EU High Court Clarifies Customs Valuation Under Similar Merchandise, Deductive Value Methods

Though the case raises questions about the Community Customs Code, which has since been replaced by the Union Customs Code as the EU’s customs law, the ruling has applications to the current customs framework. “The rules governing the deductive valuation method are still in place and are nearly identical in wording to the former legislation,” said EU-based law firm Meijburg & Co. in an alert. As of press time the ruling had not been translated into English, but a preliminary advisory report issued in January that reached similar conclusions was available.

The case involved a Latvian importer that contracted to distribute Ranbaxy Laboratories generic drugs under consignment. The importer, Oribalt Riga, had appraised the imported drugs using the transaction value method using a pro forma invoice. After importation, once the goods were sold to the customer, Ranbaxy would create a second, final invoice and Oribalt would send payment. The drugs were distributed in first-in, first-out order, so that the medicines closest to expiration would be delivered first. As a result, months often passed between importation and sale.

When Latvian customs authorities found that the goods had not actually been sold, and that payment was only sent once the goods were sold to the final customer, it imposed additional value-added tax, late payment fees and a fine. It told Oribalt that the goods should have been valued using the deductive method.

In proceedings in Latvian courts, Oribalt argued that the medicines should have instead been appraised using the transaction value of similar goods. Latvian customs argued that would be impossible, because they lacked information on whether medicines produced by other sellers are similar to goods produced by Ranbaxy.

The Latvian national revenue authority, VID, argues that the imported goods could not be valued on the basis of Article 30(2)(b) since the Latvian customs authorities lack the necessary knowledge and information in order to assess whether medicines produced by other sellers are in fact similar to the goods produced by Ranbaxy Laboratories. The Latvian Supreme Court, in doubt as to the correct interpretation of the relevant laws and regulations, referred the case to the ECJ.

Specifically, the Latvian high court asked whether, when considering medicines, “similar merchandise” must have only the same active ingredient and quantity, or if it also needs to consider “market position as well, that is to say the popularity and demand, of the imported medicine in question and of its producer.”

The ECJ held that “similar merchandise” must above all “perform the same functions” and be “commercially interchangeable.” Only after that should other, merchandise-specific factors be considered, including the quality and reputation of the merchandise and the existence of a trademark.

According to the preliminary ruling, in the case of Oribalt’s medicines, information on similar merchandise might not be too difficult to find. "As long as there are other generic medicines produced in the same country, that are considered to be an equal substitute for the same brand-name medicinal products as the goods to be valued, and that have been valued on the basis of their transaction value, those other imported medicines constitute similar goods.”

Turning to questions asked by the Latvian supreme court on the deductive value method, the ECJ found that the requirement that average unit values be from within 90 days of importation is not flexible, and 90 days is the hard cut-off unless the fall-back method of valuation is used.

The ECJ also ruled that discounts to customers cannot be deducted as part of the deductive value appraisal method. The EU regulations specifically say the only deductions allowed are commissions, profits and other selling costs; transportation costs; and import duties and other fees. Those deductions constitute an exhaustive list, the ECJ said.