Valuation of Car Engines Mis-declared as HMS Scrap

Background

CompuBee Technologies is registered at JNPT as a custom valuation agency. JNPT is the largest port in India, Indian customs has installed an industrial grade X-Ray machine, in which one complete container can be taken inside and X-Ray scanned to understand the contains of that container.

Few years back out of routine work, Indian customs officials randomly selected one container for X-Ray scanning. While making the declaration the Custom House Agent (CHA) & Importer had declared that the container contains HMS (High Manganese Scrap). When the container was scanned the concerned customs officials found one item which looked like fan blades. Since fan-blades are not made from HMS, he had a suspicion and after discussion with his seniors, he ordered the CHA to open the container in his presence.

Upon opening the container, they found that HMS scrap sheets were stacked very close to the door. So as soon as the door was opened, these HMS scrap started falling. Further removal of the some HMS scrap, customs officials saw one engine and then they called in one of the chartered engineers on the panel of Jawaharlal Nehru Customs House (JNCH) for inspection of these items and carry out custom valuation. The customs official also told  the chartered engineer that it appears that many car engines are there in one container and such 3 or 4 containers need to be inspected for finding out the contains of that consignment.

So the concerned Chartered Engineer (CE) along with one automobile engineer as a subject matter expert reached to the Container Freight Station (CFS) / Container Yard for inspection of the contains in those 4 containers so that custom valuation can be performed.

Inspection:

Upon arrival, the Engineers’ team saw that one container was partially emptied and further empting of that container was going on. In front the Engineers’ team all other 3 containers (in total 4 containers) were de-stuffed or emptied.

All the engines were stuffed in the containers in a pigeon-hole type configuration in a 4 x 4 or 4 x 3 matrix as shown in Figure 1 above. This matrix was stuffed in 4 or 5 layers inside the container, so that each container had about 60 to 70 car engines depending upon the size of the engines which depended up make, model, of the cars / engines

The engineers’ team found that there were in total 190 engines stored like above configuration in all the 3 containers with following combination. Forth container had complete scrap and no engines were found inside that container.

Container No	No Of Engines along with HMS Scrap
1	70
2	60
3	60
Total	190

When the engineers briefly studied the engines they realised that these engines were mix of old engines, which were:

• Diesel engines and import of second hand Diesel engines is banned in India.
• Of many different reputed makes
• Both serviceable and non-serviceable
• Fitted with gear boxes either for 2 wheel drive or 4 wheel drive vehicles (few engines did not have gear boxes).

Then both the engineers took stock of the situation and decided a strategy that they would carry out 100% inspection of all the engines (initially the number of engines was unknown), note down following details of each engine:

• Make
• Engine Sr. No.
• Whether the Engine was accompanied by gear box, if yes then whether:
  • 2 wheel drive gear box or
  • 4 wheel drive gear box
• If the Gear box is in good / serviceable condition or not
• Parts connected to each of the engines, such as:
  • Starter
  • Fuel Pump,
  • Alternator, etc.
• If any additional details were noted down then those to be stored in Remarks column
  • 12 / 16 Pigeon Holes per layer were made as shown above figure.
  • For making pigeon holes they used from HMS Scrap sheets which are shown in blueish rectangles in the above figure.
  • In each of the pigeon holes, one old Car / SUV Engines in stored, so the engines were stacked in 4 X 4 or 4 X 3 Configuration in one layer shown above.

Figure – 1. – Stacking of Engines in Container.

If any additional details were noted down then those to be stored in Remarks column

Once the above methodology for inspection was decided then it took about 3 working days or 6 person days for both engineers to inspect each of the 190 engines. Engines of 8 different makes including (Daihatsu, Isuzu, Mercedes Benz, Mitsubishi, Nissan, Toyota, Volkswagen and Volkswagen (Audi)) were found. Some of the engines were quite new and used engines whereas most of them were old and used engines.

Custom Valuation:

Estimating the Value or custom valuation of all these engines of different makes, models, etc. was very difficult task. So we as per inspection, we decided to segregate engines into 2 parts:

• Serviceable (engines which can be serviced and sold in the second hand engine market without much hassle) and
• Non-Serviceable (engines for which servicing them would not be economical and hence cannot be sold in second hand engine market after servicing).

As the custom valuation strategy for each one of them would be different. For serviceable engines, we decided to value them as per the customs rule of valuing the second hand / used machinery. So finding the value of the engines for serviceable engines even though was tough but was rather easy task compared to the valuation of non-serviceable engines.

For Valuation of the non-serviceable engines, it was difficult task. So we decided to break them down into parts and see if some of these parts can be used or sold into second hand market. E. g. Starters, Motors, etc. can be cannibalised and sold in second hand market as replacement parts for different engines. Balance of the engine which cannot be sold into the second hand market can be treated as scrap and sold thereof. Then adding value of the saleable parts into the value of the scrap to arrive at the value of the complete non-serviceable engine.

Estimating the scrap weight of each engine and then value thereof was tough as each engine is made from many metals as given below:

• Copper (present as wires used in cabling and starter / alternator winding)
• Aluminum (Engine Body, gear box casing, oil sump, etc.)
• Cast Iron (Cylinder Liners, heads, etc.)
• Steel (Bearings, Crank shaft. Cam Shaft, Valves, Gears, Shafts, etc.)

Figure 2 – Engine Price Working

Since there was a variety of make and models of engines, estimating the weight of each of the above metal scrap in each engine was difficult. So it was first decided to weigh engines of each make and model. Then from the automobile engineering books and internet it was found out what is the weight wise percentage of each metal used in an engine. So once this strategy was decided then further valuation work of scrap engines became very simple. Based on this strategy we found approximate weight of each metal used in the complete engine. In that we added the expected values of additional parts such as starters, alternators, etc. to arrive at the complete value of the non-serviceable engine.

So the final valuation had 2 major categories:

• Valuation of serviceable engines and
• Valuation of non-serviceable engines

Under each of the above category, container wise we jotted down each engine with serial number present and its value. So our total final value including the value of scrap and engines was 3 times more than what was originally declared by the importer.

Lessons Learnt:

1. When you encounter a complicated issue, break it down into smaller sub-issues / parts so that it becomes manageable.
2. For each sub-issue / part, we can decide different valuation strategy and later on arrive a combined valuation of complete assignment
3. After our first day of inspection, the importer came to the officer of valuer at 7:00 PM when the valuer was sitting alone in the office. The importer came with an elderly gentleman whom he called his uncle, one driver and 4 bouncers. The importer said he wants proper valuation to be carried out in front of all his men. To which the valuer said, he does not know the value of goods as of now, we would be impartial and try to complete the assignment as early as possible without favouring anyone. Later on those people visited the valuer’s office and tried to contact the valuer on phone to reduce to value of goods, which was not done and final un-biased valuation report was handed over directly to the customs officials in their office with all the supporting workings and explanation as to how the valuation was arrived. The customs officials appreciated the detailed working carried out for valuation and complimented that they have not seen such meticulous valuation work. So good and meticulous work is always appreciated
4. When a complex issues comes, try to involve a subject matter expert (in this case an automobile engineer), so that we get another perspective of the issue in hand.

Author

Author is a Chartered Engineer or CEng or CE in Mechanical Engineering Field and on panel of Indian customs at JNPT, Mumbai Port as well as Sahar Air Cargo. He is talso a registered valuer with IBBI as well as Government Approved Valuer with Income Tax Department under Wealth Tax Act. Section 34AB