Customs valuation: Role of price list in determination of transaction value

 The customs value of imported goods is  determined mainly for the purposes of applying taxes  and duties. It constitutes the taxable basis for Customs duties. It is also an essential element for compiling trade statistics, monitoring quantitative restrictions, and collecting national taxes.Customs valuation is a customs procedure applied to determine  the customs value of imported goods. If the rate of duty is ad valor-em, the customs value is essential to determine the duty to be paid on an imported goods. The primary basis for valuation is the "Transaction Value" which means the price actually paid or payable for the goods when sold for export to the destined country.

In determining customs value the  price actually paid or payable should be adjusted to include all the costs and services such as royalties, license fees, commission and brokerage, cost of container and packing, tool, mold, engineering and design work, made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller. Since the assessment is on a CIF basis, the invoice value should be suitably adjusted to include the freight, insurance and handling charges as well.  This concept is based on the Agreement of Interpretation of Article VII of the General Agreement on Tariffs and Trade 1994.(1)The emphasis of the agreement is that the value should be based on the actual value of goods and not on notional value of goods.

However, the implementation of GATT Code has not been uniform and different countries interpret the valuation method according to their own views and whims.For example, in many cases import value is rejected on grounds unknown to the GATT Code. In many cases Customs  administrations forget that all transactions of imported goods are out come of a contractual obligation between the parties, and this obligation has a binding effect unless an element fraud and misrepresentation is detected and proved. It has also been observed that extraneous factors are at times considered for determining the customs values and among such factors is the use of price list as the basis for determining the customs value.

Articles 1 through 7 of the valuation agreement lay down the methods for determination of customs valuation.(2) In fact GATT Code establishes the fundamental rule that the customs value of imported goods is to be the 'transaction value' of goods or in other words it is the price actually paid or payable for the goods on their sale.(3)

A logical thing to understand is that the GATT code does not lay down uniform values of merchandise or uniform duties of merchandise.  Under the Valuation Code, it is logically possible that the customs value of same merchandise can often differ from one shipment to another, at the given same time and given same  place. This fact supports the  uniformity involved which in fact is the uniformity embodied in the system applied. For example, most of the imports are to be valued on the base of price agreed  between buyer and seller, and as a matter of procedure, the invoice price is to be accepted unless the same is mis-declared. It is possible that in some cases the invoice prices may vary widely; if so, the customs values may also vary widely, even though the goods involved in two transactions  may be identical.

   In the light of what has been stated above, the concept of "Transaction Value" in principle is based on business decisions on pricing as the basis of customs value. Only a minimum number of specified adjustments to the price established in the light of the agreement of the parties may possibly be permitted  to arrive at the  Transaction Value. And in this perspective  only a minimum number of grounds are available for departing from the Transaction Value in order to consider and to apply the alternative basis of valuation as provided under Articles 2 to 7 of the GATT valuation Code.

The acceptance of a price agreed between the parties to one transaction means the rejection of the concept that any two shipments of the same product coming from and going to the same place at the same time must have the same dutiable value within the framework of  Transaction Value(4), and each shipment is to be valued according to its own price, whether the prices differs due to the quantity difference, or due to difference in trade levels, or because of the terms of the sales agreements which might have been entered into at different times - or even if one importer gets a lower price simply because he drives a hard bargain or the exporter chooses to favor him. And in return for a lower price for the imported goods to a particular buyer (importer), the seller (exporter) receives any additional payment or other compensation (especially goods or services), then such additional payments or other compensations will qualify as an indirect payment (in cash or kind) and are to be added to the invoice price to arrive at Transaction Value for customs purposes. Similar calculations are required in a barter or counter trade situation if the price of the imported goods being valued is influenced by a service received or by the price paid by the importer or by the exporter in another transaction which is part of the same barter or counter-trade arrangement. In such situations it may not be possible to value these indirect factors on which the import transaction is conditioned, and then it will not be possible to establish a Transaction Value.

The question now arises about the legal status of the transaction value, that is, can the same be rejected on the basis of a  list price. Here one must remember  that agreements of sale constitute a contracts and are binding on the parties except that such contracts suffer from legal infirmities. Where a list price  is the basis for a sale contract  it may attract consideration of being a sale price otherwise it has no relevance for determination of value.  In many instances, customs authorities make no allegation of mis-declaration and despite that reject the price of the goods imported without giving adequate  reasons for rejection.   Often customs administration reject the transaction value on the basis of price list of the seller, but while doing so, customs not only ignores the GATT code's guiding principles, but also act contrary to the legal provisions in this regard. It may be noted,  by proposing that price list is a valid piece of evidence for the rejection of transaction value since their action ab initio is illegal  and a wrong notion.  The action of the customs is erroneous as it  cannot be a reason by itself to reject the transaction value.(5)

 An invoice price, one has to keep in mind, is a consequence of a legal contract, and where such  invoice price is rejected , one is rejecting the contract cause, reasons and plausible evidence.  And decisions of such a nature become challenge-able  before the W.T.O Arbitration Tribunal, and all this may lead to costs and damages.

The grounds hitherto discussed  may also be reviewed  in the light of one's domestic regulations on the subject (6). Because the laws generally provide that the price (value) in a contract of sale may be fixed by the contract and where the contract provides a fixed price the same is generally enforceable and is accepted as the valid price of goods.

(The writer is an Advocate and is currently working  with M/s Azimuddin Law Associates Karachi.)

1. The agreement consists of four parts and three annexes ie, it provides a hierarchy of methodologies, rules on customs valuation, and a committee to oversee the implementation etc.

2. The Agreement creates a strict and detailed hierarchy of valuation methodologies. Articles 1 through 7 of the Agreement define the methods for determination of customs value in a sequential order of application. Article 1 defines the primary method of valuation, which is used whenever the conditions of Article 1 are met. When the conditions of Article 1 are not met, customs value is to be determined by proceeding sequentially through the succeeding Articles to the first Article under which customs value can be determined. Except as provided in Article 4, it is only where the customs value cannot be determined under a particular Article that the provisions of the next Article are to be used. Article 4 provides that upon request of the importer, the application of Articles 5 and 6 will be reversed. However, if the importer does not request that the order be reversed, these Articles will be considered in their natural sequence. If the importer does request that the order be reversed, but customs value cannot be determined under Article 6, customs value will be determined under Article 5, where possible.

3. Transaction value is the appropriate measure of customs value. However, for the application of the new method the condition required state: (a) there are no restrictions on the disposition or use of the goods by their buyer, other than restrictions which are imposed by law, that limit the geographical area in which the goods are sold, or do not substantially affect the value of the products; (b) the sale price is not subject to some condition or consideration for which a value cannot be determined; (c) no part of the proceeds from the subsequent resale of the product accrues to the seller without adjustment to the transaction value; and, perhaps most importantly, (d) the buyer and seller are not related.

Article 15 provides, the rules for determining where persons are related for purposes of the Agreement. That persons will deemed to be related person only if: (a) they are officers or directors of one another's businesses; (b) they are legally recognized business partners; (c) they are employer and employee; (d) any person directly or indirectly owns, controls or holds five percent or more of the outstanding voting stock or shares of both persons; (e) one person directly or indirectly controls the other; (f) both persons are directly or indirectly controlled by a third person; or (g) they are members of the same family.

4. While determining the transaction value, following additions (applicable where same have been paid by the buyer and not already included in the price) are to be made: • commissions and brokerage, other than buying commissions; • the cost of containers (if not a reusable transportation device) and packing; • the value of certain specified types of goods and services supplied by the buyer free of charge or at reduced cost for use in the production or sale of the imported goods (but excluding design and engineering undertaken in the country of importation); • royalties and licence fees related to the goods imported which must be paid as a condition of the export sale; and • the value of any part of the proceeds of resale, disposal or use of the goods that accrues to the seller.

The following items are excluded, and if in the price are to be deducted 'provided that they are distinguished from the price: 

Charges for construction, erection, assembly, maintenance or technical assistance after importation; 

The cost of transport after importation; 

Duties and taxes of the country of importation.

5. Eicher Tractors case decided by the Indian Jurisdiction.

6. The provisions of section 9 of the Sale of Goods Act, 1930.