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Valuation of Goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007

Justice M.K. Sharma
Supreme Court of India

The Supreme Court in Commissioner of Customs Excise Vs. Living Media (India) Ltd. had the occasion to deal with the issue of the valuation of imported goods, when royalty is / was paid by the importer to the overseas supplier of such goods. The issue before the Supreme Court was whether such royalties are / were to be included in the transaction value of the imported goods, in the light of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. The Supreme Court held as under;

24. In order to appreciate the contentions of the parties, we propose to extract the provisions of Section 14 of the Customs Act, 1962 which deals with valuation of goods for the purpose of assessment. The said section reads as follows:- 

"14. Valuation of goods- 

(1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf; Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf: Provided further that the rules made in this behalf may provide for, - 

(i) the circumstances in which the buyer and the seller shall be deemed to be related; 

(ii) the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case; 

(iii) the manner of acceptance or rejection of value declared by the importer or exporter, as the case may be, where the proper officer has reason to doubt the truth or accuracy of such value, and determination of value for the purposes of this section: 

Provided also that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under section 46, or a shipping bill of export, as the case may be, is presented under section 50. 

(2) Notwithstanding anything contained in sub- section (1), if the Board is satisfied that it is necessary or expedient so to do, it may, by notification in the Official Gazette, fix tariff values for any class of imported goods or export goods, having regard to the trend of value of such or like goods, and where any such tariff values are fixed, the duty shall be chargeable with reference to such tariff value." 

25. In exercise of the power vested under the Customs Act, the Central Government has made Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (hereinafter for short called "the Rules"). 

26. Rule 2(f) of the Rules defines "transaction value" where it says that it means the value determined in accordance with rule 4 of the Rules. Rule 3 of the Rules deals with the determination of the method of valuation where it states as follows:- 

"Determination of the method of valuation.- For the purpose of these rules – 

(i) subject to rules 9 and 10-A the value of imported goods shall be the transaction value; 

(ii) if the value cannot be determined under the provisions of Cl. (i) above, the value shall be determined by proceeding sequentially through rule 5 to 8 of these rules." 

27. What is transaction value is stated in Rule 4 in the following manner:-

"4. Transaction value – 

(1) The transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of these rules." 

28.Rule 9(1)(c) of the Rules states as follows:- 

"9. Costs and services (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods – 

***** ***** ***** ***** ***** ***** ***** ***** 

(c) - royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable." 

29. In the case of Commissioner of Customs Vs. Ferodo India Pvt. Ltd. reported in 2008 (4) SCC 563 this Court had occasion to analyze the aforesaid relevant provision of Rule 9(1)(c) with which we are also concerned in the present appeals. The relevant portion of which is extracted herebelow: 

"16. Under Rule 9(1)(c), the cost of technical know- how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition prerequisite for the supply of the imported goods by the foreign supplier. If such a condition exists then the payment made towards technical know-how and royalties has to be included in the price of the imported goods. On the other hand, if such payment has no nexus with the working of the imported goods then such payment was not includible in the price of the imported goods. 

17. In Essar Gujarat Ltd. the condition prerequisite, referred to above, had direct nexus with the functioning of the imported plant and, therefore, it had to be loaded to the price thereof. 

18. Royalties and license fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and license fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know how in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/license fees which are also paid to the foreign supplier. 

19. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition prerequisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasize the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at T AA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example, if on examination of the pricing arrangement in juxtaposition with TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/license fees then the adjudicating authority would be right in including the cost of royalty/license fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/license fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract Rule 9(1))(c)." 

30. While laying down the aforesaid proposition this Court has considered the case of Collector of Customs (Prev.), Ahmedabad Vs. Essar Gujarat Ltd. reported in 1996 88 ELT 609 (S.C.) to which also reference was made at the time of hearing of the appeals. 

31. There is yet another decision on the aforesaid issue rendered by three Judges' Bench of this Court in the case of Associated Cement Companies Ltd. Vs. Commissioner of Customs reported in (2001) 4 SCC 593. Having referred to the case of Essar Gujarat (supra) and after having noted Rules 3, 4 and 9 of the Rules, this Court has stated thus in paragraph 42, 43 and 44 as follows:- 

"42. .............................. Therefore, the intellectual input in such items greatly enhances the value of the paper and ink in the aforesaid examples. This means that the charge of a duty is on the final product, whether it be the encyclopaedia or the engineering or architectural drawings or any manual. 

43. Similar would be the position in the case of a programme of any kind loaded on a disc or a floppy. For example in the case of music the value of a popular music cassette is several times more than the value of a blank cassette. However, if a pre-recorded music cassette or a popular film or a musical score is imported into India duty will necessarily have to be charged on the value of the final product. 

...................................................... ..................................................... 

44. It is a misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with the Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. The final product at the time of import is either the magazine or the encyclopaedia or the engineering drawings as the case may be. There is no scope for splitting the engineering drawing or the encyclopaedia into intellectual input on the one hand and the paper on which it is scribed on the other. For example, paintings are also to be taxed. Valuable paintings are worth millions. A painting or a portrait may be specially commissioned or an article may be tailor-made. This aspect is irrelevant since what is taxed is the final product as defined and it will be an absurdity to contend that the value for the purposes of duty ought to be the cost of the canvas and the oil paint even though the composite product, i.e., the painting, is worth millions." 

32. The issue that arises for our consideration is therefore appears to be answered by the aforesaid decision in Associated Cements Companies Ltd. (Supra). In the said decision this Court had stated clearly that if a pre-recorded music cassette or a popular film or musical score is imported into India, duty will necessarily have to be charged on the value of the final product. As per Rule 9, in determining the transaction value there has to be added to the price actually paid or payable for the imported goods, royalties and the license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of sale of goods. Therefore, when pre-recorded music cassette is imported as against the blank cassette, definitely its value goes up in the market which is in addition to its value and therefore duty shall have to be charged on the value of the final product. Therefore, there can be no dispute with regard to the fact that value of the royalty paid is to be included in the transaction value. 

33. In all these cases, there is no dispute that the cassettes under question are brought to India as pre-recorded cassettes which carry the music or song of an artist. There is an agreement existing in all the matters that royalty payment is towards money to be paid to artists and producers who had produced such cassettes. Such royalty becomes due and payable as soon as cassettes are distributed and sold and therefore, such royalty becomes payable on the entire records shipped less records returned. It could therefore, be concluded that the payment of royalty was a condition of sale. Counsel appearing for the Respondent relied upon the commentary on the GATT Customs Valuation Code. We failed to see as to how the aforesaid commentary on the GATT Customs Valuation Code could be said to be applicable to the facts of the present case. The specific sections and the rules quoted hereinbefore are themselves very clear and unambiguous. 

We are required only to give interpretation of the same and apply the same to the facts of the present case.

'Inclusive' & 'Exhaustive' Definitions - Meaning and Difference - The Law

Justice G.S. Singhvi
Supreme Court of India

The Supreme Court in West Bengal State Warehousing Corporation Vs. Indrapuri Studio Pvt. Ltd. has examined the meaning of 'inclusive' and 'exhaustive' definitions as appearing in various statutes. While relying on various judicial pronouncements on the subject, the Supreme Court has culled out the difference between the two types of definitions, and held as under;

13. Section 3(b) of the 1894 Act, which also contains definition of the expression `person interested' and which was interpreted by the Constitution Bench in U.P. Awas Evam Vikas Parishad v. Gyan Devi (supra), reads as under: 

"3(b). the expression "person interested" includes all persons claiming an interest in compensation to be made on account of the acquisition of land under this Act; and a person shall be deemed to be interested in land if he is interested in an easement affecting the land." 

14. A comparative study of the two definitions of expression `person interested', one contained in Section 3(b) of the 1894 Act and the other contained in Section 2(d) of the Act shows that while the first definition is inclusive, the second definition is exhaustive. The difference between exhaustive and inclusive definitions has been explained in P. Kasilingam v. P.S.G. College of Technology (1995) Supp 2 SCC 348 in the following words: 

"A particular expression is often defined by the Legislature by using the word `means' or the word `includes'. Sometimes the words `means and includes' are used. The use of the word `means' indicates that "definition is a hard- and-fast definition, and no other meaning can be assigned to the expression than is put down in definition". (See : Gough v. Gough; Punjab Land Development and Reclamation Corpn. Ltd. v. Presiding Officer, Labour Court.) 

The word `includes' when used, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include. The words "means and includes", on the other hand, indicate "an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions". (See: Dilworth v. Commissioner of Stamps (Lord Watson); Mahalakshmi Oil Mills v. State of A.P. The use of the words "means and includes" in Rule 2(b) would, therefore, suggest that the definition of `college' is intended to be exhaustive and not extensive and would cover only the educational institutions falling in the categories specified in Rule 2(b) and other educational institutions are not comprehended. Insofar as engineering colleges are concerned, their exclusion may be for the reason that the opening and running of the private engineering colleges are controlled through the Board of Technical Education and Training and the Director of Technical Education in accordance with the directions issued by the AICTE from time to time." 

In Bharat Cooperative Bank (Mumbai) Ltd. v. Employees Union (2007) 4 SCC 685, this Court again considered the difference between the inclusive and exhaustive definitions and observed: 

"When in the definition clause given in any statute the word "means" is used, what follows is intended to speak exhaustively. When the word "means" is used in the definition it is a "hard-and-fast" definition and no meaning other than that which is put in the definition can be assigned to the same. On the other hand, when the word "includes" is used in the definition, the legislature does not intend to restrict the definition: it makes the definition enumerative but not exhaustive. That is to say, the term defined will retain its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word "means" followed by the word "includes" in the definition of "banking company" in Section 2(bb) of the ID Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other." 

In N.D.P. Namboodripad v. Union of India (2007) 4 SCC 502, the Court observed : 

"The word "includes" has different meanings in different contexts. Standard dictionaries assign more than one meaning to the word "include". Webster's Dictionary defines the word "include" as synonymous with "comprise" or "contain". Illustrated Oxford Dictionary defines the word "include" as: (i) comprise or reckon in as a part of a whole; (ii) treat or regard as so included. Collins Dictionary of English Language defines the word "includes" as: (i) to have as contents or part of the contents; be made up of or contain; (ii) to add as part of something else; put in as part of a set, group or a category; (iii) to contain as a secondary or minor ingredient or element. It is no doubt true that generally when the word "include" is used in a definition clause, it is used as a word of enlargement, that is to make the definition extensive and not restrictive. But the word "includes" is also used to connote a specific meaning, that is, as "means and includes" or "comprises" or "consists of"." 

In Hamdard (Wakf) Laboratories v. Dy. Labour Commissioner (2007) 5 SCC 281, it was held as under: 

"When an interpretation clause uses the word "includes", it is prima facie extensive. When it uses the word "means and includes", it will afford an exhaustive explanation to the meaning which for the purposes of the Act must invariably be attached to the word or expression." 

15. The judgment in U.P. Awas Evam Vikas Parishad v. Gyan Devi (supra) is clearly distinguishable. The question which fell for consideration of the Constitution Bench was whether the appellant was entitled to participate in the proceedings of the Tribunal constituted under Section 64 of the Uttar Pradesh Awas and Vikas Parishad Adhiniyam, 1965 and lead evidence on the issue of payment of compensation to the land owners. After adverting to the definition of `person interested' contained in Section 3(b), Sections 11, 17, 18 and 50 of the 1894 Act, as amended in 1984, and making a reference to an earlier judgment in Himalayan Tiles and Marble (P) Ltd. v. Francis Victor Coutinho (1980) 3 SCC 223, this Court held that local authority is entitled to be impleaded as a party in the proceedings before the Reference Court and in case the amount of compensation is enhanced by the Court, the local authority can file an appeal with the leave of the Court subject to the condition that no appeal is filed by the Government. The ratio of this decision cannot be invoked for declaring that the appellant falls within the definition of the expression `person interested' within the meaning of Section 2(d) of the Act and is entitled to challenge the award of the Arbitrator because the definition which was interpreted by the Constitution Bench was inclusive and not exhaustive. The other judgments in which Section 3(b) of the 1894 Act is interpreted are likewise not relevant for deciding the issue raised in this case.

Amendment of Pleadings : Broad Principles

Justice P. Sathasivam
Supreme Court of India

We have already dealt with a post on the Law relating to Amendment of Pleadings, and the different tests to be applied in cases of amendment of Plaint as against a Written Statement. The Supreme Court in State of Madhya Pradesh Vs. Union of India has re-itereated the law relating to amendment of pleadings under the Code of Civil Procedure, 1908. The Court, while considering Order VI Rule 17 of the Code, in several judgments has laid down the principles applicable in the case of amendment of plaint which are as follows: 

8. In order to consider the claim of the plaintiff and the opposition of the defendants, it is desirable to refer the relevant provisions. Order VI Rule 17 of the Code of Civil Procedure, 1908 (in short `the Code') enables the parties to make amendment of the plaint which reads as under; 

"17. Amendment of pleadings - The Court may at any stage of the proceedings allow either party to alter or amend his pleadings in such manner and on such terms as may be just, and all such amendments shall be made as may be necessary for the purpose of determining the real questions in controversy between the parties: Provided that no application for amendment shall be allowed after the trial has commenced, unless the Court comes to the conclusion that in spite of due diligence, the party could not have raised the matter before the commencement of trial." 

The above provision deals with amendment of pleadings. By Amendment Act 46 of 1999, this provision was deleted. It has again been restored by Amendment Act 22 of 2002 but with an added proviso to prevent application for amendment being allowed after the trial has commenced, unless the Court comes to the conclusion that in spite of due diligence, the party could not have raised the matter before the commencement of trial. The proviso, to some extent, curtails absolute discretion to allow amendment at any stage. Now, if application is filed after commencement of trial, it must be shown that in spite of due diligence, such amendment could not have been sought earlier. The purpose and object of Order VI Rule 17 of the Code is to allow either party to alter or amend his pleadings in such manner and on such terms as may be just. Amendment cannot be claimed as a matter of right and under all circumstances, but the Courts while deciding such prayers should not adopt a hyper-technical approach. Liberal approach should be the general rule particularly, in cases where the other side can be compensated with costs. Normally, amendments are allowed in the pleadings to avoid multiplicity of litigations. 

9. Inasmuch as the plaintiff-State of Madhya Pradesh has approached this Court invoking the original jurisdiction under Article 131 of the Constitution of India, the Rules framed by this Court, i.e., The Supreme Court Rules, 1966 (in short `the Rules) have to be applied to the case on hand. Order XXVI speaks about "Pleadings Generally". 

Among various rules, we are concerned about Rule 8 which reads as under: 

"The Court may, at any stage of the proceedings, allow either party to amend his pleading in such manner and on such terms as may be just, but only such amendments shall be made as may be necessary for the purpose of determining the real question in controversy between the parties." 

The above provision, which is similar to Order VI Rule 17 of the Code prescribes that at any stage of the proceedings, the Court may allow either party to amend his pleadings. However, it must be established that the proposed amendment is necessary for the purpose of determining the real question in controversy between the parties. 

10. This Court, while considering Order VI Rule 17 of the Code, in several judgments has laid down the principles to be applicable in the case of amendment of plaint which are as follows: 

(i) Surender Kumar Sharma v. Makhan Singh, (2009) 10 SCC 626, at para 5: 

"5. As noted hereinearlier, the prayer for amendment was refused by the High Court on two grounds. So far as the first ground is concerned i.e. the prayer for amendment was a belated one, we are of the view that even if it was belated, then also, the question that needs to be decided is to see whether by allowing the amendment, the real controversy between the parties may be resolved. It is well settled that under Order 6 Rule 17 of the Code of Civil Procedure, wide powers and unfettered discretion have been conferred on the court to allow amendment of the pleadings to a party in such a manner and on such terms as it appears to the court just and proper. Even if, such an application for amendment of the plaint was filed belatedly, such belated amendment cannot be refused if it is found that for deciding the real controversy between the parties, it can be allowed on payment of costs. Therefore, in our view, mere delay and laches in making the application for amendment cannot be a ground to refuse the amendment." 

(ii) North Eastern Railway Administration, Gorakhpur v. Bhagwan Das (dead) by LRS, (2008) 8 SCC 511, at para16: 

"16. Insofar as the principles which govern the question of granting or disallowing amendments under Order 6 Rule 17 CPC (as it stood at the relevant time) are concerned, these are also well settled. Order 6 Rule 17 CPC postulates amendment of pleadings at any stage of the proceedings. 

In Pirgonda Hongonda Patil v. Kalgonda Shidgonda Patil which still holds the field, it was held that all amendments ought to be allowed which satisfy the two conditions: 

(a) of not working injustice to the other side, and 

(b) of being necessary for the purpose of determining the real questions in controversy between the parties. Amendments should be refused only where the other party cannot be placed in the same position as if the pleading had been originally correct, but the amendment would cause him an injury which could not be compensated in costs." 

(iii) Usha Devi v. Rijwan Ahamd and Others, (2008) 3 SCC 717, at para 13: 

"13. Mr Bharuka, on the other hand, invited our attention to another decision of this Court in Baldev Singh v. Manohar Singh. In para 17 of the decision, it was held and observed as follows: (SCC pp. 504-05) 

"17. Before we part with this order, we may also notice that proviso to Order 6 Rule 17 CPC provides that amendment of pleadings shall not be allowed when the trial of the suit has already commenced. For this reason, we have examined the records and find that, in fact, the trial has not yet commenced. It appears from the records that the parties have yet to file their documentary evidence in the suit. From the record, it also appears that the suit was not on the verge of conclusion as found by the High Court and the trial court. That apart, commencement of trial as used in proviso to Order 6 Rule 17 in the Code of Civil Procedure must be understood in the limited sense as meaning the final hearing of the suit, examination of witnesses, filing of documents and addressing of arguments. As noted hereinbefore, parties are yet to file their documents, we do not find any reason to reject the application for amendment of the written statement in view of proviso to Order 6 Rule 17 CPC which confers wide power and unfettered discretion on the court to allow an amendment of the written statement at any stage of the proceedings." 

(iv) Rajesh Kumar Aggarwal and Others v. K.K. Modi and Others, (2006) 4 SCC 385, at paras 15 & 16: 

"15. The object of the rule is that the courts should try the merits of the case that come before them and should, consequently, allow all amendments that may be necessary for determining the real question in controversy between the parties provided it does not cause injustice or prejudice to the other side. 

16. Order 6 Rule 17 consists of two parts. Whereas the first part is discretionary (may) and leaves it to the court to order amendment of pleading. The second part is imperative (shall) and enjoins the court to allow all amendments which are necessary for the purpose of determining the real question in controversy between the parties." 

(v) Revajeetu Builders and Developers v. Narayanaswamy and Sons and Others, (2009) 10 SCC 84, at para 63: 

"63. On critically analysing both the English and Indian cases, some basic principles emerge which ought to be taken into consideration while allowing or rejecting the application for amendment: 

(1) whether the amendment sought is imperative for proper and effective adjudication of the case; 

(2) whether the application for amendment is bona fide or mala fide; 

(3) the amendment should not cause such prejudice to the other side which cannot be compensated adequately in terms of money; 

(4) refusing amendment would in fact lead to injustice or lead to multiple litigation; 

(5) whether the proposed amendment constitutionally or fundamentally changes the nature and character of the case; and 

(6) as a general rule, the court should decline amendments if a fresh suit on the amended claims would be barred by limitation on the date of application. These are some of the important factors which may be kept in mind while dealing with application filed under Order 6 Rule 17. These are only illustrative and not exhaustive." 

The above principles make it clear that Courts have ample power to allow the application for amendment of the plaint. However, it must be satisfied that the same is required in the interest of justice and for the purpose of determination of real question in controversy between the parties.