2007 (7) TMI 9 - SC - Customs

Valuation(Custom) Department contended that the respondent had under invoiced the value of goods in order to evade huge amount of government revenue - Held that the department contention is correct

The core legal questions considered in this judgment revolve around the determination of the assessable value of imported goods under the Customs Act, 1962, and the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. Specifically, the issues include:

Whether the transaction value declared by the importer in the Bill of Entry represents the correct assessable value under Section 14(1) of the Customs Act and Rule 4 of the Customs Valuation Rules;
The evidentiary standard and procedure for rejecting the declared invoice price and enhancing the assessable value on the basis of export declarations from the foreign supplier;
The applicability and sequential application of the Customs Valuation Rules, particularly whether Rule 8 can be invoked without first applying Rules 5, 6, and 7;
The probative value and admissibility of uncertified xerox copies of export declarations from foreign customs authorities in determining under-invoicing;
The burden of proof on the Department to establish under-valuation by producing evidence of contemporaneous imports at higher prices;
The treatment of conflicting evidence regarding possible over-invoicing by the foreign supplier to claim export incentives and its impact on valuation in India;
The difference between "value" and "price" in the context of customs valuation and the correct approach to ascertain the assessable value of imported goods.

Issue-wise Detailed Analysis:

1. Correct Determination of Assessable Value under Section 14 and Rule 4

The legal framework governing valuation is primarily Section 14 of the Customs Act, 1962, and the Customs Valuation Rules, 1988. Section 14(1) defines the value of goods as the price at which such or like goods are ordinarily sold for delivery at the time and place of importation, where buyer and seller are unrelated and price is sole consideration. Section 14(1A) mandates that the price for imported goods be determined in accordance with the Customs Valuation Rules.

Rule 4 of the Customs Valuation Rules defines "transaction value" as the price actually paid or payable for the goods when sold for export to India, subject to certain conditions. The Rule also provides mechanisms to accept transaction value even when buyer and seller are related, provided the relationship did not influence the price.

The Court emphasized that the value is a function of price and that the invoice price is prima facie evidence of the transaction value. However, the invoice price is not sacrosanct and can be rejected if the Department adduces cogent reasons supported by evidence, such as contemporaneous imports of identical or similar goods at higher prices.

The Court held that before rejecting the declared invoice price, the Department must gather and produce evidence of such contemporaneous imports to justify enhancement of value. Mere suspicion or reliance on uncertified foreign export declarations is insufficient.

2. Evidentiary Value of Export Declarations and Xerox Copies

The Department relied on an overseas investigation report and xerox copies of export declarations from the Hong Kong Customs and Excise Department to allege under-invoicing. The importer challenged the authenticity and probative value of these documents, pointing out the lack of certification, absence of customs seals or signatures, and disclaimers barring their use in legal proceedings.

The Tribunal accepted that xerox copies without certification do not constitute genuine declarations and that such documents cannot be the sole basis for enhancing assessable value. The Court agreed with the Tribunal's reasoning, observing that strict rules of evidence do not apply to adjudication proceedings but that the adjudicating authority must still examine the probative value of documents relied upon.

Moreover, the Court noted that the Department had possession of original export declarations but failed to produce them before the importer or the Court despite requests, undermining the Department's case.

3. Burden of Proof and Requirement of Contemporaneous Imports Evidence

The Court reiterated that the burden lies on the Department to prove that the declared invoice price is incorrect and that under-valuation exists. This proof must be supported by evidence of contemporaneous imports of identical or similar goods at higher prices. In the absence of such evidence, the invoice price must be accepted.

The importer's evidence of contemporaneous imports at the same declared price from the same supplier was not rebutted by the Department, which further weakened the Department's case for enhancement.

4. Sequential Application of Customs Valuation Rules and Improper Invocation of Rule 8

The Department initially invoked Rule 8 of the Customs Valuation Rules, which relates to the use of "computed value" when transaction value cannot be determined. The importer contended that the Department erred in invoking Rule 8 without sequentially applying Rules 5, 6, and 7, which provide a hierarchy for valuation methods.

The Court endorsed the earlier Supreme Court precedent that Rule 4(1) prescribes acceptance of the transaction value unless it is unacceptable under Rule 4(2), and that the Department must proceed sequentially through Rules 5, 6, and 7 before resorting to Rule 8. The Department's failure to comply with this sequence was held to be erroneous.

5. Impact of Over-invoicing by Foreign Supplier to Claim Export Incentives

The foreign supplier's fax message admitted that the manufacturer might have over-invoiced export prices to claim government rebates and incentives, as the goods originated from China where such subsidies are common. The Court accepted this explanation as credible and noted that the Commissioner did not rule out the possibility of over-invoicing by the foreign supplier.

This factor undermined the Department's reliance on export declarations for enhancing the assessable value in India, as the export declaration price might be inflated and not reflective of the actual transaction value relevant for customs valuation.

6. Distinction Between "Value" and "Price" in Customs Valuation

The Court highlighted the conceptual difference between "value" and "price." While value is a function of price, the assessable value under Section 14(1) is a "deemed value" based on the price at which goods are ordinarily sold at the time and place of importation. The export declaration price may be relevant under Customs Valuation Rules but cannot be substituted for the transaction value without proper evidence.

7. Treatment of Competing Arguments and Final Conclusions

The Department's reliance on uncertified export declarations and failure to produce original documents, coupled with lack of evidence of contemporaneous imports at higher prices, led the Court to uphold the Tribunal's decision allowing the importer's appeal. The importer's evidence of contemporaneous imports at the declared prices was accepted as credible and unrebutted.

The Court dismissed the appeal filed by the Department, affirming that the invoice price declared in the Bill of Entry must be accepted as the transaction value in the absence of cogent evidence to the contrary.

In subsequent related appeals, the Court upheld the Tribunal's decisions favoring the Department where importers failed to provide adequate explanations for discrepancies between import invoices and export declarations or failed to produce manufacturer's invoices.

Significant Holdings:

"Value is derived from the price. Value is the function of the price. This is the conceptual meaning of value."

"Before rejecting the transaction value as incorrect or unacceptable, the Department has to find out whether there are any imports of identical goods or similar goods at a higher price at around the same time. Unless the evidence is gathered in that regard, the question of importing Section 14(1A) does not arise."

"Casting suspicion on invoice produced by the importer is not sufficient to reject it as evidence of value of imported goods. Under-valuation has to be proved."

"Strict rules of evidence do not apply to adjudication proceedings. However, even in adjudication proceedings, the AO has to examine the probative value of the documents on which reliance is placed by the Department in support of its allegation of under-valuation."

"It is not open to the Department to invoke Rule 8 without sequentially complying with Rules 5, 6 and 7 even in cases where the transaction value is to be rejected under Rule 4."

"The value in the export declaration may be relied upon for ascertainment of the assessable value under the Customs Valuation Rules and not for determining the price at which goods are ordinarily sold at the time and place of importation."

The Court's final determination was that the Department failed to discharge its burden of proving under-valuation and erred in rejecting the declared invoice price without adequate evidence. Consequently, the assessable value as declared by the importer was upheld. The appeals challenging the Tribunal's decisions in favor of the importer were dismissed, while related appeals where importers failed to justify discrepancies were dismissed in favor of the Department.

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