CESTAT Delhi Sets Aside Over-Valuation Allegation

ALO Law Office- IDT Tax I Arbitration I Litigation

Date: 20.10.2025

CESTAT Delhi Sets Aside Over-Valuation Allegation

In a significant ruling, the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, delivered its final verdict on the Customs Appeal No. ​ 50025 of 2020 on October 16, 2025. ​ The case revolved around allegations of overvaluation of export goods by Isgec Heavy Engineering Ltd., a leading manufacturer and exporter of heavy engineering goods, including boilers and sugar plants. ​ The company had sought to quash the order passed by the Commissioner of Customs (Appeals), which upheld the Joint Commissioner’s decision to impose fines and penalties for alleged overvaluation of goods. ​

Background of the Case

Isgec Heavy Engineering Ltd. entered into contracts with foreign buyers for the supply of heavy engineering goods. ​ These contracts stipulated a lump sum payment for the goods, without specifying individual component costs. ​ Due to the massive size of the goods, the company exported them in partial shipments, with invoices raised on a pro-rata basis. ​ However, discrepancies arose between the Free on Board (FOB) values declared in the shipping bills and the values declared in ARE-1 forms prepared by supporting manufacturers. ​ This led to the seizure of goods exported under 16 shipping bills and the issuance of a show-cause notice alleging overvaluation and improper duty drawback claims. ​

Key Issues in the Case

The primary issue was whether Isgec Heavy Engineering Ltd. had intentionally overvalued the export goods to claim higher duty drawback benefits. ​ The customs authorities argued that the FOB values declared in the shipping bills were inflated compared to the values in the ARE-1 forms, and re-determined the transaction value under Rule 5 of the Customs Valuation (Determination of Value of Exported Goods) Rules, 2007. This led to a reduction in the duty drawback amount and the imposition of fines and penalties under Sections 114 and 114AA of the Customs Act.

Tribunal’s Observations and Decision ​

After hearing arguments from both sides, the Tribunal made several key observations:

1. FOB Value Cannot Be Modified by Customs Authorities: The Tribunal emphasized that the FOB value is a product of negotiations between the buyer and seller and cannot be modified by a stranger to the contract, including customs authorities. ​ The principle of “privity of contract” protects the agreed-upon transaction value. ​
2. Duty Drawback on FOB Value: The Tribunal clarified that duty drawback under Section 75 of the Customs Act is calculated as a percentage of the FOB value declared in the shipping bills. ​ Customs authorities cannot re-determine the FOB value to alter the duty drawback amount. ​
3. Costs Added to FOB Value: The Tribunal accepted the appellant’s explanation that the difference between the ARE-1 value and the FOB value was due to additional costs such as marketing expenses, transportation, pre-shipment costs, warranty obligations, design charges, and profit margins.
4. Statements Under Section 108 of the Customs Act: The Tribunal ruled that statements made under Section 108 of the Customs Act could not be relied upon as evidence since the provisions of Section 138B were not complied with. ​
5. Fine and Penalties: The Tribunal set aside the imposition of fines under Section 125 and penalties under Sections 114 and 114AA of the Customs Act, stating that the allegations of overvaluation were not substantiated. ​

Final Verdict

The Tribunal concluded that the FOB value declared by Isgec Heavy Engineering Ltd. was valid and could not be rejected or re-determined by customs authorities. ​ Consequently, the order passed by the Commissioner (Appeals) was set aside, and the appeal was allowed in favor of the appellant.

Source: CESTAT Delhi

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