Customs duties form a significant source of revenue for India. The principle statute under which they are imposed is the Customs Act, 1962 (hereinafter Act).
Charge of Customs Duty:
Duties of custom are levied under section 12 of the Act on goods imported into or exported from India. The rates of duty are specified under the Customs Tariff Act, 1975 (hereinafter Tariff Act) or under any other law for the time being in force. For instance, special duties of customs may be levied under Finance Acts.
Valuation of Goods:
The basis of valuation is the "transaction value" of goods. The transaction value is the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation or as the case may be or export from India for delivery at the time and place of exportation. The transaction value as declared is normally accepted, except in cases where the buyer and seller of the goods are related persons and the price is not the sole consideration for the sale of goods. Section 14 of the Customs Act provides that the transaction value shall include, in addition to the price, any amount that is paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges. The extent and the manner in which such charges are to be added are specified in the Rules framed under the Customs Act.
From the point of view of valuation the relevant Rules are the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and the Customs Valuation (Determination of Value of Export Goods) Rules, 2007. These Rules, inter alia, provide for the circumstances in which the buyer and seller shall be deemed to be related, the manner of determination of value in respect of goods in cases where there is no sale or where the buyer and seller are related, or the price is not the sole consideration for the sale, the manner of acceptance or rejection of value declared by the importer or exporter, where the concerned Customs Authorities doubt the truth or accuracy of the value declared.
Duties of Customs:
As stated above, section 12 of the Customs Act is the charging section. It provides that the duties of customs shall be levied at such rates as may be specified, inter alia, in the Tariff Act.
The Basic Duty of Customs:
Section 2 of the Tariff Act provides that the rates of duties of customs are specified in the First and Second Schedules. These are commonly referred to as basic customs duties. The First Schedule relates to import duties and the Second Schedule relates to export duties. The First Schedule to the Tariff Act envisages two rates of basic customs duties - standard and preferential. The Tariff Act empowers the Central Government to notify any country or territory to be a "preferential area". In the case of imports from such notified preferential country or territory, the preferential rate of duty would be leviable. The Second Schedule lists out the commodities on which export duty is leviable and the rates at which such duty is leviable.
Additional Duties of Customs:
Section 3 of the Tariff Act specifies the different categories of additional duties of customs that may be levied on goods imported into India.
- Under section 3 (1) of the Tariff Act (which is the charging section in respect of additional duty of customs) an additional duty of customs is leviable equivalent to the excise duty leviable on like goods manufactured or produced in India. Such duties are levied under the Central Excise Act, 1944 read with the rates of duties as specified under the Central Excise Tariff Act, 1985. Duty under the Excise Act may be levied if the article has come into existence as a result of production or manufacture. In other words articles which are not produced or manufactured cannot be subjected to levy of excise duty. For instance, in a case where the importer was importing brass scrap (broken taps and broken pipes), the Customs Authorities sought to levy additional duty of customs on the imports. The Supreme Court of India was of the view that additional duty could not be imposed as broken taps and pipes are neither manufactured nor produced.
- Under section 3 (3) of the Tariff Act an additional duty of customs may be imposed by the Union Government to counterbalance excise duty leviable on raw materials, components and ingredients of the same nature as, or similar to those used in the production or manufacture of such articles as the Union Government may specify by notification.
- Under section 3 (5) of the Tariff Act a further additional duty of customs may be imposed by the Union Government to counterbalance sales tax, value-added tax, local tax or any other charges for the time being leviable on a like article on its sale, purchase or transportation in India.
The aforesaid additional duties of customs are imposed to protect the domestic industry from unfair disadvantage.
Classification of Goods:
There are thousands of varieties of imported goods. All goods do not carry the same rate or amount of duty. It is not possible to identify all the goods individually. Therefore, it is necessary to identify the goods through groups and sub-groups and then to determine the rate of duty on each group or sub-groups. The exercise of placing the various imported goods under the various groups or sub-groups is known as 'Classification' of a product. This basically means the determination of the heading or sub-heading under which a particular product will be covered.
The classification of goods under various heads and/or sub-heads, is under the Tariff Act. The said Act is based on the International Convention of Harmonised System of Nomenclature (HSN). This is an International Nomenclature standard adopted by almost all countries to ensure uniformity and classification of goods in international trade.
The First Schedule of the Tariff Act relates to goods imported into India. It is divided into 21 sections, which broadly cover separate categories of goods. For instance Section I deals with live animals: animal products, Section II deals with vegetable products; Section XI deals with textile and textile articles; and Section XV deals with base metals and articles of base metal. Each Section contains a number of Chapters. The First Schedule comprises of 98 Chapters.
Principles of Classification:
Probably the most common and oft repeated principle of classification is that goods should be classified according to their popular meaning or as they are understood in commercial sense. The test applied is: how is the product identified by the class of people dealing with or using the product? This test is applied whenever a statute does not contain any definition. The courts in India have repeatedly held that while interpreting fiscal statutes resort should be had to the commercial or popular meaning attached to terms by those dealing in them and not to any scientific or technical meaning.
The trade parlance test may, however, have some limitations. For instance when a new product is introduced in the market, or where the structure of the heading in the Chapter is entirely based on technical identification of various products, the commercial parlance by which a particular product is known would have no relevance. In such cases the technical or scientific meaning may have to be resorted to for classifying the product.
The Union Government also has the power, in public interest, to grant exemptions in the rate of duty applicable on imported goods as also goods for exports. These exemptions may reduce the duty to nil or may be partial and subject to certain conditions.
A special facility has been granted under the Tariff Act to persons importing goods for the initial setting up or substantial expansion of industrial plants, irrigation projects, power projects, mining projects, projects for exploration of oil and other minerals and for such other projects as may be notified by the Union Government. In such cases all items of machinery, including prime movers, instruments, apparatus and appliances, control gear and transmission equipment, auxiliary treatment, as well as components or raw materials for the manufacture of the aforesaid items and their components are classified under a single heading in Chapter 98 of the First Schedule to the Tariff Act at a concessional rate of duty. The classification of such goods under one heading facilitates the import as otherwise the goods would be required to be classified under different headings/sub-headings.
For purposes of clearance of imported goods from the port/airport of arrival, an importer is required to file a Bill of Entry with the concerned officer of Customs. The importer has the option of either clearing the goods for 'home consumption' or of having the goods put in a warehouse (customs bonded warehouse) for clearance at a later date.
The Bill of Entry may be filed 30 days prior to the arrival of vessel carrying the goods. In the Bill of Entry the importer is required to fill in the description of the goods, classification, transaction value, rate of duty applicable, (both for basic and additional duties), and the customs duties payable.
An importer of capital goods or raw materials, who utilises the imported goods in setting up a factory or in the manufacture of goods in India, is allowed to take additional duty of customs (imposed under section 3 (1) of the Tariff Act, which is equivalent to the excise duty for the time being leviable) as credit under the Cenvat Credit Scheme and utilize it for payment of duty on the final goods manufactured in his factory.
Under the Customs Act, 1962 (like the Central Excise Act, 1944) an Authority for Advance Ruling was constituted in the year 1999. This Authority has basically been set up for purposes of determination of questions of law or fact regarding the liability to pay customs duty to an activity proposed to be undertaken by the applicant. This facility can be availed of only by non-residents or individuals in joint ventures with non-residents. This Authority would, inter alia, determine (in advance of imports) the classification of goods under the Tariff Act, the principles to be adopted for valuation and the applicability of notifications having a bearing on the rate of duty. Any determination is statutorily binding. This is a great boon for importers as it takes away the uncertainties and vagaries of taxing statutes.
A hierarchy of authorities has been specified under the Customs Act for the adjudication of disputes that may arise between importers/exporters and the customs authorities. These may be in relation to classification of goods, valuation, exemptions etc.
In the first instance the adjudication is taken up before officers of the rank of Assistant Commissioner or Joint Commissioner or Additional Commissioner. In certain circumstances disputes may be adjudicated by a Commissioner.
Either party (the assessee and/or the customs authority) aggrieved by an order passed by an Assistant Commissioner or Joint Commissioner or Additional Commissioner may file in appeal before the appellate authority known as the Commissioner of Customs (Appeals). A second appeal lies before the Customs Excise & Service Tax Appellate Tribunal. However, if in the first instance the dispute is adjudicated by an officer of the rank of Commissioner, an appeal would also lie to the Customs Excise & Service Tax Appellate Tribunal.
Against orders of the Customs Excise & Service Tax Appellate Tribunal two streams of appeals are contemplated. In case the issue relates to either the classification or valuation of goods, an appeal lies to the Supreme Court of India. In other cases an appeal lies to the jurisdictional High Court. However, such an appeal to the High Court would only lie if the appeal involves a substantial question of law.