[By Manav Chakraborty and Manya Singh]
The authors are students of Jindal Global Law school
The computation of proper customs is a matter of vital importance for both Government and importers alike as it forms the backbone of revenue collection and compliance in cross-border trade. In a recent decision, titled Coal India Limited Vs. Commissioner Of Customs (Port) (Coal India) the Supreme Court of India confronted a contentious and commercially significant issue in this field: whether “product service fees” paid to a third party which is separate from the price paid to the foreign exporter should be included in the assessable value of imported goods under Rule 9(1)(a) and (e) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. (Valuation Rules)
While the judgment establishes an important precedent with far-reaching consequences for transactions involving complex import arrangements, it also raises several interpretive and doctrinal issues that need to be resolved. In particular, the ruling raises questions about the scope of “condition of sale”, the distinction between pre- and post-import services, and the extent to which form can be disregarded in favour of commercial substance. This article critically analyses the decision, examining its reasoning, statutory context, and potential consequences for future customs valuation disputes.
Factual Matrix and Supreme Court’s Ruling
The case arose out of a contract for the supply of spare parts for P&H Shovels entered into between Central Coalfields Ltd. (a subsidiary of Coal India Ltd., the appellant) and Harnischfeger Corporation, USA (the foreign supplier). The contract was routed through the latter’s Indian distributor, M/s Voltas Ltd., which was to be paid 8% of the Free On-Board (FOB) value of the contract in Indian rupees towards “engineering and technical service fees.” This payment was not deducted from the FOB value and was made directly to Voltas. Following provisional assessments, the Assistant Commissioner of Customs included the 8% fee paid to Voltas in the assessable value of the goods under Rule 9(1)(a) and (e) of the Valuation Rules, read with Section 14(1) of the Customs Act, 1962. The short levy of duty was quantified at Rs. 64,47,244 and the appellant was directed to furnish this amount within 15 days.
The Court first began by scrutinizing the pertinent contractual documents and its clauses specifically focusing on Clause 5 of the Purchase Order. It observed that the 8% payment to Voltas Ltd. was not a collateral arrangement but an integral term of the sale contract and the obligation to pay this amount was inextricably linked to the act of importation. The Court therefore held that the foreign supplier’s quotation made it clear that the payment to Voltas Ltd. was to be made in addition to the FOB price, and not deducted from it, reinforcing the viewpoint reached by different authorities before that this payment was a condition of sale and not a separate post-importation service.
The Court’s main reasoning as to why the 8% payment obligation under the Purchase order was rightfully included in the assessable value of the imported goods under Rule 9(1)(a) and Rule 9(1)(e) of the Valuation Rules read with Section 14(1)(a) of the Customs Act, 1962 lied in the nature of the services rendered by Voltas Ltd. While the appellant characterized these services as post-importation maintenance and technical assistance, the Court essentially found them to be fundamentally tied to the import transaction activities to ensure smooth execution of the sale and importation of goods and hence includable in the assessable value.
In addressing the appellant’s reliance on the Note to Rule 4 of the Valuation Rules and previous Supreme Court decisions such as Commissioner of Customs (Ports), Kolkata Vs. J.K. Corpn. Ltd (J.K Corporation) and Commissioner of Customs Vs. Ferodo India (P) Ltd. the Court drew a clear distinction between the cases on the basis of their factual matrix. In J.K Corporation, the Court held that payments for post-importation activities (such as technical know-how or license fees for plant operation after import) were not a precondition for the sale of goods and hence would not come within the purview of assessable value of the imported goods so as to enable the authorities to levy customs duty in view of the Note to Rule 4. In contrast, the services in the present case were pre-importation or contemporaneous with importation and thus includible in the assessable value under Rule 9(1)(e).
Substance Over Form: Doctrinal Application and Limitations
One of the central takeaways from the judgement rendered by the Court is the reaffirmation of the principle of “substance over form” adopted by judicial bodies in the context of customs valuation. Despite the contractual clause classifying the services rendered by Voltas Ltd. as engineering and technical service, the Court based on a granular and detailed reading of the clause and all the other surrounding documents, termed these “product service” charges as nothing but commission being paid to Voltas Limited for procurement of spare parts and making the sale as effective as possible.
This principle has long held a foundational role in the jurisprudence of indirect taxation, with courts repeatedly cautioning that mere contractual form or nomenclature cannot immunize a transaction from scrutiny when the economic substance suggests otherwise. In CCE v. Acer India Ltd., the Supreme Court underscored that the artificial division of prices into dutiable and non-dutiable components, without justification, is impermissible. The Court emphasized that the true character of consideration must be evaluated in substance and not in structure.
While the Court’s reliance on this principle in Coal India Ltd. is consistent with its past jurisprudence, its broad classification of the services provided by Voltas as having a direct nexus to the value of imported goods—and hence dutiable—raises concerns. If interpreted expansively, this reasoning could enable customs authorities to include a wide range of third-party services within the assessable value, even where such services are tangential to the transaction. The Court’s conclusion that Voltas’ services were merely facilitative of the sale was primarily grounded in Clause 5 of the Purchase Order, which outlined Voltas’ role in assisting with spare part identification, customs clearance, insurance coordination, and addressing supply discrepancies. However, Clause 5 was not confined to such pre-importation activities. It also expressly provided for “Regular product support visits by Voltas Service Engineers to all the operational mine sites for inspection of the shovels., providing technical updates, guidance on reports and maintenance at ‘No Cost’ to the projects.” It further included ongoing coordination with agencies for addressing post-supply issues. These latter functions clearly fall within the domain of post-importation services, as delineated by the Court itself in J.K. Corporation Ltd. v. Commissioner of Customs, and are specifically excluded from assessable value under the Note to Rule 4 of the Customs Valuation Rules. In Commr. of Customs (Port) v. Toyota Kirloskar Motor (P) Ltd., the Court similarly held that technical assistance and maintenance works fall within the domain of post – importation activities and not with importation of goods.
Given this uncertainty in valuing services spanning pre- and post-importation phases, adopting a more pragmatic framework such as a ‘multi-factor test’ would enable authorities to more systematically evaluate each component’s primary purpose and economic benefit within a bundled service agreement. Core elements and factors which such a test could consider be the service’s temporal link to the importation event, its nexus to the goods’ functionality or saleability, and the independent commercial value of its components. Foreign jurisdictions such as the European Union (EU) and the United States provide illustrative examples of such nuanced approaches which could be implemented by the India custom authorities in the future. For instance, the EU’s Union Customs Code prescribes apportioning royalties and making appropriate adjustments when they relate to specific post-importation activities and services. In view of this, the EU’s Customs Code Committee recommended different formula methods linking royalty to the production cost ratio of the imported goods to ensure an “appropriate adjustment” is made. Similarly, U.S. Customs and Border Protection (CBP), through various rulings, has permitted deductions for post-importation services using an apportionment method based on their proportion to the total contract value. Therefore, moving away from a simple “pre-vs-post” distinction to a more substance-based apportionment could enhance clarity for all the relevant parties involved while ensuring a fairer valuation of the services when computing the assessable value.
Conclusion
The judgement of the Court in Coal India therefore unfortunately creates a jurisprudential void and fails to provide guidance for services which span for both temporal periods or where service commencement precedes importation but extends significantly beyond the customs clearance event. This analytical gap can prove particularly problematic in contemporary international trade, where integrated service agreements often involve continuous performance obligations that transcend traditional importation timeframes. Going forward, the Government and the Courts can benefit from laying down some form of multi-factor tests which can help in properly classifying such complex service payments and bring a semblance of stability and predictability in the market.