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There are two broad steps involved in the Customs appraisement of your import transaction:

1. Classification of your goods

2. Valuation for the purposes of determination of duty

You should refer to the rules of interpretation for ascertaining the classification of your items. However, the following broad steps may be followed:

(1) Refer the heading and sub-heading. Read corresponding Section Notes and Chapter Notes. If there is no ambiguity or confusion, the classification is final and you do not have to look to classification rules or trade practice or dictionary meaning.

(2) If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be established, find technical or dictionary meaning of the term used in the tariff. You may also refer to BIS or other standards, but trade parlance is most important.

(3) If goods are incomplete or un-finished, but classification of finished product is known, find if the un-finished item has essential characteristics of finished goods. If so, classify in same heading. Rule 2(a).

(4) If ambiguity persists, find out which heading is specific and which heading is more general. Prefer specific heading.- Rule 3(a).

(5) If problem is not resolved by Rule 3(a), find which material or component is giving ‘essential character’ to the goods in question. - Rule 3(b).

(6) If both are equally specific, find which comes last in the Tariff and take it - Rule 3(c).

(7) If you are unable to find any entry which matches the goods in question, find goods which are most akin. - Rule 4.

Valuation of your items

Customs duty is payable as a percentage of ‘Value’ often called ‘Assessable Value’ or ‘Customs Value'. The Value may be either (a) ‘Value’ as defined in section 14 (1) of Customs Act or (b) Tariff value prescribed under section 14 (2) of Customs Act.

Tariff Value - Tariff Value can be fixed by Central Government for any class of imported goods or export goods. Government should consider trend of value of such or like goods while fixing tariff value. Once so fixed, duty is payable as percentage of this value. (The percentage applicable is as prescribed in Customs Tariff Act).

Customs value as per section 14 (1) - Customs Value fixed as per section 14 (1) is the ‘Value’ normally used for calculating customs duty payable (often called ‘customs value’ or ‘Assessable Value'.)

Section 14 (1) provide following criteria for deciding ‘Value’ for purpose of Customs Duty :

1. Price at which such or like goods are ordinarily sold or offered for sale

2. Price for delivery at the time and place of importation or exportation

3. Price should be in course of International Trade

4. Seller and buyer should have no interest in the business of each other

5. Price should be sole consideration for sale or offer for sale

6. Rate of exchange as on date of presentation of Bill of Entry as fixed by Central Government should be considered

This criteria is fully applicable for valuing export goods. However, in case of imported goods, valuation is required to be done according to valuation rules.

Customs Value is ‘deemed value’ and although transaction value may be a relevant consideration, but value for purpose of Customs Duty will have to be determined by customs authorities, which can be more, than what is indicated in the documents of purchase or sale. Mere CIF price cannot be automatically accepted as 'Value' of such goods. Valuation has to be on the basis of condition at the time of import. CVD should be levied on goods in the stage in which they are imported and stages subsequent to processing of goods may not be not relevant.

Price at which goods are being sold under an invoice is not the sole criteria for deciding ‘Value’ for Customs duty purposes (though it is a major criteria). Each word used in section 14 (1) is significant and we will see significance of each word.

The first criteria is that price of ‘such’ or ‘like’ goods and not ‘the’ goods is relevant. If buyer has incurred some expenditure in connection with the goods under sale, selling price of the goods may be lower. Hence, rule 9 of Valuation Rules provide that if buyer has supplied some materials, components, parts, tools, dies etc. or has spent on engineering, development or art work etc.; cost of such expenditure will be added to the price actually paid.

If price of the goods are not available, price of identical goods or similar goods can be considered. However, the conditions are (a) price should be for sale for export (b) price should be for sale to India (c) sale should be at substantially same quantity of goods (d) price should be at same commercial level (e) these should be imported from same country (f) prices should be of goods sold at or about the same time (g) goods should be produced by same manufacturer - price of other manufacturer can be considered only if price of same manufacturer is not available. Thus, price quoted for 10 pieces cannot be used for price for 1,000 pieces or price prevailing in June 2003 may not be relevant for goods imported in December 2003. Price for sale to another country or price of manufacturer in different country also cannot be considered.

Goods should be ordinarily sold at that price as per section 14(1). As per Valuation Rule 4(2), ‘transaction value’ is acceptable only if the sale is under fully competitive condition. If there is any abnormal discount or reduction from ordinary competitive price or special discounts limited to exclusive agents, the ‘transaction value’ cannot be accepted.

Price ‘offered for sale’ can be considered (e.g. price lists, quotations etc.) though there may not be actual sale at that price.

 Price at the place of importation does not mean that only expenses till goods enter Indian Customs water should be included. Import is an integrated process which culminates when goods land on land-mass of India so that they can be introduced in stream of supplies to form part of mass of goods within the country. Thus, all expenses upto the destination port, including freight, transit insurance, unloading and handling charges are to be included.

Time of importation means price ruling when the goods were imported is relevant.  'ordinary' price at the time of importation is relevant and not the price prevalent on date of contract. [In this case, the contract was over 6 months old before date of shipment].

Price should be in International trade. Price in domestic trade either in exporting country or within India cannot be considered.

Seller and buyer should not have interest in business of ‘each other’. Mere sale/purchase or mere collaboration agreement does not create mutual interest. Only buyer having interest in seller or seller having interest in buyer is not enough. Both should have interest in each other.

 Price should be sole consideration for sale. If there is other consideration, it should be added to the transaction value.

In case of high sea sale, price charged by importer to assessee would form the assessable value and not the invoice issued to the importer by foreign supplier.

Rate of Exchange for Customs Valuation - Exchange rate as applicable on date of presentation of bill of entry as prescribed by Central Government should be considered. This rate is not same as ‘Inter Bank Closing Rates’ fixed by ‘Foreign Exchange Dealers Association’ or by ‘Reserve Bank of India'. These rates are quoted daily by Banks, while exchange rate applicable for valuation is prescribed periodically by Central Government by way of a notification under section 14 (3) (a) of Customs Act. Relevant date for determining foreign exchange rate is date of presentation of Bill of Entry.