2015 (4) TMI 643 - SC - Customs

Supreme Court Invalidates Customs Valuation Rule, Deems Proviso Unlawful

The Supreme Court declared the proviso (II-i) of Rule 9(2) of the Customs Valuation Rules, 1988, inserted by Notification No.39/90 dated 05.07.1990, as ... Transaction value - Cost of services - Loading, unloading and handling charges - Ultravires - Article 14 - arbitrariness - Rule-making power consistent with parent statute - Reading downTransaction value - Cost of services - Loading, unloading and handling charges - Ultravires - Article 14 - arbitrariness - Rule-making power consistent with parent statute - Reading down - Validity of proviso (ii) to sub rule (2) of Rule 9 of the Valuation Rules (Notification dated 05.07.1990) insofar as it mandates addition of one per cent of FOB value for loading, unloading and handling charges even where actual charges are ascertainable. - HELD THAT: - Having regard to the scheme of Section 14 of the Customs Act and the Valuation Rules, 1988, valuation is anchored to the transaction value - the price actually paid or payable - and Rule 9 requires addition of costs and services to the transaction value 'to the extent they are incurred by the buyer' or are 'actually made or to be made'. Rules 5-8 otherwise prescribe fictional or residual methods only when actual transaction value cannot be determined, with an express sequence aimed at achieving closest approximation to actuals. The proviso introduced by Notification dated 05.07.1990 departs from this scheme by prescribing a one per cent of FOB addition for loading, unloading and handling charges irrespective of whether actual charges are ascertainable. That amendment substitutes a fixed fiction even when objective, quantifiable actuals exist; it is therefore inconsistent with the statutory scheme which gives primacy to ascertainable actual costs and with the mandate that additions be based on objective and quantifiable data. The impugned clause, insofar as it applies where actual handling charges are known and ascertainable, is arbitrary and without nexus to the object of Section 14 and thus ultravires the parent provision and violative of Article 14. The correct judicial remedy is to read down the proviso so that clause (ii) applies only when the actual charges referred to in clause (b) are not ascertainable, leaving actual, ascertainable handling charges to be included as such. [Paras 31, 32, 36, 37]Proviso (ii) to sub rule (2) of Rule 9 (Notification 05.07.1990) is unsustainable insofar as it mandates a one per cent FOB addition even where actual loading, unloading and handling charges are ascertainable; it is to be read down to apply only when such actual charges are not ascertainable.Final Conclusion: The High Court judgment upholding the impugned proviso is set aside; the proviso is read down to operate only when actual loading, unloading and handling charges are not ascertainable, and the appeals are allowed. Issues Involved:1. Constitutional validity of proviso (II-i) of Rule 9(2) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.2. Whether the proviso is ultravires Section 14(1) and Section 14(1-A) of the Customs Act, 1962.3. Whether the proviso is violative of Article 14 and Article 19(1)(g) of the Constitution of India.Detailed Analysis:1. Constitutional Validity of Proviso (II-i) of Rule 9(2) of the Customs Valuation Rules, 1988:The appellant challenged the constitutional validity of proviso (II-i) of Rule 9(2) of the Customs Valuation Rules, 1988, inserted by Notification No.39/90 dated 05.07.1990. The High Court had dismissed the writ petitions and writ appeals challenging this proviso, leading to the present appeals.2. Ultravires Section 14(1) and Section 14(1-A) of the Customs Act, 1962:The appellant contended that the proviso was ultravires Section 14(1) and Section 14(1-A) of the Customs Act, 1962. The Customs Authorities added 1% of the F.O.B. value of goods as handling charges, even when actual handling charges were ascertainable. This was argued to be contrary to the provisions of Section 14, which aims to determine the actual transaction value of imported goods.The Court examined the scheme of the Customs Act and the Valuation Rules, emphasizing that the value of imported goods should be based on the actual transaction value. Rule 9 of the Valuation Rules specifies that costs and services, including handling charges, should be added to the transaction value. However, this should be based on actual costs incurred by the buyer, as per sub-rule (3) of Rule 9, which mandates additions based on 'objective and quantifiable data.'The Court found that the impugned proviso introduced a fiction by mandating 1% of the F.O.B. value for handling charges, even when actual costs were ascertainable. This was deemed contrary to Section 14 and the underlying principle of determining actual transaction value.3. Violation of Article 14 and Article 19(1)(g) of the Constitution of India:The appellant argued that the proviso was arbitrary and irrational, violating Article 14 (right to equality) and Article 19(1)(g) (right to practice any profession or to carry on any occupation, trade, or business) of the Constitution. The notional fixation of handling charges at 1% of the F.O.B. value, irrespective of the nature of goods or actual costs, was claimed to be discriminatory and lacking a rational basis.The Court agreed with this contention, stating that introducing a fictional cost for handling charges when actual costs are ascertainable is arbitrary and lacks a nexus with the objectives of Section 14. The Court held that the proviso was violative of Article 14 as it was irrational and arbitrary.Conclusion:The Supreme Court set aside the judgment of the High Court and allowed the appeals. The impugned amendment, namely, proviso (ii) to sub-rule (2) of Rule 9 introduced by Notification dated 05.07.1990, was declared unsustainable and bad in law. The Court read down the proviso to mean that it would apply only when actual handling charges are not ascertainable.