Post import Activity – the great ‘customs valuation’ escape

The Customs Valuation Rules, 2007 [and earlier that of 1988] (“the CVR”) were formulated under the aegis of Customs Valuation Agreement (“the CVA”) in pursuance of GATT 1994. Largely the rules under the CVR mimics the Articles of the CVA to show India’s accord to the GATT. The value for imported goods under Article 1[1] of CVA is transaction value (TV) adjustable in accordance with provisions of Article 8[2] of CVA. The present piece examines the challenge faced by revenue in customs valuation cases involving EPC arrangements.

Transaction Value and Price adjustments

The CVA states that Article 1 is to be read together with Article 8, the premise of Article 8 is for providing for the inclusion of those price adjustments where such elements are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. In the Indian context not only that it is deducible from the interpretive rules that Rule 10 of the CVR[3] is subservient to Rule 3 of the CVR, but has also been affirmed by the judiciary[4].

Rule 10 (1) (e) – modification to CVA

So far so good, but factor in the bad habit here. Rule 10 (1) of the CVR which almost mimics Article 8 by including all the four limbs of Article 8 (1), also provides an additional sub-clause, namely sub-clause (e)[5]. An eminent Indian author in his exhaustive commentary on Customs Valuation, emphasis the relevance of sub-clause (e), by saying that since the value in Rule 3 points to ‘total payment made’[6], it was needed to have an additional clause to cover the possible exclusions of sub-clause (a) to clause (d).

Post import activity – the fallacy of Rule 10 (1) (e)

Very well, sub-clause (e) attempts to cover up the mischief of importers who disguise the nature of extra payments for escaping the exclusion under sub-clause (a) to (d). But recall that, Rule 10 is a subservient to Rule 3, therefore the application of Rule 10 is subject to the inclusions and exclusions of Rule 3.

The interpretive note to Rule 3 provides that value of imported goods shall not include ‘Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment’. This exclusionary clause has been the nomenclature-d as ‘post import activity’ by the Courts. The combined operation of Rule 3 read with the exclusionary clause of interpretive note therefore restricts the application of clauses of Rule 10 (1), if the payments relates to post import activities, regardless of the fact that payments satisfies the test of condition of sale.

In numerous cases[7] relating to EPC arrangements of steel plants, the Courts has vehemently rejected the argument of revenue for inclusion of engineering, design, supervision, implementation and the charges alike for them being post-import activity, even when the revenue for argument’s sake succeeds in establishing that such charges satisfied the condition of sale test. The recent decision by the Hon’ble Supreme Court in Commissions of Customs vs SAIL[8] continues the trend.

Post Script

The anomaly lies in the fact that while sub-clauses (a) to (d) of Rule 10 (1) and other sub-rules of Rule 10 majorly escapes the embargo of ‘post import activity exclusion’ criteria of Rule 3. But sub-rule (e) in all these cases fails to the satisfaction of this criteria in Rule 3.

The revenue counsel have always built their arguments on the basis of decision in Essar Gujarat case[9] and Mukund Limited case[10], despite being seemingly aware that authorities in these cases are distinguishable. In fact, the Supreme Court also appears to have created a bubble by making Rule 10 (1) (e) subject to the exclusion of Rule 3, in as much as reading the rules literally it is quite apparent that Rule 10 is not subject to Rule 3, but is in accordance with Rule 3. The Court if it able to appreciate that once the ‘condition of sale’ test is satisfied, it could try to find the colorable device employed by many importers in disguising the nature of their payments. The importers can continue to enjoy, till the Courts is not able to the fault in their stars.

We may also spare a thought for the government which is promise-tied to adopt the customs valuation principles formulated in the CVA, and therefore unable to misuse its unfettered powers. Post Import activity is a tool which the importers continue to exploit.

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