Customs Officers Cannot Re-Determine FOB Value, Are Strangers to Contract of Sale: CESTAT Delhi
Pranav B Prem
In a significant decision reaffirming the legal sanctity of contractual pricing in international trade, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has ruled that Customs officers cannot re-determine the Free on Board (FOB) value of goods declared by exporters, as it represents the agreed transaction value between buyer and seller. The Tribunal quashed the confiscation of export goods, imposition of redemption fine, and penalties imposed on the appellant, M/s Kritika Enterprises, holding that such revaluation had no legal basis under the Customs Act.
The ruling came from a Bench comprising Justice Dilip Gupta (President) and Mr. P.V. Subba Rao (Technical Member), which allowed the appeal filed by Kritika Enterprises against the order of the Commissioner of Customs (Appeals), New Delhi, upholding the re-determination of value and penalties imposed by the Additional Commissioner of Customs.
The controversy arose when the appellant, Kritika Enterprises, filed a Shipping Bill dated 22 December 2018 for the export of oil filters, declaring an FOB value of Rs. 1,36,75,185 and paid IGST of Rs. 24,61,534. It did not claim any rebate of state levies but availed of Merchandise Exports from India Scheme (MEIS) at 3%. Upon examination, customs officers alleged overvaluation to claim undue MEIS and IGST refunds and re-determined the FOB value at Rs. 8,06,600, based on a market survey involving two traders.
Subsequently, the Additional Commissioner confiscated the goods under Section 113(i) of the Customs Act, imposed a redemption fine of Rs. 8,00,000, and levied penalties of Rs. 12,00,000 each under Sections 114(iii) and 114AA. The consignment, however, had already been provisionally released against a bond and bank guarantee. The Commissioner (Appeals) upheld this order, prompting the appellant to file the present appeal.
In its analysis, the Tribunal addressed a central legal issue—whether customs authorities have the power to re-determine the FOB value declared by an exporter. The Tribunal clarified that FOB (Free on Board) is a globally recognized INCOTERM representing the transaction value mutually agreed upon between the buyer and the seller. It held that: “Only the buyer and the seller who are parties to the contract can decide the transaction value of the goods. No other person, including the customs officers, can determine or re-determine the transaction value whether it is on FOB basis, CIF basis, C&F basis or otherwise.”
The Tribunal further held that while Section 14 of the Customs Act, read with the Customs Valuation Rules, empowers the proper officer to determine assessable value for the purpose of computing customs duties, it does not grant any power to re-determine the FOB value, which is part of a private contractual arrangement.
Rejecting the department’s claim that the exporter had misdeclared the value, the Tribunal emphasized that an exporter is legally required to declare only the transaction value, not predict or second-guess the valuation the customs officer may later impose. It observed: “The exporter has no obligation whatsoever to do the impossible task of anticipating if the proper officer would accept the declared transaction value or would re-determine it and if so, what would be the re-determined value.”
The Tribunal also criticized the department’s reliance on market surveys involving just two traders to determine an alternate value, calling the method unreliable and inconsistent with the statutory rules.
Regarding the confiscation under Section 113(i), the Tribunal noted that the section can only be invoked when the value declared does not match the actual transaction value. In this case, there was no evidence that the FOB value declared in the shipping bill was not the transaction value. Therefore, the Tribunal ruled that: “Export goods will not be liable to confiscation when the value declared in the Shipping Bill is as per the transaction value but the proper officer rejects it and determines the value through some other method.”
Consequently, the confiscation, redemption fine, and penalties under Sections 114 and 114AA were found unsustainable and were set aside in full. The Tribunal held that there was no evidence that Kritika Enterprises had knowingly made any false declaration or that the value declared did not represent the actual agreed price with the buyer.
In summation, the Tribunal held:
FOB value is the transaction value agreed upon by the contracting parties.
Customs officers are strangers to the contract of sale and cannot alter or re-determine that value.
Section 14 and the Valuation Rules only apply for assessing duty, not for questioning or modifying contractual pricing.
Confiscation and penalties based solely on re-determined valuation, absent any evidence of misdeclaration, are legally untenable.
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Allowing the appeal, the Tribunal set aside the orders of the Additional Commissioner and the Commissioner (Appeals) and granted consequential reliefs to the appellant.
Appearance
Shri B. Venugopal, Advocate for the appellant
Shri Shashi Kant Sharma, Authorized Representative for the Department
Cause Title: M/s Kritika Enterprises V. Commissioner of Customs (Appeals)
Case No: Customs Appeal No. 51722 OF 2022
Coram: Hon’ble Justice Mr. Dilip Gupta [President], Hon’ble Mr. P.V. Subba Rao [Member [Technical]
[Read/Download order]
