CESTAT: FOB Value Fixed Between Exporter And Buyer Protected By Privity Of Contract; Customs Authorities Cannot Alter Declared Value
Pranav B Prem
The New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) comprising Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) has held that the Free On Board (FOB) value mutually determined between contracting parties is protected by the principle of privity of contract and cannot be altered or modified by any third party or authority that is a stranger to the contract. The Bench emphasized that the FOB value represents the product of negotiations and deliberations between the exporter and foreign buyer, and such a value cannot be interfered with by outsiders. Accordingly, the FOB value declared by the exporter could not have been rejected by the customs authorities.
Background
The appellant, M/s ISGEC Heavy Engineering Ltd., is engaged in the manufacture and export of heavy engineering goods such as boilers, sugar plants, and process equipment. The company had entered into several contracts with overseas buyers for the supply of goods, each stipulating a lump-sum price payable by the foreign buyer. Following execution of these contracts, the appellant prepared a broad billing breakup of the goods in accordance with the agreed terms, which was duly approved by the foreign buyers. In certain cases, components were manufactured by supporting manufacturers and directly supplied to the port of export under Form ARE-1.
The customs authorities seized the goods covered under 16 shipping bills, alleging that the component values declared under ARE-1 were lower than the corresponding FOB values declared in the shipping bills. A show cause notice was issued proposing rejection of the declared export value under Rule 8 of the Customs Valuation (Determination of Value of Exported Goods) Rules, 2007, and re-determination of the value under Rule 5. The Joint Commissioner of Customs confirmed the demand as proposed, which was upheld by the Commissioner (Appeals). Aggrieved by the rejection of declared values and denial of drawback, the appellant approached the Tribunal.
Submissions
The appellant contended that the FOB value in the shipping bills was fixed under binding contractual terms with the foreign buyer, and thus could not be questioned by customs authorities who were not parties to the contract. It was further argued that the duty drawback was rightly claimed on the declared FOB value since drawback is based on realized export proceeds, not on any re-determined value under the Valuation Rules.
The revenue, on the other hand, alleged that the shipping bills were overvalued in comparison to the All-Industry Rate (AIR) values and that the exporter had mis-declared the valuation to obtain higher drawback benefits.
Tribunal’s Observations
The Tribunal examined the relevant valuation provisions and noted that neither the Drawback Rules nor the Drawback Notifications make any reference to the 2007 Customs Valuation Rules for determining the quantum of drawback. It observed that drawback entitlement is linked to actual export and realization of export proceeds, and therefore, the re-determination of export value under the 2007 Rules was not applicable in the appellant’s case. The Bench emphasized that the values declared in the shipping bills were rejected solely because there was a difference between the component-wise values declared under ARE-1 forms and those in the shipping bills, without any corroborative evidence of mis-declaration.
It observed: “The FOB value determined between the contracting parties is protected by privity of contract and cannot be modified by any stranger. The transaction value under Section 14 of the Customs Act is the FOB value declared in the shipping bills.” The Tribunal also noted that the authorities had failed to produce any material to demonstrate that the declared FOB values were not genuine or that the exporter had received any higher consideration.
Holding that the FOB value determined between the parties is binding and protected under the principle of privity of contract, the Tribunal concluded that customs authorities could not have re-determined the declared values or denied drawback benefits on that basis. “The FOB value declared by the assessee could not have been rejected. The valuation determined between the parties to the contract cannot be altered by a stranger to the contract.” Accordingly, the Tribunal set aside the impugned orders and allowed the appeal in favour of the exporter.
Appearance
Counsel for Appellant/ Assessee: Shri B.L. Narasimhan, Shri Anurag Kapur, Ms. Osheeba Basir and Ms. Rubel Bareja
Counsel for Respondent/ Department: Shri Rakesh Kumar
Cause Title: Isgec Heavy Engineering Ltd. v. Commissioner of Customs (Export)
Case No: Customs Appeal No. 50025 Of 2020
Coram: Justice Dilip Gupta (President), Hemambika R. Priya (Technical Member)
