Customs Special Valuation Branch

Simplifying Special Valuation

INTERNATIONAL JOURNEY OF CUSTOMS
The General Agreement on Tariffs and Trade (GATT), international trade. WCO develops international standards
established in 1947 from the 1944 Bretton Woods Conference, and best practices, conducts research on trade trends, and
played a pivotal role in shaping the modern global trading coordinates efforts to combat cross-border crime through
system by reducing the trade barriers and promoting Customs Enforcement Network (CEN). It also conducts
economic recovery post war. research and analysis on emerging trends and challenges in
international trade and customs administration, providing
The World Customs Organisation (WCO), headquartered
guidance to its members. WCO also issues technical
in Brussels, Belgium, was established in 1952 as Customs
advisories from the issues raised by the member countries
Co-operation Council (CCC) and renamed in 1994. The
and generally customs authorities follow such advisories for
WCO has 183 members countries, representing over 98% of
the determination of the value of imported goods.

1947 1952 1994

General Agreement on World Customs World Trade

Tariffs and Trade Organization Organization

• This treaty was signed in • Facilitates international • Covers Trade in services

1947 with 23 countries trade and intellectual property

• India was the founder • Develops international • Negotiations and

member standards and best liberalized trade across
practices in Customs the world takes place
• The objective was to
procedure
liberalize the trade • Dispute settlement forum

• GATT Code on Customs Valuation • Works on Customs-related • Successor to the GATT - WTO
1981 - Article VII - the concept of matters - classification, valuation, members operate a non-
“Actual Value” - charged in the rules of origin, collections of discriminatory trading system-
ordinary course of value customs revenue etc. guarantees that exports of
member nations will be treated
fairly
CUSTOM’S GOVERNANCE IN INDIA
The governance of Customs in India is overseen by with other countries. CBIC has launched the Single Window
Central Board of Indirect Taxes and Customs (CBIC), which Interface for Facilitating Trade (SWIFT) for electronic customs
operates under the Department of Revenue, Ministry of submissions and automated systems like the Indian Customs
Finance, Government of India. CBIC formulates policies on EDI System (ICES) and Indian Customs Risk Management
customs and indirect taxes, implements customs laws, and System (ICRM) to enhance efficiency.
prevents illicit activities like smuggling and tax evasion.
To ensure compliance with the Customs laws, CBIC conducts
Customs is enforced through the field formations of CBIC
audits and inspections of customs records and premises. It
including Customs Commissionerate’s, Central Excise
also conducts anti-smuggling operations to prevent the illicit
Commissionerate and Directorates. CBIC also represents
movement of goods across borders and protect national
India in international customs forums and organisations,
security and economic interests.
fostering cooperation and collaboration on customs matters

Following are the broad categories of advisory and litigation issues that arise under Customs:

Customs Valuation
Customs valuation is a subject matter of dispute and major challenges are found in determining the transaction value
of imported goods, especially in cases involving related parties, royalties, or the inclusion of additional costs. Customs
authorities may question the transfer pricing arrangements between related entities, leading to valuation disputes.

Classification issues
Classification issues may arise under harmonised system of nomenclature, impacting the applicable customs duties and
tariffs. Further issues related to the origin of goods can lead to disputes regarding preferential tariff treatment, especially
in cases involving free trade agreements or rules of origin requirement.

Other areas may involve anti-dumping and countervailing duties, safeguard measures, seizures and penalties, dispute
resolution etc.
RULES OF CUSTOMS VALUATION
Customs valuation refers to the process of determining The Customs Act, 1962 provides for the transaction value to
the customs value of imported goods for the assessment be the value of imported goods when they are imported from
of customs duties and taxes. WCO provides guidelines an unrelated party and the price of the goods is not impacted
and principles for customs valuation through its valuation by such relationship.
agreement, also known as the agreement on implementation
WCO valuation agreement consists of six main Articles and
of Article VII of the GATT 1994. The Customs Valuation
Indian Customs Valuation Rules are summarised to depict
(Determination of Price of Imported Goods) Rules, 2007
how customs valuation rules align with WCO valuation
(‘Indian Customs Valuation Rules’) are based on GATT 1994.
agreement:

WCO Article Indian Customs Valuation Rule Valuation Method

Article 1 Rule 3: Transaction Value It provides the primary method for determining the customs
Transaction Value value, based on the transaction value of imported goods i.e.
the price actually paid or payable for the goods when sold
for export to the country of importation.
The transaction value is acceptable only in cases where the
relationship between the parties has not influenced the
value.

Article 2 Rule 4: Value of Identical Goods For imported goods, the value of identical goods is to be
Identical goods adopted. Such goods are defined to be the same with
respect of physical characteristics, quality, and reputation,
produced in the same country by the same person at the
same commercial levels and in the same quantity

Article 3 Rule 5: Value of Similar Goods For imported goods, the value of similar goods is to be
Similar Goods adopted. Similar goods are not alike to the imported goods
but have like characteristics and component materials,
perform the same functions and are commercially
interchangeable, produced in the same country by the same
or different persons, and imported into India at or about the
same time

Article 4 Rule 7: Deductive Value Method Where the transaction value cannot be determined, it allows
Deductive Value the use of the deductive value method using sale price and
deductions on account of various factors involved.

Article 5 Rule 8: Computed Value Method It provides for the valuation of imported goods based on cost
Computed Value of material and overheads involved. This method is resorted
when the value cannot be determined based on transaction
or deductive value method.

Article 6 Rule 9: Residual Method It allows customs administrations to use reasonable means
Fall back method consistent with the principles and general provisions of the
agreement to determine the customs value when none of
the above methods can be applied.
 Further, Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 also provides for Rule 10, which in addition
to the value determined sequentially in accordance with the above rules, provides for including the specific expenditures into
the value of the imported goods.

3. Condition
(3A)
Royalities License
of sale
Fee paid as a
condition of sale
(3B)
of the imported
All other
(1B) goods
payments made
Packing
1. Costs incurred by buyers

or to be made as
cost-labour and
a condition of
material
sale by the
(1A) Proceeds form
importer
Commssion and resale of
Brokerage imported goods
(except buying (1C) accuring to the
commission) seller (2A)
Cost of Freight hading / Materials
containers - loading / consumed in
treated as one unloading the production
with the charges and of imported
imported insurance (2A) goods
goods
Materials,
components,
(2C) tools, dies,
Engineering, moulds etc.
artwork
development
design work,
and plans and 2. Provided by buyer/
sketches
importer FOC / reduced cost
SPECIAL VALUATION BRANCH
India’s Customs Department houses a specialized unit known The SVB investigates related party imports and complex
as the Special Valuation Branch (SVB) for investigating and situations requiring adjustments in the declared transaction
determining the assessable value of transactions involving value, including instances of payment of royalties, license fees
related parties or special circumstances. SVB promotes [as specified in Rule 10(1)(c)], and proceeds from subsequent
transparency in the customs valuation, reducing the risk sales [as specified in Rule 10(1)(d)/ 10(1)(e)] by the importer
of disputes and ensuring compliance with international to the foreign seller or any other person at the behest of such
trade regulations. It helps prevent undervaluation or foreign seller. CBIC vide Circular No. 05/2016-Customs dated
misdeclaration of imported goods, ensuring fair trade 09.02.2016, revamped the entire SVB process. The Circular
practices. now provides a detailed guideline for the investigation of
related party imports and other cases by SVB.
SVB PROCESS

1 BoE filed by the importer with Annexure A

Proper officer to determine on prima facie basis within 3 days for the need for investigation by
2
the SVB and submit its findings to the Commissioner

3 Case to be trasnferred to SVB

SVB to complete the investigation and issues its findings through Investigation Report [IR] duly
4
approved by the concerned Principal Commissioner/ Commissioner

During the investigation BoE will be provisionally assessed and no Extra Duty Deposit [EDD]
5 to be charged if response to Annexure B along with documents is filed within 60 days from the
date of requisition

Importer to file Annexure B and the relevant documents with the SVB authority 6

Recommendations to be submitted in the form of IR to the referring customs station where

7 goods are cleared on the provisional basis as well as to Director General of Valuation [DGOV]

Provisional assessment to be finalised upon receipt of positive IR 8

9 Where IR is negative Adjudication proceedings to be initiated by Group Customs authorities

 Key Highlights:

• SVB functions under the jurisdictional Chief three months. The importer can choose to provide the
Commissioner/ Principal Commissioner/ Commissioner security deposit either in cash or a Bank guarantee.

• In case of imports at Mumbai/ Delhi/ Chennai/ Kolkata/ • SVB shall convey its findings by way of an investigation
Bangalore, the importer shall have the option to select report instead of an appealable order
SVB of Customs House of Imports or Customs House
• Imports of prototypes, exempt goods, or goods valued
most proximate to the corporate office. In other cases,
less than INR 1 lakh (cumulatively not exceeding INR
jurisdiction continues to be governed by the location of
25 Lakhs in any financial year) cannot be taken up for
corporate office.
investigation
• Requirement of ‘Extra Duty Deposit’ (EDD) has been done
• Renewal of SVB orders has been discontinued. In case of
away with except in cases where the importer fails to
a change in circumstances or terms and conditions of the
furnish the requisite information/ documents within 60
agreement, the importer shall declare the same at the
days of requisition, in which case a security deposit at 5%
place of import.
shall be imposed strictly only for a period not exceeding
CRUCIAL ASPECTS INVOLVED IN SVB
As mentioned earlier, per the Customs procedure, where details pertaining to such relationship and the pricing of the
the importer and supplier of goods are related parties/ imported goods in Annexure A as prescribed under Board
persons, then at the time of filing of bill of entry [BOE], the Circular 5/2016 dated 9 February 2016.
importer is required to make a declaration stating that the
The proper officer examines the ‘circumstances surrounding
importer and supplier are related along with all the relevant
the sale’ and evaluates the case on the following parameters:

Adjustment in price by way of debit note Influence of

or credit note after a defined period relationship on price

Declared value is a Any payments such as royalty,

transfer price license fee etc are involved as
a condition of sale

Basis on which the price is settled Existence of any advance pricing

between the importer and exporter agreement with Income Tax Authority
or Advance Ruling

A. Circumstances of the sale

• Rule 3(3)(a) of the Customs Valuation Rules [CVR] − Manner in which the buyer and seller organize their
provides that where the Indian importer and the foreign commercial relations, i.e., whether the price had been
supplier are related, the circumstances surrounding settled in a manner consistent with the normal pricing
the sale should be examined and the transaction value practices of the industry in question or with the way
will be accepted as the value of imported goods only the seller settles prices for sales with independent
where the relationship did not influence the price. third parties
However, the existence of a relationship between the
− The methodology of arriving at the price, for example,
parties, in itself does not necessitate the examination
to demonstrate that the price is adequate to ensure
of the circumstances and values in all instances and
recovery of all costs plus an appropriate profit or as per
this examination is envisaged only where the Customs
Rule 3(3)(b) of the CVR the transaction value closely
authorities doubt the acceptability of the price.
approximates a “test” value previously accepted by
• The Interpretative Notes provide that whether or not the the Customs authorities. For such determination,
relationship has influenced the price can be examined by some important factors would be the nature of the
the Customs authorities by examining various relevant imported goods, the nature of the industry itself, the
aspects of the transaction, including: season in which the goods are imported, and whether
the difference in values is commercially significant
Relevance of Transfer Pricing Study prices. This may lead the Customs authorities to overlook
• A transfer pricing study submitted by an importer may be the arm’s length value accepted in a transfer pricing
a good source of information, as the purpose of a transfer study. Courts in India1 have held that when the pricing
pricing study is to establish that the prices negotiated methodology is based on transfer pricing guidelines then
between the parties are under normal business even though the parties are related persons, it is to be
conditions and are an arm’s length price. Also, various accepted.
methods of Customs valuation are similar to the transfer
• However, a transfer pricing study might not be relevant
pricing methods, for example, the deductive value
or adequate in examining the circumstances surrounding
method under Customs aligns with the resale minus
the sale because of the differences that exist between the
method under transfer pricing, similarly, the computed
methods under Customs and those of the OECD Transfer
value method is similar to the cost-plus method.
Pricing Guidelines. The WCO also advises that the use of
• It is relevant to note that the transfer pricing is looked a transfer pricing report as a possible basis for examining
at from the perspective of annual profitability, Customs the circumstances surrounding the sale should be
is more concerned with the value of imported goods considered on a case-by-case basis.
at a transaction level. Despite this, the SVB authorities
• Despite the aforesaid aspects, there is required to be
also investigate whether the Company is earning the
a convergence between the determination of price
appropriate profit margin as per the benchmarking
under Customs and transfer pricing. The in-house tax
exercise carried out for transfer pricing purposes on an
teams handling transfer pricing and customs must work
overall basis to accept the value under Customs. This may
together to arrive at the arms-length price/transaction
necessarily not be at a product level.
value of the imported goods.
• One may argue that both laws [i.e., Customs and Transfer
pricing] are at cross purpose as Customs wants to
1. Gemplus India Private Limited vs. Commissioner of Customs [2005
ensure that the imported values are not understated, (185) ELT 269 (Tri-Bangalore)], Volvo India Private Ltd. vs. Commissioner
of Customs [2005 (180) E.L.T. 489 (Tri. - Bang.)] and Hindustan Unilever
while transfer pricing aims to ensure that inappropriate
vs Commissioner of Customs, Mundra [ 2023 (5) TMI 616 – (CESTAT
elements are not included in the price to overstate the Ahmedabad)].

B. Intricacies involved in the Deductive Value and Computed Value Method

• As mentioned, the Customs Valuation Rules provide for of the import]. This method is particularly applicable
the determination of value. The Sub-Rules stated therein to the import of traded goods /processed goods where
are to be followed in sequence for the determination the cost of value addition is accurately determinable,
of value. The complexity in determining value arises when there are no identical or similar goods imported to
where there are no identical and similar goods that are establish the customs value.
being imported, and consequently, a resort is made to
• The method starts with the retail price at which the goods
either the deductive value method under Rule 7 or the
are sold in the market of the importing country. The given
computed value method under Rule 8. The key aspects of
price is adjusted to reflect deductions for the cost of
both methods are briefly discussed below:
transport, duties and taxes, and profit margin.

Deductive Value Method

Documents to substantiate Deductive Value
• The deductive value method also known as the retail
• In addition to the standard documents as required to be
minus method is a customs valuation approach used
submitted along with Annexures A and B, generally the
to determine the value of imported goods based on the
following key documents would need to be submitted to
selling price in the country of importation [within 90 days
substantiate the Retail minus/ Deductive value method:
 − A certificate disclosing the back working from the significantly across various product categories. The WCO
retail price of imported goods [when sold in India] commentary states that “considering that companies
to the price of such when imported into India. The may not maintain information on profit and general
workings will deduct the landed cost, cost of value expenses by specific product, administrations may have
addition (if any) other general costs including the to follow the principle of examining profits and general
direct and indirect cost of marketing the goods and expenses from the narrowest group or range of goods for
the profit margins to finally arrive at the ideal value which sufficient information can be obtained”.
of imported goods. The Customs authorities may
• Accurately allocating / apportioning costs to specific
insist that this certificate should be certified by an
products is challenging, especially for companies dealing
independent Chartered Accountant.
with a broad range of goods. This complexity makes
− Documents/details to substantiate the method of cost it strenuous for importers to comply with customs
appropriation and method for deriving profit margins requirements and can lead to potential disputes or delays
as reflected in the computation/certificate. in the SVB process.
− Statement of goods imported during the investigation
• Difficulty in determining the value addition for any further
period
processing undertaken in India
− Summary of high value imported goods.
Computed Value Method
− The transfer pricing report, if the retail minus method
is used to arrive at the arm’s length price. • The computed value for customs valuation refers to the
value of goods determined by first identifying the costs
Importers may face the following critical issues associated incurred by the supplier in the production and delivery
with applying the Deductive Value Method are: of the goods. These costs include material costs, labour
costs, and any other direct or indirect costs attributable
• Difficulty in determining the highest quantities sold
to the production of the goods. An appropriate markup is
at a particular price, especially in cases where pricing
then applied to these costs to account for the supplier’s
fluctuates, due to customization of goods as per
profit margin, which is to be determined by reference
customer’s need/requirement
to the gross profit margin earned in comparable
• Difficulty in the determination of commission or profit and uncontrolled transactions between independent parties.
general expenses that could be considered as “usually
• The mark-up applied is examined by the Customs
paid or agreed to be paid”. The WCO commentary on
Authority which in turn reflects the margin a supplier
deductive value provides as under:
would require to cover its operating expenses,
“The usual amount for commission or profit and general considering the functions performed, assets employed,
expenses could constitute a range of amounts which and risks assumed by the supplier.
probably would vary according to the class or kind of the
• Common examples of the cost-plus method being
goods being valued. In order for a range to be acceptable,
successfully applied in practice inter alia include2:
it should be neither too wide nor too deficient in
population. The range should be obvious and easily − Situations where a supplier of the goods or services
discernible in order for it to be the “usual” amount. in the controlled transaction(s) supplies similar
Other approaches might also be possible, e.g. the use of goods or services to independent parties, but due to
a preponderant amount (where such an amount exists) differences in the product or service the CUP method
or an amount derived by simple - or weighted averaging.” cannot be applied

• Difficulty in providing product-specific margins for

imported goods. Given that the risk profile of different
products can vary, the profit margins may also differ 2. WCO Guide to Customs Valuation and Transfer pricing
 − Sales of products where the manufacturer does not − Summary of high value imported goods.
contribute valuable intangibles or assume substantial
− In the case of traded items, supporting invoices
risks (e.g., contract manufacturers, etc.)
showing the price at which goods were purchased by
− Intra-group services the supplier.

− Contract research and development arrangements

Importers may face the following critical issues associated
with applying the Computed Value Method:
Documents to substantiate the computed value
• The transfer pricing report typically reflects a global profit
• In addition to the standard documents as required to be
margin, while customs authorities require a product-
submitted along with Annexures A and B, generally the
wise margin analysis. This difference can be particularly
following documents would need to be submitted to
challenging for companies that operate across various
substantiate the Computed Value Method:
segments, as it demands meticulous tracking and
− Transfer Pricing report reflecting gross profit margins allocation of costs to each specific product.
at the global level
• Fluctuation in values owing to market conditions, which
− A statement showing a breakdown of various costs raises additional concerns.
(i.e. material, labour, and overheads) related to the
imported goods along with profit recovered on each • Different profit margins for traded and manufactured
product. products. The methodology for determining the profit
margin for traded and manufactured products sold by
− Declaration from the supplier on the profit margins
the same foreign supplier may differ, thereby leading to
maintained
allegations of undervaluation in certain instances
− Trend analysis of imports to substantiate that
• Data confidentiality – many foreign suppliers are reluctant
appropriate profit margins have been maintained
to disclose product-level profit margins owing to reasons
across financial years
of data confidentiality. The interpretative note to Rule 8,
− Product-wise gross margin to substantiate the cost specifically provides that the use of the computed value
computation method. method will generally be limited to those cases where
− Statement of goods imported during the investigation the foreign supplier is prepared to supply to the Customs
period authorities the necessary costings and to provide facilities
for any subsequent verification which may be necessary.

C. Inclusions in the value of imported goods under Rule 10 of the CVR

Another aspect that becomes important in determining − The sale and import of imported goods by the
value is the Rule 10 inclusions. Under Rule 10 of the CVR, if importer are subject to such conditions, i.e., the
the price of the imported goods includes payments beyond importer would not be able to import the said goods
the basic cost of the goods, such as royalties, commissions, without making the specified payments
or licensing fees, which are a condition of sale of the
− In relation to licensing fee/know-how fee, the
imported goods then such pay puts needs to be included in
importer cannot use or operate the imported goods,
the customs value.
more importantly, machinery/equipment without
• Condition of sale: Some important elements that such licensing arrangement or know-how. However,
determine whether a payment is a condition of sale, are payments made towards technical know-how relating
as under: to the manufacturing process or relating to the setting-
up or commissioning of a plant in India would not be
considered a “condition of sale” of imported goods
 − Such payments include payments in respect of payments tied to the transaction, are also includible in
patents, trademarks, and copyrights. Royalties paid the customs valuation, as they represent indirect costs
towards pre-recorded CDs and music disks are to be borne by the importer.
added to the value of such CDs and disks, as such
• The term “price actually paid or payable” would include
royalties are payable to the artists and producers and
all payments to be paid by the importer to the foreign
become payable on the distribution and sale of such
supplier, directly and indirectly, whether in money or
CDs and disks.
kind. However, the law does not merit the inclusion of any
− License fee payable for use of software in case of sums on a notional basis. Also, payments made by the
packaged software and media packs are a condition importer to third parties on the importer’s own account
of sale as a customer is unable to use such software cannot be considered as indirect payments to the foreign
without paying a license fee supplier, for example, marketing costs incurred in the
− Payments made by the importer to a third party at country of import, etc.
the behest of the supplier, in lieu of the supply of the
• One of the more complex issues arises with contingent
imported goods.
payments, which are tied to future events, such as
− Royalty related to the final product is paid on the performance-based incentives. These payments can
net selling price, i.e., without including the cost of be difficult to quantify at the time of import as data on
imported components, then such royalty is not the actual payments to be made may not be available at
condition of sale of the imported goods. the time of determining the customs value. Despite this,
customs authorities may require such future payments to
− Payments made towards post-importation activity,
be factored into the valuation if they are connected to the
which is not directly attributable to the imported
imported goods.
goods or crucial to the use of such goods cannot be
considered as payments made as, a condition of sale. • In such cases, importers face the challenge of ensuring
− Charges for the right to reproduce the imported goods compliance with customs regulations by providing
in the country of importation, are not a payment detailed and transparent documentation, including
made as a condition of sale and cannot be added to clear evidence of any additional payments or conditions
the price actually paid or payable for the imported tied to the sale. Failure to account for these can result
goods in determining the customs value. in the customs authorities rejecting the declared value,
reassessing the duty payable, or initiating further inquiries
• These additional payments are considered part of the
or audits. Thus, it becomes essential for importers to
overall cost of acquiring the goods, and therefore, they
carefully assess the full range of payments associated
are subject to import duties. Similarly, certain conditions
with a transaction to ensure accurate valuation and
attached to the sale, such as trade-in agreements or future
compliance with customs regulations.
 Our Team

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