FOB Value Beyond Interference: CESTAT Rules Customs Can’t Alter Contractually Fixed Export Prices

FOB Value Beyond Interference: CESTAT Rules Customs Can’t Alter Contractually Fixed Export Prices

Introduction

The New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has reaffirmed that the FOB (Free On Board) value determined between contracting parties is protected by the principle of privity of contract, and cannot be modified by a stranger. The Bench, comprising Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member), held that the FOB value arises out of mutual negotiations and deliberations and thus must be respected for customs valuation purposes.

Factual Background

The appellant, Isgec Heavy Engineering Ltd., is engaged in the manufacture and export of heavy engineering goods, including boilers and sugar plants. The company entered into contracts with foreign buyers providing for a lump-sum payment for the supply of goods. Following these contracts, a broad billing breakup was prepared and approved by the foreign buyers. Certain components were manufactured by supporting manufacturers and supplied directly to the port of export under Form ARE-1. However, the customs authorities seized the goods exported under 16 shipping bills, alleging that the component values declared in ARE-1 were lower than those declared in the shipping bills.

Procedural Background

A show cause notice was issued proposing rejection of the declared export values under Rule 8 of the Customs Valuation (Determination of Value of Exported Goods) Rules, 2007, and redetermination under Rule 5. The Joint Commissioner confirmed the demand, and the Commissioner (Appeals) upheld it. The appellant then approached the Tribunal, contesting the valuation rejection and denial of duty drawback.

Issues

1.  Whether the FOB value mutually agreed upon between contracting parties can be altered by customs authorities or any third party?
2.  Whether the appellant was entitled to claim duty drawback on the FOB value declared in the shipping bills?

Contentions of the Parties

Appellant’s Submissions: The FOB value was derived from a valid contract and approved by the buyer. The customs department, being a third party, could not alter the negotiated value under the principle of privity of contract. The appellant lawfully claimed duty drawback based on the declared FOB value. The 2007 Customs Valuation Rules could not override contractual terms for drawback computation.

Revenue’s Submissions: The FOB value declared was allegedly inflated compared to the All-Industry Rate prices. There was misdeclaration of valuation and an improper claim of drawback benefits. The difference between component values in shipping bills and ARE-1 justified redetermination under the 2007 Rules.

Reasoning and Analysis

The Tribunal emphasized that FOB value determination is a contractual matter governed by the principle of privity, shielding it from external modification. It observed that neither the Drawback Rules nor the Drawback Notification refers to the 2007 Valuation Rules for determining drawback eligibility. The bench found that the customs authorities had no evidence of misdeclaration other than a numerical variance between component and shipping bill values. The absence of corroborative proof rendered the rejection of declared FOB values untenable.The Tribunal clarified that duty drawback pertains to exports and realization of proceeds and hence must be computed based on the FOB value declared in shipping bills under Section 14 of the Customs Act, 1962.

Implications

This judgment reinforces the sanctity of commercial autonomy and contractual freedom in international trade. It limits the authority of customs officials to interfere with negotiated export values unless supported by concrete evidence of fraud or misdeclaration. It also affirms exporters’ entitlement to duty drawback based on agreed FOB values, strengthening procedural fairness in customs valuation.

In this case the Appellant was represented by Shri B.L. Narasimhan, Shri Anurag Kapur, Ms. Osheeba Basir, and Ms. Rubel Bareja, Advocates. Meanwhile the Respondent was represented by Shri Rakesh Kumar, Advocate.