OCTOBER 18, 2024

By Jignesh Ghelani (Partner) & Navaz PC (Principal Associate), Economic Laws Practice

INDIA's exporters are grappling with a legal quagmire over the inclusion of export duty in customs valuation, leading to significant uncertainty and potential financial setbacks. Export duties are levied as per the Second Schedule of the Customs Tariff Act, 1975, either as ad valorem duty or as quantity-based specific duty. Export duty applies to a variety of goods, such as tea, coffee, pepper, cardamom, various types of rice, raw sugar, iron ore, bauxite, raw cotton etc. The ad valorem export duty creates complexities when determining the assessable value for customs purposes, particularly when export duty itself must be factored into the transaction value.

The Key Issue - Inducibility of Export Duty in Transaction Value

At the heart of the current debate is whether export duty should be included in the assessable value for calculating further export duties. Section 14 of the Customs Act, 1962 ('the Customs Act'), governs the valuation of goods for export purposes. It stipulates that the value of export goods is the 'transaction value, which refers to the price actually paid or payable for the goods at the time of export. However, the inclusion of export duty in the transaction value has become a contentious issue, sparked numerous legal disputes and created a climate of uncertainty for exporters.

Circular No. 18/2008-Cus, dated 10.11.2008 ('the Circular'), clarifies that for over four decades, the transaction value of export goods had been treated as a cum-duty price, meaning the Free on Board ('FOB') price was considered inclusive of export duty. The Circular acknowledges that this practice did not conflict with statutory provisions (both before and after the 2007 amendments to Section 14) but noted that the decision on how to compute export duty was ultimately a matter of policy. It further provided that the existing practice of treating the FOB price as cum-duty would continue until 31.12.2008, and pending cases should be finalized accordingly. From 01.01.2009, however, export duty would be calculated on the transaction value as per Section 14 of the Customs Act, which refers to the price actually paid or payable for the goods, excluding the assumption that the price includes duty. For example, before 2009, if an exporter received INR 100 for goods subject to 10% export duty, the duty was calculated as INR 9.09 (100 * (10/110)), with the price treated as inclusive of the duty. After 2009, the duty is calculated directly from the transaction value as INR 10 (100 * 10%), with the price treated as exclusive of duty. This raises the question of how a statutory valuation method can be left to policy discretion, as valuation should be uniformly governed by statute.

Arguments For and Against Inclusion of Export Duty in Transaction Value

Proponents of including export duty in the transaction value argue that taxes are generally included in the price unless specifically excluded by law. For instance, Section 4 of the Central Excise Act, 1944 and Section 15 of the Central Goods and Services Tax Act, 2017 both explicitly exclude certain taxes from the value of goods, but Section 14 of the Customs Act does not provide such exclusions for export duties. Under erstwhile sales tax regime, in cases such as McDowell & Co. Ltd. vs. Commercial Tax Officer, VII Circle, Hyderabad- 2002-TIOL-40-SC-CT-CB, and George Oakes (Private) Ltd. vs. The State of Madras [1961 (11) TMI 46 - SC], the Supreme Court ruled that taxes collected as part of the price paid by the buyer form part of the taxable turnover and should be included in the overall consideration for determining tax liability, even if separately collected from the buyer. In line with these rulings, Sesa Goa Ltd. vs Commissioner of Customs, Vishakhapatnam [2009 (241) ELT 204 (Tri. - Bang.)] held that export duty must be included in the assessable value and cum-tax treatment will not be available. This position has been upheld by numerous subsequent Tribunal rulings as well; however, the issue is currently pending before the Supreme Court in Civil Appeal Nos. 9844-9888/2010, leaving exporters in a state of legal uncertainty.

On the other hand, there are strong arguments against the inclusion of export duty in the assessable value as well. Critics argue that the negotiated price of goods reflects the value agreed upon by the buyer and seller and does not include the statutory levies imposed by the Government, such as export duty. It is contended that export duty is a statutory obligation, paid in addition to the agreed price of the goods, and is not part of the price actually paid or payable. The 'price actually paid or payable' refers to the benefit that the seller accrues, and any export duty reimbursed by the customer is not a benefit for the seller but rather a statutory payment to the Government. Therefore, in the case of export duties, the reimbursement of export duty by foreign buyers is merely a pass-through cost and should not be included in the assessable value for export duty calculation.

Further, in cases where export duty is separately reimbursed by the customer, over and above the price of the goods, a key issue arises as to whether it will make a difference in treatment. While the Circular and the Sesa Goa (supra) decision primarily addressed whether the agreed-upon price should be treated as inclusive of tax, they did not directly consider the situation where export duty is reimbursed separately. It could be argued that when the duty is reimbursed separately, it presents a better case for this amount to be excluded from the assessable value, as it represents a statutory obligation paid to the government, rather than part of the goods' price. However, judicial precedents on the definition of 'price' discussed supra suggest that this argument may not hold good, as reimbursement of taxes or duties is often treated as part of the overall consideration for the sale. This continues the uncertainty about whether such reimbursements should be included in the assessable value for calculating export duty.

Adverse Impact of Including Export Duty in Transaction Value

Including export duty in the assessable value also creates a 'tax loop' issue, where duty is continually applied to an ever-increasing base, leading to inflated costs for exporters. For example, if an exporter sells goods for INR 100 and the export duty is 10%, the initial duty would be INR 10, making the assessable value INR 110. However, if the export duty is recalculated on this new value, the duty becomes INR 11 (10% of INR 110), further increasing the assessable value to INR 121, and so on.

Exporters are now facing significant pressure as customs authorities have initiated investigations, taking the position that export duty irrespective of whether recovered from customers over and above the agreed price should be includable in the assessable value for the calculation of export duty. This issue is particularly critical for sectors which operate on fixed prices and thin profit margins, leaving little room to absorb additional costs. The inclusion of export duty could severely impact the viability of these businesses. If exporters are forced to absorb these additional costs, they may find it increasingly difficult to remain competitive in international markets.

Way Forward

The issue of customs valuation for export goods has led to protracted litigation, with numerous cases still pending resolution. This ongoing uncertainty continues to affect the viability and competitiveness of several export sectors.

To avoid similar issues in the future, a quantity-based specific duty system could provide a sustainable solution to avoid similar issues in the future. Under such a system, export duty would be calculated based on the physical quantity of goods exported (for instance, per ton or per unit), rather than the ad valorem system, which ties duty to fluctuating transaction values. This approach would eliminate the ambiguity around the inclusion of export duty in the transaction value and prevent the tax-on-tax cycle, reducing the financial strain on exporters.

[The views expressed are strictly personal.]