Aadrikaa Legal Services (ALS) – IDT Tax I Arbitration I Litigation
Date: 25.04.2026
CESTAT Delhi Distinguishes Calculation Error from Suppression of Facts
This Short Article has been prepared & written by Advocate Ravi Shekhar Jha-Delhi High Court, New Delhi. The views expressed are based on his interpretation of the law. He can be reached at his email idΒ intelconsul@gmail.com . Β
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This article explores a significant legal dispute involving customs valuation and duty assessment between M/s Ranbaxy Laboratories Ltd. (now Sun Pharmaceutical Industries Ltd.) and the Commissioner of Customs (Appeals), New Delhi. The case, adjudicated by the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) in April 2026, highlights the complexities of customs valuation, the interpretation of international commercial terms (INCOTERMS), and the responsibilities of importers under Indian customs law.
Background of the Case
Ranbaxy Laboratories, engaged in the manufacture and import of pharmaceuticals, filed 173 Bills of Entry between March 2009 and December 2011 through its customs broker, M/s Schenker India Pvt. Ltd. The goods were imported by air, purchased on an ex-works basis, but the ex-works price was declared as Free on Board (FOB) value in the Bills of Entry. The company also declared freight costs, including transportation from the exporterβs factory to the port of export and onward to the place of importation.
Key Legal Issues
1. Customs Duty Assessment
Customs duties in India are assessed either on quantity (specific rate) or value (ad valorem rate). When assessed on value, the transaction value (the price paid or payable for delivery at the time and place of importation) is used, typically referred to as Cost, Insurance, and Freight (CIF) price. INCOTERMS like ex-works, FOB, and CIF define the rights and liabilities of buyers and sellers:
- Ex-works:Β Only costs up to the factory gate are included.
- FOB:Β Costs up to placing goods on board the vessel/aircraft are included.
- CIF:Β All costs, including transportation and insurance up to the place of importation, are included.
2. Valuation Rules and Air Freight Cap
The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, specify how transaction values should be adjusted. Rule 10 requires adding certain costs (like transport and insurance) if not already included. For air imports, the fifth proviso to Rule 10(2) caps the transport cost added to the assessable value at 20% of the FOB value, regardless of actual freight paid.
3. Mis-declaration and Penalties
The dispute arose because Ranbaxy declared ex-works prices as FOB values and calculated air freight as 20% of the ex-works price, not the FOB value. This led to short assessment and short payment of duty. The Directorate General of Revenue Intelligence (DRI) investigated, resulting in a show cause notice and subsequent penalties under various sections of the Customs Act.
Arguments Presented
Appellants (Ranbaxy & Schenker India)
- No Wilful Mis-declaration:Β All import documents were submitted; no suppression or collusion occurred.
- Incorrect Valuation Method:Β The law does not prescribe a method to calculate assessable value from ex-works price.
- Ambiguity in Freight Definition:Β The Valuation Rules do not clearly define freight charges.
- Strict Interpretation of Fiscal Statutes:Β If the rules do not specify a method, duty liability cannot be determined using a method for a different payment term.
- Penalties Not Justified:Β Interest and penalties should not be imposed.
Revenue (Customs Department)
- Wilful Mis-declaration:Β Ex-works prices were wrongly declared as FOB, and lesser freight amounts were declared, justifying extended limitation and penalties.
- Duty and Interest Payment:Β Payment after the show cause notice does not preclude penalties.
- Penalties Valid:Β Both company and customs broker knowingly submitted false declarations.
- Obligation to Declare Correct Value:Β Importers must make truthful declarations; failure invites statutory consequences.
Tribunalβs Findings and Decision
- Legal Position on Valuation:Β The Tribunal clarified that the cost of air freight should be 20% of the FOB value, not the ex-works price.Β FOB value includes all costs up to placing goods on board the aircraft, including transport from the factory.
- Limitation and Penalty:Β The Tribunal found no evidence of intentional evasion or suppression by the importer, customs broker, or officers.Β Oversight occurred on both sides, and the extended period of limitation was not justified.Β Consequently, penalties were set aside.
- Relief Granted:Β Both appeals were allowed, and the impugned orders were set aside, providing consequential relief to the appellants.
Conclusion
This case underscores the importance of accurate customs declarations and understanding INCOTERMS in international trade. It also highlights the need for clarity in customs valuation rules and the responsibilities of both importers and customs authorities. The Tribunalβs decision provides guidance on the correct method for calculating assessable value and the circumstances under which penalties and extended limitation can be invoked.
Source: CESTAT Delhi
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