2025 (3) TMI 514 - AT - Customs

Customs officers cannot modify contractual FOB values agreed between buyer and seller for export incentives

M/s. JBN Apparels Pvt Ltd Versus Commissioner Of Customs-New Delhi ICD TKD.

CESTAT held that FOB value represents the transaction value agreed between buyer and seller, which cannot be modified by Customs officers or any third ... Determination of FOB values - Entitlement for export incentives in the form of drawback, MEIS and ROSL - suspicion of the department is that the exporters had overvalued their goods so as to claim excess export benefits. What is the meaning of FOB value of the goods and who decides it? - HELD THAT:- If goods are agreed to be sold on FOB basis, the exporter is free once the goods are put on board the vessel and all risks and costs associated with transporting them up to destination thereafter is on account of the importer. Similarly, C & F is an INCOTERM in which in addition to the value of the goods the cost of freight is also to be borne by the exporter and CIF is a term under which the cost, freight as well as the transit insurance are to be borne by the exporter. Business contracts are entered into under FOB, C&F or CIF basis or as per as per any other INCOTERMS. For instance, for a consignment, the parties may agree the goods will be sold for US$ “X” on FOB basis and that settles the rights and liabilities of the buyer and seller in the transaction. In short, FOB value is the transaction value of the goods agreed to between the buyer and the seller. Does the Joint Commissioner, Commissioner (Appeals) or any other officer of Customs have the power to re-determine the FOB value of the goods and if so, under what legal provisions? - HELD THAT:- The exported goods are the consideration which the overseas buyer would receive and the price is the consideration which the exporter would receive. Therefore, this price has to be determined only by the buyer and seller. Consideration, as per the Indian Contract Act, need not be adequate for the goods. It can be higher or lower and so long as some consideration is paid the contract is valid. There is a privity of contract between the buyer and the seller and they alone can decide the terms of contract and in case of non-compliance by one, the other can seek to enforce it. The consideration or the transaction value cannot be modified by any stranger to the contract including any officer. If the assessable value of the export goods is re-determined under the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 by the proper officer, will it also change the FOB value? - HELD THAT:- Import and export duties are usually levied as a percentage of the value in the Customs Tariff. The question as to what value should be taken as the value to determine the duties is answered in section 14. It shall be the transaction value for delivery at the time and place of import or export. However, Section 14 itself provides for rejection of the transaction value under certain circumstances and the Valuation Rules lay down the procedure for rejection of transaction value and determination of value using some other methods - Even when the proper officer rejects the transaction value and re-determines the value-whether in import or exports-all that he does is to refuse to accept the declared transaction value as the assessable value for the purpose of determining the duty. He does not change and cannot change the transaction value-be it on FOB, C&F or CIF basis. The FOB value cannot be modified by anyone including any Customs officer. Nothing in the Customs Act confers any power on anyone to modify the transaction value between the buyer and seller-be it FOB, C&F or CIF or on any other terms. If the export incentives are based on FOB value, does any Customs officer have the power under the law to order that the export benefits shall instead be paid on the basis of some other value determined by the officer? - HELD THAT:- It is in exercise of this power under section 75, the Central Government notifies the rates at which drawback shall be allowed. Once the drawback schedule is notified by the Central Government, it is a direction to the officers that the drawback shall be paid accordingly. If the schedule prescribes drawback to be given as a percentage of FOB value, that is the direction of the central government under section 75. The concerned Customs officers are bound to follow the directions of the Central Government. No power is conferred under the Act on the Commissioner or any other officer of customs to defy the notification issued by the Central Government and to determine the drawback based on any other value. A plain reading of the Customs Act and the FT(D&R) Act would have shown all these officers that they had no such powers under them. The only power under the Customs Act is to determine the assessable value of the goods and not to change the FOB value - All three export incentives in dispute-drawback, MESI and ROSL are to be paid as a percentage of FOB value as per the notifications issued by the Central Government under the Customs Act and the FT(D&R) Act and no officer has the power to order that they should instead be paid as a percentage of any other value. The purported letter sent by DRI is a blatant interference in the adjudication process by the Joint Commissioner. DRI seems to have issued the letter under the wrong impression that it has the power to dictate how adjudication orders are passed by quasi-judicial officers. The Joint Commissioner was wise enough to ignore this letter from DRI but the department seems to have lost sight of the fact that quasi-judicial orders should be passed without fear or favour and without obtaining NOCs from any investigating agency. Conclusion - i) FOB value is the transaction value of the goods agreed to between the buyer and the seller. ii) The consideration or the transaction value cannot be modified by any stranger to the contract including any officer. iii) The FOB value cannot be modified by anyone including any Customs officer. Nothing in the Customs Act confers any power on anyone to modify the transaction value between the buyer and seller-be it FOB, C&F or CIF or on any other terms. iv) The Joint Commissioner was wise enough to ignore this letter from DRI but the department seems to have lost sight of the fact that quasi-judicial orders should be passed without fear or favour and without obtaining NOCs from any investigating agency. The order of the Joint Commissioner is restored upholding the declared FOB values with the modification that the FOB values stand accepted because the officer had no power to modify the FOB values nor any power to direct that the export incentives should be paid on some other values - Revenue’s appeals are dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include: Whether the Customs authorities have the power to re-determine the Free on Board (FOB) value of exported goods. Whether the Customs authorities can modify the basis on which export incentives like drawback, MEIS, and ROSL are calculated, specifically from FOB value to any other value. The validity of the actions taken by the Customs authorities based on the suspicion of overvaluation of goods for claiming excess export benefits. The role and influence of the Directorate of Revenue Intelligence (DRI) in the adjudication process.ISSUE-WISE DETAILED ANALYSIS1. Power to Re-determine FOB ValueThe legal framework under consideration includes Section 14 of the Customs Act and the Customs Valuation (Determination of Value of Export Goods) Rules, 2007. The Court interpreted that FOB value is the transaction value agreed upon between the buyer and the seller, and no customs officer has the authority to alter this value. The transaction value is a product of negotiations and contracts between the parties involved, and any modification by a third party, including customs officers, is not permissible under the law.The Court emphasized that the Customs Act allows for the determination of the assessable value for duty purposes but does not grant the power to alter the FOB value. The assessable value, even if re-determined, does not affect the FOB value, which remains as agreed between the contracting parties.2. Basis for Export IncentivesThe relevant legal provisions include Section 75 of the Customs Act and the Foreign Trade (Development & Regulation) Act, 1992. The Court noted that export incentives like drawback, MEIS, and ROSL are calculated based on the FOB value as per notifications issued by the Central Government. Customs officers do not have the authority to alter this basis and calculate incentives on any other value.The Court highlighted that the power to notify rates of drawback and other incentives is vested with the Central Government, and the officers must adhere to these notifications. Any deviation from the prescribed basis for calculation of incentives would constitute a violation of the policy framework.3. Investigation and Adjudication ProcessThe Court examined the investigation process initiated by the Customs authorities based on the suspicion of overvaluation. It was found that the entire investigation was premised on the incorrect assumption that Customs officers could alter the FOB value. The Court reiterated that suspicion, however strong, cannot replace evidence in legal proceedings.The Court also addressed the role of the DRI, noting that its directive to obtain a no-objection certificate (NOC) before releasing export incentives was an overreach and an interference in the adjudication process. The Court emphasized the importance of independent adjudication without undue influence from investigative agencies.SIGNIFICANT HOLDINGSThe Court established several core principles in its judgment: 'FOB value is the transaction value, i.e., the price paid or to be paid for the goods as decided between the exporter and the overseas buyer.' 'No stranger to the contract, including any Customs officer, has any right to interfere with the FOB value of the goods.' 'The Customs Act does not empower any officer to modify the FOB value of goods.' 'The power to notify rates of drawback is vested with the Central Government, and if the rates of drawback are as a percentage of FOB value, drawback should be paid accordingly, and no Customs officer has the power to ignore the FOB value and determine drawback based on any other value determined by him.' 'The incentives under MEIS and ROSL are part of the FTP framed by the Central Government under section 5 of the FT(D&R) Act, 1992, and all officers are bound to follow the FTP.'The Court concluded by setting aside the impugned order and restoring the order of the Joint Commissioner, affirming the declared FOB values and allowing the exporters' appeals while dismissing the Revenue's appeals. The judgment underscores the limitations of Customs officers in altering transaction values and emphasizes adherence to established legal frameworks for export incentives.