WRITE UP ON REGULATORY FRAMEWORK IN CASE OF RELATED PARTY IMPORT- SVB

15/10/2016

Dated: 15/10/2016

WRITE UP ON REGULATORY REQUIREMENTS IN CASE OF RELATED PARTY IMPORT

  1. 1. The valuation of  goods  under  Customs  Law  is  done  under  Section  14  of Customs  Act  1962  which  prescribes  that  valuation  shall  be  based  on  arms length  transaction  value  and  in  case  transaction  is  not  arms  length,  then  it prescribes  certain  adjustments  to  the  declared  price  or  complete  rejection  of declared  price  for  arriving  at  a  value  which  can  be  considered  closed  to  fair transaction  value  for  determination  of  tax  liability.  Section  14  is  reproduced below for clarity which is self explanatory.

SECTION 14. Valuation of goods.— (1)  For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price  actually  paid  or  payable  for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the  time  and  place  of  exportation,  where  the  buyer  and  seller  of  the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf :

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for    costs    and    services, including    commissions    and    brokerage, engineering,   design   work,   royalties   and   licence   fees,   costs   of transportation  to  the  place  of  importation,  insurance,  loading,  unloading and  handling  charges to  the  extent  and  in  the  manner  specified  in  the rules made in this behalf.

  1. 2. As per the scheme of section 14 of the act, finer details have been prescribed under  Customs  Valuation  (Determination  of  Value  of  Imported  Goods)  Rules, 2007. In the rules related party has been defined as below and this definition of related party is very wide compared to Companies Act definition.

Rule 2(2) For the purpose of these rules, persons shall be deemed to be―related‖ only if –

(i) they are officers or directors of one another’s businesses;  
(ii) they are legally recognized 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 of them are directly or indirectly controlled by a third person; (vii)       together they directly or indirectly control a third person; or

(viii)       they are members of the same family.

Explanation I. – The term ―person‖ also includes legal persons.

Explanation  II.  –  Persons  who  are  associated  in  the  business  of  one another   in   that   one   is   the   sole   agent   or   sole   distributor   or   sole concessionaire, howsoever described, of the other shall be deemed to be related for the purpose of these rules, if they fall within the criteria of this sub-rule.

  1. 3. Under rule 10, certain costs and considerations whether actually paid or payable shall be compulsorily added to the value.

Rule 10. Cost and services. — (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, —

(a)          the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

(i)           commissions and brokerage, except buying commissions;

(ii)          the  cost  of  containers  which  are  treated  as  being  one  for customs purposes with the goods in question;

(iii)         the cost of packing whether for labour or materials;

(b)          The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export  of  imported  goods,  to  the  extent  that  such  value  has  not  been included in the price actually paid or payable, namely :-

(i)           materials, components, parts and similar items incorporated in the imported goods;

(ii)          tools, dies, moulds and similar items used in the production of the imported goods;

(iii)         materials   consumed   in   the   production   of   the   imported goods;

(iv)         engineering, development, art work, design work, and plans and  sketches  undertaken  elsewhere  than  in  India  and  necessary for the production of the imported goods;

(c)          royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;

(d)          The  value of any part of the proceeds of any  subsequent  resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller;

(e)          all  other  payments  actually  made  or  to  be  made  as  a  condition  of sale of the imported goods, by the buyer to the seller, or by the buyer to a third  party  to  satisfy  an  obligation  of  the  seller  to  the  extent  that  such payments are not included in the price actually paid or payable.

Explanation.   —   Where   the   royalty,   licence   fee   or   any   other payment  for  a  process,  whether  patented  or  otherwise,  is  includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.

(2) For the purposes of sub-section (1) of section 14 of the Customs Act,1962 (52 of 1962) and these rules, the value of the imported goods shall be  the  value  of  such  goods,  for  delivery  at  the  time  and  place  of importation and shall include –

(a)          the  cost  of  transport  of  the  imported  goods  to  the  place  of importation;

(b)          loading,   unloading   and   handling   charges   associated   with   the delivery of the imported goods at the place of importation; and

(c)          the cost of insurance :

  1. 4. Under Rule 3(2) the declared price in a number of cases cannot be accepted as a general Rule and additional exercise is required to arrive at a fair transaction value.

Rule 3(2) Value of imported goods under sub-rule (1) shall be accepted :

Provided that –

(a)          there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which –

(i)           are imposed or required by law or by the public authorities in India;

or

(ii)          limit the geographical area in which the goods may be resold; or

(iii)         do not substantially affect the value of the goods;

(b)          the sale or price is not subject to some condition or consideration for  which  a  value  cannot  be  determined  in  respect  of  the  goods  being valued;

(c)          no  part of  the  proceeds  of  any  subsequent  resale,  disposal or use of  the  goods  by  the  buyer  will  accrue  directly  or  indirectly  to  the  seller, unless  an  appropriate  adjustment  can  be  made  in  accordance  with  the provisions  of  rule  10  of  these  rules;  and  [royalty and franchisee fee shall be scrutinized under this clause]

(d)          the buyer and seller are not related, or where the buyer and seller are  related,  that  transaction  value  is  acceptable  for  customs  purposes under the provisions of sub-rule (3) below.

  1. 5. Under Rule 3(3) the declared price of a related party can be accepted provided it is established that price is not affected by relationship.

Rule  3(3)(a)  Where  the  buyer  and  seller  are  related,  the  transaction value    shall   be                  accepted         provided         that                 the       examination                     of      the circumstances   of   the   sale   of   the   imported   goods   indicate   that   the relationship did not influence the price.

(b)  In  a  sale  between  related  persons,  the  transaction  value  shall  be accepted, whenever the importer demonstrates that the declared value of the  goods  being  valued,  closely  approximates  to  one  of  the  following values ascertained at or about the same time.

(i)           the transaction value of identical goods, or of similar goods, in sales to unrelated buyers in India;

(ii)                the deductive value for identical goods or similar goods;

(iii)            the computed value for identical goods or similar goods :

Provided  that  in  applying  the  values  used  for  comparison,  due  account shall be taken of demonstrated difference in commercial levels, quantity levels, adjustments in accordance with the provisions of rule 10 and cost incurred by the seller in sales in which he and the buyer are not related;

(c)          substitute  values shall not be established under  the provisions of clause (b) of this sub-rule.

  1. 6. Thus the standards  of  acceptance  of  value  declared  by  related  parties  are prescribed under Rule 3(3)(b). In case related importer is not able to show that the  transaction  value  of  imported  goods  are  at  par  with  transaction  value  of identical  goods/similar  goods,  in  sales  to  unrelated  buyers  in  India;  then technically customs officer can reject the declared value under Rule 12 and can go  for  deductive  value  or  computed  value  as  per  the  option  of  importer. Therefore importer trying to establish that his declared prices are not affected by  relationship  should  be  ready  with  appropriate  third  party  data  of  identical goods/similar goods and should also be ready with one of the two methods in case of rejection of transaction value. If importer is not ready in the alternative, the  customs  officer  may  arbitrarily  determine  the  value  based  on  a  deductive method from retail sell price of the goods in India, which shall be very harsh on importer.
  1. 7. The deductive or computed method can be applied at the option of importer The deductive and computed value has been given under Rule 7 & 8 respectively, which is self explanatory.
  1. 7. Deductive value. — (1) Subject to the provisions of rule 3, if the goods being valued or identical or similar imported goods are sold in India, in the condition as imported  at  or  about  the  time  at  which  the  declaration  for determination of value is presented, the value of imported goods shall be based  on  the  unit  price  at  which  the  imported  goods  or  identical  or similar  imported  goods  are  sold  in  the  greatest  aggregate  quantity  to persons who are not related to the sellers in India, subject to the following

deductions: —

(i)           Either  the  commission  usually  paid  or  agreed  to  be  paid  or  the additions  usually  made  for  profits  and  general  expenses  in  connection with sales in India of imported goods of the same class or kind;

(ii)          The  usual  costs  of  transport  and  insurance and  associated  costs incurred within India;

(iii)         The customs duties and other taxes payable in India by reason of importation or sale of the goods.

(2) If neither the imported goods nor identical nor similar imported goods  are  sold  at  or  about  the  same  time  of  importation  of  the goods  being  valued,  the  value  of  imported  goods  shall,  subject otherwise to the provisions of sub-rule (1), be based on the unit price at which the imported goods or identical or similar imported goods are sold in India, at the earliest date after importation but before the expiry of ninety days after such importation.

(a)If  neither  the  imported  goods  nor  identical  nor  similar imported  goods  are  sold  in  India  in  the  condition  as imported,  then,  the  value  shall  be  based  on  the  unit price       at              which the                   imported  goods, after further processing, are sold in the greatest aggregate quantity to persons who are not related to the seller in India.

(b)     In such determination, due allowance shall be made for the  value  added  by  processing  and  the  deductions provided for in items (i) to (iii) of sub-rule (1).

  1. 8. Computed value. — Subject to the provisions of rule 3, the value of imported goods shall be based on a computed value, which shall consist

of the sum of:-

(a)          the cost or value of materials and fabrication or other processing employed in producing the imported goods;

(b)          an  amount  for  profit  and  general  expenses  equal  to  that  usually reflected in sales of goods of the same class or kind as the goods being valued  which  are  made  by  producers  in  the  country  of  exportation  for export to India :

(c)          the cost or value of all other expenses under sub-rule (2) of rule 10.

  1. 8. In the absence  of  data  valuation  can  be  done  under  Rule  9  using  reasonable means as Customs officer deems fit on the basis of data available in India :
  1. 9. Residual meth — (1) Subject to the provisions of rule 3, where the value of imported  goods  cannot  be  determined  under  the  provisions  of any   of   the   preceding   rules,   the   value   shall   be   determined   using reasonable means consistent with the principles and general provisions of these rules and on the basis of data available in India :

Provided that the value so determined shall not exceed the price at which such or like goods are ordinarily sold or offered for sale for delivery at the time  and  place  of  importation  in  the  course of  international  trade,  when the seller or buyer has no interest in the business of other and price is the sole consideration for the sale or offer for sale.

(2) No value shall be determined under the provisions of this rule on the basis of :-

(i)           the  selling  price  in  India  of  the  goods  produced  in India;

(ii)          a   system  which   provides   for   the   acceptance   for customs  purposes  of  the  highest  of  the  two  alternative values;

(iii)         the price of the goods on the domestic market of the country of exportation;

(iv)         the  cost  of  production  other  than  computed  values which have been determined for identical or similar goods in accordance with the provisions of rule 8;

(v)          the  price  of  the  goods  for  the  export  to  a  country other than India;

(vi)         minimum customs values; or

(vii)        arbitrary or fictitious values.

  1. 9. Under Rule 11 importer is required to make correct declaration before customs officer regarding valuation and relationship e In case of related party import cases need to be registered with ‘Special Valuation Branch’ (SVB, for short) for clearance of value by customs. Pending SVB inquiry the assessment shall be provisional. Detailed procedure has been prescribed under Circular no 11/2001 dated 23-2-2001. SVBs  are  established  at  four  major  Custom  Houses,  i.e. Chennai,  Calcutta,  Delhi  and  Mumbai  and  any  decision  taken  in  respect  of  a particular case in any of  these major Custom Houses shall be followed by all other  Custom  Houses/formations. The Special  Valuation Branch  of  that major Custom House, (out of the 4 mentioned) which is located proximate to the Head or  Corporate   Office  of   the  importer  would  handle  the  investigations  into valuation of such importer.
  1. 10. In case of non registration of case with SVB, Custom having seized of the issue will book a case of intentional Duty evasion under Section 28 of Customs Act 1962, which shall cover imports of previous five years. Apart from duty liability following liabilities may also be fastened on importer
  1. a. Interest under Section 28AB (Compulsory)
  1. b. Seizure of goods under Section 110.
  1. Confiscation of goods and consequent redemption fine under Section 111
  2. read with 125.
  1. d. Penalty on concerned persons of the company under Section 112.
  1. e. Penalty equal to duty evaded under Section 114A of the a
  1. f. Penalty up to five times the value of goods under Section 114AA of the Act.
  1. g. Summons and  recording  of  statement  of  concerned  persons  including directors under 108 of the act
  2. h. Arrest of concerned persons under Section 104 of the a
  1. Search of premises under Section 105
  1. Criminal prosecution under Chapter XVI of the Act
  1. Where two year imprisonment has been prescribed under Section

132 for false declaration.

  1. Where  seven  year  imprisonment  has  been  prescribed  under Section 135 for evasion of duty. This offence is non bailable.

iii.   Under  section  138A,  it  shall  be  presumed  that  importer  has committed the offence intentionally unless he proves otherwise.

  1. 11. Under Section 140 (1) of the Act , in case of offence by company every person who, at the  time  the  offence  was  committed  was  in  charge  of,  and  was responsible to, the company for the conduct of business of the company, shall be deemed to be guilty of the offence.

SECTION 140 Offences by companies.– (1)  If the person committing an offence under this Chapter is a company, every  person  who,  at  the  time the offence was committed was in  charge of, and was responsible to, the company  for  the  conduct  of  business  of  the  company,  as  well  as  the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly :

Conclusion

  1. 12. In view of huge possible liabilities, civil as well as criminal as discussed above in  case  of  non  compliance  of  regulatory  framework,  it  is  advisable  that  every organisation, which is not a fly by night operator, must pay proper attention to these issues.
  1. 13. The company must  get  the  various  agreements  vetted  in  advance  from Customs  perspective  before  entering  into  the  agreement  so  that  they  do  not land up paying more tax.

Enclosures:

  1. Circular no 11/2001 on SVB- cir-no-11-2001-svb
  2. Circular No 04-2016 on SVB- circ04-2016cs
  3. Circular No 04-2016 on SVB-circ05-2016cs

For further facilitation for SVB registration kindly contact the undersigned- 

CP: Mr. Ravi Jha

Email: rsj@sjeximtech.com or intelconsul@gmail.com

Web: www.sjeximtech.com

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