Supreme Court clarifies sequential application of Customs Valuation Rules in import valuation: Anil Kumar Anand vs. Commissioner of Customs (2019) INSC 352

Case Background

M/s. Diyas Mantra Lighting Private Limited, the appellant, regularly imported electric decorative lightings. On January 21, 2015, they filed a bill of entry at the Inland Container Depot (ICD), Tughlakabad, New Delhi, for a consignment of electric decorative lightings under the brand names ‘Diyas’ and ‘mAntra’. This triggered an inquiry to ascertain if the goods were correctly valued for customs duty purposes. The inquiry led to proceedings for revaluing not only the current consignment but also twenty past consignments imported between December 2012 and January 2015.

The customs authorities issued a show cause notice under Section 28 of the Customs Act, 1962, alleging that the appellant had:

• Knowingly failed to declare the brand of the imported goods.
• Undervalued the goods to evade customs duty.
• Imported branded goods from a related party and undervalued them to evade customs duty.

The authorities revalued the goods under Rule 7 and Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, resulting in a differential duty of approximately ₹9.53 lakhs for the current consignment and ₹1.23 crores for the past consignments. The goods were held liable for confiscation but were released on payment of a redemption fine. Additionally, a penalty of ₹13 lakhs was imposed on the Directors of the appellant company. The appellant contested this valuation method, arguing that the rules were not correctly applied.

Timeline

Legal Framework

The core of this case revolves around the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. These rules provide a structured approach to determining the value of imported goods for customs duty purposes. Key definitions include:

• Identical Goods: As per Rule 2(1)(d) of the said Rules, “means imported goods which are same in all respects, including physical characteristics, quality and reputation as the goods being valued except for minor differences in appearance that do not affect the value of the goods; produced in the country in which the goods being valued were produced; and produced by the same person who produced the goods, or where no such goods are available, goods produced by a different person.”
• Similar Goods: As per Rule 2(1)(f) of the said Rules, “means imported goods which although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable with the goods being valued having regard to the quality, reputation and the existence of trade mark; produced in the country in which the goods being valued were produced; and produced by the same person who produced the goods being valued, or where no such goods are available, goods produced by a different person.”

Rule 3 of the said Rules states that the value of imported goods is the transaction value, adjusted as per Rule 10. If the buyer and seller are related, the transaction value is accepted if the relationship did not influence the price. Rule 3(4) mandates that if the value cannot be determined under Rule 3(1), the valuation must proceed sequentially through Rules 4 to 9.

The sequential application of the Rules is as follows:

1. Rule 4: Transaction value of identical goods.
2. Rule 5: Transaction value of similar goods.
3. Rule 7: Deductive value.
4. Rule 8: Computed value.
5. Rule 9: Residual method.

Rule 4 of the said Rules allows for the use of the transaction value of identical goods imported at or about the same time as the goods being valued. Rule 5 of the said Rules allows for the use of the transaction value of similar goods if identical goods are not available. Rules 7, 8 and 9 of the said Rules are to be applied only if the value cannot be determined under Rules 3 to 5 of the said Rules.

Arguments

Appellant’s Submissions:

• The appellant argued that the valuation should have been done based on imports from China and Spain, as these suppliers were not related parties. The authorities incorrectly treated the import from the United Kingdom as the sole basis for valuation, despite the availability of data from other sources.
• The appellant submitted that the brands ‘Diyas’ and ‘mAntra’ were not well-known enough to significantly affect the value of the goods. They contended that the goods from China, which were also branded ‘Diyas’, were cleared after physical verification, indicating that the brand did not attract any intrinsic market value.
• The appellant contended that the sequential application of the Rules was not followed. The valuation should have been done under Rules 3 to 5 of the said Rules before resorting to Rules 7 to 9 of the said Rules.
• The appellant also submitted that even if identical or similar goods were not available, data from the National Import Database (NIDB) or the Department of Valuation database (DOV) could have been used.
• The appellant clarified that they were not comparing different types of goods, but rather comparing similar items (e.g., one lamp light with another one lamp light), for which data was available.

Respondent’s Submissions:

• The respondent argued that the authorities had correctly applied the rules and that the goods were undervalued to evade customs duty.
• The respondent relied on the judgment in Collector of Customs, Bombay v. Swastic Woollens (P) Ltd. & Others [1988 Suppl. SCC 796], arguing that the concurrent findings of the lower authorities should not be interfered with by the Supreme Court.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issue:

1. Whether the customs authorities correctly applied the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, particularly regarding the sequential application of valuation methods.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeals, setting aside the orders of the Principal Commissioner of Customs (Preventive), New Delhi, and the CESTAT. The matter was remitted back to the Principal Commissioner to proceed afresh, adhering to the principle of sequential application of the Customs Valuation Rules.

How each authority was viewed by the Court:

• Collector of Customs, Bombay v. Swastic Woollens (P) Ltd. [1988 Suppl. SCC 796]:* The Court distinguished this case, stating that there was a fundamental mistake in the manner of implementation of statutory rules, and therefore the concurrent findings of the lower authorities were not binding.
• Rule 2(1)(d) and Rule 2(1)(f) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007:* The Court referred to these definitions to clarify the meaning of “identical goods” and “similar goods”.
• Rule 3 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007:* The Court relied on this rule to emphasize that the transaction value should be the starting point for valuation.
• Rule 3(4) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007:* The Court highlighted that Rule 3(4) mandates the sequential application of Rules 4 to 9.
• Rules 4 and 5 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007:* The Court emphasized that these rules should be applied first, before resorting to other methods.
• Rules 7, 8 and 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007:* The Court clarified that these rules should only be applied if the value cannot be determined under Rules 3 to 5.
• Section 28 of the Customs Act, 1962:* The court referred to this section as the basis for the show cause notice issued by the authorities.

The Court’s reasoning was based on the following points:

• The Customs Valuation Rules mandate a sequential application of valuation methods.
• The authorities failed to consider the availability of data from imports of identical or similar goods from unrelated parties in China and Spain.
• The brands ‘Diyas’ and ‘mAntra’ were not significant enough to warrant a departure from the sequential application of the rules.
• The authorities incorrectly jumped to Rules 7 to 9 without exhausting the possibilities under Rules 3 to 5.

The Court stated, “The irony is that if the competent authority thought that these were goods 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.”

The Court further emphasized, “We have no doubt this principle of sequential application would apply, 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 Court clarified that all other pleas raised by the appellant can be raised again before the Principal Commissioner and will be dealt with on merits.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the mandatory nature of the sequential application of the Customs Valuation Rules. The Court emphasized that the authorities had erred by skipping the initial steps of valuation (Rules 3 to 5) and directly applying Rules 7 to 9. This procedural lapse was deemed a fundamental flaw in the valuation process. Additionally, the availability of comparable data from unrelated sources (China and Spain) and the insignificance of the brand names in question further solidified the Court’s view that the valuation was done incorrectly.

Fact:Law Ratio

Logical Reasoning:

Key Takeaways

• Customs authorities must strictly adhere to the sequential application of the Customs Valuation Rules.
• The transaction value of identical or similar goods should be the primary basis for valuation, and the authorities must make a reasonable effort to find such data before resorting to other methods.
• The mere presence of a brand name does not automatically justify a departure from the prescribed valuation methods.
• The judgment emphasizes the importance of procedural correctness in customs valuation to ensure fairness and transparency.
• The ruling may lead to a more rigorous and systematic approach to customs valuation, with a greater emphasis on the initial steps of the valuation process.

Directions

The Supreme Court directed the Principal Commissioner of Customs (Preventive), New Delhi, to re-evaluate the matter, ensuring strict adherence to the sequential application of Rules 3 to 5 of the Customs Valuation Rules. The Court also clarified that all pleas available to the appellant can be raised again and will be dealt with on merits.

Development of Law

The ratio decidendi of this case is that the Customs Valuation Rules must be applied sequentially, and the authorities cannot bypass the initial steps of valuation (Rules 3 to 5) unless it is demonstrably impossible to apply them. This judgment reinforces the importance of procedural compliance and ensures that the valuation of imported goods is done in a fair and transparent manner. It clarifies that the presence of a brand name is not sufficient reason to depart from the prescribed valuation methods and that the authorities must consider all available data from unrelated parties before resorting to other methods.

Conclusion

The Supreme Court’s judgment in Anil Kumar Anand vs. Commissioner of Customs (Preventive) clarifies the mandatory sequential application of the Customs Valuation Rules. The Court emphasized that customs authorities must first attempt to determine the value of imported goods using the transaction value of identical or similar goods before resorting to other methods. This ruling ensures a more systematic and fair approach to customs valuation, protecting importers from arbitrary assessments and promoting transparency in the valuation process.