WRITE UP ON REGULATORY REQUIREMENTS IN CASE OF RELATED PARTY IMPORT
- 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.
- 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.
- 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 :
- 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;
(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.
- 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.
- 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.
- 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.
- 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
(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).
- 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.
- 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 :
- 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.
- 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.
- 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
- a. Interest under Section 28AB (Compulsory)
- b. Seizure of goods under Section 110.
- Confiscation of goods and consequent redemption fine under Section 111
- read with 125.
- d. Penalty on concerned persons of the company under Section 112.
- e. Penalty equal to duty evaded under Section 114A of the a
- f. Penalty up to five times the value of goods under Section 114AA of the Act.
- g. Summons and recording of statement of concerned persons including directors under 108 of the act
- h. Arrest of concerned persons under Section 104 of the a
- Search of premises under Section 105
- Criminal prosecution under Chapter XVI of the Act
- Where two year imprisonment has been prescribed under Section
132 for false declaration.
- 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.
- 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 :
- 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.
- 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.
- Circular no 11/2001 on SVB- cir-no-11-2001-svb
- Circular No 04-2016 on SVB- circ04-2016cs
- Circular No 04-2016 on SVB-circ05-2016cs
For further facilitation for SVB registration kindly contact the undersigned-
CP: Mr. Ravi Jha
Disclaimer: Please refer to official sources before effecting a decision.
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