Customs valuation rules require strict proof of related person status and free-supply nexus before adding drawing costs.
Related person status under the Customs (Valuation) Rules, 1988 was not established where the foreign supplier's 40% shareholding did not satisfy the statutory control test and no factual control was shown under the notice or findings below. The value of drawings used for manufacture of imported machinery components was also not includible because Rule 9(1)(b) applies only where the buyer supplies goods or services free of charge for use in producing the imported goods, and no such nexus was proved. Rule 9(1)(c) could not be relied on when it was not invoked in the notice and did not fit the facts. The valuation adopted below was upheld.
Issues: (i) Whether the importer and the foreign supplier were related persons under the Customs (Valuation) Rules, 1988; (ii) Whether the value of drawings supplied for manufacture of the imported machinery components was includible in the assessable value.
Issue (i): Whether the importer and the foreign supplier were related persons under the Customs (Valuation) Rules, 1988.
Analysis: Rule 2(2)(iv) applies where the statutory shareholding or control condition is satisfied through ownership or control by a third person. Mere ownership of 40% of the respondent's shares by the foreign supplier did not satisfy that requirement. The alternative reliance on Rule 2(2)(v) also failed because control was neither established on the facts nor supported by the show cause notice or the findings below; the existence of control was treated as a question of fact, not a pure question of law.
Conclusion: The parties were not shown to be related persons; the finding was in favour of the assessee.
Issue (ii): Whether the value of drawings supplied for manufacture of the imported machinery components was includible in the assessable value.
Analysis: Rule 9(1)(b) applies only where goods or services are supplied free of charge by the buyer for use in connection with the production and sale for export of the imported goods. There was no allegation or material showing that the respondent supplied any goods or services used in preparing the drawings. Rule 9(1)(c) could not be relied upon because it was not invoked in the notice and, in any event, did not fit the facts.
Conclusion: The drawings' value was not includible in the assessable value; the finding was in favour of the assessee.
Final Conclusion: The department failed on both issues, and the valuation adopted by the lower appellate authority was upheld.
Ratio Decidendi: Related person status and valuation additions must be supported by the precise statutory basis invoked and by facts establishing the relevant shareholding, control, or free supply nexus; a new factual basis not raised in the notice cannot be introduced at the appellate stage.
TaxTMI 
AI Drafter ✕
TaxTMI 
