Customs Valuation Rules in India: Complete Guide for Importers (Rule 3 to Rule 9 Explained)

Why Customs Valuation Matters for Importers?

India’s position as one of the largest importers worldwide has led to an annual level of merchandise imports exceeding USD 700 billion. As a result, customs agents focus their efforts on scrutinising the valuation which leads to the prevention of undervaluation, revenue loss and transfer pricing abuse. The smallest deviations in valuation have a great impact on:

• Duty assessment including interest accumulation
• Customs Act penalties
• Provisional assessments and audits.

Thus, it is essential for the proper application of the transaction value customs principle to avoid these unintended consequences.

Rule 3: Transaction Value Method

What is Transaction Value?

This is the total amount that the buyer paid for the goods (or will pay if it is a future sale) when they are sold for export to India. The total amount must be increased to include the following expenses:

1. The cost of the shipping and insurance
2. The cost of commissions and brokerage
3. Any royalties and licensing fees
4. The value of any tools, molds, designs, or other services that were either supplied for free or at a greatly reduced price.

Conditions for Acceptance

The transaction value can be accepted under either of the following two conditions:

1. There is no relationship between the buyer and seller or
2. Even if there is a relationship, it has not had an effect on the price of the goods.
3. The goods do not have any restrictions on their use that would have an effect on their value.

Most customs valuation methods used are under Rule 3, which is based on transaction value.

Rule 4: Transaction Value of Identical Goods

If Customs rejects the transaction value under Rule 3, then it will utilize the customs valuation methods set out in Rule 4; thus, customs will apply Rule 4 if Rule 3 has been rejected or if the transaction value has not been provided.

Characteristics of Rule 4

• Rule 4 provides for valuation based on the use of identical goods imported at about the same time.
• For Rule 4 to apply to identical goods, they must be “identical” in all respects, i.e., they must have exactly the same physical characteristics, quality, and reputation.

Practical Application of Rule 4

Customs will often apply this rule when the invoice value of a shipment appears low relative to that of a comparable product.

Rule 5: Transaction Value of Similar Goods

If customs cannot apply Rule 4, customs will apply Rule 5. The basic requirements for Rule 5 to be applicable are that:

• The goods are similar in characteristics and function
• The same level of quality
• The goods must be commercially interchangeable
• Minor differences among the goods will still allow for the application of this rule.

Customs commonly will reference the National Import Database while using Rule 5 to determine the appropriate valuation for imported goods.

Rule 7: Deductive Value Method

Where rules 3, 4, or 5 are unable to be used, customs will apply Rule 7. The basis of an assessment under this rule will include

1. Resale price of the imported goods once they reach India;
2. The deduction of all post-import costs, including:

• Commissions
• profit margins
• inland freight
• duties and taxes;

It is expected that Rule 7 will be more frequently used for consumer goods sold in large quantities than for any other category of imported goods.

Rule 8: Computed Value Method

Rule 8 values goods based on production costs and includes the following components: the costs of materials and fabrication, general expenses and profit of the exporting country, and freight and insurance costs.

Practical Challenges of Rule 8:

• Importers rarely use this method because they may not have access to the exporter’s cost information or because foreign suppliers may not be willing to provide that information.

Rule 9: Residual Method

If valuation cannot be determined under any of the previous rules, Rule 9 will apply. Rule 9 uses reasonable means that are consistent with WTO Valuation Principles, and you cannot use:

1. arbitrary or fictional values
2. domestic selling prices in India or
3. minimum or reference prices.

Although Rule 9 allows for flexibility, it is subject to increased scrutiny and may often be appealed.