Transaction value of imported auto components as OE Parts and Service Parts - Regarding - Customs - 082/02

Circular No. 82/2002-Cus.V, dated 3-12-2002 F. No. 467/17/2001-Cus.V Government of India Ministry of Finance (Department of Revenue) Central Board of Excise Customs, New Delhi Subject: Transaction value of imported auto components as OE Parts and Service Parts - Regarding. A reference was received in the Board from the Commissioner of Customs, Chennai to consider the issue regarding the acceptance of dual pricing on import of auto components as original equipment parts and service parts, since both are identical in all respects, and hence, are covered under the definition of identical goods as per Rule 2(1)(c) of Customs Valuation Rules, 1988. 2. It may be noted that Board's instruction vide letter No. 3/26/57, dated 30-10-1957 (Page 116 of Appraising Manual Volume I refers), had permitted dual pricing of Original Equipment parts and Spare parts, subject to the condition that (a) the lower prices in question are reasonable, and not unduly and deliberately lower than what they would be, and (b) that the said prices are inclusive of the various elements which go to make the value under Section 14 of the Customs Act, viz., factory cost (cost of labour and material), factory overhead administration or commercial overheads and a reasonable margin of profit for the original manufacturer. It has been stated that it is a well recognized practice and trade usage prevalent in the manufacturing circles, all over the world, whereby a manufacturer supplied components of his products to a co-manufacturer, who buys the components for use in further manufacturing process, at a price lower than what he charges to his distributors or dealers who buy the components for resale as spare parts or replacements. This circular was issued under the earlier "Deemed Value" method, which existed prior to the formulation of Customs Valuation Rules, 1988. 3. The material circumstances and the trade usage discussed in the 1957 circular above, has not changed under the present Customs Valuation Rules, 1988 also. Further, it has been represented by the trade that the Original equipment parts meant for manufacturing activity are imported at lower prices, since they are imported in large volumes and for a definite quantity. The spare parts meant for trading activity are imported at higher prices for various reasons such as lower quantity sales, unit packaging, piece-meal orders, higher inventory carrying cost, air freight, etc. While the components imported for manufacture suffer Central excise duty, the spare parts do not suffer Central excise duty as they are meant for trading activity. Though they are identical goods as per Rule 2(1)(c) of CVR, 1988, they are independent transactions in view of the commercial considerations as discussed above. 4. The issue has been examined. The decision of the Board in this regard is as follows: "It was decided that in view of the introduction of the 'transaction value' concept on the Customs side, dual prices in respect of components imported as OE parts and as spare parts had to be accepted unless there was evidence to the contrary. To reject the transaction value, the onus is on the department to establish that price is not sole consideration for the sale/transaction. This would be consistent with the practice on the Central Excise side." 5. Therefore, Board would like to reiterate the acceptance of dual pricing as long as they represent the transaction value. Problems, however, may arise as these imports are generally made between related persons. It has been reported by the Commissioner of Customs, Chennai that a price difference of up to 200 per cent has been noticed on import of certain identical automobile parts. Such a vast variation cannot be explained only by reasons of difference in commercial levels, quantity levels, freight, inventory, etc. The related party transactions needs to be looked into, to see whether this is a case of 'tied in' sales and examine whether the price charged for original equipment parts has been reduced by loading the same in the price of payments not related to imported goods. The Custom Houses should investigate implications of transfer pricing also and see whether declared price is not lesser than the intrinsic value (cost of production plus profit margin) of the product as discussed in the 1957 circular. 6. The Chief Commissioners of Customs are requested to bring the above circular to the notice of all the assessing officers under their jurisdiction and direct them to finalise the pending provisional assessments. Difficulties, if any, in implementing the above circular may be brought to the notice of the Board immediately.