MAY 07, 2018

By K K Sharma, Member, Central Board of Excise & Customs (Retd.)

FOLLOWING the Wipro case judgement - 2015-TIOL-79-SC-CUS on landing charges as part of transaction value, the CBEC (now rechristened as "CBIC") issued a Notification No. 91/2017-Cus (NT) dated 26.9.2017 with a view to amending Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 ("CVRs" for brevity). The notification inserted a new sub-rule (da) in Rule 2 to define place of importation and substituted erstwhile Rule 10(2) with a new one.

2. Explaining the scope of this amendment, the CBEC issued a circular No. 39/2017-Customs dated 26th September 2017, which inter alia clarified that:

(i) the transaction value of the imported goods in terms of section 14 of the Customs Act, 1962 would include the costs incurred up to the place of importation , as defined above ;

(ii) the loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation, shall no longer be added to the CIF value of the goods;

(iii) The phrase "loading, unloading and handling charges" appearing in the amended Rule 10 (2) (a) is to be understood in context of Article 8(2) of the WTO Agreement which reads as "the cost of transport of the imported goods to the port or place of importation". Thus , only charges incurred for delivery of goods "to" the place of importation (such as the loading and handling charges incurred at the load port) shall now be includible in the transaction value; and

(iv) by virtue of the 6th proviso to Rule 10 (2), costs related to transshipment of goods (from ports to ICDs; port to port, port to CFS, Airport to Airport etc.) within India will be excluded . (emphasis supplied)

3. The amendment of CVRs as also the circular explaining it came, as noted earlier and unambiguously acknowledged in the circular itself, in the wake of Hon'ble Supreme Court's judgement in Wipro Ltd case. In that case, the Customs authorities had, instead of considering the actual landing charges incurred by the importer,notionally added 1% towards such charges to the FOB value of goods, in terms of the proviso (ii) to Rule 9(2) of the erstwhile Customs Valuation Rules, 1988. That proviso was akin to proviso (ii) to the Rule 10(2) of CVRs, as existing before the afore-noted Notification No. 91/2017-Cus(NT) came into effect, i.e. 26.9.2017. The Hon'ble Court had held that notional 1% addition was ultra vires the S.14 of Customs Act, 1962 (in short "CA"), where the actual landing charges were known or determinable.

4. A conjoint reading of the provisions of S.14 CA,the Wipro case judgement, substituted Rule 10(2) of the CVRs, and Circular No. 39/2017 indicates that, contrary to the provisions of S. 14 CA as well as ratio of Wipro judgement, the amended CVRs no longer consider landing charges,associated with the importation of goods, as part of the transaction value. Can the transaction value envisaged in S.14 CA be redefined by the CVRs? Can any place other than the destination port or airport be designated as place of importation? What will the said amendment mean for the Customs revenue? These and related questions throw up several issues for consideration, notably the following:

A. What is the nature of transaction envisaged in S.14 CA?

B. What is the value of such a transaction?

C. Is the amendment of CVRs in consonance with S.14 of CA?

D. Does the amendment follow the ratio decidendi of Wipro case?

Let us analyze these issues in detail.

A. Nature of Transaction

5. For appreciating the nature of transaction contemplated in S.14(1) CA, it will be useful to have a look at the text of that provision:

14.Valuation of goods. - (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods ……..shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation ……. , 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 :

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties andlicence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf : (emphasis provided)

6. Incidentally, WTO Rules on Customs Valuation, referred to in the CBEC circular, define the transaction value (vide Art.1.1) thus: The customs value of imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation adjusted in accordance with the provisions of Article 8. Unmistakably, the two definitions are not fully aligned with each other. S.14 definition of transaction value differs from that in Art 1.1 of WTO Rules, inasmuch as the latter does not include any reference to the delivery of goods at the time and place of importation.

7 . In a layman's language, what S.14(1) states is this:

(i) where duty/tax rates leviable on imported goods are ad valorem, i.e. expressed as a percentage of value of the goods, (such as those prescribed in Customs Tariff Act, 1975, Integrated GSTAct etc), such value shall be the transaction value of those goods;

(ii) the transaction, of which the value is to be determined, is that of importation of goods;

(iii) importation means bringing the goods from outside India into India; and

(iv) for the purposes of valuation u/s 14, the process of importation does not end merely at the line/point where the goods enter territorial waters of India, not even when the vessel carrying them reaches the destination port. It comes to an end only when the goods are delivered (landed) at the place of importation, i.e. port.

Thus, the transaction envisioned u/s 14(1) CA is the process of importation which commences with the overseas supplier agreeing to sell goods to the buyer located in India; continues with the carriage of such goods from former's factory or warehouse to India's territorial waters and concludes only when the delivery or landing of those goods takes place at the destination port in India. Clearly, this transaction is a little wider in its ambit than mere importation into a country contemplated in Art. 1.1 of the WTO Rules.

B. Value of the Transaction

8. Once we understand what the transaction u/s 14(1) CA means, it is easier to determine what would constitute its value. Clearly, it would consist of :

(a) selling price of the goods at the overseas supplier's premises;

(b) cost of loading and transportation of the goods to the load port and of unloading thereof at such port;

(c) handling charges at such port, including those for reloading of the goods on to a foreign going vessel;

(d) freight charges (F) and insurance (I) for transportation of goods from load port to the destination port; and

(e) cost of delivery (landing or unloading) of those goods from the vessel at destination port.

9. The sum total of price components referred to at (a), (b) and (c) above is called the FOB price. Addition of freight (F) and insurance (I) elements to the FOB price results in what is commonly known as the CIF price, with a single letter "C" (for cost) replacing the 3-lettered "FOB". The CIF price is the total price payable for bringing the goods from the overseas supplier's premises to the destination port. This equals the transaction value contemplated under Art.1.1 of WTO Rules.At this stage, though the goods have reached the destination port (place of importation), they are still lying on board the vessel. The delivery, referred to in S.14(1) CA, of goods has yet not taken place.

10. It is only when the goods are unloaded from the vessel and delivered (landed) at the destination port that the transaction (of importation) mentioned in S.14 (1) is complete. Naturally, therefore, for a value of goods to be the transaction value u/s 14(1), the cost of unloading or delivery or landing of the goods will have to be necessarily added to the CIF value.The transaction value would be frozen at this point and any other cost suffered hereafter can't be added. It is not without reason, therefore, that the transaction value, spoken of in S.14(1) CA, has for long been reckoned only as equal to CIF plus landing charges.

C. CVRs amendment and the S.14

11. Having understood the meanings of the transaction and transaction value, let us now examine if the said amendment of CVRs echoes them or not. One of the two amendments made to the CVRs is the insertion of Rule 2(da) which defines the term place of importation to mean the customs station, where the goods are brought for being cleared for home consumption or for being removed for deposit in a warehouse. Till 26.9.2017 (date of amendment), only the port, airport or land customs station, where the goods first landed in India, was regarded as the place of importation. Now, its scope has been extended to include even the ICDs/CFSs located in the hinterland where the imported goods, transshipped from the port or airport of importation, are cleared for home consumption or entered for warehousing. This is prima facie a problematic proposition for the following reasons:

(i) The place of importation, if at all required, should have been defined in the CA itself. Defining it in CVRs, which is a procedural law, to interpret a substantive provision of the CA is not permissible unless there is an enabling clause in the CA itself. The S.2 CA, relating to "Definitions", has no enabling clause allowing the use of words or phrases defined in any other Act or Rules, including the CVRs.

(ii) If, as defined in S.2 (23) of the CA, import implies bringing into India from a place outside India and India , as per S.2 (27) ibid, includes territorial waters of India (which extend up to 12 nautical miles into the sea), then the moment a vessel, carrying any goods from outside India, enters such waters, the goods are deemed to have been imported into India. However, the place of importation, in terms of S.14 CA, is the port where the goods are delivered or landed. It can't be taken to include any other place.

(iii) The place of importation,both under the WTO Rules and the CA, is no different from the place of introduction, defined in erstwhile European Economic Community's Council Regulation (EEC) No. 833/68 dated 27.6.1968 on the valuation of goods for customs purposes. Article 6 of that Regulation specified the place of introduction of goods into the territory of the Community, with reference to different means used for transport of goods, as follows:

(a) for the goods carried by sea, the port of unloading or the port of transshipment, subject to the transshipment being certified by the customs authorities of that port;

(b) …

(c) for the goods carried by rail, inland waterway or road, the place where the first customs office is located.

Under the CA, this place would obviously translate into the Customs port / airport / Land Customs Station where the imported goods are first unloaded or delivered or landed.

(iv) if an ICD/CFS located thousands of miles away from the destination port or airport is defined as place of importation contemplated in S.14 CA, then, in terms of substituted Rule 10(2)(a) of CVRs, the cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to such a place has to be necessarily included in the transaction value. However, the 6th proviso to new Rule 10(2) adds a caveat that in case of goods imported by sea or air and transshipped to another Customs station in India, the cost of insurance, transport and loading, unloading, handling charges associated with such transshipment shall be excluded. Thus, what Rule 2(da) does, the said proviso undoes. The proviso restores the status quo existing till 25.9.2017 and indirectly recognizes only the destination port or airport as the place of importation.

One wonders what has been achieved by insertion of Rule 2(da)!

12. Now, let us examine the amendment of Rule 10(2) of the CVRs. The relevant text of pre and post amendment Rule 10(2) of CVRs is reproduced below with key parts highlighted:

(A) Pre-amendment Rule 10(2)

(2) For the purposes of sub-section (1) of section 14 of the Customs Act, 1962 (52 of 1962) and these rules, the value of the imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include -

(a) the cost of transport of the imported goods to the place of importation;

(b) loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation ; and

(c) the cost of insurance

Provided that -

(i) …. Where the cost of transport referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods;

(ii) the charges referred to in clause (b) shall be one per cent of the free on board value of the goods plus the cost of transport referred to in clause (a) plus the cost of insurance referred to in clause (c);

(iii) where the cost referred to in clause (c) is not ascertainable, such cost shall be1.125% of free on board value of the goods:

…..

B. Post amendment Rule 10(2)

(2) For the purposes of sub-section (1) of section 14 of the Customs Act, 1962 (52 of 1962) and these rules, the value of the imported goods shall be the value of such goods, and shall include -

(a) the cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to the place of importation ;

(b) the cost of insurance to the place of importation:

Provided that where the cost referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods

………….

………..

Provided also that in the case of goods imported by sea or air and transshipped to another customs station in India, the cost of insurance, transport, loading, unloading, handling charges associated with such transshipment shall be excluded .

13. It is evident that both the costs mentioned in un-amended Rule 10(2)(a)&(b) viz. cost of transport and loading, unloading and handling charges have been bundled into new Rule 10(2)(a). Further, such cost has been made a part of the transaction value only if it is associated with the delivery of imported goods to the place of importation. The first proviso to this new Rule adds that where the cost referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods. Explaining the meaning of this formulation, para 4.2 of the circular No. 39/2017–Cus categorically acknowledges that only charges incurred for delivery of goods to the place of importation (such as the loading and handling charges incurred at the load port) shall now be includible in the transaction value. But such charges incurred at the load port are already deemed to be included in the FOB price at that port. How can these be added again to the transaction value?

14. Under the un-amended Rule 10(2)(a), these charges were associated with the delivery of goods at the place of importation and were pegged at 1% of the CIF value. However, as para 4.1 of the circular clarifies, the loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation, shall no longer be added to the CIF value of the goods. Accordingly, addition of an amount equal to 1% of the CIF, on account of landing charges, has been dispensed with.

15. The net outcome of the amendment thus is that regardless of where the imported goods are cleared for home consumption or for deposit in a warehouse, the transaction value would only be the CIF value at the destination port or airport in India. This value, as we noted earlier in para 9 and 10 above, conforms to the transaction value as defined in WTO Rules, but not that in S.14 CA, delivery at the place of importation being the differentiating factor.

16. Is delivery of imported goods at the port or place not essential for the completion of transaction of importation envisioned in S.14 CA? Will such a transaction be complete if the goods having arrived at the port or place of importation are not landed? How would the delivery envisioned in S.14 of CA take place unless the goods are unloaded at such port or place? Will not then the charges associated with such unloading be inescapable part of transaction value of the imported goods? How can a vital component of transaction value, defined in S.14 CA, be excluded under a Rule made in terms of that section?

17. Clearly, the amendment of CVRs is not in consonance with S.14 CA. The transaction value of imported goods envisaged u/s 14 CA,which equals CIF plus landing charges has been lowered to only CIF value following the amendment. The component of price paid or payable by the importer for the goods, attributable to the delivery or landing of imported goods at the destination port or airport in India,has been excluded from the transaction value. Consequently, the amendment would cause improper and recurring revenue loss, to the extent of duties and taxes payable on the delivery or landing charges.

D. Wipro Case ratio and the amended CVRs

18. As noted in para 3 supra, the Hon'ble Supreme Court had, in Wipro case judgement, struck down the notional addition of 1% of FOB value. The reasoning put forth by the Hon'ble court was that:

(a) u/s 14 CA, the transaction value was defined as the price actually paid or payable for the imported goods;

(b) where the actual loading, unloading and handling charges associated with delivery of the imported goods at the place of importation (collectively called the landing charges) were known and determinable,there was no reason to have such a yardstick (addition of 1% of FOB value as notional landing charges);

(c) such notional addition of 1% to arrive at the transaction value was repugnant to the provisions of S.14 CA; and

(d) therefore, the said proviso was contrary to the provisions of Section 14 and would clearly be ultra vires this provision .

19. There was not even an obiter dictum in the judgement to discard altogether the landing charges as an element of transaction value. In fact, the notional addition of 1% was not considered unreasonable where actual amount of such charges paid or payable was not known or was not determinable. Obviously, therefore, the amendment of Rule 10(2) carried out by the notification No.91/2017-Cus (NT) goes well beyond the ratio laid down in the Wipro case judgement.

20. To sum up, the amendment is not only distortive of the transaction value contemplated in S.14 CA but also detrimental to the legitimate revenue of the Government.In my humble view, all that was required to be done was to amend merely proviso (ii) to Rule 10(2) of CVRs so as to permit addition of 1% of CIF value, on account of landing charges, to the transaction value only where the charges referred to in clause (b) were not ascertainable. This would have, apart from squarely applying the Wipro case ratio to the CVRs and rendering that proviso intra vires the S.14 CA, kept the transaction value intact at CIF plus landing charges.

(The author is based at Chandigarh and is associated with GST axperts as Chief Patron. The views expressed are strictly personal.)