Procedure for investigation of related party import cases and other cases by the Special Valuation Branches - Customs - FACILITY NOTICE No. 35/2016

OFFICE OF THE COMMISSIONER OF CUSTOMS (IMPORT) JAWAHAR LAL NEHRU CUSTOM HOUSE, NHAVA SHEVA. RAIGAD, MAHARASHTRA F. No. S/22-Gen-01/2015-16 AM (I) Dated: 25.02.2016 FACILITY NOTICE No. 35/2016 Sub: Procedure for investigation of related party import cases and other cases by the Special Valuation Branches - reg. Attention of all the Importers, Customs Brokers and the Members of the Trade is invited to the Board s Circular No.5/2016 dated 9.2.2016 on the above subject. 2. The Special Valuation Branch (hereinafter referred to as SVB ) was created as an institution specializing in investigation of transactions involving special relationships between buyer - seller or those involving other special circumstances surrounding the sale of imported goods, both of which have a bearing on the assessable value. Detailed instructions were issued vide Circular Nos. 1/98 - Customs dated 1.1.98 and 11/2001-Customs dated 23.2.2001, prescribing the procedure to be observed by the Custom Houses for referring cases to Special Valuation Branches and time lines to be followed for finalising such cases. 3. However, trade and industry has been repeatedly representing regarding delays in finalisation of SVB investigations, continued uncertainty due to provisional assessments, increase in transaction costs due to extra duty deposits and burdensome procedure of renewal of SVB orders. Board has also taken cognizance of the WCO s Guide to Customs Valuation and Transfer Pricing (June 2015) and the fact that the circula₹ 1/98 and 11/2001 were based upon the Customs Valuation (Determination of Price of imported goods), Rules, 1988, which have since been superseded by the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Accordingly, after considering the above and the large number of SVB investigations pending in various Customs Houses, a need has been felt to streamline the procedures relating to investigations by SVBs. 4. Vide Circular No. 29/2012 dated 7th of December, 2012, it had been decided to vest functional control over SVBs with the Director General of Valuation (DGOV), with effect from 1st January, 2013. However, upon assessing the impact of the revised administrative arrangements and taking into consideration the suggestion of the industry that jurisdictional Chief Commissioner / Commissioner offer a convenient avenue for redressing grievances, it has been decided to withdraw the said circular with immediate effect. Henceforth, the Special Valuation Branches shall function under the supervisory control of the jurisdictional Chief Commissioner/Principal Commissioner/Commissioner. DGoV shall continue to support the SVBs by issuing advisories on legal issues guidance notes. DGoV shall also continue to qualitatively monitor investigation orders issued by SVBs. 4.1 The SVBs are presently functioning at the Customs Houses at Bengaluru, Chennai, Kolkata, Delhi and Mumbai. Para 1 (b) of circular no. 11/2001 dated 23rd Feb 2001 laid down the jurisdiction of the SVBs, based upon the principle of location of the corporate office of the importer. After reviewing this arrangement from the point of view of convenience of the trade, it has been decided to continue with the same administrative arrangements. Accordingly, as when imports requiring investigation by SVBs are noticed at any customs formation, the concerned Commissionerate shall after following the procedure laid down in this circular, transfer all relevant records to the jurisdictional SVB for investigations. However, in cases where the import takes place through CHs of Mumbai / Delhi / Chennai / Kolkata / Bangalore, the importer will be free to select the SVB of the Customs House of import or the Customs House most proximate to the corporate office, as convenient to him. The jurisdiction of the five SVBs is attached as Annexure F. 4.2 The Board has reviewed the practice relating to levy of Extra Duty Deposits (EDD) in cases where SVB investigations are undertaken. It has been taken into consideration that Extra Duty Deposit @ 1% of declared assessable value is being obtained from the importer for a period of 4 months during which time he is required to submit required documents and information to the SVB. In the event of his failing to do so, the EDD can be increased to 5% till such time the importer complies. Upon the importer complying with the requisition for documents and information, Circular 11/2001 Cus dated 23.2.2001 provides that EDD shall be discontinued, while imports will continue to be assessed provisionally till the completion of investigations. In other words, the imports were continued to be assessed provisionally on the basis of a PD Bond but without any EDD. It has also been noted that many importers have represented on delays in dispensing of EDD, even though they have provided the required information and a period of 4 months has passed without the case having been decided. Therefore, the Board has decided that while reference to SVB requires the assessments to be provisional, for the sake of reducing transaction cost and bringing uniformity across Customs Houses, no security in the form of EDD shall be obtained from the importers. However, if the importer fails to provide documents and information required for SVB inquiries, within 60 days of such requisition, security deposit at a rate of 5% of the declared assessable value shall be imposed by the Commissioner for a period not exceeding the next three months. Simultaneously, the importer shall be granted a further period of 60 days to comply with the requisition for information documents. If the importer fails to submit documents within this extended period, the Commissioner in charge of SVB may consider the use of other provisions of the Customs Act for obtaining documents / information from an importer for conducting investigations. In no case shall the imposition of Security Deposit exceed the period of three months specified above. Furthermore, the Board has also decided that the importer would be free to choose whether the Security Deposit to be provided for the purposes of provisional assessment shall be by way of cash deposit or a Bank Guarantee. The form of Bond to be initially furnished by the importer is attached as Annexure D. The form of Bond to be used in a case where taking a Security Deposit becomes necessary is attached as Annexure E. 4.3 It has also been decided that the existing system of adjudication, wherein the proper officer of the SVB passed an appealable order followed by the assessing officer passing another corresponding order finalizing provisional assessments should be replaced. It has now been decided that the SVB shall not issue an appealable order. Instead, the SVB shall convey its investigative findings by way of an Investigation Report to the referring customs formation for finalizing the provisional assessments. This would obviate multiple streams of appeals for the trade. 4.4 During consultations with field formations, it has been reported that while circular 11/2001- Cus dated 23.2.2001 cast the responsibility upon the Commissioner to carefully examine whether a case merits SVB investigations, lack of adequate information at the stage of assessment did not facilitate making a judicious decision on whether a case needs to be referred to SVB or not. Accordingly, it has been decided to introduce a questionnaire to be filled by the importer (attached as Annexure A to the circular), which would enable the jurisdictional Commissioner to take a decision on whether a case needs to be referred to SVB for investigations. 4.5 The Board has also decided that in order to ensure that only cases with significant revenue implications are taken up for SVB investigations, the following cases shall not be taken up for inquiries by SVBs : (i) Import of samples and prototypes from related sellers (ii) Imports from related sellers where duty chargeable (including additional duty of Customs etc.) is unconditionally fully exempted or nil. (iii) Any transaction where the value of imported goods is less than ₹ 1 lac but cumulatively these transactions do not exceed ₹ 25 lacs in any financial year Cases, which may be considered for SVB Investigations 5.0 While filing a bill of entry, every importer makes a declaration about whether the seller of imported goods is a related party or not, as defined under Rule 2(2) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 (CVR, 2007). In other words, where any importer makes a declaration that the transaction is between related persons , as defined under Rule 2 (2) of CVR 2007, it would be necessary to examine whether or not the circumstances surrounding the sale of the imported goods indicate that the relationship has influenced the price. Accordingly, such transactions will require to be examined as to whether SVB inquiries are necessary. 5.1 Apart from investigation of transactions involving related parties, cases involving possible additions to declared transaction value also need to be examined to determine whether SVB investigations are necessary. Accordingly, transactions where any payments are sought to be made which are in the nature of instances given below, shall be examined with respect to the need for SVB investigations: (a) royalty and licence fee under Rule 10 (1)(c) of CVR, 2007 or (b) where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller [i.e. Rule (10)(1)(d)] of CVR, 2007 or (c) where any other payments are made or are contemplated to be made in future by buyer to seller as a condition of sale of imported goods etc., [i.e.Rule 10(1)(e)] of CVR, 2007 5.2 However, no reference to SVB would be necessary where any additions are sought to be made under Clauses (a) and (b) of Rule 10(1), as it is expected that such matters would be decided routinely by Appraising Groups. Procedure for considering reference to SVB 6. Scrutiny of a transaction between related persons or involving additions to value on account of royalty, licence fee etc. can pose complex issues and may lead to delay in clearance. Therefore, importers are advised that if their transaction falls in such a category they should, in so far as possible, file a prior bill of entry as provided under the second proviso to subsection (3) of section 46 of the Customs Act, 1962, preferably 15 days prior to the import. The importers are also advised to provide information as prescribed in Annexure A to this circular as well as information enjoined under Rule 3 (3) (b) of CVR 2007 at the time of filing of the Bill of Entry itself. Such advance filing of the Bill of Entry is expected to provide sufficient time for taking a decision on whether the transaction needs to be referred to SVB or not and therefore ensuring timely clearance of the goods. This would be necessary only in the first instance of import and once a decision has been taken regarding referring the matter to SVB or not, there would be no need for such advance filing of the Bill of Entry for each subsequent import. 6.1 Upon filing of the Bill of Entry, and receipt of information in Annexure A, the proper officer shall proceed to determine whether, prima facie, there is a need for investigation by the SVB. He shall complete such examination within 3 days of the filing of Bill of Entry and the matter submitted before the Commissioner. While examining the information submitted by the importer, the proper officer shall carefully examine the circumstances surrounding the sale and evaluate the case on the following parameters:-. i. Has the importer declared the price of the goods imported is a transfer price ? ii. What is the basis on which the price has been settled between the buyer seller? iii. Has the price been settled in a manner consistent with the way the seller settles prices for sales to buyer who are not related to the seller? iv. Does the nature of relationship between the buyer and seller appear to influence the price? v. Is the information provided by the importer in terms of rule 3 (3) (b) able to demonstrate that the transaction is at arms length? vi. Are there any payments, such as royalty, licence fee etc., 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 cast by the seller? Are such payments included in the price actually paid or payable? vii. Whether any part of the proceeds of subsequent re-sale, disposal or use of the imported goods accrues, directly or indirectly, to the seller? viii. What is the nature of other payments, if any, made or to be made by the buyer as a condition of sale of the imported goods? ix. Has the importer entered into an Advance Pricing Agreement with the Income Tax Authorities or obtained an Advance Ruling? x. Will the prices paid or payable by the importer be settled with the seller at the end of a defined period by means of a debit note / credit note? 6.2. While examining the information provided by the importer in terms of Rule 3(3) (b), if any, the proper officer shall bear in mind that the interpretative note to CVR 2007 states: A number of factors must be taken into consideration in determining whether one value closely approximates to another value. These factors include the nature of the imported goods, the nature of the industry itself, the season in which the goods are imported, and whether the difference in values is commercially significant. Since these factors may vary from case to case, it would be impossible to apply a uniform standard such as a fixed percentage, in each case. For example, a small difference in value in a case involving one type of goods could be unacceptable while a large difference in a case involving another type of goods might be acceptable in determining whether the transaction value closely approximates to the test values set forth in rule 3(3)(b). 6.3. After examining the transaction on the above lines, the proper officer at the customs station of import shall submit the findings to the Commissioner for a decision on whether the case is fit for being referred to the SVB for investigations. 6.4. The Commissioner shall after due consideration of the preliminary findings, take a considered view whether: (a) the matter be referred to the SVB for further investigations and the goods be provisionally assessed to duty in terms of section 18 of the Customs Act, or (b) the transaction does not merit investigations by SVB and that assessment be finalized on the basis of enquiries to be conducted by the proper officer in terms of Rules 4 to 9 of the CVR 2007 or (c) the transaction be assessed in terms of Rule 3 of CVR 2007 Procedure for reference to SVB: 7. In the event of the Commissioner directing investigations by SVB, the proper officer shall promptly carry out provisional assessment in terms of section 18 of the Customs Act, 1962 and ensure that no delays occur in the release of the goods. 7.1 In order to facilitate expeditious inquiries by the SVB, the proper officer shall alongside of provisionally assessing the bill of entry, requisition further information from the importer as per Annexure B to this circular. The importer should be advised to furnish the documents and a duly indexed reply to the questionnaire to the jurisdictional SVB (as per para 3.1) within 60 days. 7.2 Upon completion of the procedure for provisional assessment and issue of the questionnaire (Annexure B), all related records shall be transferred to the jurisdictional SVB, and in no case later than 3 working days of the release of the goods. 7.3 The documents received from the importer with respect to the checklist shall be duly acknowledged by the SVB. An intimation shall be forwarded to RMD and the referring appraising group regarding submission of the documents within time so that provisional assessments, without security deposit or bank guarantee, continue till the finalisation of the investigation. Procedure for cases where reference to SVB is not required: 8. In case where after examination of the transaction, it is decided by the Commissioner that a reference to SVB is not necessary, the Customs House shall issue a reference number to the importer and the Risk Management Division to indicate that the transaction has been examined from the point of view of need for SVB inquiries and it has been decided not to refer the same for SVB investigations. Procedure in Special Valuation Branch 9. Upon receipt of all related records from the referring customs formation, the SVB shall forthwith assign a case number and update the Central Registry Database (CRD) maintained by DGoV. The SVB shall also inform the RMD of the details of the importer, his IEC code, and details of seller for inserting suitable instructions for assessing officers at all Customs Houses so as to ensure provisional assessments during the currency of SVB inquiries. 9.1 Upon receipt of information from the importer as per Annexure B, SVB shall commence inquiries, during the course of which the Deputy Commissioner / Asst. Commissioner (SVB) may call for further documents or information as required. The importer shall also be given suitable opportunity to submit evidence in support of the declared value. 9.2 The SVBs shall, as far as possible, complete the investigations and issue its findings within two months from the date of receipt of information in Annexure B. In cases where investigations are not completed within 2 months, the SVB shall seek the approval of the jurisdictional Commissioner for such extended time period as is deemed necessary to complete investigations. However, where investigations are not completed within 4 months from the date of receipt of information in Annexure B, the matter shall be submitted before the Chief Commissioner for extension of period as is deemed fit. 9.3 Upon completing investigations, the SVB shall submit the findings before the Principal Commissioner/Commissioner, quantifying the extent of influence on the transaction value due to the relationship or payments towards royalty or licence fee or other payments actually made or to be made as a condition of sale of the imported goods. Upon approval by the Principal Commissioner / Commissioner, an Investigation Report (IR, for short) shall be prepared incorporating all relevant facts, submissions made by the importer, investigative findings, grounds for acceptance or rejection of transaction value, and the extent of influence on declared transaction value, if any. The IR shall include all relied upon documents and shall be communicated to the referring customs station/appraising group and such other stations where imports have been provisionally assessed. A copy of the IR shall also be sent to the DGoV. Finalisation of assessments 10. Upon receipt of the IR from the SVB, where investigative findings are that the declared value is found conforming to Rule 3 of the CVR, 2007, the customs stations where provisional assessments have been undertaken shall immediately proceed to finalize the same. There would be no need to issue a speaking order for finalising the provisional assessments in such cases. 10.1 However, when investigative findings are that the declared value has been influenced by the circumstances surrounding the sale, the proper officer shall issue a show cause notice to the importer within 15 days of the receipt of the IR, under intimation to the concerned SVB. 10.2 In cases where imports have been cleared through multiple customs locations, the jurisdictional commissioner of the SVB shall, after issue of notices by the proper officers in the said locations, make a proposal addressed to the Commissioner (Customs), CBEC recommending appointment of a common adjudicating authority by the Board for the purpose of passing order for finalization of the provisional assessments. 10.3 The adjudicating authority shall, after following the principles of natural justice, pass an order quantifying the extent of influence on the declared transaction value. The Order shall be endorsed to the Risk Management Division and the DGoV, for updating the Central Registry Database. 10.4 The appellate provisions under Section XV of the Customs Act would apply for filing appeals against the order passed by the adjudicating authority. Change in circumstances surrounding the sale 11. In any case where, the circumstances of sale or terms and conditions of the agreement between the buyer and related seller change, or any other payments of the kind referred under Rule 10 (1) (c), (d) (e) of the CVR, 2007 become payable, the importers shall be required to declare the same at the place of import in the prescribed format at Annexure C. In all such cases, the proper officer shall examine the transactions as per procedures laid out above in this circular and the jurisdictional Commissioner shall refer the matter to the jurisdictional SVB, where required. 11.1. In view of the above, it may be noted that the system of renewal of SVB orders has been discontinued with immediate effect. 11.2. Instructions regarding disposal of pending cases are contained in circular 4 / 2016 dated 9th February 2016 issued by CBEC, New Delhi. Monitoring of SVB investigations: 12. DGoV shall facilitate co-ordination amongst the SVBs. Once a case is registered by the SVB, detailed information regarding the same along with the IEC code of the importer should be entered in the Central Registry Database (CRD) maintained by the Directorate General of Valuation. DGoV shall monitor the progress of the investigations and report to the Board cases involving any inordinate delays. 13. The aforementioned Board s Circular No.5/2016 dated 9.2.2016 is issued in supersession of Circular No. 1/98 Cus dated 1.1.98 and 11/2001-Cus dated 23rd February 2001 and comes into immediate effect. 14. Difficulties, if any, faced in the implementation of this Circular may be brought to the notice of the undersigned. --Sd-- (D.K. SRINIVAS) COMMISSIONER OF CUSTOMS, NS-I III