Supreme Court quashes 1% notional loading in Customs valuation when actual charges are ascertainable. Executive summary

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1 23 April 2015 EY Tax Alert Supreme Court quashes 1% notional loading in Customs valuation when actual charges are ascertainable Executive summary This tax alert gives an update on the recent decision 1 of the Supreme Court (SC). Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. The SC over ruled the Madras High Court Division Bench ruling 2 which confirmed notional fixation of loading, unloading and handling charges at 1% of Free on Board (FOB) value for Customs valuation. The present ruling is significant because SC has held the relevant proviso (ii) to Rule 9(2) of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, prescribing the notional fixation of loading, unloading and handling charges at 1% of the FOB value has been held as ultra vires, especially when such actual costs are ascertainable. SC observed that the High Court had missed the point that decision in Garden Silk Mills Ltd 3 case had been rendered considering the scenario wherein actual costs were not ascertainable. Thus, SC held that the aforesaid proviso had to be read down to mean that it would apply only when actual charges referred were not ascertainable TIOL-79-SC-CUS TIOL-204-HC-MAD-CUS (8) SCC 744

2 Background Issue pertains to Customs Valuation under the provisions of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (Valuation Rules). The value for determining Customs duty of imported goods includes loading, unloading and handling charges associated with their delivery, at the place of importation. Such charges are statutorily fixed at 1% of Free on Board (FOB) value of the goods in terms of proviso (ii) to Rule 9(2) of the Valuation Rules [which deals with Cost of Services ]. The Assessee is engaged in the manufacture and marketing of Mini and Micro Computer Systems and peripheral devices like printer, drivers etc. Assessee, inter alia, imported various components including software from time to time. In the year 1993, Assessee had presented a Bill of Entry to the customs authorities. The chargeable weight of their consignment was 315 kg and the actual loading, unloading and handling charges amounted to Rs.65 as per the tariff of the International Airport Authority of India, Madras. However, Revenue on the basis of Notification No.39/90 dated 5 July 1990 added handling charges calculated at 1% of the FOB value of goods on account of loading, unloading and handling charges in terms of proviso (ii) to Rule 9(2). The Single Judge of the Madras High Court 4 (HC) accepted Revenue s plea holding that rule making authority had the requisite power to make a provision of this nature by including landing charges for the purpose of valuation. 4 Ref: Writ Petition No of 1993 and Writ Petition No of 1993 Assessee had contested that such a proviso was not only ultra vires of Section 14(1) and Section 14(1A) of the Customs Act, 1962 but was also violative of Article 14 and Article 19(1)(g) of the Constitution of India. The HC disposed of Assessee s writ petitions and writ appeals, where the constitutional validity of proviso (ii) to Rule 9(2) of Valuation Rules was challenged. The proviso was inserted by the Notification No. 39/90 dated 5 July 1990 issued by the Ministry of Finance, Department of Revenue, Union of India. HC observing as follows, dismissed the Assessee s writ petition/appeal - "For the purpose of determination of the value, rules have been made and taking into consideration the difficulties experienced in the past in fixing the handling charges on the actuals, it is fixed at one percent of the CIF value of the goods. When the statute confers the power to make rules for determination of the value, such determination of the value by imposition of the same as a percentage cannot at any stretch of imagination be considered as repugnant to Section 14(1) or discriminatory." Being aggrieved, Assessee filed Special Leave Petition before the Supreme Court (SC). Addition of 1% notional fixation is the crux of dispute for consideration before the Apex court. Assessee s contentions Prior to the Notification No.39/90 dated 5 July 1990, relevant Rule 9 prescribed that handling charges were reckoned on actuals and only where the actual cost could not be ascertained, 1% of FOB of the goods was to be added as charges. With amendment in the Valuation Rules, the actual cost incurred and / or ascertainable was totally ignored in the matter of "handling charges" and was to be arrived at fictionally by adding 1% of FOB value of imported goods and its transportation and insurance charges.

3 Assessee pointed out that they were engaged in the manufacture and marketing of computer systems and peripherals, and in the course of its business, imported various components worth crores of rupees, which were of high value but of low weight and dimensions. Actual costs incurred towards the handling charges in accordance with the prescribed charges by the international Airport Authority of India were not even a fraction of the notional handling charges arrived at by applying the prescribed formula contained in the amended Rule. amounts incurred towards loading, unloading and handling charges while making the assessment as they varied depending upon the quantities and place of import. Finding this difficulty in actual practice and in order to achieve certainty that 1% of the FOB value was fixed for inclusion in the assessable value. Merely because some assessees would get the benefit while others would suffer certain detriment, was no reason for invalidating the provision when many others would be getting the benefit thereof as well. Assessee further indicated that where actual cost could be ascertained, the same had to be taken into consideration to determine the valuation of the goods for the purpose of Customs duty and it was only in those cases where actual cost could not be arrived at the fictional formula should be made applicable. There was no rationale in adding 1% of the FOB value in such cases and this smacked of arbitrariness making it violative of Article 14 of the Constitution. Revenue submitted that as the percentage had been fixed by the rule making authority after taking into consideration the overall picture, it cannot be said to be violative of Article 14. Supreme Court Ruling After extensively delving into the statutory provisions alongwith their amendments and referring to several decisions, the SC observed as follows - Assessee placed reliance upon the judgment of SC in Indian Acrylics v. Union of India and Another 5 to support the aforesaid submissions. Assessee also referred to provisions of General Agreement on Tariffs and Trade (GATT) which inter alia laid down yardsticks / methodology for arriving at cost of transport and the prescription therein is the actual cost of transport of the imported goods to the port or place of importation plus the handling charges and cost of insurance. Revenue s contentions Revenue defended the judgement of the High Court on the following grounds: Over last number of years, it was found impossible to ascertain the actual Wherever actual cost of the goods or the services are available; these would be the determinative factor. Only in the absence of actual cost, fictionalised cost is to be adopted. The scheme gives an ample message that an attempt is to arrive at value of goods or services as well as costs and services which bear almost near resemblance to the actual price of the goods or actual price of costs and services. Due to this, the sequence goes from the price of identical goods to similar goods and then to deductive value and then the best judgment assessment, as a last resort. No doubt, rule making authority has the power to make Rules, but such powers has to be exercised by making the rules which are consistent with the scheme of the Act and not repugnant to the main provisions of the statute itself (2) SCC 678

4 Validity of the provision and 1% FOB value in determining handling charges etc. could be justified only in those cases where actual cost is not ascertainable. HC had missed the point that Garden Silk Mills Ltd. (supra) case was decided in the scenario where actual cost was not ascertainable. That is why the first amendment to the proviso to Rule 9(2) which was incorporated vide Notification dated 19 December 1989, was justified. However, the amendment introduced vide Notification No.39/90 dated 5 July 1990 has changed the entire basis of inclusion of loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation. The only justification for stipulating 1% of the FOB value as the cost of loading, unloading and handling charges is that it would help customs authorities to apply the aforesaid rate uniformly. This can be a justification only if the loading, unloading and handling charges are not ascertainable. Proviso (ii) to Rule 9(2) introduced vide Notification dated 5 July 1990 (adding 1% for loading, unloading and handling charges) is unsustainable and bad in law as it exists in the present form and it has to be read down to mean that this clause would apply only when actual charges referred to in Clause (b) are not ascertainable. Comments The Apex Court ruling will benefit importers significantly as the adjustment to the transaction value will reduce in cases where the actual handling charges can be ascertained in respect of imports. The concern of industry on higher burden of Customs duty due to notional addition of 1% to the value of imports seems to be finally addressed. Where such charges are known and determinable, there is no reason to have such a yardstick. SC held that they are not impressed with the reason given by the authorities to have such a provision and opined that the authorities have not been able to satisfy as to how such a provision helps in achieving the object of Section 14 of the Customs Act. It cannot be ignored that this provision as well as Valuation Rules are enacted on the lines of GATT guidelines and the golden thread which runs through is the actual cost principle. Further, the loading, unloading and handling charges are fixed by the International Airport Authority.

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