Customs Valuation Dispute & Related Party

Customs valuation in India is governed by the Customs Valuation (Determination of Value of Imported Goods) Rules 2007, issued under Section 14 of the Customs Act 1962. The primary method under Rule 4 is the transaction value — the price actually paid or payable for the goods when sold for export to India — subject to adjustments for commissions, royalties, assists, and other additions specified in Rule 10. If the transaction value is rejected, the customs officer must sequentially apply alternative methods: Rule 5 (transaction value of identical goods), Rule 6 (transaction value of similar goods), Rule 7 (deductive value), Rule 8 (computed value), and Rule 9 (residual method). The customs officer must give the importer a written notice of the specific reasons for rejecting the declared transaction value before applying an alternative method, as required by Rule 12 of the 2007 Rules and affirmed by the Supreme Court in CC v. Aggarwal Industries Ltd.

When the buyer and seller are related persons as defined under Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007 — including parent-subsidiary, holding-subsidiary, or parties where one controls the other — the customs officer may scrutinise whether the relationship has influenced the price. The importer must demonstrate by one of three tests under Rule 4(3) that the declared transaction value is acceptable: that the price closely approximates the transaction value of identical/similar goods to unrelated buyers, or the deductive or computed value of the goods. Transfer pricing documentation prepared under Section 92D of the Income Tax Act 1961 and agreements with the Foreign Advance Pricing Agreement authority can support but do not automatically bind customs valuation. If the importer fails to satisfy the customs officer, the transaction value is rejected and the customs officer proceeds to sequential alternative valuation methods, often leading to demands under Section 28 of the Customs Act 1962.

When the customs officer proposes to enhance the declared value, a show cause notice must be issued to the importer under Section 28(4) of the Customs Act 1962 setting out the grounds for enhancement, and the importer must be given a reasonable opportunity of being heard before any order of enhancement is passed. The enhanced value is typically computed using database prices, contemporaneous import data, or NIDB (National Import Data Base) prices maintained by CBIC, though NIDB data alone is not sufficient grounds for rejection without considering the specific transaction's commercial reality as held by multiple CESTAT benches. Additional duty demand arising from value enhancement must be paid along with interest under Section 28AA of the Customs Act 1962, accruing from the date the duty was originally payable. The importer can appeal the enhancement order to the Commissioner (Appeals) under Section 128 of the Customs Act 1962 within 60 days, and further to CESTAT under Section 129A.

Royalties and licence fees must be included in the customs value under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007 if they relate to the imported goods and are a condition of the sale of those goods for export to India — regardless of whether they are paid to the seller or to a third party. If royalties are paid for the right to use intellectual property in India (post-importation) rather than as a condition of sale, they may be excluded from customs value, but the burden of proving this distinction lies on the importer. Royalties paid to a parent company for a global brand licence where the licence is not directly tied to the imported goods' sale have sometimes been excluded by CESTAT, following the WCO Technical Committee's Commentary 25.1 on royalties. Importers should structure royalty agreements carefully and maintain clear documentation differentiating manufacturing know-how royalties (includible) from post-importation marketing royalties (potentially excludible).

Under Section 28(1) of the Customs Act 1962, the customs department can issue a notice demanding short-levied or non-levied duty within two years from the date of payment of duty where there is no fraud, suppression, or wilful misstatement; where fraud is alleged, the limitation extends to five years. If the importer has overpaid duty due to a higher assessed value that is subsequently reduced on appeal, a refund claim must be filed under Section 27 of the Customs Act 1962 within one year from the date of payment of the excess duty, or from the date of the final order, whichever is later. The refund is subject to the doctrine of unjust enrichment under Section 27(2) — if the importer has passed on the burden of duty to buyers, the refund is credited to the Consumer Welfare Fund rather than paid to the importer, unless the importer proves it bore the incidence of duty. Pre-deposit of 7.5% of the disputed demand is required to maintain an appeal before the Commissioner (Appeals) and CESTAT under the second proviso to Section 129E of the Customs Act 1962.