Customs Must Follow Valuation Rules Sequentially Before Using Residual Method: CESTAT Delhi

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) at Delhi has held that customs authorities cannot invoke the residual method of valuation without first ruling out the valuation methods that precede it under the Customs Valuation Rules.

The ruling resulted in most of the duty demand, confiscation, and penalties imposed on Rochees Time Pvt. Ltd. being set aside.

A coram comprising Judicial Member Dr. Rachna Gupta and Technical Member P.V. Subba Rao partly allowed Rochees Time Pvt. Ltd.'s appeal.

The tribunal also allowed the appeals filed by Om Prakash Pareek and Neeraj Moolrajani, who had been subjected to personal penalties in the case.

While explaining the valuation framework applicable after rejection of a declared transaction value, the tribunal observed:

“The above Rules have to be followed sequentially, i.e., before adopting the method prescribed under one Rule, all the preceding Rules have to be ruled out.”

The dispute arose from imports of watch parts and watch movements by Rochees Time Pvt. Ltd. from Hong Kong-based suppliers. Customs authorities alleged that the imports had been undervalued.

The Commissioner rejected the declared transaction value of the goods, re-determined their value and confirmed a differential duty demand of about ₹20.67 lakh along with interest. The goods were also ordered to be confiscated and penalties were imposed on the company and certain individuals.

Before the tribunal, the appellants challenged the valuation exercise. They argued that the department had relied on third-party documents and statements and had failed to establish undervaluation.

Revenue authorities maintained that the Indian importer and the Hong Kong suppliers were related entities. According to the department, the investigation had revealed substantial undervaluation of the imported goods.

The tribunal agreed that the declared transaction value could not be accepted. It found that the relationship between the buyer and seller was sufficient to create reasonable doubt about the accuracy of the declared value.

Explaining why rejection of the declared value was justified, the tribunal held:

“In our considered view the fact that the buyers and sellers are related being owned or controlled by the same set of persons is sufficient to entertain a reasonable doubt about the truth and accuracy of the transaction value.”

However, the tribunal found that the subsequent re-determination of value was not carried out in accordance with the valuation rules. For several categories of goods, it noted that the Commissioner's order proceeded on the basis that there were no comparable imports, sales or manufacturing data available. Yet the same order relied on invoices, cost sheets and other material indicating that such transactions existed.

While examining the valuation of watch cases, the tribunal found that the material relied upon by the Commissioner did not justify resorting to the residual method.

It observed, “The value could not have been determined under Rule 8. The demand of differential duty on the watch cases therefore, needs to be set aside.”

The tribunal reached similar conclusions in relation to watch dials, watch movements, metal straps, winding knobs, hands and certain other goods. As a result, the re-determination of value for those goods could not be sustained.

One part of the demand survived scrutiny. The tribunal upheld a differential duty demand of ₹13,401 on leather straps along with interest after finding that duplicate invoices reflected a higher value than the one declared for import.

Having set aside most of the re-determined valuation, the tribunal also set aside the confiscation of goods, redemption fine and penalties imposed on the company. The penalties imposed on Om Prakash Pareek and Neeraj Moolrajani were also quashed.

For Appellants: None appeared; Shri Keshav Krishnan, Advocate, appeared as proxy and sought adjournment

For Revenue: Shri R.P. Sharma, Special Counsel