Valuation of Second Hand Machinery
Valuation of Second Hand Machinery
The Government of India has prescribed a methodology to import second-hand machinery from other countries. As the system evolves with new technology and the scope of import, the government has revised the procedures in a detailed manner. The details include the process and the exact order to apply the rules of valuation for various cases. The Central Board of Indirect taxes & Customs has issued a circular (Circular No. 07/2020-Customs) dated 5th February 2020 regarding the valuation of machinery and procedures are explained in this article.
Valuation of Second Hand Machinery
The following are the details in the Circular:
Background: Previously, Circular No. 25/2015–Customs dated 15th October 2015 had information on the valuation of second-hand machinery that is imported to India.
It was stipulated in the old circular that:
- An inspection report will be required by the Customs for the valuation of second-hand machinery.
- This inspection report can be issued overseas, at the loading port, by an overseas Chartered Engineer.
- In case it has not been issued overseas, the inspection report can also be issued, upon import, by a PSIA (pre-shipment inspection agency) notified by DGFT (Directorate General of Foreign Trade).
- In case, a DGFT notified PSIA is not available, the inspection report can be prepared by a Chartered Engineer empanelled by the Custom House.
Issues raised by Trade Representatives
Issue #1: The number of PSIAs that are DGFT approved is not enough, and this causes clearance delay.
Issue #2: The PSIA approved or empanelled by DGFT do not possess the qualification to appraise second-hand machinery.
Criteria from DGFT
The DGFT released a memorandum dated 3rd September 2019 with the following clarifications:
- The role of PSIAs is only applicable in consignments of metal scrap, where they need to certify that the consignments are free of radioactive substances and explosives.
- It is not necessary for PSIAs to have Engineering Qualification.
- Only a qualified engineer can perform the assessment of the age of the second-hand machinery.
- Hence, certification of the age of the second-hand machinery is not included in the jurisdiction of PSIAs.
Procedure for Assessment
The board has come up with a detailed process to be followed henceforth for assessment of second-hand machinery:
The first step is to check if the sale of second-hand machinery to be exported to India, has met all the requirements stipulated in the Customs Valuation Rules 2007 for Determination of Valuation of Imported Goods. If all requirements have been met, then the price of the goods (either already paid or to be paid) will be the basis to determine the assessable value. In other words:
- Assessable Value = Function of (Price of Goods)
For the case when there are other costs involved:
- When the second-hand machinery is modernized or improved upon as per separate arrangements, before being imported to India OR
- In case other charges are incurred like dismantling, crating etc. after the actual sale of goods.
All these additional costs incurred has to be determined first in order to arrive at the value of the imported goods under Section 14 of the Customs Act. In other words, when Rule 3 of the Customs Valuation Rules are not met, the circular specifies the method of valuation to be applied in sequential order. For the case when it is difficult to find information on the sale of similar or identical goods in India since the goods are second hand, all the requirements of Rule 4 or 5 of Customs Valuation Rules may not be met and cannot be applied to derive the value of second-hand imported goods.
For case when it is difficult to find information on resale of similar or identical goods in India since usually the second-hand goods being imported are for use and not for resale, the requirements of Rule 7 of Customs Valuation Rules may not be met and so cannot be applied to derive the value of imported second-hand goods. For the case when Rule 8 of Customs Valuation Rules cannot be applied, where the value of imported goods is assessed using the Computed Value Method. This method is based primarily on the production cost + profit amount + general expenses. Here, the production cost is difficult to derive since the imported goods are old and used machinery.
For all the above cases, i.e. when appraisal of imported goods cannot be done under Rule 3, and there are difficulties in applying Rules 4 to 8, the Rule 9 of Customs Valuation Rules may be applied which is a valuation method factoring Condition, Depreciation, Refurbishment, Dismantling, Crating, any other expense including PSIA charges etc. In other words:
- Assessable Value = Function of (Condition, Depreciation, Refurbishment, Dismantling, Crating, All extra expenses + Price of Goods)
The flow of assessment will be as follows:
- Declared Value of goods by the importer to be compared with the report of Chartered Engineer.
- Declared Value of goods by the importer to be compared to the depreciated value of goods as per circulars dated 19th November 1987, 4th January 1988.
- If there are no doubts regarding the declared value of goods, then value maybe appraised under Rule 3 of Customs Valuation Rules, 2007.
- But, if there is a significant difference seen after the above two comparisons, as per Rule 12 of Customs Valuation Rules, 2007, the concerned officer needs to seek explanations from the importer. After evaluating the evidence from the importer, the officer can determine if the declared value conforms to Rule 3 of Customs Valuation Rules or if valuation needs to be done sequentially in terms of Rules 4 to 9 of Customs Valuation Rules, 2007.
Inspection/Appraisement Report
The Inspection or Appraisement Report can be made by Chartered Engineers or their equivalent overseas, in the country selling the second-hand goods. The report format should be as per Form A, which can be accessed at the end of the notification link provided below. In case the above is not available, then the importer can engage the services of any of the Chartered Engineers who are empanelled by the Custom House at the port of import. The report format should be as per Form B in the link provided. It is noted that certification from PSIA for valuation of second-hand machinery will not be valid, and the practice discontinued.
The notification and related forms associated with this can be accessed below:
