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Customs valuation: Role of price list in determination of transaction value

In international business transactions, buyers usually confront harsh and uncalled for attitude of customs administration, throughout the globe. At times, there are cases where under invoicing did take place and obviously the culprit can be penalised but in many cases ‘transaction value’ is often rejected on whimsical grounds. The most common weapon in the hands of customs administration is to either apply indicative prices or reliance is placed on the price list.

While resorting to such measures the enforcement agencies forget that international business transactions are the outcome of a commercial contract which is enforceable at law and the contract so formed represents a ‘transaction’ and ‘transaction value’ and the same cannot rejected solely on the ground of price list. This paper accordingly examines the concept of ‘transaction value’ in the perspective of GATT code and its impact on values determined on the basis of price lists.

Customs valuation is a problem area for the customs organisations and businesses throughout the world. Customs duties are levied by the states on imported goods and are assessed on ad valorem basis. That means, the amount of duty is determined upon a percentage of the value of imported goods.

The method to determine the value for the purpose of charging or levying the duty is an important one both for trade and customs administrations. In order to make a global uniform procedure negotiations on customs valuation were aimed primarily at refining, the Tokyo Round Customs Valuation Code. The code had reinforced the obligations of GATT’s Article VII by establishing the mandatory presumption that customs valuation be based on the amount actually paid by the importer for the goods, and the method was known as ‘transaction value’ method. The new method came into existence as a consequence of the multilateral agreement on implementation of Article VII.1

Article 1 through 7 of the agreement defines the methods for determination of customs valuation.2 Article VII establishes the fundamental rule that the customs value of imported goods is to be the ‘transaction value’ of goods or in other words it is the price actually paid or payable for the goods on their sale.3

The uniform system of valuation was laid down in the Valuation Code. The code does not establish uniform values for merchandise or uniform duties. As will be seen, under the Valuation Code the customs value of the same merchandise can often differ even from one shipment to another at the same time and place. The uniformity involved is uniformity in the system applied. For example, most of the imports are to be valued on the base of price agreed to between buyer and seller, and as a matter of procedure the invoice price is to be accepted. May be the invoice prices vary widely; if so, the customs values may also vary widely, even though the goods involved in two importations may be identical.

Transaction Value concept in principle accepts business decisions on pricing as the basis of customs value. Only a minimum number of specified adjustments to the price established by the parties are allowed in arriving at Transaction Value, and only a minimum number of grounds are recognised for departing from Transaction Value and moving forward to the alternative bases of valuation under Articles 2 to 7.

The acceptance of the price agreed upon between the parties to one transaction means the rejection of the concept that any two shipments of the same product coming from and going to the same place at the same time must have the same duty value. Under Transaction Value,4 each shipment is to be valued according to its own price, whether the prices differs due to the quantity difference, or due to difference in trade levels, or because the sales agreements were entered into at different times – or even if one importer gets a lower price simply because he drives a hard bargain or the exporter chooses to favour him. If, in return for a lower price for the imported goods to a particular buyer (importer), the seller (exporter) receives any additional payment or other compensation (especially goods or services), such additional payment or other compensation will quality as an indirect payment (in cash or kind) which must be added to the invoice price to arrive at Transaction Value. Similar calculations are required in a barter or countertrade situation if the price of the imported goods being valued is influenced by a service received or by the price paid by the importer or by the exporter in another transaction which is part of the same barter or counter-trade arrangement. In such situations it may not be possible to value these indirect factors on which the import transaction is conditioned, and then it will not be possible to establish a Transaction Value.

The question now arises about the legal validity of the transaction value, that is, can the same be rejected on the basis of list price. In order to answer the question, one should understand that agreements entered into for sale constitute sale contracts and are binding on the parties except that such contracts suffer from legal infirmities. The list price unless accepted and as a consequence thereof a contract is formed, it cannot be made the basis for rejecting the transaction value. For example, it has been observed that generally the customs authorities make no allegation of mis-declaration and despite that reject the price of the goods imported without giving the reasons for rejection of the transaction value. Often claims are made by customs administration that transaction value is being rejected on the basis of price list of the seller. But in doing so, customs not only ignores the GATT’s code provisions but also act on the basis of seller’s price list by proposing that price list is a proof for the rejection of transaction value. But the fact is that the action of the customs is erroneous and cannot be a reason by itself to reject the transaction value.5

It must be remembered that an invoice price is the consequence of legal contract, and where the invoice price is rejected by customs, the legal contract is being rejected without evidence and the same cannot be done within the framework of domestic customs laws. In certain situation such a decisions of the customs may by challenged before the W.T.O Arbitration Tribunal, and it may lead to costs and damages as the argument against the violator will be rejection of GATT code of customs valuation and restrictive trade practice.

This aspect may also be reviewed from the perspective of valuation concept provided by the domestic law.6 The law provides that the price (value) in a contract of sale may be fixed by the contract and where the contract provides a fixed price the same is generally enforceable and is accepted as the price of goods. The values must be reasonably worth and where the same is not reasonable worth the same can be challenged.

(The writer is an Advocate and is currently working as an Associate with M/s Azim ud Din Law Associates Karachi.)

1. The agreement consists of four parts and three annexes ie, it provides a hierarchy of methodologies, rules on customs valuation, and a committee to oversee the implementation etc.

2. The Agreement creates a strict and detailed hierarchy of valuation methodologies. Articles 1 through 7 of the Agreement define the methods for determination of customs value in a sequential order of application. Article 1 defines the primary method of valuation, which is used whenever the conditions of Article 1 are met. When the conditions of Article 1 are not met, customs value is to be determined by proceeding sequentially through the succeeding Articles to the first Article under which customs value can be determined. Except as provided in Article 4, it is only where the customs value cannot be determined under a particular Article that the provisions of the next Article are to be used. Article 4 provides that upon request of the importer, the application of Articles 5 and 6 will be reversed. However, if the importer does not request that the order be reversed, these Articles will be considered in their natural sequence. If the importer does request that the order be reversed, but customs value cannot be determined under Article 6, customs value will be determined under Article 5, where possible.

3. Transaction value is the appropriate measure of customs value. However, for the application of the new method the condition required state: (a) there are no restrictions on the disposition or use of the goods by their buyer, other than restrictions which are imposed by law, that limit the geographical area in which the goods are sold, or do not substantially affect the value of the products; (b) the sale price is not subject to some condition or consideration for which a value cannot be determined; (c) no part of the proceeds from the subsequent resale of the product accrues to the seller without adjustment to the transaction value; and, perhaps most importantly, (d) the buyer and seller are not related.

Article 15 provides, the rules for determining where persons are related for purposes of the Agreement. That persons will deemed to be related person only if: (a) they are officers or directors of one another’s businesses; (b) they are legally recognised business partners; (c) they are employer and employee; (d) any person directly or indirectly owns, controls or holds five percent or more of the outstanding voting stock or shares of both persons; (e) one person directly or indirectly controls the other; (f) both persons are directly or indirectly controlled by a third person; or (g) they are members of the same family.

4. While determining the transaction value, following additions (applicable where same have been paid by the buyer and not already included in the price) are to be made: • commissions and brokerage, other than buying commissions; • the cost of containers (if not a reusable transportation device) and packing; • the value of certain specified types of goods and services supplied by the buyer free of charge or at reduced cost for use in the production or sale of the imported goods (but excluding design and engineering undertaken in the country of importation); • royalties and licence fees related to the goods imported which must be paid as a condition of the export sale; and • the value of any part of the proceeds of resale, disposal or use of the goods that accrues to the seller.

The following items are excluded, and if in the price are to be deducted ‘provided that they are distinguished from the price:

Charges for construction, erection, assembly, maintenance or technical assistance after importation;

The cost of transport after importation;

Duties and taxes of the country of importation.

5. See Eicher Tractors case decided by the Indian Supreme Court.

6. See the provisions of section 9 of the Sale of Goods Act, 1930.

Zafar Azeem, "Customs valuation: Role of price list in determination of transaction value," Business recorder. 2013-06-06.
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