Customs | FOB Value Determined Between Parties Protected By Privity Of Contract; Cannot Be Modified By Stranger: CESTAT

Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) opined that FOB value is the product of negotiations and deliberations between the parties to the contract, which value cannot be modified by any stranger to the contract by virtue of the principle of “privity of contract”. The FOB value of the individual components declared by the assessee, therefore, could not have been rejected.

In this case, the assessee/appellant was engaged in the business of manufacturing and exporting heavy engineering goods, including boilers and sugar plants.

The assessee entered into various contracts with foreign buyers for the supply of the goods. These contracts provided for payment of a lump sum price by the foreign buyers for the supply of the goods.

After the contract was entered, a broad billing breakup of the goods was prepared by the assessee, as per the terms of the contract, which was approved by the foreign buyer.

In a case where components were manufactured by the supporting manufacturers, they were directly supplied to the port of export under Form ARE-1 by the supporting manufacturer.

The goods exported through 16 shipping bills were seized because the values of components declared under ARE-1 were found to be less than the FOB values declared in the shipping bills.

A show cause notice was issued to the assessee to show cause as to why the declared value of the exported goods should not be rejected under Rule 8 of the Customs Valuation (Determination of Value of Exported Goods) Rules, 2007 and re-determined under Rule 5.

The Joint Commissioner confirmed the demand made in the show-cause notice. The assessee challenged the said order by filing an appeal before the Commissioner (Appeals), which was dismissed.

The assessee submitted that the assessee is entitled to avail duty drawback on the FOB value of the goods declared in the shipping bills. Thus, the assessee had rightly availed of duty drawback on the FOB value of the subject goods.

The revenue submitted that the assessee had filed the shipping bills of heavy engineering goods with over-valuation as compared to the All-Industry Rate prices, and it was found that the assessee had mis-declared the goods to be exported in terms of valuation, along with a wrong claim of the drawback benefits.

The issue before the bench was whether the FOB value can be modified by a stranger to the contract.

The Tribunal observed that neither the Drawback Rules nor the Drawback Notification makes any specific reference to the 2007 Customs Valuation Rules for determining the quantum of drawback.

The bench stated that drawback is disbursed on account of export of goods and realization of export proceeds. Therefore, the 2007 Customs Valuation Rules for redetermination of value of subject goods cannot be applied and the appellant would be eligible to avail duty drawback on the FOB value indicated on the shipping bills.

The values declared in the shipping bills have been rejected solely on the ground that there was a difference in the values of individual components as declared by the assessee in the shipping bills and the corresponding ARE-1 prepared by the supporting manufactures. There is no other evidence that was relied upon furnished to corroborate this allegation. The transaction value of the goods under section 14 of the Customs Act is the FOB value declared in the shipping bills, stated the Tribunal.

The bench opined that the FOB value declared by the assessee could not have been rejected.

In view of the above, the Tribunal allowed the appeal.

Case Title: Isgec Heavy Engineering Ltd. v. Commissioner of Customs (Export)

Case Number: CUSTOMS APPEAL NO. 50025 OF 2020

Counsel for Appellant/ Assessee: Shri B.L. Narasimhan, Shri Anurag Kapur, Ms. Osheeba Basir and Ms. Rubel Bareja

Counsel for Respondent/ Department: Shri Rakesh Kumar

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