Under and Over Valuation under Customs Laws and Consequences Thereof.

“Under and Over Valuation under Customs Laws and the Consequences Thereof” is one of the most crucial and litigation-prone areas in international trade and customs jurisprudence.

Below is a comprehensive, analytical write-up explaining the concept, legal framework, judicial interpretation, and consequences under the Indian Customs Act, 1962, Customs Valuation (Determination of Value of Imported Goods) Rules,  and related case law.

1. Introduction

Valuation of goods is the heart of customs assessment, as it directly determines the duty payable, eligibility for exemptions, and fair trade practices.
Misdeclaration or manipulation of value — whether undervaluation (declaring less than actual value) or overvaluation (declaring more than actual value) — can amount to misdeclaration, fraud, and evasion under the Customs Act, 1962.

Customs authorities treat valuation not merely as a fiscal issue but also as a matter of national revenue integrity and trade compliance.

2. Legal Framework Governing Valuation

A. Statutory Basis

1. Section 14 of the Customs Act, 1962 –

   • Defines the value of imported/exported goods for duty purposes.

   • Valuation is based on the transaction value, i.e., the price actually paid or payable for the goods when sold for export to India.

2. Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 –

   • Derived from the WTO Customs Valuation Agreement (CVA).

   • Prescribes methods of valuation when the declared transaction value is not acceptable.

3. Related Rules for Exports –

   • Customs Valuation (Export of Goods) Rules, 2007, applicable for determining FOB value for export duty/refund/benefit calculations.

3. Meaning of “Undervaluation” and “Overvaluation”

Both acts constitute misdeclaration and are punishable under the Customs Act, even if done without direct monetary gain.

4. Principles of Customs Valuation (Import)

As per Section 14(1) and Rule 3 of Valuation Rules, 2007:

The value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to India,
subject to the buyer and seller not being related, and the price being the sole consideration.

When transaction value is doubted or rejected, the law prescribes a hierarchical order of alternate valuation methods:

1. Transaction value of identical goods (Rule 4)

2. Transaction value of similar goods (Rule 5)

3. Deductive value (Rule 7)

4. Computed value (Rule 8)

5. Residual method (Rule 9)

Thus, valuation depends strictly on statutory method, not on subjective logic or negotiation.

5. Undervaluation: Nature, Detection, and Consequences

A. What Is Undervaluation?

Undervaluation occurs when the importer intentionally declares a value lower than the true transaction value or artificially manipulates costs to reduce duty incidence.

Example:
Importer declares goods worth Rs.10 lakh at Rs. 5 lakh to save customs duty and IGST.

B. Common Methods of Undervaluation

1. Falsifying commercial invoices or contracts.

2. Dual invoicing — one for customs, one for payment.

3. Misclassifying goods under a tariff with lower duty.

4. Declaring incorrect country of origin to claim preferential rates.

5. Collusion between buyer and seller (related party under-valuation).

C. Legal Provisions Invoked

• Section 111(m): Confiscation for misdeclaration of value.

• Section 112(a): Penalty for improper importation or abetment.

• Section 114A: Mandatory penalty equal to the duty evaded.

• Section 135: Criminal prosecution for fraud or evasion.

D. Judicial Stand

1. EICHER TRACTORS LTD. Versus COMMISSIONER OF CUSTOMS, MUMBAI - 2000 (11) TMI 139 - Supreme Court

   • Transaction value can only be rejected if credible evidence shows collusion or manipulation.

2. COLLECTOR OF CUSTOMS, CALCUTTA Versus SANJAY CHANDIRAM - 1995 (5) TMI 25 - Supreme Court

   • Declared value can be rejected if importer fails to prove genuineness of transaction.

3. Tolin Rubbers Pvt. Ltd. v. CCE (2011)

   • Burden of proof lies on Customs to show declared value is false.

E. Consequences of Undervaluation

6. Overvaluation: Nature, Detection, and Consequences

A. What Is Overvaluation?

Overvaluation involves declaring a value higher than the actual transaction price, often to misuse export incentives, launder money, or manipulate financial statements.

B. Common Motives

1. Inflated export value to claim:

   • Higher duty drawback (Section 75).

   • Higher MEIS (old regime) / RoDTEP / GST refund.

2. Round-tripping / Money Laundering:

   • Exporter receives inflated foreign exchange inflows.

3. Over-invoicing imports:

   • To transfer funds abroad illegally or inflate costs for tax purposes.

C. Legal Provisions Invoked

• Section 113(i) & (ii): Confiscation of export goods for overvaluation.

• Section 114(i): Penalty for misdeclaration or fraudulent export.

• Foreign Exchange Management Act (FEMA) & Prevention of Money Laundering Act (PMLA) may also apply.

D. Judicial Precedents

1. COLLECTOR OF CUSTOMS, CALCUTTA Versus EAST INDIA COMMERCIAL CO. LTD. - 1962 (4) TMI 89 - Supreme Court

   • Exporter must declare correct value; intentional misdeclaration leads to confiscation.

2. OM PRAKASH BHATIA Versus COMMISSIONER OF CUSTOMS, DELHI - 2003 (7) TMI 74 - Supreme Court

   • Overvaluation to claim higher drawback amounts to fraud; export goods liable to confiscation.

3. Kanhaiya Exports v. CC (2015)

   • Overvaluation even without physical loss to exchequer still punishable if intent to defraud incentives exists.

E. Consequences of Overvaluation

7. Procedural Safeguards and Investigation Mechanisms

A. Value Verification

• Conducted through:

  • Valuation databases (NIDB) maintained by Directorate of Valuation.

  • Comparable import/export data under Rule 4 & 5.

  • Cross-verification with foreign suppliers, shipping lines, or bank documents.

B. Show Cause and Adjudication

• Customs must issue show cause notice (Section 124) before confiscation or penalty.

• Adjudicating authorities decide based on evidence and valuation rules.

C. Appeal Mechanism

• Commissioner (Appeals) ? CESTAT ? High Court / Supreme Court (Sections 128–130).

• Judicial review ensures procedural fairness and correct application of valuation principles.

8. Practical Challenges and Emerging Issues

1. Related Party Transactions – Determining influence on price (Rule 2(2)).

2. Transfer Pricing vs. Customs Valuation – Conflict between Income Tax and Customs valuation mechanisms.

3. E-Commerce Imports – Low-value consignments, invoice manipulation, and valuation under scrutiny.

4. Digital Evidence – Electronic invoices and remittance records now subject to forensic verification.

5. Trade-Based Money Laundering (TBML) – Over/undervaluation as tool for illicit fund flow; customs working with FIU and ED.

9. Defenses Available to Importer / Exporter

• Bona fide mistake or clerical error.

• Burden of proof on department to show intent or collusion.

• Availability of identical/similar goods data required for rejection of transaction value.

• Proper documentation (bank remittance, invoices, correspondence) to prove genuineness.

10. Penalty Mitigation and Voluntary Disclosure

• Section 28(5) – allows reduced penalty (15%) for voluntary payment of short-levied duty before notice.

• Settlement Commission (Chapter XIV-A) – enables settlement of duty liability with immunity from prosecution.

• AEO Programme – trusted traders with strong compliance history face lesser scrutiny.

11. Conclusion

Valuation under customs law is not a matter of assumption or logic, but of strict legal interpretation and documentation.

• Undervaluation erodes national revenue and invites heavy penalties.

• Overvaluation distorts trade incentives and can lead to criminal prosecution.

Both undermine the integrity of India’s international trade system.

Modern customs jurisprudence emphasizes:

• Transparency, traceability, and compliance through technology (NIDB, ICEGATE, RMS).

• Legal certainty through adherence to valuation rules, not subjective discretion.

In essence:

“True value is the soul of lawful trade.”
Any deviation — upward or downward — transforms a commercial transaction into a legal offence.

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