2011 (2) TMI 863 - AT - Customs

Import - Valuation of computer software - relating parties - Transfer price agreed to between the foreign supplier and the Appellant - The transfer prices are normally scrutinized by the Income Tax Department considering the whole gamut of issues relevant and with better focus on the overall accounts of the company unlike the customs department which compares prices for the product billed to other importers - The matter of transfer prices is to be determined by in-depth analysis of the books of accounts and not to be simply rejected on the basis of list price of the commodity for retail sale - No evidence of price for sale at the same commercial level and same quantity level is produced by the department - No case is made out that the Income Tax department found the prices to be vitiated - Once the Transfer Prices Agreement for the products or services is not objected to by the Income-tax Department a case that the value of goods has been transferred to service has to be proved with more meaningful evidence rather than a comparison with list price for sale to retail buyers especially when evidence exists for discounts given even to retail buyers. The services availed by the importer from their holding company, for which CSC is paid, are likely to be chargeable to service tax under Section 66A of the Finance Act, 1994 and it is open to the Customs authorities to notify the concerned service tax authorities for taking action as permitted under law for recovery of service tax if not already paid.

Issues Involved:
1. Valuation of imported computer software.
2. Relationship between importer and foreign supplier.
3. Comparison of prices with unrelated buyers.
4. Corporate Service Charges (CSC) and their impact on declared values.

Detailed Analysis:

1. Valuation of Imported Computer Software:
The primary issue revolves around the valuation of computer software imported by the Appellant from its parent company, Bentley Incorporated USA. The Appellant declared the relationship under the Customs Valuation Rules and paid duty based on the transfer price agreed upon. The department directed the Appellant to make a revenue deposit of 1% of the assessable value initially, which was later increased to 5%.

2. Relationship Between Importer and Foreign Supplier:
The Appellant and the foreign supplier are related as per Rule 2(2) of the Customs Valuation (Determination of Imported Goods) Rules, 2007. The Appellant argued that the prices were at arm's length despite the relationship. The adjudicating authority rejected this claim, stating that the prices declared were abnormally discounted compared to prices for unrelated buyers.

3. Comparison of Prices with Unrelated Buyers:
The Appellant provided data showing that prices to unrelated buyers were higher than those to the Appellant. They argued that a 25% commission paid to the Appellant as an agent should be considered when comparing prices. The adjudicating authority, however, used the supplier's price list to determine the assessable value, rejecting the declared prices as abnormally discounted.

4. Corporate Service Charges (CSC) and Their Impact on Declared Values:
The Appellant contended that CSC paid to the parent company for various services (accounting, finance, legal, etc.) did not influence the declared values. The Commissioner (Appeals) noted that the Appellant failed to prove that CSC did not influence the declared values. The adjudicating authority had linked CSC to the purchase of software products, suggesting that the assessable value might be transferred to other charges payable.

Tribunal's Findings:
1. Valuation Based on List Price:
- The Tribunal found no merit in assessing goods imported by a distributor based on the list price for retail sale, especially since evidence of discounts given to unrelated buyers was provided.
- The orders of the lower authorities were set aside on this count.

2. Corporate Service Charges:
- The Tribunal noted that the supplier provided various services to the importer, and there was no evidence that the payment was disproportionate to the cost of services.
- CSC was not proportionate to the value of sales, and no objections were raised by the Income-tax Department regarding the cost of services in the Transfer Price Agreement.
- The Tribunal found that the argument linking CSC to imported goods was a stretched interpretation of Rule 4(2)(g) of the Customs Valuation Rules.

3. Transfer Prices and Income Tax Scrutiny:
- The Tribunal emphasized that transfer prices are scrutinized by the Income Tax Department, which considers the overall accounts of the company.
- No evidence was provided that the Income Tax Department found the prices to be vitiated.
- The Tribunal concluded that the value of goods had not been transferred to services based on the evidence provided.

Conclusion:
The Tribunal allowed the appeal, setting aside both the order-in-original and order-in-appeal, with consequential relief to the Appellant. The Tribunal also observed that CSC might be chargeable to service tax under Section 66A of the Finance Act, 1994, and directed the Customs authorities to notify the concerned service tax authorities for recovery if not already paid.

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