not a case where valuation was not possible under Rules 3 to 5.

The Hon’ble Supreme Court opined that if the competent authority thought that goods in question were where trademark was of significance, it could not simultaneously have ignored the imports under the same trademark, from different countries, where there were no related parties. Naturally, there would have to be made adjustments for the distance from which the import was made, or the size of the consignment, if applicable, as set out in Rules 3 to 5. There was really no occasion to straightaway proceed to determine the transactional value by relying on Rules 7 to 9.

The Hon’ble Supreme Court opined that there was no doubt that the principle of sequential application applied to the case, especially in view of sub-Rule (4) of Rule 3, which provides that there has to be a sequential implementation of the Rules, i.e., that Rules 3 to 5 would have to be exhausted first, and only in the eventuality of an inability to apply the Rules would the assessing authority proceed to impose Rules 7 to 9.

The Hon’ble Supreme Court opined that a fundamental mistake was committed in the manner of implementation of the statutory Rules. Once the statutory Rules exist and provide for sequential implementation, the assessing authority has no option but to proceed in accordance with those Rules, in that manner.

The Department when put to question, could not give a satisfactory answer as to why the concerned authority chose to ignore, in the given facts of the case, Rules 3 to 5, and did not proceed “sequentially”.

Accordingly, both, the order of the Principal Commissioner of Customs (Preventive) and the order of the CESTAT was set aside, and the matter was remitted back to the Principal Commissioner of Customs (Preventive) to proceed afresh with the matter in accordance with the Court’s observations that Rules 3 to 5 which would have to be applied first, as it is provided for the Rules to apply “sequentially”.

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