Indirect Tax Laws and Practice · Valuation and Related Party Transactions

Related Party Transactions and Rejection of Declared Value

Updated 11 October 2026 · Fact-checked

Under the 2007 import valuation rules, value is the transaction value. If buyer and seller are related, the officer accepts it only if the relationship did not influence the price, or if it closely approximates a test value. If the officer doubts the declared value, rule 12 sets the query and hearing process before rejection.

Understand Related Party Transactions and Rejection of Declared Value

Customs value starts from the transaction value. Section 14 of the Customs Act, 1962 says it is the price actually paid or payable when the buyer and seller are not related and price is the sole consideration. So a relationship between buyer and seller is a red flag, because related parties can fix prices to cut duty.

Rule 3(2)(d) of the Imports Rules accepts transaction value where the buyer and seller are not related. Where they are related, the value is acceptable only under rule 3(3). Being related does not by itself reject the price. It only triggers a closer look.

Rule 3(3)(a) is the circumstances test. The officer examines the circumstances of the sale. If they show the relationship did not influence the price, the transaction value is accepted.

Rule 3(3)(b) is the test value route. The importer can show that the declared value closely approximates one of these values, ascertained at or about the same time: the transaction value of identical or similar goods in sales to unrelated buyers in India, the deductive value, or the computed value of identical or similar goods. Due account is taken of demonstrated differences in commercial levels, quantity levels, rule 10 adjustments and costs the seller incurs in sales to unrelated buyers. Rule 3(3)(c) says substitute values shall not be established under this comparison.

Rule 12 deals with doubt. If the proper officer has reason to doubt the truth or accuracy of the declared value, he asks for more information. If doubt remains, or the importer does not respond, the transaction value is deemed not determinable under rule 3(1). Value is then fixed sequentially under rules 4 to 9. For exports, rule 3 of the Export Rules accepts transaction value even between related parties if the relationship has not influenced the price.

Key rules to remember

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.

How to solve Related Party Transactions and Rejection of Declared Value questions

Use this order for any question on related parties or rejection of declared value.

1Identify whether the goods are imported or exported, because the rules differ (Imports Rules or Export Rules).
2Check whether buyer and seller are related on the facts given. Note any other rule 3(2) conditions that fail.
3If related, apply rule 3(3)(a): did the relationship influence the price? Look at the circumstances of the sale.
4If the price looks doubtful, apply rule 3(3)(b): compare the declared value with a test value, adjusting for demonstrated differences in commercial level, quantity and rule 10 items.
5If the officer still doubts the value, apply rule 12: request for information, reasonable doubt remaining, written grounds and hearing if the importer asks.
6If the declared value is rejected, state that value moves sequentially through rules 4 to 9.
7Conclude clearly: accepted or rejected, and the rule that supports it.

Quickest way: Related, influenced, test value, rule 12

When to use it: Use this for MCQs and short case questions where you must decide whether transaction value is accepted.

Ask: are they related? If not, and the rule 3(2) conditions hold, accept.
If related, ask: did the relationship influence the price? If no, accept.
If unclear, check if the declared value is close to a test value. If yes, accept.
If doubt persists, go to rule 12 and then rules 4 to 9 in sequence.

Common mistakes in Related Party Transactions and Rejection of Declared Value

Saying a related-party sale is automatically rejected.
Students read relationship as proof of manipulation.
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.
It appears among the valuation rules.
Fix: Rule 12 only gives the mechanism for rejecting declared value. Value is then determined sequentially under rules 4 to 9.
Skipping the importer's opportunity to be heard.
Students focus on the officer's power.
Fix: On the importer's request, the officer must give written grounds for doubt and a reasonable opportunity of being heard before the final decision.
Rejecting value just because a doubt is raised.
Students forget the enquiry stage.
Fix: Rejection follows only if, after further information or no response, reasonable doubt still remains. The declared value is accepted if the officer is satisfied after enquiry.
Applying the import related-party test to exports.
Both sets of rules are titled alike.
Fix: Export rule 3 accepts transaction value even if related, provided the relationship has not influenced the price. It has no test value list.
Using substitute values to decide acceptance under rule 3(3)(b).
Students treat test values as a replacement price.
Fix: Rule 3(3)(c) bars establishing substitute values. The comparison only tests the declared value.

Worked examples

Example 1

Sunrise Textiles Ltd, Surat, imports fabric from its parent company abroad at a declared price. The proper officer finds that the parent sells identical fabric at about the same time to an unrelated Indian buyer at a nearly equal price after allowing for a demonstrated quantity difference. Can the transaction value be accepted?

Show the solution

The buyer and seller are related, so rule 3(3) applies.
Under rule 3(3)(b)(i), acceptance follows if the importer demonstrates that the declared value closely approximates the transaction value of identical goods sold to unrelated buyers in India at about the same time.
Due account is taken of the demonstrated quantity difference.
The values are nearly equal after this adjustment, so the test is met.

Answer: Yes. The transaction value is accepted under rule 3(3)(b), despite the relationship. The comparison is only a test and no substitute value is set (rule 3(3)(c)).

Example 2

Bharat Auto Pvt Ltd imports parts and declares a value that the officer doubts. The importer replies with documents, but the officer remains doubtful. The importer asks for reasons in writing. Explain the procedure and consequence.

Show the solution

The officer may ask the importer for further information including documents or other evidence under rule 12(1).
After the reply, if the officer still has reasonable doubt, the transaction value is deemed not determinable under rule 3(1).
As the importer requested, the officer must tell him the grounds for doubt in writing and give a reasonable opportunity of being heard before the final decision (rule 12(2)).
If the declared value is rejected, value is determined by proceeding sequentially through rules 4 to 9.
If the officer becomes satisfied after the enquiry, the declared value is accepted.

Answer: The officer must give written grounds and a hearing before deciding. If doubt remains, the declared value is rejected and value is determined sequentially under rules 4 to 9. Rule 12 itself provides no method.

Exam tips

Write the rule number with each point: 3(2)(d), 3(3)(a), 3(3)(b), 12(1), 12(2).
In case-based MCQs, check first whether the facts show influence on price or a close test value before deciding acceptance.
Mention that rule 12 leads to rules 4 to 9 in sequence. Examiners reward this link.
For export questions, answer with the Export Rules: transaction value is accepted if the relationship has not influenced the price.
Know the reasons for doubt in rule 12 explanation, such as abnormal discount, misdeclaration of description or quantity, non-declaration of brand or grade, and fraudulent documents.

Practice questions from Valuation and Related Party Transactions

Related Party Transactions and Rejection of Declared Value in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Related Party Transactions and Rejection of Declared Value: frequently asked questions

When is a related buyer and seller's price accepted in customs?

It is accepted if the circumstances of the sale show the relationship did not influence the price. It is also accepted if the importer shows the declared value closely approximates a test value such as the transaction value of identical goods sold to unrelated buyers in India.

Does rule 12 tell how to value goods after rejection?

No. Rule 12 only provides the mechanism and procedure for rejecting the declared value. After rejection, value is determined by proceeding sequentially through rules 4 to 9.

What are grounds for doubting declared value under rule 12?

They may include a significantly higher assessed value for identical or similar goods, abnormal discount, special discounts limited to exclusive agents, misdeclaration of goods, non-declaration of brand or grade, and fraudulent or manipulated documents.

Is the importer entitled to know why the value is doubted?

Yes, on request. The officer must intimate the grounds for doubt in writing and give a reasonable opportunity of being heard before taking the final decision.