Rules 1 and 2 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rules 1 and 2 are the gateway to customs valuation of imports. Rule 1 says the Rules apply to imported goods and from when. Rule 2 fixes the meaning of the terms every later valuation rule uses, including "identical goods", "similar goods", "place of importation" and the eight situations in which a buyer and seller are treated as "related". Importers who want these tests applied to a live import can ask our compliance advisory team.
This article is written as amended up to Notification No. 91/2017-Customs (N.T.) dated 26 September 2017 (CBIC text; no later amending notification found). The later notifications should still be checked before you rely on it, and no official consolidated text exists beyond the CBIC text.
The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 apply to imported goods and came into force on 10 October 2007. Rule 2 defines the terms used in valuation and, in sub-rule (2), lists the eight relationships that make a buyer and seller "related". Whether the parties are related matters because it decides if the price between them can be accepted as the transaction value without further tests.
Rule 1: name, start date and reach
The Rules are made by Notification No. 94/2007-Customs (N.T.) under section 156 read with section 14 of the Customs Act, 1962, and replace the Customs Valuation (Determination of Price of Imported goods) Rules, 1988, except for things done or left undone before that replacement. Our guide to section 14 of the Customs Act explains the parent provision.
| Sub-rule | What it says |
|---|---|
| 1(1) | Short title: the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 |
| 1(2) | In force on the 10th day of October, 2007 |
| 1(3) | The Rules apply to imported goods |
Rule 1(3) is short but important. Goods that leave India are valued under a separate set, the Customs Valuation (Determination of Value of Export Goods) Rules, 2007, which we cover in our article on the export valuation rules.
Rule 2(1): the defined terms
Rule 2(1) opens "unless the context otherwise requires" and then defines seven terms in clauses (a) to (g).
- Computed value (clause (a)) is the value of imported goods determined under rule 8.
- Deductive value (clause (b)) is the value determined under rule 7.
- Goods of the same class or kind (clause (c)) means imported goods within a group or range produced by a particular industry or industrial sector, and it includes identical goods or similar goods.
- Identical goods (clause (d)) are imported goods that are the same in all respects, including physical characteristics, quality and reputation, apart from minor differences in appearance that do not affect value. They must be produced in the country where the goods being valued were produced, and by the same person; if no such goods exist, goods made by a different person count.
- Place of importation (clause (da)) means the customs station where the goods are brought for clearance for home consumption or for removal to a warehouse for deposit. This clause was inserted by Notification No. 91/2017-Customs (N.T.) dated 26 September 2017.
- Produced (clause (e)) includes grown, manufactured and mined.
- Similar goods (clause (f)) are goods that, although not alike in all respects, have like characteristics and like component materials, can perform the same functions and are commercially interchangeable with the goods being valued, having regard to quality, reputation and the existence of a trade mark. The same country and same producer conditions apply as for identical goods.
- Transaction value (clause (g)) means the value referred to in section 14(1) of the Customs Act, 1962.
The design-work exclusion
Both "identical goods" and "similar goods" exclude goods where engineering, development work, art work, design work, plan or sketch undertaken in India was completed, directly or indirectly, by the buyer on those goods without charge or at a reduced cost, for use in connection with the production and sale for export of those goods. In practice, if an Indian buyer supplied the design for a comparison shipment, that shipment cannot be used as the comparison.
For example, Meridian Appliances in Pune imports fan motors. A comparison import by another buyer, Kaveri Fans, was made to a design Kaveri's own Indian engineers supplied to the foreign maker at no cost. That shipment is outside the definition of "identical goods" and cannot be used as the comparison for Meridian's goods.
Rule 2(2): when buyer and seller are "related"
For the purposes of the Rules, persons are deemed "related" only if one of the eight situations in sub-rule (2) applies. The word "only" means the list is closed.
| Clause | Relationship |
|---|---|
| (i) | They are officers or directors of one another's businesses |
| (ii) | They are legally recognised partners in business |
| (iii) | They are employer and employee |
| (iv) | Any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them |
| (v) | One of them directly or indirectly controls the other |
| (vi) | Both are directly or indirectly controlled by a third person |
| (vii) | Together they directly or indirectly control a third person |
| (viii) | They are members of the same family |
Explanations I and II
Explanation I says the term "person" also includes legal persons, so companies and other bodies are covered, not just individuals.
Explanation II deals with sole agents, sole distributors and sole concessionaires, however described. Persons associated in each other's business in that way are deemed related if they also fall within the criteria of sub-rule (2). A sole distribution agreement alone does not make parties related; it must come with one of the eight situations.
Why relatedness matters
Under rule 3 of the Valuation Rules, the transaction value is accepted only if, among other conditions, the buyer and seller are not related, or if they are related and the price is acceptable under rule 3(3). Our article on rule 3 and transaction value walks through those tests. Where customs doubts the price in a related-party import, importers often meet the Special Valuation Branch process; see our guide to the Special Valuation Branch for the procedure and our general guide to transaction value and the Rules.
If your group imports from an overseas parent, subsidiary or sister company, work out early which clause of rule 2(2) applies and document how the price was set. A review of related-party pricing before a bill of entry is filed avoids surprises later.
Practical points
- Check the closed list before assuming parties are related. A long-standing supplier is not "related" merely because of a long relationship.
- A shareholding of exactly five per cent in both parties meets clause (iv), because the test is "five per cent or more".
- The family test in clause (viii) uses the words "members of the same family"; the rule gives no further definition.
- When a comparison shipment is sought for identical or similar goods, test it against clauses (d) and (f), including the design-work exclusion.
Need help with valuation or related-party imports?
If customs has questioned the declared value of your imports or you are setting transfer prices with a foreign group company, our team can map the facts to rule 2(2) and the later rules. Speak to our compliance advisory desk before the next consignment is cleared.
Key takeaways
- The Rules apply to imported goods and have been in force since 10 October 2007.
- "Place of importation" was added to rule 2(1) as clause (da) by Notification No. 91/2017-Customs (N.T.).
- Identical and similar goods exclude goods that carry design work done in India by the buyer without charge or at reduced cost.
- Two persons are related only on one of eight listed grounds; the list is closed.
- Sole agents, distributors and concessionaires are related only if a listed ground also applies.
Read next
- Rule 3: transaction value and related-party sales
- Rules 4 to 6: identical goods, similar goods and the order of methods
- Section 14 of the Customs Act, 1962: valuation of goods
- Special Valuation Branch for related-party imports
Disclaimer: Based on the customs rules named above as published on the CBIC Tax Information Portal and, for sets amended since 2023, the amending notifications (read through a TaxClue consolidated reading text; no official consolidated text exists), as consulted on 3 October 2026. Later notifications, rates and the Customs Act, 1962 provisions referred to should be checked. This article is general information, not legal advice; check the official text before acting.