Holding

The Department erred; Rule 7A was not applicable as the transaction was at arm’s length with no allegation of taint or abnormal discount, making the declared transaction value valid.

Summary

The appellant, Rabindra Chandra Paul, imported two consignments of refined soybean oil from Bangladesh at a C&F price of Rs 24.50 per kg. The Customs Department, doubting the declared value, asked for a cost break‑up and later invoked Rule 7A of the Customs Valuation Rules, 1988, rejecting the raw‑material cost but accepting processing charges to compute a higher assessable value. The appellant contended that the transaction was at arm’s length, there was no allegation of a tainted sale or abnormal discount, and therefore Rule 7A was inapplicable. The Commissioner (A) agreed, holding that the Department erred in invoking Rule 7A, while the Tribunal had upheld the Department’s view. The Supreme Court allowed the appeals, set aside the Tribunal’s judgment and confirmed the Commissioner’s order, ruling that the transaction value should stand as declared.

Issues considered

Whether the Customs Department was justified in invoking Rule 7A of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 in the present case
Whether the transaction was at arm’s length and free of any taint or abnormal discount warranting the application of Rule 7A

Legislation cited

Customs Act, 1962s. 128A(3), s. 130E, s. 14(1), s. 14(2), s. 4(1), s. 4(2), s. 5, s. 6, s. 7, s. 8, s. 9
Customs Valuation (Determination of Price of Imported Goods) Rules, 1988s. Rule 3, s. Rule 4(1), s. Rule 4(2), s. Rule 5, s. Rule 6, s. Rule 7, s. Rule 7A, s. Rule 8(2)(i), s. Rule 9(2)

Subjects

customs valuationtransaction valueRule 7Acomputed valuearm’s length transactioncustoms dutyimported goodsdiscount

Judgment

' --;.-· RABINDRA CHANDRA PAUL A
v.
COM MR. OF CUSTOMS (PREVENTIVE) SHILLONG

FEBRUARY 27, 2007

[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] B

Customs Valuation (Determination of Price of Imported Goods) Rules,
I 988-Rule 7A-Arms length transaction-Invocation of Rule 7A, by
Department-Correctness of-Held, not correct as transaction was at arms c
length and not tainted-Also no allegation that on account of discount,
price pegged at lower level.

Appel:ant purchased two consignments of Refined Soya bean Oil from
Mis United Edible Oils Ltd., Bangladesh (producer). The C & F value of the
Soyabean Oil (final product) showed the price to be Rs. 24.50 per kg. D
calculated at the prevailing rate of US Dollar. The Department called upon
). the appellant to give the cost break-up of the imported goods. The appellant
also obtained a certificate from the Superintendent of Customs which stated
.j
that the consignments imported was assessed by the Assistant Commissioner
of Customs at Rs. 27.17 and Rs. 31.96 respectively. The Department, however, E
refused to accept these rates. Before the Assistant Commissioner, appellant
contended that Assistant Commissioner was not entitled to invoke ~ule 7A
of the Customs Valuation (Determination of Price of imported goods) Rules,
1988 on the basis of the cost break-up, particularly when there was no
allegation that the price declared was tainted. The demand raised by the
Department was confirmed. The appellant successfully filed appeal before the F
Commissioner (A). Aggrieved Department filed appeal before the Tribunal.
By a cryptic order, the Tribunal held that the Department was right in invoking
Rule 7A. Hence these appeals.

Allowing the appeals, the Court G
HELD: I. The primary base for Customs Valuation is the Transaction
':' Value, i.e., the price actually paid or payable for the goods when sold for export
to the country of importation. The said price should not be subject to any
condition or consideration that could prevent the value from being determined
H
319
320 SUPREME COURT REPORTS (2007] 3 S.C.R.

A under Rule 4(1) of Customs Valuation (Determination of Price of Imported
Goods) Rules, 1988. Where the Department has reason to doubt the truth or
accuracy of a declared value, it may ask the importer to provide further
explanation to the effect that the declared value represents the total amount
actually paid or payable for the imported goods. If the declared value is lower
B than the declared value of similar goods imported by other buyers at or about
the same time, it can constitute "reason to doubt" the truth or accuracy of
the declared value indicated in the commercial invoice. !Para 7] 1325-C-E]

Eicher Tractors Ltd. v. Commissioner of Customs, Mumbai, (2000) 122
E.L.T. 321, relied on.
c 2.1. The Department had erred in invoking Rule 7A. Firstly, there was
no allegation made by the Department stating that the transaction was tainted.
The appellant has proved that the transaction was at arm's length. Secondly,
the Department has not even alleged that on account of discounts the price
stood pegged at a lower level. In matters of agro-processing, processing of
D seeds, refined oil from crude oil etc., the cost of the raw material has a crucial
role to play in the method of costing. Crude oil which is the raw material is
the major component of the refined oil (final product). In such cases, ifthe
cost of the raw material exceeds the price of the final product then in that
event the Department can invoke Rule 7A. However, even assuming for the
E sake of argument that Rule 7A applies, the Assistant Commissioner of •
Customs while applying Rule 7A has followed a peculiar method. She has
examined the cost break-up. She rejected the cost of the raw material but, at
the same time, she accepted the processing charges (figures supplied by the
appellant). Rule 7A refers to Computed Value in contradistinction to Rule 7,
F which refers to Deductive Value. (Para 8] 1325-A, B, F, G, HJ

2.2. Computed value under Rule 7A is the value of the imported goods
consisting of the cost or value of materials plus amount for profit and cost or
value of all other expenses under Rule 9(2). Further, Rule 7A is subject to
the provisions of Rule 3. Rule 3 applies in cases where the buyer and seller
G are related. In the interpretative note to Rule 7A, value of imported goods is
to be determined by examining the costs of production of the goods and the
said interpretative note clarifies that Rule 7A should be applied to those cases
where the buyer and seller are related. Further, if the officer wants to proceed
under Rule 7~· the cost or value has got to be decided on the basis of the ..;
H commercial accounts of the producer, provided that such accounts are
RABINDRA CHANDRA PAUL"· COMMR. OF CUSTOMS(PREVENTIVE) SHILLONG [KAPADIA l] 321
.. consistent with the accounting standards applicable in the country where the A
__,., ·goods are produced. In the present case, there is no finding given that the
• buyer and seller are related. There is no finding that producer from
Bangladesh has not followed the accounting system of that country
(Bangladesh). In such cases, normally the Department should call upon the
assessee to furnish the value/cost of raw materials plus all costs (direct,
indirect, fixed and variable) plus profit at an average rate. The Department
B
should call upon the assessee to produce a certificate from the Chartered
Accountant of the foreign seller indicating the turnover, profit and other details
on the basis of which computation of the Deductive Value under Rule 7 could
be determined. This exercise had not been done in the present case. The
Assistant Commissioner has rejected the cost of raw materials and, at the c
same time, she has accepted the value of the processing charges. Therefore,
even if Rule 7A was to be applied, which, is not attracted, still the computation
made under Rule 7A by the Assistant Commissioner was erroneous. None of
these aspects have been considered by the Tribunal in the impugned judgment.
!Para SJ [325-B-GJ D
CIVIL APPEALLA TE JURISDICTION : Civil Appeal No. 4498 of2006.

From the Final Judgment and Order No. M-299/Kol/06 dated 6.7.2006 of
>
the Customs, Excise & Service Tax Appellate Tribunal, East Zonal Bench,
Kolkata in Customs Appeal No. CDM-150/2004. E
WITH

C.A. No. 4753 of2006.

V. Lakshmi Kumaran, Bikas Kar Gupta and Avijit Bhattacharjee for the F
Appellant.

K.P. Pathak, A.S.G., Shilpa Singh and B. Krishna Prasad for the
Respondent.

The Judgment of the Court was delivered by G

KAPADIA, J. Civil Appeal No. 449812006

..
·~ I. This is an appeal under Section 130E of the Customs Act, 1962
against judgment and order No. M-299/Kol /06 dated 6.7.2006 passed by the
H
322 SUPREME COURT REPORTS [2007] 3 S.C.R.

A Customs, Excise & Service Tax Appellate Tribunal, Kolkata ("the Tribunal").
It is an appeal filed by the assessee.

2. A short question which arises for determination in this civil appeal
is whether the Department, in the facts and circumstances, was justified in
B invoking Rule 7A of Customs Valuation (Determination of Price oflmported
Goods) Rules, 1988 framed under section 156 of the said 1962 Act.

3. Appellant-assessee purchased two consignments of Refined Soyabean
Oil from Mis United Edible Oils Ltd., Bangladesh. The goods imported were
accompanied with Invoice dated 4.10.2003 and Invoice dated 30.10.2003. The
C C & F value of the Soyabean Oil (final product) showed the price to be Rs.
24.50 per kg. calculated at the prevailing rate of US $. The Department called
upon the appellant to give the cost break-up of the imported goods. The
details were forwarded by the appellant to the Department vide letter dated
19.10.2003 along with copy of the bills of entry. The appellant also obtained
D a certificate from the Superintendent of Customs which stated that the
consignments imported stood assessed by the Assistant Commissioner of
Customs at Rs. 27.17 and Rs. 31.96 respectively. The Department, however,
refused to accept the rate of Rs. 27.17 and Rs. 31.96 respectively. On 5.12.2003
the Assistant Commissioner of Customs gave a hearing to the appellant in
the matter of finalization of the assessable value of the said two consignments.
E The appellant contended that Mis United Edible Oils Ltd., Bangladesh was
the manufacturer of Refined Soyabean Oil. The said goods were manufactured
from imported Crude Soyabean Oil (raw material). The said raw material was
imported by Mis United Edible Oils Ltd., Bangladesh from a foreign country
under a valid invoice and bills of entry, copies whereof were also submitted
F by the appellant herein to the Assistant Commissioner of Customs. Mis
United Edible Oils Ltd., Bangladesh processed the said raw material in their
factory in Bangladesh into Refined Soyabean Oil (final product) which was
exported to the appellant. Before the Assistant Commissioner, the appellant
presented the actual price of the above raw material plus processing charges
G plus transportation charges from the factory gate to the point of exportation.
The price declared, therefore, was the price at the point of exportation. Before
the Assistant Commissioner, the appellant submitted the above documents.
The appellant contended before the Assistant Commissioner that the Assistant
Commissioner was not entitled to invoke Rule 7A on the basis of the cost
break-up, particularly when there was no allegation that the price declared
H was tainted. The appellant contended before the Assistant Commissioner that
RABINDRA CHANDRA PAUL"· COMMR. OF CUSTOMS (PREVENTIVE) SHILLONG[KAPADIA. J.J 323
the Department was not entitled to invoke Rule 7A and that the Department A
•
..... was not justified in invoking Rule 7A when the declared price tallied with the
price of the Indian Refined Soyabean Oil (see page 'E' of the synopsis). By
Order dated 26.12.2003 the Assistant Commissioner of Customs confirmed the
demand raised by the Department fixing the assessable value at Rs. 31.66 per
... kg. The Assistant Commissioner came to the conclusion that the Declared
Price of the final product was less than the Tariff Value indicated in the letter
B
issued by the Central Board of Excise and Customs dated 15.12.2004 under
which the Board had stated that the Tariff Value for Crude Soyabean Oil stood
at US$ 565 PMT vide Notification No. 105/2004-Customs (NT) dated 15.9.2004.
In the said letter, the Board further stated that it was logical to value the raw
material at prices higher than the Crude Soyabean Oil. On the basis of said c
letter dated 15.12.2004 and Notification dated 15.9.2004 the Assistant
Commissioner of Customs fixed the assessable value of the Refined Soyabean
Oil at the above rate of Rs. 31.66 per kg .. Accordingly, the Assistant
Commissioner directed the Department to complete the assessment and
. confiscate the goods under section 11 l(m) of Customs Act, 1962 .
D
4. Being aggrieved by Order dated 26.12.2003 passed by the Assistant
Commissioner of Customs, the appellant preferred an appeal under Section
>- I28A (3) of Customs Act, 1962. This appeal was filed before the Commissioner
'I
(A). By Order dated 30.6.2004 the Commissioner came to the conclusion that
there was no reason for the Assistant Commissioner of Customs to invoke
E
Rule 7A, particularly when the Department had not alleged that the sale was
not in the ordinary course of trade. It was further held that there was no
reason to invoke Rule 7A since the import did not attract any of the
circumstances enumerated in Rule 4(2) (c) to (h). According to the Commissioner
(A), the only ground on which the Assistant Commissioner had invoked Rule
7A was that the appellant was given abnormal discounts. According to the F
Commissioner (A), in the present case there was nothing to show that the
-.' discounts obtained were abnormal. In the circumstances, the Commissioner
held that the Department was not correct in rejecting the transaction value
in terms of Rule 4(1 ).

5. Aggrieved by the decision of the Commissioner (A), the matter was G
carried in appeal to the Tribunal (CESTAT). The matter was carried in appeal
,_ by the Department. By a cryptic order, the Tribunal stated that on the facts
I
and circumstances of the case, the Department was right in invoking Rule 7A.
Hence this civil appeal.
H
324 SUPREME COURT REPORTS [2007] 3 S.C.R.

A 6. In the case of Eicher Tractors Ltd. v. Commissioner of Customs,
Mumbai reported in (2000) 122 E.L.T. 321 this Court held that the principle for ..r- i
valuation of imported goods is found in Section 14( I) of Customs Act, 1962
which provides for the determination of the assessable value on the basis of
the international sale price. Under the said Act, customs duty is chargeable
on goods. According to section 14(1 ), the assessment of duty is to be made
B on the value of the goods. The value may be fixed by the Central Government
under section 14(2). Where the value is not so fixed it has to be decided under
section 14(1 ). The value, according to section 14( I), shall be deemed to be
the price at which such or like goods. are ordinarily sold or offered for sale,
for delivery at the time and place and importation in the course of international
C trade. The word "ordinarily" implies the exclusion of special circumstances.
This position is clarified by the last sentence in section 14(1) which describes
an "ordinary" sale as one where the seller or the buyer have no interest in
the business of each other and the price is the sole consideration for the sale
or offer for sale. Therefore, when the above conditions regarding time, place
and absence of special circumstances stand fulfilled, the price of imported •
D goods shall be decided under section 14(1A) read with the rules framed
thereunder. The said Rules are the Customs Valuation Rules, 1988. It was
further held that in cases where the circumstances mentioned in Rule 4(2)( c)
to (h) are not applicable, the Department is bound to assess the duty under
Transaction value. Therefore, unless the price actually paid for the particul~ ,
E transaction falls within the exceptions mentioned in Rule 4(2)(c) to (h), the
Department is bound to assess the duty on the Transaction value. It was
further held that Rule 4 is directly relatable to section 14(1) of Customs Act,
1962. Section 14(1) read with Rule 4 provides that the price paid by the
importer in the ordinary course of commerce shall be taken to be the value
in the absence of any special circumstances indicated in section 14(1).
F Therefore, what should be accepted as the value for the purpose of assessment
is the price actually paid for the particular transaction, unless the price is
unacceptable for the reasons set out in Rule 4(2). It was further held that the
word "payable" in Rule 4(1) must be read as referring to the "particular
transaction" and payability in respect of the transaction contemplates as
G situation where payment of price stands deferred. Therefore Rule 4 is limited
to the transaction in question. It was further held that Rule 5 allows the
transaction value to be determined on the basis of identical goods imported
into India about the same time; Rule 6 allows fixation of transaction value on
the basis of the value of similar goods imported into India about the same
time. Where there are no contemporaneous imports into India, the value is to
H
RABINDRA CHANDRA PAUL"· COMMR. OF CUSTOMS (PREVENTIVE) SHILLONG (KAPADIA. J.] 325

be decided under Rule 7 by a process of deduction in the manner provided A
therein. If this is not possible, then the value shall be computed under Rule
.+
7A~ It was further held that it is only when the transaction value under Rule
4 is rejected, only then under Rule 3(ii) the value shall be determined by
proceeding sequentially through Rules 5 to 8. Conversely, if the transaction
value can be decided under Rule 4( I) and does not fall under any of the B
circumstances given in Rule 4(2), there is no question of determining the
value under the subsequent rules. It was further held that discount is a
recognized feature of international trade and as long as those discounts are
uniformly available and as long as they are based on commercial
considerations, they cannot be denied under section 14.

7. The primary base for Customs Valuation is the Transaction Value, i.e.,
c
the price actually paid or payable for the goods when sold for export to the
country of importation, subject to adjustment. The said price should not be
subject to any condition or consideration that could prevent the value from
being determined under Rule 4(1 ). Where the Department has reason to doubt
the truth or accuracy of a declared value, it may ask the importer to provide D
further explanation to the effect that the declared value represents the total
amount actually paid or payable for the imported goods. If the declared value
is lower than the declared value of similar goods imported by other buyers
at or about the same time, it can constitute "reason to doubt" the truth or
accuracy of the declared value indicated in the commercial invoice (see Rule E
IOA). Under Rule 8(2)(i) no value shall be determined based on the selling
price of the goods produced in India. In cases where the Department fails to
establish circumstances mentioned in Rule 4(2), the transaction value declared
by the assessee cannot be rejected and the price mentioned in the Invoice
should be held to represent the transaction value.
F
8. Applying the above principles to the facts of the present case, we
find that the Department had erred in invoking Rule 7A. Firstly, there was no
allegation made by the Department stating that the transaction was tainted.
The appellant has proved that the transaction was at arm's length. There was
no evidence before the Department to show that the price was pegged at a
lower level on account of the circumstances mentioned in Rule 4(2). Secondly, G
the Department has not even alleged that on account of discounts the price
.
'
stood pegged at a lower level. Thirdly, we may point out that in a given case,
the Department would be entitled to invoke Rule 7A. For example, in matters
of agro-processing, processing of seeds, refined oil from crude oil etc., the
cost of the raw material has a crucial role to play in the method of costing. H
326 SUPREME COURT REPORTS [2007] 3 S.C.R.

A In such cases, crude oil which is the raw material is the major component of
the refined oil (final product). In such cases, if the cost of the raw material
exceeds the price of the final product then in that event the Department can
invoke Rule 7A. However, in the present case, even assuming for the sake
of argument that Rule 7A applies, the Assistant Commissioner of Customs
B while appiying Rule 7A has followed a peculiar method. She has examined the
cost break-up. She rejects the cost of the raw material but, at the same time,
she accepts the processing charges (figures supplied by the appellant). Rule
7A refers to Computed Value in contradistinction to Rule 7 which refers to
Deductive Value. Computed value under Rule 7A is the value of the imported
goods consisting of the cost or value of materials plus amount for profit and
C cost or value of all other expenses under Rule 9(2). Further, Rule 7A is subject
to the provisions of Rule 3. Rule 3 applies in cases where the buyer and seller
are related. In the present case, there is no finding given that the buyer and
seller are related. In the interpretative note to Rule 7A, value of imported
goods is to be determined by examining the costs of production of the goods
and the said interpretative note clarifies that Rule 7A should be applied to
D those cases where the buyer and seller are related. Further, if the officer wants '
to proceed under Rule 7A, the cost or value has got to be decided on the
basis of the commercial accounts of the producer, provided that such accounts
are consistent with the accounting standards applicable in the country where
the goods are produced. In the present case, the producer is from Bangladesh.
E There is no finding that Mis United Edible Oils Ltd. has not followed the
accounting system of that country (Bangladesh). In such cases, normally the
Department should call upon the assessee to furnish the value/ cost of raw
materials plus all costs (direct, indirect, fixed and variable) plus profit at an
average rate. In such cases, the Department should call upon the assessee
to produce a certificate from the Chartered Accountant of the foreign seller
F indicating the turnover, profit and other details on the basis of which
computation of the Deductive Value under Rule 7 could be determined. This
exercise had not been done in the present case. As stated above, in the
present case, the Assistant Commissioner has rejected the cost of raw materials
and, at the same time, she has accepted the value of the processing charges.
G Therefore, even if Rule 7A was to be applied, which, in our opinion, is not
attracted, still the computation made under Rule 7A by the Assistant
Commissioner was erroneous. None of these aspects have been considered
by the Tribunal in the impugned judgment.

9. Accordingly, the civil appeal stands allowed, the impugned judgment
H
RABJNDRA CHANDRA PAUL'· COMMR. OF CUSTOMS (PREVENTIVE) SHILLONG [KAPADIA, J.] 327

of the Tribunal (CESTAT) in Appeal No. M-299/Kol/06 dated 6.7.2006 is set A
..,.. aside and the Order of the Commissioner (A) stands confirmed with no order
' ' as to costs.

Civil Appeal No. 4753 of 2006

10. In view of our judgment in Civil Appeal No. 4498/06 (supra), ~he B
impugned judgment of the Tribunal (CESTA T) in Appeal No. A-76/Kol/2005
dated 17.1.2005 is also set aside. This civil appeal is allowed with no order
as to costs.

D.G. Appeals allowed. C