The Customs Appellate Tribunal has clarified that when goods are imported from related parties, the importer bears the legal burden to demonstrate that the declared transaction value is not influenced by the relationship. This ruling reinforces the statutory framework under the Customs Valuation Rules and shifts the onus squarely onto importers to substantiate pricing integrity.
Background & Facts
The Dispute
The appellant, M/s. Zaharansky Moulds & Machines Pvt. Ltd., imports raw materials and components from its parent company, Zahoransky AG, Germany. After transitioning from a joint venture to a wholly owned subsidiary, the company relocated its registered office to Coimbatore and shifted its customs registration to Chennai. The Special Valuation Branch initially accepted the invoice value as transaction value, even after applying a 20% discount offered by the related supplier. However, the department challenged this acceptance, arguing that the discount reduced the sale price below the supplier’s cost, indicating potential price manipulation due to the related-party relationship.
Procedural History
- 2012: Order in Original affirmed acceptance of invoice value post-20% discount under Rule 3(3)(a) of the Customs Valuation Rules, 2007.
- 2015: Renewal Order reiterated acceptance of transaction value, citing supplier’s letter confirming 65% markup and 20% discount applied uniformly to all global subsidiaries.
- 2015: Commissioner of Customs (Appeals) set aside the renewal order, holding that the appellant failed to prove the supplier recovered costs and profit after discount.
- 2026: Appeal filed before the Customs Appellate Tribunal, Chennai.
Relief Sought
The appellant sought reversal of the Commissioner’s order, arguing that the department failed to produce evidence of price manipulation and that the transaction value should be accepted under Rule 3(3)(a). It relied on Supreme Court precedents placing the burden on the department.
The Legal Issue
The central question was whether Rule 3(3)(a) of the Customs Valuation Rules, 2007 requires the importer to prove that the relationship with the supplier did not influence the price, or whether the department must first establish such influence before the transaction value can be rejected.
Arguments Presented
For the Appellant
The appellant contended that the transaction value must be accepted unless the department proves the relationship influenced the price. It cited Commissioner of Customs, New Delhi v. Prodelin India Ltd. and Commissioner of Customs (Imports), Mumbai v. Bayer Corp. Science Ltd., where the Supreme Court held that the burden of proving non-transaction value lies with the department. It also relied on Paschal Form Work India Pvt. Ltd. and Hanil Automotive India Pvt. Ltd., where the Tribunal held that absence of evidence of price manipulation or flow-back precludes adjustment of value. The appellant submitted that its supplier’s letter and global pricing pattern demonstrated arm’s length pricing.
For the Respondent
The department argued that the 20% discount reduced the invoice price below the supplier’s cost, making it commercially implausible that profit was recovered. It emphasized that the appellant failed to provide a cost-profit breakdown or prove that the same discount was extended to unrelated buyers. The department contended that the absence of contemporaneous identical imports and the variance in model comparisons rendered the appellant’s evidence insufficient to rebut the presumption of influence.
The Court's Analysis
The Tribunal examined the statutory framework under Section 14 of the Customs Act and Rule 3(3)(a) of the Customs Valuation Rules, 2007, which explicitly states that transaction value between related parties shall be accepted only if the circumstances of sale indicate that the relationship did not influence the price. Crucially, the rule places the burden on the importer to demonstrate this.
"Rule 3(b) also incorporates a legal requirement that the importer demonstrates that the declared value satisfies the Rule. The burden of proof is hence on the importer, which he has not discharged."
The Tribunal rejected the appellant’s reliance on precedents placing the burden on the department, distinguishing them on the basis that they applied to pre-2007 valuation regimes or different statutory contexts. It emphasized that Rule 3(3)(a), as amended, imposes a clear affirmative duty on importers to prove non-influence.
The Tribunal further relied on Mahakali Sujatha v. Future Generali India Life Insurance Co., which affirmed that where a fact is especially within the knowledge of a party, the burden of proof lies with that party under Section 106 of the Indian Evidence Act, 1872. The appellant’s failure to disclose the supplier’s profit margin or confirm uniform discounting to unrelated parties rendered its evidence incomplete.
The Tribunal also drew analogy from Commissioner of Central Excise v. Fiat India, where the Supreme Court held that a price below cost, if not explained by legitimate commercial reasons, cannot be treated as the "normal price." Here, the 20% discount, coupled with the absence of profit inclusion in the markup, created a reasonable inference of non-arm’s length pricing.
Finally, the Tribunal held that the Commissioner’s satisfaction, based on material on record, was neither perverse nor arbitrary. Judicial interference is not warranted merely because an alternative view is possible.
The Verdict
The appellant’s appeal was dismissed. The Tribunal upheld the Commissioner’s order, holding that the burden of proving non-influence of relationship on transaction value rests with the importer under Rule 3(3)(a), and that the appellant failed to discharge this burden.
What This Means For Similar Cases
Burden of Proof Is On the Importer
- Practitioners must now prepare comprehensive documentation upfront to substantiate transaction value in related-party imports.
- Merely submitting invoices and generic supplier letters is insufficient; a detailed cost-profit analysis and evidence of uniform pricing across unrelated parties is required.
- Legal arguments citing pre-2007 precedents placing burden on the department are no longer tenable under current rules.
Documentation Must Be Granular and Global
- Importers must maintain records showing:
- Breakup of markup (profit, handling, administration)
- Proof that the same discount structure applies to all global subsidiaries, unrelated buyers, and third-party distributors
- Comparative data from unrelated importers for identical or similar goods
- Absence of such data invites adverse inference under Section 106 of the Evidence Act.
Valuation Adjustments Are Likely Without Direct Evidence
- Customs authorities may now reasonably reject transaction value if:
- The price is below the supplier’s cost
- Profit is not demonstrably included in the markup
- No evidence exists of comparable pricing to unrelated parties
- Practitioners should advise clients to avoid deep discounts in related-party transactions unless fully documented and justified.
