RESTRICTEDWORLD TRADE
ORGANIZATIONWT/GC/W/124
16 December 1998
(98-5082)
General Council
IMPLEMENTATION OF THE
AGREEMENT ON IMPLEMENTATION OF ARTICLE VII OF THE
GATT 1994
Communication from India
The following communication, dated 16 December 1998, has been received from the
Permanent Mission of India.
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1. The Agreement on Implementation of Article VII (Customs Valuation) of the General
Agreement on Tariffs and Trade 1994 (the “Agreement”) sets out the principles andprocedures to be followed by WTO Members in their assessment of the value of importedgoods, if the rate of duty is ad valorem, for the purpose of levying the appropriate amount ofcustoms duty.  It aims to provide a fair, uniform and neutral system for the valuation of goodsthat precludes the use of values of merchandise of national origin as well as arbitrary orfictitious customs values.
2. Under the Agreement, the primary basis for customs value of imported goods in the case of
unrelated parties is the “transaction value” as defined in Article 1.  It is defined as “the priceactually paid or payable for the goods when sold for export to the country of importation” bythe buyer to the seller.  Freight, packaging, commissions, goods and services supplied to thebuyer free of charge and some other costs may be added to the customs value.  TheAgreement also sets out the measures that may not be used to establish a value.  These
include, the price of goods on the domestic market of the exporting country, the selling price
of goods produced in the importing country, and a system which provides for the higher oftwo values. If there are suspicions that the tran sactions value is false, customs administrations
may determine the value by going sequentially through five options: (a) the value of identicalgoods, (b) the value of similar goods, (c) the imported price of identical or similar goods lessapplicable deductions for costs incurred within the country of import, (d) computed value,constructed by adding to the original cost of materials and fabrication, and (e) if none of thesemethods work, reasonable means may be used.
3. Additional considerations apply where the importer and exporter are related entities.WT/GC/W/124
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4. Moreover, the Agreement contains provisions for special and differential treatment of
developing countries1 and for technical assistance.
5. However, many problems continue to be associated with valuation.  One set of problems
emanates from the growth over several decades of various preferential agreements, free tradeareas, and customs unions, and the need to take into account the rules of product origin atcustoms entry and to uphold through policies and practices the principle of ‘non-discrimination’ in differentiation of treatment  of imports depending on their origin, and the
principle of ‘substantial processing’ through either the ‘transformation’ or ‘value added’
approaches of the input goods obtained from another country.  Another set of problemsemanates from multilateralism in the context of customs valuation.  In this paper, we proposeto discuss the latter as they emanate from the implementation of the Agreement.
A. Ministerial Decision Regarding Rejection of Transactions Value Method in Doubtful
Cases
6. Article 1 of the Agreement is to be read together with Article 8 which provides inter alia  for
adjustments to the price actually paid or payable in cases where certain specific elementswhich are considered to form a part of the value for customs purposes are included by thebuyer but are not included in the price actually paid or payable for the imported goods.  TheAgreement, therefore, enjoins customs administ rations to accept the transaction value except
in specified circumstances as laid down in Article 1.  The Agreement makes it clear that whatis to be accepted is the “transaction value” and not the declared value which may or may notbe equal to the transaction value of the goods being valued.
7. Article 17 of the Agreement recognises that in cases where there may be reason for doubt,
customs administrations may satisfy themselves as to the truth or accuracy of any statement,document or declaration presented for customs valuation purposes.  Paragraph 6 of Annex IIIto the Agreement secures full co-operation of importers in the conduct of enquiries by acustoms administration in this regard.
8. However, these provisions are inadequate to deal with situations such as collusion between
the importer and exporter for under-valuation of goods aimed at evading customs duty.
Verification and enquiry by customs administrations set out in Article 17 would not enable
the establishment of fraud in such instances.  Furthermore, the importer can not be expectedto fully cooperate with customs administrations when he is a party to under-valuation and tosuppression of information.
                                                     
1 Developing countries are understood to include the least developed countries, unless
otherwise specified.WT/GC/W/124
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9. Since the inception of the Tokyo Round Agreement on Customs Valuation in 1981,
developing countries like India were apprehensive of the inadequacy of these provisions, inparticular as they do not empower customs administrations to reject the declared value indoubtful cases. Though the existence of the problem has been acknowledged, it was not untilthe Marrakesh meeting of April 1994 when a decision was taken by the Ministers to deal withit.  A “Decision Regarding Cases Where Customs Administrations have Reasons to Doubt theTruth or Accuracy of the Declared Value” was taken by the WTO Committee on CustomsValuation at its first meeting held on 12 May 1995 pursuant to the Marrakesh decision.  ThisDecision sets out the procedures to be observed in such cases and may be particularly useful
in cases where a manufacturer’s invoice has not been submitted and where the declared value
is much less than the traded prices given in contemporaneous reputed internationalpublications or is less than the price at which the goods are sold in the ordinary course oftrade under fully competitive conditions.
10. We propose that this Decision may be incorporated in the WTO Agreement itself as it will
help in a significant way in tackling the prob lem of under-valuation which is reported to be
rampant in many developing countries, especially those where the rates of customs duty arerelatively high.
B. Multilateral Arrangement for Exchange of Information on Customs Value
11. The provisions of the Agreement do not address the situation where an exporter files the
correct export declaration to the customs authorities, but the importer unilaterally resorts tomis-declaration of value to the customs authorities in the importing country to evade duecustoms duty.  To tackle this problem, the practice of entering into bilateral agreements forexchange of information regarding customs value has evolved.  But this is not a practical andenduring solution to the problem.
12. A multilateral solution that enables customs administrations of importing countries to seek
and obtain information on export values contained in the export declaration to the customsadministrations of exporting countries, in a time-bound manner, in doubtful cases  meritsconsideration.
C. Determination of Customs Value on the Ba sis of Transactions Value of Identical or
Similar Goods
13. Where the customs value can not be determined under the provisions of Article 1, Articles 2
and 3 of the Agreement, proceeding sequentially, envisage consultation between the customsadministration and the importer with a view to arriving at a ‘identical goods’ or ‘similargoods’ basis of transaction value.  The Agreement provides that if in applying these Articlesmore than one transaction value of identical or similar goods is found, the lowest such valueshall be used to determine the customs value of the imported goods.WT/GC/W/124
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14. This provision creates a bias in favour of importers and could lead to manipulation.  In fact, in
many instances the variation between the lowest value and the highest value of identical orsimilar goods is very wide and there may be a concentration of transactions in the higher endof the range.  In a situation where the transaction at the far lower end results from adeliberately conducted import consignment, a pilot consignment at a suppressed value, theresultant application of the provision that the lowest value shall be used to determine the
customs value of the imported goods may not fall within the general principles of valuationset forth in these Articles.
15. This situation needs appropriate correction to avoid manipulation of import prices and to lead
to better approximation of ‘transaction value’.
D. Buying Commissions
16. Under Article 8 of the Agreement, adjustments to the price actually paid or payable is
provided in cases where certain elements which are considered to form a part of the value forcustoms purposes are incurred by the buyer but are not included in the price actually paid orpayable for the imported goods.  Commissions and brokerage, except buying commissions,therefore, have to be taken into consideration in determining the customs value.
17. “Buying commissions” are payments made by an importer to his agent for the service
rendered by the agent towards representing the importer overseas in the purchase of the goodsunder valuation. Buying agents may also, in some instances, buy the goods from themanufacturer or trader in that country using own funds and re-invoice the purchase to theimporter.  The Agreements recognises the second invoice price as the transaction value insuch instances.  However, manipulation through artificially reduced re-invoice pricesfrequently occurs to mutual benefit. The exclusion of buying commissions from thecomputation of value encourages such under-invoicing and the artificial splitting of value,especially when purchases are first made by buying agents and are reinvoiced to the importer.
18. Buying commissions should, therefore, be taken into account in the determination of customs
value of imported goods as it forms a legitimate component of the landed cost of importedgoods.
E. Cost of Services, such as Engineering, Development and Design
19. Under Article 8:1(b)(iv) of the Agreement, addition of cost of services such as engineering,
development, and design work, which are supplied directly or indirectly by the buyer free ofcharge or at reduced cost for the production of goods under import, is permitted only if theservices are undertaken other than in the country of importation.  This provision providesroom for the splitting of the import value, by claiming that part of the services were renderedin the importing country itself.WT/GC/W/124
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20. It is proposed that the cost of such services, which are integral to the value of the imported
goods, should be included in the valuation irrespective of whether they were undertaken in thecountry of importation.
F. Imports by Sole Agents, Sole Distributors and Sole Concessionaires
21. Valuation of imports by sole agents, sole distributors, and sole concessionaires of large
corporations, including transnational corporations, poses a problem as such entities are notconsidered as “related persons” automatically under Article 15:5 of the Agreement.  If such
entities sell the product at specially reduced prices, there may be no means available with
customs administrations to check the veracity of such special prices.
22. Article 1.2(a) and (b) provide safeguards in the matter of acceptance of transaction value for
customs purposes between a buyer and a seller who are ‘related’. In order to shift the burdenof proving that the prices quoted are not influenced by the relationship to the agents,distributors or concessionaires, as the case may be, persons associated with each other as soleagents, sole distributors, and sole concessionaires, howsoever described, should thereforeautomatically be deemed ‘related’.
G. Determination of Customs Value under the Residual Method in Article 7 of the
Agreement
23. The determination of customs value under the residual method is set out in Article 7 of the
Agreement.  Article 7.2 prohibits, inter alia,  determination of customs value on the basis of
(i) the price of goods in the domestic market of the country of exportation, and (ii) the price ofthe goods for export to a country other than the country of importation.  The exclusion clause(c) in paragraph 2, however, creates a situation of dichotomous treatment.  Under the WTOAgreement on Anti-dumping, a product is to be considered as being dumped (that is,introduced into the commerce of another country at less than its normal value), if the exportprice of the product is less than the comparable price for the like product sold in the domesticmarket.  Therefore, while the Agreement on Anti-dumping takes cognisance of the domesticprice, the Customs Valuation Agreement explicitly excludes such a possibility.
24. The residual method of determining customs value appropriately should be inclusive of all
residual eventualities.
H. Discounts
25. Article VII of the GATT 1994 states that the value for customs purposes of imported
merchandise should be based on the actual value and that the actual value should be the priceat which, at a time and place of importation, such or like merchandise is sold or offered forsale in the ordinary course of trade under fully competitive conditions.  This Article stipulatesWT/GC/W/124
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that “to  the extent to which the price of such or like merchandise is governed by the quantity
in a particular transaction, the price to be considered should uniformly be related to either (i)comparable quantities, or (ii) quantities not less favourable to importers than those in whichthe greater volume of the merchandise is sold in the trade between the countries ofexportation and importation”.
26. Ad Article VII states that “it would be in conformity with Article VII to presume that “actual
value” may be represented by the invoice price, plus any non-included charges for legitimatecosts which are proper elements of “actual value” and plus any abnormal discount or other
reduction from the ordinary competitive price".  However, the Agreement does not contain
clear provisions to give effect to this, with the result that arbitrary discounts are often builtinto the invoice price without any demonstrat ed evidence linking the discounts to the
quantities purchased.
27. Accordingly, special and arbitrary discounts should be disallowed, and the ordinary
competitive price should be taken for assessment purposes.
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