Customs valuation - a WCO case study

By Vijay Kumar

Today we are carrying an interesting case from Bangalore Tribunal on Customs valuation. While deciding the case, the Tribunal remarked, It would be very instructive to go through WCO case study on the application of decision 6.1 (equivalent to Rule 10A) for rejection of Transaction Value.

It is not only instructive but enlightening that DDT is tempted to reproduce the entire case study here. Any one remotely connected with customs valuation should study this case. Here it is.

Case Study 13.1: Application of Decision 6.1 of the Committee on Customs Valuation

Facts of transaction:

1. Company ICO in country I, imported 2,000 (two thousand) units of consumer goods from exporting country X. ICO presented the following information in the import declaration.

(i) the seller of the merchandise is company XCO, domiciled in country of exportation X,

(ii) the manufacture ;of the imported goods is company MCO, domiciled in country M;

(iii) the declared value was calculated using the transaction value specified in Article 1 of the Agreement;

(iv) no adjustments were made to the price under Article 8.1 of the Agreement;

(v) in accordance with the provisions of Article 15.4, there is no relationship between ICO,XCO or MCO;

(vi) according to the commercial invoice, the unit price of the imported goods was.9.30 c.u.(FOB value);

(vii) payment was made in cash.

2. After release of the goods, the Customs risk analysis system selected ICO for an import audit.

3. Prior to the audit and as part of the process of constructing a profile of the importer, the Customs administration analyzed all imports of identical goods and obtained the following information:

(i) nine other buyers imported identical goods at or about the same time as the goods being valued:

(ii) the Customs values of the identical goods were determined under the transaction value method;

(iii) the unit prices of the identical goods varied from 69.09 c.u. to 85.00 c.u.(FOB);

(iv) the quantity of goods imported in each transaction was almost the same (between 1,800 and 2,300 units) as in the transaction between ICO and XCO (2000 units);

(v) the payments for the imports of identical goods were also made in cash, except in the case where the goods cost 85.00 c.u. (FOB).

4. The Customs administration conducted enquiries of the other importers and obtained the price lists of several suppliers in country of exportation X. The unit prices of the identical foods in these lists varied from 80.00 c.u. to 140.00 c.u. (FOB), according to the quantity sold. The origin of all imported goods was country M, although the main suppliers of these goods to import country I were domiciled in country of exportation X.

5. The Customs administration of country I had not signed a mutual assistance agreement with the Customs administrations of countries X or M. The Customs administration wrote to supplier XCO and manufacturer MCO asking for information of the price of the goods. No answer was received.

6. The Customs administration of country I had not signed a mutual assistance agreement with the Customs administration searched for suppliers on the Internet and found many offers for the sale of identical goods, whose retail sale prices for export were between 123.99 c.u. and 148.00 c.u.

7. The Customs administration notified ICO, in writing, that it had reasons to doubt the truth of the declared transaction value based on the facts set out above, but primarily based on the low value. The administration asked the importer to present any further evidence, i.e., commercial correspondence and / or any other document confirming that the invoice price was the total price actually paid or payable for the imported goods.

8. ICO replied that:

(i) all the particulars of the transaction had been detailed in the commercial invoice supplied;

(ii) there was no special trade condition such as those referred to in Article 1 of the Agreement applying to the transaction;

(iii) the transaction was based upon an ordinary offer by XCO;

(iv) there was no written contract of sale and no commercial correspondence;

(v) the sale was settled by telephone.

9. The Customs administration decided to carry out an audit on the premises of Company ICO. At its first visit, the Customs administration obtained the following information:

(i) there was no commercial correspondence with XCO;

(ii) ICO had sold all the goods to company BCO in country I at a unit price of 281.00 c.u.;

(iii) The accounting records were neither in order nor up to date and could not substantiate the amount paid for the imported merchandise at issue.

10. The Customs administration granted a reasonable period to enable Company ICO to update its accounting records and put them in order. When the records were provided, the audit did not find any further evidence concerning the price actually paid or payable for the goods, adjusted in accordance with the provisions of Article 8. The only information presented was that which had previously been provided to Customs.

11. The audit revealed that a credit card payment had been made by one of the employees of Company ICO to a third person, during business travel to country X, which was registered in the accounting records as an administrative cost. The importer had provided no acceptable explanation as to the nature of this payment. Therefore, doubts were raised as to the low profit earned, considering that the resale price of the goods was much higher than the price declared at importation, and as to the amount of the administrative costs registered.

12. The audit report concluded that:

(i) the importer did not provide any further evidence that would demonstrate that the declared value represented the total price actually paid or payable for the imported goods, adjusted as necessary in accordance with Article 8;

(ii) the audit did not disclose any new information and did not dispel Customs, doubts as to the truth or accuracy of the transaction value declared;

Determination of Customs value:

13. The primary basis for Customs value is the transaction value, that is, the price actually paid or payable for the goods when sold for export to the country of importation, adjusted in accordance with the provisions of Article 8.

14. The price actually paid or payable should not be subject to any condition or consideration that could prevent the value from being determined on the basis of the provisions of Article 1.

15. This price may be represented by the invoice price, adjusted in accordance, with the provisions of the Valuation Agreement and, in this respect, the commercial invoice could constitute sufficient proof of the truth or accuracy of the declared value subject, of course, to Article 17 of the Agreement.

16. In accordance with Decision 6.1 of the Committee on Customs Valuation, where the Customs administration has reason to doubt the truth or accuracy of declared value, it may ask the importer to provide further explanation, including documents or other evidence, that the declared value represents the total amount actually paid or payable for the imported goods, adjusted in accordance with the provisions of Article 8.

17. In this case, due to the fact that the declared value was substantially lower than the declared values of identical goods imported by nine other buyers at or about the same time, the Customs administration had reason to doubt the truth or accuracy of the declared value as reflected in the commercial invoice. Therefore, in accordance with Decision 6.1, the Customs administration properly asked the importer to provide further evidence to confirm that the declared value was the total price actually paid or payable for the imported goods, adjusted in accordance with the provisions of Article 8.

18. In such cases, both parties should seek to strengthen the spirit of co-operation and dialogue encouraged by the Agreement with a view to finding solutions which harm neither the legitimate interests of the importer nor those of the Customs administration.

19. In determining Customs value under the Agreement, Customs administrations should not be required to rely on documents which are incomplete in respect of relevant information, particularly if there are doubts concerning other charges and payments which may form part of the transaction value.

20. Specifically, Decision 6.1 provides that if, after receiving further information, or in the absence of a response, the Customs administration still has reasonable doubts about the truth or accuracy of the declared value, it may, taking in account the appeals provisions of Article 11, be deemed that the Customs value of the imported goods cannot be determined under the provision of Article 1. However, before taking a final decision, the Customs administration shall communicate to the importer, in writing if requested, its grounds for doubting the truth or accuracy of the particulars or documents produced and the importer shall be given a reasonable opportunity to respond.

21. In this case, taking into account the facts that: (i) the importer provided no evidence other than the commercial invoice to substantiate that the declared value represented the price actually paid or payable for the imported merchandise, adjusted in accordance with Article 8; and (ii) the accounting records reviewed during the audit revealed a questionable expense, the Customs administration accordingly concluded that it still had reasonable doubts about the truth or accuracy of the declared value and notified the importer of its grounds for such conclusion.

Conclusion:

22. So, in accordance with Decision 6.1, the Customs administration may properly conclude that the Customs value of the imported goods cannot be determined under the provisions of Article 1. The Customs administration shall communicate to the importer, in writing, its decision and the grounds thereof.

[Source: Dutt Majumdar’s Customs valuation – Law and Practice – 2003 04 Fourth edition]