Marine Insurance - declared value - Under declaration to Customs

In General Insurance contracts, there are the avowed principles of Insurable Interest, Indemnity, Subrogation and ….more…In all Property Insurances, the property would be the subject matter of insurance and a pecuniary loss or damage is what is insured for.  The Policies make good the loss i.e., indemnity the policy holder – thereby placing them back in the position they were prior to the occurrence of loss or damage.  Marine Insurance is slightly different that it offers commercial indemnity.

In Marine Cargo Insurance – goods in transit from once place to another are insured at the ‘pre-agreed’ values – they are ‘Agreed value policies’.  The basis of valuation is generally CIF + 15% and more… in special cases i.e., the coverage is for the Cost + Insurance + Freight values + a pre-agreed % over and above to cover incidental expenditures associated with the trade and movement of goods from place to place.

Thus theoretically,  in a total loss claim [arising out of an insured peril] – the policy holder gets the Price [not the cost] + the % of expenditure insured upon……. Can you imagine a situation, where a Marine cargo policy for imported cargo is taken on CIF value + 15% - suffers a total loss, still the policy holder ends-up with a big loss ?

Yes, you will say after reading this newsitem of Times of India.  Goods imported into India pass through Customs and there will be incidence of Customs duty. Even this duty is insurable, provided the policy is taken prior to the arrival of goods at the port of destination.  For the importer, a loss occurring after the landing of goods – there will be loss of goods (value) + the duty paid + the profits that they would have realized upon sale ….. the last one is not insurable though !

The report in TOI reveals that ‘Importers undervalue Chinese goods, make a killing’ …… this is nothing new but still ……..

TNN | Jan 23, 2014: Mumbai : An MP3 player for the price of a candy; an LED torch that costs less than a Mumbai local train ticket; an emergency lamp at little more than the price of a kilo of tomato; an LED bulb for as much as "cutting chai"! No it's not Christmas again but a peek at how Chinese goods are grossly undervalued by importers to evade customs duty. The declared value of an MP3 player is Rs 1.83, but you are unlikely to get it for less than Rs 230 in the market. An LED torch and LED bulb, both valued at Rs 8, will set you back by anything between Rs 350 and Rs 450. An emergency lamp shown as worth Rs 25 goes for Rs 1,000. The retail price of a tablet with 4GB memory is declared as selling for Rs 400, but is being sold in the market for Rs 4,299.

In an investigation spanning six months, the Directorate of Revenue Intelligence has found that for over 3,673 items brought from China, the importers usually declared 1-9% of the actual value of the goods. Customs duty is about 31% of the value declared by the importers.

In one specific case, the duty evasion was around Rs 300 crore on imports worth over Rs 1,000 crore in the past four years by M/s Riddhi Siddhi Collection and M/s Aisha Electronics.  Faisal Javeri, proprietor of Aisha Electronics, claimed he was not even aware of the import procedures. He said he called up a Hong Kong-based supplier from a telephone booth and placed orders. DRI seized 66 containers of goods at the Jawaharlal Nehru Port. But there is usually a web of connections behind such frauds. Investigations revealed that Javeri was a dummy importer controlled by Sunil Jain, proprietor of M/s Riddhi Siddhi Collection. DRI says the supplier — Hong Kong-based KS Group of Kishore Sohanda — was also a dummy. Saturn International, a company owned by Mitesh and Manoj Jain, the Hong Kong-based brothers of Sunil were the actual suppliers.

"Once the Jain brothers decided to capitalize on the huge demand for cheap Chinese goods, mainly in rural areas, Manoj and Mitesh established themselves in Hong Kong and started trading under the name of Saturn International. Sunil stayed in India to look after the import and sales. He roped in friend Javeri, whose uncle owns a chain of shops, and Sohanda as the director of a front they floated in Hong Kong," explained an investigator. They routed the imports through several front firms to mask the transactions and also raise undervalued manipulated invoices that they could produce before customs to evade duty. The rest would have been taken care of with some greasing of palms.

DRI has issued show-cause to Jain brothers (Sunil, Manoj and Mitesh), Javeri, Sohanda and clearing agents, Balraj Kumar and P P Associates for recovering duty and imposing penalty. "Their operations are typical of covert black money operations involving smuggling and tax evasion," the notices sent to the Jain brothers said. Investigators said the MP3 players' retail price was declared at Rs 4, which they found ridiculous. "Strangely, for the MP3 players, the customs increased the value to just Rs 5 during clearance, which again raises questions about the process," an official said. "The clearing agent was paid Rs 45,000 in cash for every container over and above the official charges," he added.

Perhaps there needed no investigation to find this out – so apparent.  The answer to the Q is : if the importer had insured these consignments on the Invoice declared to Customs – they would have !!

With regards – S. Sampathkumar

12^th Feb 2o14.