2025 (5) TMI 1376 - AT - Customs

Additional Commissioner cannot re-determine FOB value of exported garments using section 14 and Valuation Rules

CESTAT NEW DELHI held that Additional Commissioner lacked authority to re-determine FOB value of exported readymade garments using section 14 and ... Seeking to re-determining the FOB value of the export goods - export 598 cartons of readymade garments - export incentives - goods overvalued in order to claim excess Drawback and rebate of State Levies (ROSL) - confiscation - redemption of fine under section 125 and imposition of penalty - Meaning of “FOB value of the goods” and the power to re-determine it - HELD THAT:- The decision of M/s JBN Apparels Pvt LTD, [2025 (3) TMI 514 - CESTAT NEW DELHI], was followed by this Tribunal in some other appeals. We have no reason to take a different view in this appeal. Accordingly, we hold that the Additional Commissioner was wrong in re-determining the FOB value invoking section 14 and the Valuation Rules. This section and the rules do not empower the Customs Officer to determine the FOB value but only empower him to determine the assessable value. Assessable value can be determined as per the transaction value or through some other method. The two export incentives in this case- Drawback and ROSL are to be paid the percentage of FOB value should be paid so. They have no correlation with the assessable value of the goods. The Additional Commissioner had no authority to order that instead of paying the drawback on the FOB value (as notified by the Government), it should be paid on a value determined by him treating it as FOB value. Similarly, he had no authority to order that instead of the ROSL being paid on the FOB value as laid down in the Foreign Trade Policy, it should be paid on a value determined by him treating it as FOB value. To sum up: a. The Additional Commissioner is a stranger to the contract between the exporter and the overseas buyer and has no locus standi to change the FOB value of the goods; b. The Additional Commissioner has no authority to order that the drawback should be paid on a value determined by him instead of on the FOB value as notified by the Government of India; c. The Additional Commissioner also has no authority to order that the ROSL should be paid on a value determined by him instead of on the FOB value as per the Foreign Trade policy; d. The order of confiscation of goods, imposition of redemption fine and penalties are based on the change of the FOB value by the Additional Commissioner, therefore, also cannot be sustained; e. The impugned order of the Commissioner (Appeals) upholding the above order of the Additional Commissioner cannot be sustained and needs to be set aside; 10. Thus, the appeal is allowed and the impugned order is set aside with consequential relief to the appellant. The core legal questions considered by the Tribunal in this appeal are:1. Whether the Commissioner (Appeals) was correct in upholding the Additional Commissioner's order re-determining the FOB value of the export goods under Rule 6 of the Customs Valuation (Determination of Export Goods) Rules, 2007 read with Section 14 of the Customs Act, 1962.2. Whether the Commissioner (Appeals) was correct in upholding the order that drawback and Rebate of State Levies (ROSL) on the export goods would be payable on the re-determined value rather than the declared FOB value.3. Whether the confiscation of goods under Section 113, the redemption fine under Section 125, and the penalty under Section 114 imposed by the Additional Commissioner and upheld by the Commissioner (Appeals) were legally sustainable.4. The legal meaning and scope of 'FOB value' in the context of export goods and export incentives.5. The extent of powers conferred on Customs officers under Section 14 of the Customs Act and the Valuation Rules to reject declared values and re-determine assessable values, and whether such powers extend to altering the FOB value agreed between buyer and seller.6. Whether Customs officers have the authority to determine export incentives such as drawback and ROSL on any value other than the FOB value as notified by the Central Government.Issue-wise detailed analysis:Issue 1 & 4: Meaning and determination of FOB value and the power to re-determine itThe Tribunal examined the legal framework governing valuation of export goods, primarily Section 14 of the Customs Act, 1962, and the Customs Valuation (Determination of Export Goods) Rules, 2007. It relied heavily on a prior decision of the Tribunal in a related appeal, which elucidated the meaning of FOB (Free On Board) value as the transaction value agreed between the buyer and seller for export goods. FOB value is a term defined by international commercial terms (INCOTERMS) and reflects the price at which the goods are sold for export, with risk and cost transfer occurring once goods are loaded on board the vessel.The Tribunal held that the FOB value represents the contractually agreed price and is not subject to modification by any third party, including Customs officers. The power under Section 14 and the Valuation Rules to reject declared values and re-determine assessable values pertains solely to the purpose of calculating Customs duties and does not extend to altering the FOB value itself. The Tribunal illustrated this distinction with an example: even if Customs rejects a declared transaction value for duty assessment and re-determines a higher assessable value, the contractual transaction value between buyer and seller remains unchanged.The Tribunal emphasized that the FOB value is the transaction value and cannot be modified by Customs authorities, as there is no provision in the Customs Act or the Valuation Rules that confers such authority. The power to determine assessable value is distinct from the contractual FOB value, and the latter remains the basis for commercial transactions and export incentives.Issue 2 & 6: Payment of export incentives (Drawback and ROSL) on FOB valueThe Tribunal analyzed the statutory framework governing export incentives, focusing on Section 75 of the Customs Act which empowers the Central Government to notify drawback schemes, and the Foreign Trade (Development & Regulation) Act, 1992 under which the Foreign Trade Policy (FTP) is framed. The drawback and ROSL schemes in question are notified by the Central Government and specify that incentives are payable as a percentage of the FOB value of exported goods.The Tribunal held that Customs officers have no power to deviate from the Central Government's notification and pay export incentives on any value other than the FOB value. Any attempt by Customs officers to pay drawback or ROSL on a re-determined assessable value instead of the declared FOB value would violate the statutory scheme and the policy laid down in the FTP. The Tribunal underscored that the power to frame and amend the FTP, including the basis for export incentives, lies exclusively with the Central Government, and no Customs officer has authority to alter this basis.Issue 3: Confiscation, redemption fine, and penalty imposed based on re-determined FOB valueThe Tribunal found that the confiscation of goods under Section 113, the imposition of redemption fine under Section 125, and the penalty under Section 114 were all predicated on the re-determined FOB value by the Additional Commissioner. Since the Tribunal held that the Additional Commissioner had no authority to re-determine the FOB value, these consequential orders also lacked legal foundation and could not be sustained.The Tribunal noted that the entire investigation and subsequent orders were founded on the erroneous presumption that Customs officers could re-determine FOB value. This fundamental error vitiated the impugned orders, including confiscation and penalties.Treatment of competing arguments:The Department contended that the re-determination of FOB value under Section 14 and the Valuation Rules was permissible and necessary to prevent overvaluation aimed at claiming excess export incentives. The Tribunal acknowledged the Department's concern but clarified that while Customs officers can reject declared values for duty assessment, they cannot alter the contractual FOB value which forms the basis of export incentives.The Tribunal rejected the Department's view that the assessable value determined under Section 14 could be equated with FOB value for the purpose of calculating drawback and ROSL. It emphasized the distinction between assessable value for duty and FOB value for export incentives, and the statutory mandate that export incentives be calculated strictly on FOB value.Conclusions:a. FOB value is the transaction value agreed between buyer and seller and cannot be modified by Customs officers.b. Section 14 of the Customs Act and the Valuation Rules empower Customs officers only to determine assessable value for duty purposes, not to alter FOB value.c. Export incentives such as drawback and ROSL must be paid as a percentage of the FOB value as notified by the Central Government; Customs officers have no authority to pay these on any other value.d. Confiscation, redemption fine, and penalties based on re-determined FOB value are unsustainable.e. The impugned orders of the Additional Commissioner and Commissioner (Appeals) upholding the re-determination of FOB value and consequential penalties are set aside.Significant holdings:The Tribunal preserved the following crucial legal reasoning verbatim from the prior decision relied upon:'FOB value is free on board value, that is the value agreed to between the buyer and the seller for the goods to be imported and that no stranger to the contract including the Customs Officer has any right to modify the FOB value because it is the transaction value.''The power of the officers to determine the value as per section 14 of the Act and the valuation Rules is only to determine the assessable value of the goods. Any export incentives such as drawback and ROSL which are available as a percentage of the FOB value should be paid accordingly. The Customs Officers have no right to say that although the drawback, ROSL etc., are payable as a percentage of the FOB value as per the notification, they shall, instead be paid on a different value determined by the officers.''Section 14 reads as follows: 'For the purposes of the Customs Tariff Act, 1975... the value of the imported goods and export goods shall be the transaction value of such goods...' However, even when the proper officer rejects the transaction value and re-determines the value... 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.''If the drawback 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.''The power to frame FTP and to amend it has been conferred by FT(D&R) Act, 1992 exclusively on the Central Government. If the FTP prescribes that incentives under MEIS or ROSL or any other scheme shall be provided as a percentage of FOB value, they should be so provided. It is not open to the Commissioner or any other officer of Customs to say that they shall instead be provided as a percentage of either assessable value or some other value determined by him.'Final determinations:The Tribunal allowed the appeal, set aside the impugned orders of the Commissioner (Appeals) and the Additional Commissioner, and held that:- The Additional Commissioner and Commissioner (Appeals) erred in re-determining the FOB value under Section 14 and the Valuation Rules.- Export incentives must be paid on the declared FOB value as notified by the Central Government.- Confiscation, redemption fine, and penalties based on the re-determined FOB value are invalid.