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TMI Blog2014 (5) TMI 753X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the claim of the Revenue that the price charged to SI by Sun SGP cannot be accepted since there were other circumstances besides the relationship between the entities has considerable force. Appellant cannot be considered as different from other buyers of equipments since the parts are supplied against replacement and old parts are sent back and appellant is reimbursed on the basis of cost plus 10% for the services they render. In such a situation, the discount given to appellant has no meaning since appellant in any case, do not incur any extra cost and AMC / warranty charges do take into account the cost of spare parts that they may have to be replaced during the course of rendering such services. Therefore even if the refurbishable spare parts were being paid for to Sun US at the price of new parts, such a transaction would definitely affect the transaction value between the two entities. whatever angle we look at the transactions we find that the value adopted cannot be considered transaction value in terms of section 14 of Customs Act, 1962. Therefore US list price minus discount cannot be a basis for charging customs duty. - Decided against the assessee. Rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There were raising freight invoices. They were aware that the consignments were received on freight to collect basis. They have a unique system of identifying ‘freight to collect’ consignments imported based on account number. Non-declaration of freight element and terms of import resulted in non-payment of duty on freight charges. DHL did not inform CHA to include the freight charges in the assessable value. Even though the learned counsel argued vehemently, and submitted that they had not filed any documents and therefore no penalty can be imposed on them, we find that facts go against DHL totally. DHL is in the business of logistics and for a professional organization which is engaged in the same business, it cannot be said that they were not aware of the legal position. However, Penalty reduced from 20 lacs to 10 lacs. - C/1841/2012-DB, C/1873/2012-DB, C/1874/2012-DB, C/1875/2012-DB, C/1876/2012-DB, C/1877/2012-DB, C/1922/2012-DB - Final Order Nos. 27126-27132/2013 - Dated:- 12-12-2013 - SHRI B.S.V.MURTHY AND SHRI ASHOK JINDAL, JJ. For the Appellant : Mr. Rohan Shah, Advocate, For the Respondent : Mr. P.R.V. Ramanan, Special Consultant JUDGEMENT Per : B.S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and several transactions there were direct and indirect flow-backs. The Commissioner also found that there were miss-representations and suppression of facts as regards valuation before Special Valuation Branch (SVB) which had considered the values adopted for importation warranting invocation of extended period of duty demand. 4. Before proceeding further, it would be appropriate to take note of some relevant facts and factual background. SI and SunSGP are 100% wholly owned subsidiaries of SunUS. SunUS and SunSGP exercise control over Managing Director of SI and he is on the pay roll of SunSGP. SunUS is the manufacturer of spares and also sources spares from various suppliers and decides the pricing policy including discount rates. SunSGP is the supplier of these spares from Singapore to different group companies in Asia Pacific Region including SI. 5. SI is engaged in providing research and development services (software development) for SunUS and this activity is taken care of by the STPI unit of SI. For this activity, there is an agreement viz. Research and Development Services Agreement between SI and SunUS. As per this agreement, SI exports software development to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list (Sun, US price list) less discount of fifty four percent (54%). 9. According to the Revenue, the investigation has unearthed the following facts: This agreement allowed discount on Sun, US price list. Mail correspondences indicated that the said discount rate is averaged out considering different discounts extended to group companies. For example, Group company in Japan got a discount of 26% from the List Price that in Australia/New Zealand got 44%, while companies in India and some other countries got a much higher discount of 68-70 %. Conditions at Sl.No. (i) and (ii) are followed for import of spares by SI inasmuch as freight, insurance, duty etc are paid by SI for spares import. 10. Further facts that emerged from investigations according to Revenue were: Transactions among Sun, US, Sun, SGP and SI indicate that SI makes payments to Sun, SGP mainly for import of spares based on invoice value and in the guise of service charges under agreements (Logistics service and Technical support). SI was to receive substantial amounts from SunSGP and SunUS for the services provided to them and export of software to US. Undervalued amounts for spares were compensa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved on ALC charges works out to Rs. 16.58 Crores. (c) Non-billing and under billing of expenses to Sun Singapore/US SI carries out marketing, warranty and other professional services for Sun Singapore and SW development and export to Sun US. SI is required to bill the expenses relating to such services on cost plus reasonable return (10%) basis. SI has to provide services and spares to the customers (free of cost) who are under Warranty, on behalf of Sun, Singapore. While billing Warranty charges on Sun, Singapore, SI has to bill the full value of spares declared in the import invoice used for Warranty purposes with 10% markup, as SI had paid Sun Singapore for the spares imported for Warranty also. In actual fact, SI has not billed the full value of spares used for Warranty, resulting in under billing of Warranty charges. Investigations revealed that total expenses incurred on professional services, and certain portions of expenses relating to marketing, warranty and SW development were not billed to Sun Singapore/US. SI have admitted the underbilling Professional charges and Marketing R D charges but, claimed that this underbilling has no relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices free of cost to SunSGP, which has resulted in a benefit to SunSGP. Therefore, the price charged in the invoice for the subject goods is not an independent price nor is it in the ordinary course of trade as such export of the refurbishable spares free of cost has influenced the price charged for the subject goods, and, hence should form part of the assessable value of the subject goods. (d) The appellant has undercharged/under-billed certain charges on SunSGP/SunUS in relation to professional services, research and development services and marketing and warranty support services, which has resulted in understatement of the value of the subject goods, and the underbilled charges should be added to the assessable value of the imported spares. 13. The past assessments have been reopened invoking extended period and grounds for the same are as follows:- SI had suppressed/not furnished Logistic Services Agreement, Spare Parts Agreement and Escalated Technical Support Agreement before the SVB. The fact of supply of spares on replacement basis by Sun Singapore and export of refurbishable spares, free of cost to them as a mandatory requirement were not disclosed to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts from the price list to independent third party customers across the world. Report III - Analysed 132 invoices for spares issued by SunSGP to various Sun entities in APAC Region including the appellant and entities such as Sun Malaysia, Sun Korea, Sun China, Sun Hong Kong and Sun Taiwan etc. in relation to the subject goods. .. Similar discounts are being offered by SunSGP to other Sun entities in the APAC Region for the sale of spares .. The discounts offered to all such entities including to the appellant are in accordance with the transfer pricing report which have determined an arms length price for the spares. PWC Reports provide that even sales to third party independent buyers of equipments, were given discounts of approximately 45%. The appellant has more volume and more consistent business to warrant higher discounts. Thus, the respondents assertion that the discount is unusually high is without any basis. In light of the aforesaid factual matrix and the evidence led during the course of the hearing (for detailed submissions, refer to pg 12-13 of the written submissions) it is clear that the discounts offered by SunSGP on the list price are uniform acros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce where the price of the spares supplied along with equipment to a customer in India was much higher and in fact higher than the list price of the SunUS. Report-II is only confirming that discount has been offered by SunUS to third parties as well as SunSGP and compared and confirmed this by verification of the invoices specified by PWC. Once again the report does not analyse Customs valuation issues with reference to Customs Act. 21. Further even Report-III also, adopted the similar procedure and examined whether discounts have been offered by SunSGP to other Sun entities in APAC Region for sale of spares and found it to be in accordance with transfer pricing policy which have been determined at arm s length price for spares. The observations made with regard to Report I would apply here also. 22. PWC at page 694 of Volume B of paper books submitted by the appellant have made the following observations: Our procedures, as stated in the contract, did not constitute an examination made in accordance with generally accepted auditing standards, the objective of which would be the expression of assurance on the contents of the schedule. Accordingly, we do not express such assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een relevant. However, we have to examine other aspects on this issue before coming to any conclusion. PWC report and the fact that SunUS still made a profit may be relevant if there are other evidences to show that the transactions were not affected by the relationship or other agreements and transactions between the entities. It is also necessary to examine the facts and approach of the appellants and different entities which we would be proceeding to examine hereinafter. 27. The next submission was that in terms of Rule 3(3) of Valuation Rules, list price less discount is the correct assessable value. It was submitted that where the buyer and seller are related, assessable value of the imported goods is determined only in accordance with the provisions of Rule 3(3) of Customs Valuation Rules which mandatorily require that where the buyer and seller are related and where the circumstances of the sale indicated that the relationship has not influenced the price of the imported goods, the transaction value has to be accepted. The first requirement according to the Rule is examination of circumstances surrounding the sale and examining whether the price is based on arms length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscount given to SI Excess % charged to the customer over list price Infosys Technologies Ltd. 307763 17 Flat CRT Monitor 365 1417 01 45.63 134 128% Infosys Technologies Ltd. 2895491-1 17- Flat CRT Monitor 365 1417 02 97.5 304.7 15% Infosys Technologies Ltd. 2804760-1-1 17 Flat CRT Monitor X7147A 365 1417 02 97.5 304.7 14% Infosys Technologies Ltd. 2953628-1-1 17- Flat CRT Monitor X7147A 365 1417 02 97.5 325 1% Infosys Technologies Ltd. 2511873 17- Flat CRT Monitor 365 1417 02 97.5 325 1% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voices for supply of spares to Sun entities are generated by SOLEIL systems. The verification of SOLEIL generated invoices and invoices generated for supply of equipments clearly shows that the pricing pattern for supply of spares to Sun entities and others with equipment are quite different. Further, it is also not possible to arrive at the price based on the sale price in India, since there were no sale of spares by the Sun entity in India and supplies are made only to fulfill warranty obligations and AMC obligations. 30. Another aspect that has been a bone of contention between the department and the appellant is the return of parts which are removed during the course of fulfillment of AMC / warranty obligations. According to the system followed, every time a part is replaced, after replacing, the old part is sent back to the SunUS who refurbish the same and use the same for fulfillment of warranty/AMC obligations. The result is no one knows as to whether the part which is supplied by SunUS through SunSGP to different entities is in reality a newly manufactured one or a refurbished one. While supplying the same to Sun entities also Sun US/SGP do not indicate this aspect at al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Shri Anil Kumar, Clearing Supervisor. e. Revenue also relied upon the email dated 15.7.2006 from Shri Anand Kumar, Global Service Finance Services Manger to Shri Radhakrishnan, Finance Controller, Sun SGP wherein he mentioned that DRI have sought details of import information and undervaluation issues may be raised. f. In the month of June 2006, export documentation was changed from NFEI declaration to exports made as commercial shipments and the value declared was list price less discount applicable for importer of new spares. According to the learned special consultant, this clearly shows that prior to June 2006, by dispatches of refurbishable spares were on NFEI basis and therefore, there was no question of any payment from Sun US/SGP to SI. By this time investigation had already started. g. Even though the system was changed in June 2006 but till April 2007, shipping bills were not submitted to the bankers which started only from April 2007. After the DRI started investigation, the appellants changed their bankers from Citibank to Bank of America. h. M/s. Citibank, Bangalore clearly intimated on 12.8.2008 that there have been no remittances received in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of supply of spares by Sun US/SGP. 34. We find that there is sufficient evidence to show that during the period of dispute, refurbishable spares were not paid for by Sun US/SGP and apparently appellants have made efforts subsequently to make suitable adjustments. We have already taken note of the fact that even to PWC for conducting study of transfer pricing issue, appellants have not disclosed these facts and even the fact that defective parts were paid for and such payment was equal to the cost of new parts supplied by Sun US/SGP was also not brought to the notice of PWC. Therefore we really do not know the implications on this account on the PWC report. The analysis, evidences, annexures, documents and statements of officers of the company and information collected from bankers, courier services would clearly show that appellants have not been able to prove their claim of receiving payments in respect of refurbishable spares. Therefore, the claim of the Revenue that the price charged to SI by Sun SGP cannot be accepted since there were other circumstances besides the relationship between the entities has considerable force. 35. At this stage, it would also be worth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to the calculation made in the OIO, warranty service accounted for about 40% of the total supplies. SI has been charging to Sun US /SGP amortization charges in respect of parts used for warranty, even though according to their own submissions, they get back the entire amount when a part is replaced and refurbishable part is sent back to US. Charging amortization charges would look rational if the old parts are sent back without payment and new parts are not paid for. This would be towards the cost of storing the parts and warranty servicing. 37. Another issue that has to be taken into account is the fact that appellant has to be considered a buy/sale entity only. They do not store parts to fulfill warranty/AMC obligations. Therefore the appellant cannot be considered as different from other buyers of equipments since the parts are supplied against replacement and old parts are sent back and appellant is reimbursed on the basis of cost plus 10% for the services they render. In such a situation, the discount given to appellant has no meaning since appellant in any case, do not incur any extra cost and AMC / warranty charges do take into account the cost of spare parts th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.17,69,49,109 Rs.4,60,06,768 7. Spares re-balancing Rs.9,69,36,067 Rs.9,69,36,067 Rs.2,52,03,377 Total Rs.574,54,23,342 Rs.474,53,85,959 Rs.123,38,00,349 40. Out of the above, the export of refurbishable spares and the cost of the same has been a subject of serious dispute between the two parties. There have been claims and counter claims which were examined and we find that appellants have not been able to show that there was indeed payment for refurbishable spares on a regular basis. 41. The second issue for proving flow-back is underbilled amount of spares used for warranty. While billing warranty charges on SunSGP, SI has to bill the full value of spares declared in the import invoice used for warranty purpose with 10% mark up. SI had paid for spares imported for warranty also. However SI did not bill the full value of spares used for warranty thereby underbilling of warranty charges has resulted. Shri Ravi Vishwanath in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is intercompany pricing regime (cost +10% markup and list price less a 680% discount for spares) is intended to provide Sun India with an appropriate arm's-length level of profit on their overall operations, given their functions and risks in operating as a commission agent 44. The above mail is an evidence that the cost plus 10% billing for the services provided by SI to SunUS and SunSGP has a bearing on the supply of spares by SunSGP and SunUS to SI at list price less discount (68% or 70%). Hence, under billing in respect of services provided by SI to SunSGP and SunUS was to compensate the underbilling of spares systematically. 45. SunSGP supplies spares to SI under logistics services agreement dt. 01/07/1998 with a condition of only for replacement and at the unit price paid by SunSGP. SI imports new spares, used them for replacement and re-exported defective spares received. Asia Logistic Centre (ALC) charges amounted to Rs.63.76 crores during the period from 1998-99 to 2007-08. This was paid out of AMC income upon using the spares. The special consultant relied upon E-mail dt. 24/09/2007 between Shri Ravi Vishwanath and Mr. John McGovern (part of SunUS Customs team ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven rebuttals point by point to the allegations in the show-cause notice. As regards underbilled professional charges, the appellants stated in any event the amounts have already been charged by SI on 26/05/2009 and paid for by SunUS. It has to be noted that this is much after the issue of show-cause notice and conducting of investigation. Therefore this allegation has to be held as proved. Other than stating that this had nothing to do with the import of spares, there is no other explanation. There is no explanation how this conclusion has been reached by them. 47. Thus underbilled marketing and R D costs according to the appellant were subsequently billed and paid for. This, in our opinion, would prove the Departments case. After the investigation was started and statements were recorded if the amounts are charged and received without any basis as to why they were not billed earlier and collected, that cannot be taken into account at this stage. 48. As regards Asia Escalated Charges (AEC ) which according to the worksheet would come to Rs.19 crores, the appellants submitted that these charges are paid by the appellant to SunSGP towards provision of technical and other s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reasons we have already discussed. The only guidance available is the US list price worked out by working backwards using price paid for and discount rates claimed. For the reasons already discussed, the fact that SunUS makes profit is not relevant. To determine the transaction value, the question as to whether one of the entities makes a profit is not relevant but what is relevant is whether the relationship and other transactions between the two entities has affected the price. Our discussion above would show that it is so. Once the price becomes tainted or cannot be considered as transaction value as discussed by us above, the options left are to take the transaction value and add the flow-back. However, even the flow-back amount worked out by the Revenue has been disputed by the appellants and as already observed, it cannot be said with certainty that these reflected the correct position. For example, if we take export of defective spares, the question of amortization charges and whether there was underbilling in warranty would arise. Moreover, the export of defective spares value may include the value of spares used for warranty also. In such a case, figures given in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applied to the facts of this case. 53.2. In the case of Siemens Ltd. Vs. CC, New Delhi [2000(126) ELT 1134 (Tri.)], the Special Investigation Branch of the Customs itself had found that the invoice price was not affected by the holding company-subsidiary company relationship. That is not the case here. Therefore, this decision also cannot be applied. 53.3. In Stahl India Pvt. Ltd. Vs. CC, Chennai [2005(184) ELT 408 (Tri. Chennai)], there was evidence of contemporaneous supply of identical/similar goods at same price to other overseas subsidiary of supplier on record. It was also found that there was import in large quantities by the subsidiary when compared to unrelated consumers and it was also found that subsidiary was incurring expenses connected with marketing activities thereby justifying the transaction value. This decision cannot be applied to the facts of this case. 53.4. Two clarifications issued by US Customs have also been enclosed but we find that those clarifications are not relevant since facts are not comparable. 53.5. In the case of Gem plus India Pvt. Ltd. Vs. CC, Chennai [2005(185) ELT 269 (Tri. Bang.)], the prices of items were mutually agreed betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reji Kumar, we find that all the officers have contributed in their own way towards undervaluation. There was discussion, exchange of e-mails and further statements which go to show that the officers were aware that there was an effort to undervalue the goods. However one fact which emerges is that there is no evidence to show that they individually benefitted by way of extra remuneration or extra benefits because of this contribution. Under such circumstances, when penalty has been imposed on the appellant-company under Section 114A and goods have been confiscated and revalued for the purpose of levy of duty, some relief in quantum of penalty is warranted. Accordingly, the penalties on individuals would be as under: a. Shri Bhaskar Pramanik -- Rs.10 lakhs (Rupees ten lakhs only) b. Shri Ravi Vishwanath -- Rs.8 lakhs (Rupees eight lakhs only) c. Shri V. Radhakrishnan -- Rs.6 lakhs (Rupees six lakhs only) d. Shri Anand Kumar -- Rs.4 lakhs (Rupees four lakhs only) e. Shri Reji Kumar -- Rs.2 lakhs (Rupees two lakhs only) 57. Lastly, we have to consider whether penalty is imposable on M/s. DHL Express India Ltd., Bangalore under Section 112(a) of Customs Act, 1962. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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