CMA Final · Indirect Tax Laws and Practice

Valuation and Related Party Transactions: formula sheet

Full chapter guide

Key formulas

Transaction value (imports): Transaction value = Price actually paid or payable + costs and services added as per the rules; Additions in Section 14 include commissions and brokerage, engineering and design work, royalties and licence fees, transport to the place of importation, insurance, loading, unloading and handling. The extent is as per the rules.
Conditions for accepting price: Buyer and seller not related AND price is the sole consideration AND other conditions in the rules are met; If any condition fails, the rules on determining value apply instead of simple acceptance.
Exchange rate date: Rate of exchange in force on the date the bill of entry is presented under Section 46 (shipping bill under Section 50 for exports); The rate is as determined by the Board or ascertained as the Board directs.
Tariff value: If tariff value is fixed under Section 14(2), duty = rate of duty × tariff value; The Board notifies it in the Official Gazette for a class of goods, having regard to the trend of value of such or like goods.
Order of methods: Rule 3 (transaction value) → Rule 4 (identical goods) → Rule 5 (similar goods) → Rule 7 (deductive) → Rule 8 (computed) → Rule 9 (fallback); Rule 3(4) requires you to proceed sequentially through rules 4 to 9. Rule 6 is the link; the importer may ask to reverse rules 7 and 8.
Rule 4 and Rule 5 (comparison): Value = transaction value of identical (or similar) goods, at the same commercial level and in substantially the same quantity, imported at or about the same time; Adjust for differences in commercial level, quantity and transport cost. If more than one such value is found, the lowest is used. Identical goods look the same in all respects; similar goods only closely resemble each other, with like characteristics, materials and function.
Rule 7 Deductive value: Deductive value = unit selling price in India (greatest aggregate quantity, to unrelated buyers) − usual commission or profit and general expenses − post-import transport, insurance and handling − customs duty and taxes payable in India because of the import; Start from an Indian selling price and deduct. The sale should be at or about the time of import; the rule allows sales within 90 days of importation if there is no sale at that time.
Rule 8 Computed value: Computed value = cost or value of materials and fabrication + usual profit and general expenses + transport, insurance, loading, unloading and handling to the place of importation (rule 10(2) items); Start from the cost of production abroad and add. It needs cost data from the foreign producer, so it is often hard in practice.
Rule 9 Fallback: Value determined using reasonable means, consistent with the principles and general provisions of the Rules and Section 14, based on data available in India; It cannot be based on arbitrary or fictitious values or a minimum customs value. Apply earlier methods with reasonable flexibility.
Exchange rate: Rate of exchange in force on the date the bill of entry is presented under section 46; Section 14(1) third proviso. Convert the foreign-currency value at this rate.
Acceptance of transaction value (imports): Rule 3(2): accept if (a) no restrictions on disposition or use, (b) no unquantifiable condition or consideration, (c) no resale proceeds accrue to seller, (d) buyer and seller not related, or related and acceptable under rule 3(3); Restrictions imposed by law or public authorities in India, limiting the resale area, or not substantially affecting value are permitted. Proceeds accruing to seller are allowed if a rule 10 adjustment can be made.
Related buyer and seller: Rule 3(3)(a): accept if the circumstances of the sale show the relationship did not influence the price; The officer examines the circumstances of the sale.
Test values: Rule 3(3)(b): accept if the declared value closely approximates (i) transaction value of identical or similar goods sold to unrelated buyers in India, (ii) deductive value, or (iii) computed value; The importer must demonstrate this. Values are ascertained at or about the same time.
Rejection of declared value: Rule 12(1): reason to doubt, then ask for information, then if doubt remains or no response, deemed not determinable under rule 3(1), then rules 4 to 9 in sequence; Rule 12 gives no valuation method. It only gives the rejection mechanism.
Importer's right on request: Rule 12(2): at the importer's request, give written grounds for doubt and a reasonable opportunity of being heard before the final decision; This applies before the officer takes the final decision under rule 12(1).
Export goods: Export Rules rule 3(2): transaction value is accepted even if related, provided the relationship has not influenced the price; If not determinable, proceed sequentially through rules 4 to 6.
Basic structure: Assessable value = Price actually paid or payable + Rule 10 additions (not already included); Duty is then computed on this value. Deductions are not allowed unless the rules permit them.
Rule 10(1)(a) additions: Commissions and brokerage (except buying commissions) + cost of containers treated as one with the goods + cost of packing (labour or materials); Added only to the extent incurred by the buyer and not already in the price.
Rule 10(1)(b) assists: Apportioned value of materials, components, parts, tools, dies, moulds, materials consumed, and engineering, development, art work, design work, plans and sketches done outside India, supplied by the buyer free or at reduced cost; Design and engineering work counts only if undertaken elsewhere than in India and necessary for production of the goods.
Royalties and licence fees: Add royalty and licence fees related to the goods that the buyer must pay, directly or indirectly, as a condition of sale; Not added if already in the price. Rule 10(1)(c) applies even if the goods are subjected to the process after importation (Explanation).
Resale proceeds and other payments: Add any part of subsequent resale, disposal or use proceeds accruing to the seller + all other payments made as a condition of sale; Rule 10(1)(d) and (e). Payments to a third party to satisfy the seller's obligation count.
Freight, insurance and handling: Add transport, loading, unloading and handling charges to the place of importation + insurance to the place of importation; Rule 10(2). Includes ship demurrage on chartered vessels, lighterage and barge charges.
Default freight: Freight not ascertainable = 20% of FOB value. If FOB is not ascertainable but FOB + insurance is, freight = 20% of that sum; For air imports, where freight is ascertainable it cannot exceed 20% of FOB value.
Default insurance: Insurance not ascertainable = 1.125% of FOB value. If FOB is not ascertainable but FOB + freight is, insurance = 1.125% of that sum; Used only when actual insurance cost is not ascertainable.
Transaction value of export goods: Price actually paid or payable for delivery at the time and place of exportation; Applies where buyer and seller are not related and price is the sole consideration, subject to the 2007 export valuation rules. Section 14(1).
Value from a CIF price: Export value (foreign currency) = CIF price − freight and insurance beyond the place of exportation; Only costs after the place of exportation are removed. Costs up to the port stay in.
Rupee value: Assessable value in ₹ = Foreign currency value × exchange rate on shipping bill date; Exchange rate as determined by the Board or as it directs; date of presentation of the shipping bill under Section 50.
Export duty: Duty = Assessable value × duty rate on the date of the Section 51 order; Applies only where export duty is levied on the goods. Section 16(1)(a) fixes the date for goods entered under Section 50.
Tariff value override: If a tariff value is notified, duty is charged on the tariff value; Section 14(2): the Board may fix it for a class of goods, having regard to the trend of value.
Post and courier exports: Rate and tariff value on the date the exporter delivers the goods to the postal authorities or authorised courier; Section 83(2). Section 16 does not apply to goods exported by post.
Section 78: baggage: Rate of duty and tariff value for baggage = rate and value in force on the date of declaration under section 77; Applies to baggage only. The declaration date is the test.
Section 15: imported goods in general: Goods entered for home consumption: date of presentation of the bill of entry under section 46; Section 15(2) excludes baggage and goods imported by post. Warehoused goods: date of the bill of entry for home consumption. Other goods: date of payment of duty.
Section 83: post or courier imports: Rate and value on the date the postal authorities or authorised courier present the list of particulars to the proper officer; If goods come by vessel and the list was presented before the vessel arrived, it is deemed presented on the date of arrival.
Section 14(2): tariff value: If the Board is satisfied it is necessary or expedient, it may by notification fix tariff values for a class of goods; duty is then charged on the tariff value; This overrides transaction value under section 14(1). The Board looks at the trend of value of such or like goods.
Section 79: bona fide baggage: Free of duty if used for the minimum prescribed period, or for personal or family use or a bona fide gift or souvenir, within the value limits in the rules; The proper officer must be satisfied. Limits and conditions are set by rules made by the Central Government.

Quick revision

Transaction value means the price actually paid or payable for goods sold for export to India, for delivery at the time and place of importation.
Section 14(1) accepts transaction value only if the buyer and seller are not related and price is the sole consideration, subject to conditions in the rules.
Imported goods: add commissions and brokerage, engineering and design work, royalties and licence fees, transport to the place of importation, insurance, loading, unloading and handling, to the extent and in the manner the rules specify.
The rules decide when buyer and seller are deemed related, how value is determined when there is no sale or the sale is not at arm's length, and how a doubted value is accepted or rejected.
Relationship alone does not cause automatic rejection. Check the rules to see how a related-party price is examined.
Price is converted at the rate of exchange in force on the date the bill of entry is presented under Section 46, or the shipping bill under Section 50 for exports.
Rate of exchange is the rate determined by the Board or ascertained in the manner the Board directs.
Section 14(2): the Board may fix tariff values by notification for any class of imported or export goods, and duty is then charged on the tariff value.
Import rate of duty and tariff value: the date the bill of entry is presented under Section 46 (Section 15). A bill presented before the vessel or aircraft arrives is treated as presented on the arrival date.
Export rate of duty and tariff value: the date the proper officer permits clearance and loading under Section 51 (Section 16).
Baggage: the rate and valuation in force on the date the declaration is made under Section 77 (Section 78). Sections 15 and 16 do not apply to baggage.
Post or courier imports: the date the postal authority or authorised courier presents the list of goods to the proper officer (Section 83).

Common mistakes

Treating the invoice price as the final value Fix: Always scan for freight, insurance, royalty, commission, design work and handling before finalising value.
Ignoring the relationship or sole consideration test Fix: State the two conditions in every answer. If the question hints at related parties or extra consideration, say the transaction value cannot be accepted as it stands.
Jumping straight to deductive or computed value Fix: Always state that rules 4 and 5 are unavailable (or fail) before using rule 7 or 8, because rule 3(4) requires sequential application.
Mixing up deductive and computed value Fix: Deductive starts from an Indian selling price and subtracts. Computed starts from production cost and adds.
Saying a related-party sale is automatically rejected. Fix: Relationship only triggers scrutiny. Value is accepted if it did not influence the price or closely approximates a test value.
Treating rule 12 as a method of valuation. Fix: Rule 12 only gives the mechanism for rejecting declared value. Value is then determined sequentially under rules 4 to 9.
Adding buying commission to the value. Fix: Rule 10(1)(a)(i) adds commissions and brokerage except buying commissions. Selling commission paid by the buyer is added; commission paid to the buyer's own agent for buying is not.
Adding royalty that is already in the invoice price. Fix: Add royalty and licence fees only to the extent not included in the price actually paid or payable.
Using the Section 51 order date (let export order) for the exchange rate. Fix: Exchange rate: shipping bill date under Section 50. Duty rate: Section 51 order date. Write both labels beside the data.
Leaving ocean freight and overseas insurance inside a CIF price. Fix: Section 14(1) values goods for delivery at the time and place of exportation. Deduct post-port costs.

Exam tips

Quote the definition: price actually paid or payable, for delivery at the time and place of importation. Examiners reward the exact wording.
Write the two conditions (not related, price sole consideration) first in any case-based answer.
In numericals, show each addition as a separate line and convert to rupees at the bill of entry date rate.
Remember Section 14(2) tariff value as a separate route. One line on it can earn a mark.
Mention that the extent of additions and treatment of related parties come from the rules made under the section.
Write the rule number against each step. Examiners award marks for choosing the correct method in the correct order.
In MCQs, spot the data clue: Indian resale price means deductive; production cost means computed.
State why each earlier rule fails in one line, even in numericals.