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Judgment
Appeal has been filed against Order-in-original No.SVB/CUS/45/DRPK/2013 dated 30.10.2013 in terms of which the transaction value declared by
the importer in the import invoice in respect of imports made from M/s Richemont Dubai (FZE) was rejected and value was ordered to be re-
determined by loading the transaction value by 12.5% in terms of Rule 4 of the Customs Valuation Rules, 2007 on the ground that the transaction
value was influenced as the supplier and the appellant were related persons.
The appellant has contended that:
(i) The imports were made under a Distributorship Agreement with Richemont Dubai.
(ii) It concedes that the supplier was related person and therefore Revenue was justified in having a reasonable doubt about the declared value.
(iii) The loading has been ordered on the ground that the price charged by the supplier from the independent parties was12.5% higher than the price
charged from the appellant. However, in the table given in para 6 and 14 of the impugned order, it is nowhere indicated whether the price charged
from the retail importers was in relation to the imports around the same time and at the same level and for the identical goods.
(iv) The imports made by the retailers (the price paid by whom was compared with the price charged from the appellant) were in the range of about
29 to 48 watches per year while the imports made by the appellant were 1859 watches in the year 2012-13 and 2398 watches during 2013-14 which
shows that the level of imports were vastly different and hence not comparable.
(v) The role of a distributor is substantially different and the distributor is also required I expected to arrange marketing, distribution & domestic
logistics, advertising & promotion and keep stock of goods. It cited the judgments in the cases of Komet Precision Tolls India Pvt. Limited vs. CC-
2009 (245) ELT 737 (Tri. Bang.), CC vs. Hewlett Packard Limited - 1999 (108) ELT 221 (Tri. Mad.) to support the proposition that to compare the
value with the value of contemporaneous imports adjustment has to be made on account of difference is commercial level and quantity imported which
has not been done in the present case.
(vi) The expenses made by the appellant on marketing, distribution and advertising are post- importation expenses and therefore are not includible in
the assessable value. The appellant showed that these post import expenses actually amounted to 12.5% which showed that the transaction value was
not influenced by the relationship.
(vii) The appellant has incurred expenses considering the business requirement in India. Out of Rs.8.32 crores of such expenses, Rs.3.28 crores were
accounted for by amount reimbursed by the appellant to the foreign supplier as these expenses were incurred by the foreign supplier on the appellant's
behalf to promote sale of its products in India. As these expenses were reimbursed by the appellant they cannot be considered as consideration
towards the imported goods.
(viii) The appellant was not obliged to incur these expenses in terms of distribution agreement with overseas supplier and therefore these were not
incurred as a condition of sale. It cited the judgments in the cases of Union of India vs. Mahindra & Mahindra Limited - 1995 (76) ELT 481 (SC,) CC
vs. Toyota Kirloskar Motor Pvt. Ltd. - 2007 (213) ELT 4 (SC) and CC vs. Essar Steel Ltd. - 2015 (319) ELT 202 (SC) to support the proposition that
post import expenses cannot be included in the value of the imported goods.
Ld. DR on the other hand stated that as per the distribution agreement the appellant was required to undertake to employ such commercial methods
as shall enhance the prestige, integrity and market situation of the products and it was also required to submit to the supplier for approval its marketing
and communication budget for the following year which shall include detailed promotion public relations and media plan which showed that the
expense on marketing and sales promotion etc. was a condition of sale and therefore, such expenses are includible in the assessable value in terms of
Rule 10(l)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. As has been indicated, such expenses came to
about 12.5% of the total value of imports. Ld. DR cited the case of Matsushita Television and Audio (I) Limited vs. CC - 2007 (211) ELT 200 (SC) to
support the proposition that payment of continuing royalty was a condition of sale and includible in the assessable value.
We have considered the contentions of both sides. At the very outset, it is pertinent to note that the appellant has conceded that the appellant and
the supplier being related persons and Revenue was justified in having reason to doubt the truth or accuracy of the value declared. In terms of Rule 12
of the Customs Valuation (Determination of Value of Imported Goods) Rule, 2007, this is sufficient to allow determination of value as per Rules 4
(onwards) of the said Valuation Rules.
Both sides argued at length about includibility/ non includibility of the expenses on advertising and sales promotion etc. made by the appellant in the
assessable value. Both sides submitted several judgments in support of their respective contentions. While the appellant asserted that such expenses
were not a condition of sale and were post import expenses and therefore not includible in the assessable value as per Rule 10(1)(c) of the said Rules,
Id. DR forcefully argued to the contrary. We, however find that the primary adjudicating authority has not invoked Rule 10(1)(c) and 10(1)(e) for
loading the declared value. Indeed, it is seen that in the discussion and finding portion of the impugned order the Commissioner formulated the issue to
be decided in this case as under:
(i) Whether the Importer and the Foreign Supplier are related persons in terms of Rule 2(2) of the Valuation Rules, 2007
(ii) Whether the transactions between the Importer and the Foreign Supplier are influenced by such relationship and
(iii) Whether any addition on account of payment of royalty, technical know-how fee, interest etc. made by the Importer to the Foreign
Supplier is required to be made to the assessable value of the goods imported by the Importer from the Foreign Supplier under Rule 10 of
the Valuation Rules, 2007.
But in the remaining discussion and finding portion, nowhere the Commissioner invoked Rule 10 for the purpose of loading the value. As a matter of
fact, as is evident from the ""order portion"" of the impugned order the transaction value has been loaded by 12.5% (only) in terms of Rule 4 of CVR,
2007. Therefore, we do not think it necessary or relevant to dwell on the aspect whether the expenses on advertisement and sales promotion etc.
incurred by the appellant are includible in the assessable value in terms of Rule 10 because the adjudicating authority has not invoked the Rule 10 for
loading the declared value.
As the loading has been determined by the adjudicating authority (only) in terms of Rule 4 of the CVR, 2007 it is useful to reproduce the said rule
below:
Rule 4. Transaction value of identical goods.- (1)(a) Subject to the provisions of rule 3, the value of imported goods shall be the
transaction value of identical goods sold for export to India and imported at or about the same time as the goods being value:
Provided that such transaction value shall not be the value of the goods provisionally assessed under section 18 of the Customs Act, 1962.
(b) In applying this rule, the transaction value of identical goods in a sale at the same commercial level and in substantially the same
quantity as the goods being valued shall be used to determine the value of imported goods.
(c) Where no sale referred to in clause (b) of sub-rule (I), is found, the transaction value of identical goods sold at a different commercial
level or in different quantities or both, adjusted to take account of the difference attributable to commercial level or to the quantity or both,
shall be used, provided that such adjustments shall be made on the basis of demonstrated evidence which clearly establishes the
reasonableness and accuracy of the. adjustments, whether such adjustment leads to an mcrease or decrease m the value.
(2) Where the costs and charges referred to in sub-rule (2) of rule 10 of these rules are included in the transaction value of identical goods,
an adjustment shall be made, if there are significant differences in such costs and charges between the goods being valued and the identical
goods in question arising from differences in distances and means of transport.
(3) In applying this rule, if more than one transaction value of identical goods is found, the lowest such value shall be used to determine the
value of imported goods.
We find that in para 23 of the impugned order, the Commissioner has categorically noted that ""NJDB data in respect of contemporaneous imports
of identical/ similar goods was scrutinized; however, no data for similar/ identical goods of any other brand or company were available on
the DOV website"".
Rule 4 requires that in applying this Rule, the transaction value of identical goods in a sale at the same commercial level and in substantially the same
quantity as the goods being valued shall be used to determine value of imported goods and where no sale referred to in clause (b) of sub-rule (1) is
found the transaction value of identical goods sold at a different commercial level or in different quantities or both is required to be adjusted to take
account of the difference attributable to the commercial level or to the quantity or both and such adjustments is required to be made on the basis of
demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustments. The appellant has been able to demonstrate
that as a distributor its imports were at a different commercial level and in much larger quantity compared to the imports made by the individual
retailers. From the tables given in paras 7 and 14 of the adjudication order used to arrive at the finding that the price declared by the appellant was
12.5% lower when the price paid by individual retailers, we find that there is not even a whisper as to what were the commercial levels or quantities
involved in respect of invoice dated 22.11.2011 for imported goods by some unrelated importer and invoice dated 12.12.2012 for imports made by the
appellant. These two invoices have been mentioned in the said tables. Thus, the comparison of price per piece on the basis of these two invoices to
infer that the price paid by appellant was 12.5% lower due to relationship is obviously invalid and not in accordance with the requirements of Rule 4 of
the CVR, 2007. Further, the prices were compared only for two models of watches and simple extrapolation thereof to all other models of watches for
the purpose of revising their values upwards does not have any legal basis for sustainability. The appellant has argued, and reasonably so, that the
margin of 12.5% vis-a-vis the price for direct sales to independent retailers is not an unreasonable margin to be given to a distributor. However, we
are not particularly on that aspect; we are only concerned with the determination whether loading has been done in conformity with the requirements
of Rules 4 of CVR, 2007. We find that even in the limited comparison (for only 2 models of watches) as given in tables in paras 7 and 14 of the
impugned order for the purpose of loading the value by 12.5% there is complete disregard of the requirement of adjustment to be made for differences
in commercial levels as well as in the quantity of goods imported and therefore, we do not find the loading of 12.5% to be in conformity with the
requirements of Rule 4 of the CVR. This conclusion is supported by CEST AT decision in the case of Hewlett Packard Ltd. (supra) wherein it was
inter-alia held as under:
.... In a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value
of the goods being valued, closely approximates to one of the following values ascertained at or about the same time-the transaction value
of identical goods, or of similar goods, in sales to unrelated buyers in India;
(i) the deductive value for identical goods or similar goods;
(ii) the computed value for identical goods or similar goods.
Provided that in applying the values used for comparison, due account shall be taken of demonstrated difference in commercial levels,
quantity levels, adjustments in accordance with the provisions of Rule 9 of these rules and cost incurred by the seller in sales in which he
and the buyer are not related;
A plain reading of the above provisions shows that when the value of contemporaneous imports are to be considered vis-a-vis imports by
related persons, then in view of the proviso to sub-rule 3(b), due account has to be taken of demonstrated difference in commercial levels,
quantity levels and adjustments in accordance with the provisions of Rule 9. Now the facts of this case are undisputed regarding the
contemporaneous imports at higher price cited by revenue. However, learned Advocate for the appellant has seriously contended that the
levels, both commercial and of quantity, in the two imports are very widely different. We find great merit in this argument, because it would
be totally illogical to compare the value of 5 pieces of goods imported directly by consumers for actual use whose cumulative value is only
Rs.7.5 lakhs with imports of similar goods running into hundreds of crores on 300 or more Bills of Entry per month by HPL. (para 21).
Similar view was held in the case of Komal Precision Tolls India Pvt. Limited (supra).
Regarding the contention of Id. DR that the appellant was required to incur expenses on advertisement, sale and promotion etc. as per the
distribution agreement and such expenses also turn out to be 12.5% which was the discount given to the appellant vis-a-vis the price charged from the
independent retailers and therefore the loading is justified, we find that distribution agreement does not specify any amounts which are required to be
so spent and the approval to be obtained for incurring expenses cannot be read to mean that the exporter had the right to dictate as to how much
amount the appellant was required to spend in these areas. Further, such sales promotion I advertisement cannot be said to be for the benefit of
exporter alone inasmuch as the appellant also would get the benefit thereof and therefore to treat this entire amount as additional consideration for
import of goods in order to arrive at the loading factor is not sustainable. But as stated earlier, we are only concerned with Rule 4 of CVR, 2007
(which the adjudicating authority has used for loading the value) and not with Rule 10 thereof while the contention of Id. DR falls within the ambit of
Rule 10 (which has not been used by the adjudicating authority to arrive at loading) and for this reason it is not necessary to discuss this contention of
Id. DR or for that matter the contention of the appellant that expenses incurred were not incurred as condition of sale of goods, and so the judgments
cited by both sides regarding inclusion (or otherwise) of the expenses incurred by the appellant in the assessable value in terms of Rule 10 do not
remain germane to the issue.
In the light of the foregoing, we are of the view that the loading of 12.5% is not sustainable in terms of Rule 4 of the CVR, 2007. Accordingly, the
appeal is allowed.