The Statutory Foundation

Section 14 of the Customs Act, 1962 provides that the value of imported and export goods shall be the transaction value — the price actually paid or payable for the goods when sold for export to India, or for export from India, for delivery at the time and place of importation or exportation, where the buyer and seller are not related and price is the sole consideration for the sale, subject to such other conditions as may be specified in the rules.

The section further provides for the inclusion in the transaction value of the elements it specifies, and empowers the making of rules; and it contains provision for tariff values to be fixed for specified goods.

The rules made under it are the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 for imports, and the corresponding rules for export goods.

The Starting Point is the Declared Value

The scheme begins from a presumption in the importer’s favour: the transaction value is the value, unless the conditions for accepting it are not met.

The conditions concern restrictions on the disposition or use of the goods, conditions or considerations for which a value cannot be determined, proceeds accruing to the seller from subsequent resale, and — significantly — the relationship between buyer and seller.

Relationship is not by itself disqualifying. Where the buyer and seller are related, the transaction value is still accepted where the examination of the circumstances of sale indicates that the relationship did not influence the price, or where the importer demonstrates that the value closely approximates a test value of the kind the rules specify. Departments sometimes proceed as though a relationship automatically displaces the declared value; it does not.

When Can Customs Reject the Declared Value?

The pivot in every Customs valuation dispute is the rule empowering the proper officer to reject a declared value.

That power arises where the officer has reason to doubt the truth or accuracy of the value declared. It is not a free-standing power to substitute a value the officer considers more appropriate. The rule requires, in substance, that the officer ask the importer for further information and explanation, and — where doubt remains after considering the response — record the reasons for doubting the truth or accuracy of the declared value before proceeding to determine value under the subsequent rules. The importer is entitled, on request, to be informed in writing of those grounds.

Three propositions follow, and they form the core of most successful challenges:

• the doubt must rest on material, not on a general view that the price seems low;
• the importer must be given an opportunity to explain before the value is rejected; and
• the reasons must be recorded and communicated.

Where these steps are skipped, the rejection is liable to be set aside — and with it, the entire demand built upon it.

Redetermination of Customs Value

If the declared value is validly rejected, value is determined by applying the remaining rules sequentially. The order is prescribed and is not a menu:

1. Transaction value of identical goods — goods that are the same in all respects, sold for export to India at or about the same time.
2. Transaction value of similar goods — goods with like characteristics and component materials performing the same functions and commercially interchangeable.
3. Deductive value — derived from the unit price at which the goods, or identical or similar goods, are sold in India, with the deductions the rules prescribe.
4. Computed value — built up from the cost of materials and fabrication, profit and general expenses, and other elements the rules specify.
5. Residual method — reasonable means consistent with the principles and general provisions of the rules and Section 14, on the basis of data available in India, subject to the values the rules expressly prohibit.

The sequence may be reversed as between deductive and computed value at the importer’s request, in the manner the rules provide.

The rules also prohibit certain bases — including the selling price in India of goods produced in India, a system providing for acceptance of the higher of two alternative values, arbitrary or fictitious values, and minimum customs values.

The practical significance of the sequence is considerable. Departments frequently move straight to a contemporaneous import price found in a database. Where that price is not shown to relate to identical or similar goods, at or about the same time, at the same commercial level and in comparable quantities, the comparison does not satisfy the rule, and the redetermination fails.

The Additions to Value

Even where the declared price is accepted, customs valuation disputes arise about what must be added to it. The rules require the addition of specified elements to the extent they are incurred by the buyer and not already included in the price — commissions and brokerage other than buying commissions; the cost of containers and packing; the value of goods and services supplied by the buyer free of charge or at reduced cost; royalties and licence fees related to the goods and payable as a condition of sale; the value of proceeds of subsequent resale accruing to the seller; and the costs of transport, loading, unloading, handling and insurance, in the manner the rules prescribe.

Royalties and technical know-how payments are a persistent source of dispute. The question is not whether a payment was made, but whether it relates to the imported goods and whether it was payable as a condition of sale.

How Are Customs Valuation Disputes Decided?

A Customs Valuation Disputes is usually decided on four questions, in order.

Was there a valid basis to doubt the declared value? If not, everything after it falls.

Was the importer given an opportunity to explain, and were reasons recorded?

Was the substituted value arrived at by the prescribed sequence, on comparable data?

Do the alleged additions satisfy the tests the rules impose?

Only then does the question of the extended period and penalty arise — and there, an allegation of collusion, wilful misstatement or suppression must be independently pleaded and established, not inferred from the mere fact that the declared value was displaced.

Practical Guidance

Answer the query stage seriously. The opportunity to explain before rejection is the cheapest point at which to resolve a Custom valuation dispute, and a documented response — contracts, purchase orders, price lists, payment evidence, correspondence showing arm’s-length negotiation — often ends the matter.

Interrogate the comparison relied upon. Ask for the data: what goods, which import, what date, what quantity, what commercial level, what country of origin. A comparison that cannot answer these questions is unlikely to survive appeal.

Deal with relationship squarely. Where the supplier is related, prepare the circumstances-of-sale material in advance rather than after a notice issues.

Keep valuation and penalty separate. A redetermination of value that is upheld does not automatically justify the extended period or a penalty predicated on intent.

Frequently Asked Questions

1. Can Customs reject the declared value?

Yes. Customs must have reason to doubt its truth or accuracy and follow the prescribed procedure before rejecting it.

2. What happens after declared value is rejected?

The value must be determined sequentially under the Customs Valuation Rules, beginning with identical and similar goods.

3. Does a related supplier automatically invalidate transaction value?

No. Transaction value may still be accepted if the relationship did not influence the price or the applicable test is satisfied.

4. Can Customs use any comparable import price?

No. The comparison must satisfy the requirements for identical or similar goods and the prescribed commercial conditions.

5. Does higher customs valuation automatically mean a penalty?

No. Penalty and extended limitation require separate grounds and cannot follow automatically from value redetermination.

Legal Information Disclaimer

This article is published for general legal information and educational purposes only. It reflects the position of Indian law as researched up to 10 August 2026 and may not account for subsequent amendments, notifications, circulars or judicial developments. Valuation outcomes depend closely on the goods, the documents and the comparison data in each case. It is not legal advice, does not take into account any individual’s particular facts or circumstances, and no advocate-client relationship arises from reading it. Readers dealing with an actual matter should obtain independent professional advice from a qualified advocate of their own choosing before acting on any information contained here. Statutory provisions, notified figures, rules and case citations referred to in this article have been compiled from published legal materials and may contain errors or omissions, and may have changed since the date stated; no representation or warranty, express or implied, is given as to their accuracy, completeness or currency, and each should be independently verified against the official text or the official record before being relied upon. No liability is accepted for any loss arising from reliance on this article.

Sources / Authorities

• Customs Act, 1962 — Sections 14, 17, 28, 111, 112 and 124 — India Code, https://www.indiacode.nic.in
• Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 — rules governing transaction value, related-party transactions, rejection of declared value, identical goods, similar goods, deductive value, computed value, the residual method, additions to value, and prohibited bases of valuation
• Customs Valuation (Determination of Value of Export Goods) Rules, 2007
• Central Board of Indirect Taxes and Customs — instructions and circulars on customs valuation, https://www.cbic.gov.in

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