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TMI Blog2023 (6) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... vided in the CBIC circular to this method in related party transaction cases. This CBIC circular remains applicable on equal footing to the importer following TPus method as per WCO guide as well as to any other related party importer. It is observed that the Rule 10 of CVR, 2007 stipulates addition of price elements on account of certain goods and/or services to the transaction value ill the correct transaction value. CBIC Circular provides that the transactions where any payments are sought to be made which are in the nature of instances given at (a) (Rule 10(1) (c)), (b) (Rule 10(1)(d)) and (c) (Rule 10 (1)(e)) above, shall be examined with respect to the need for S VB investigations. The applicant has stated that they are not making any such payments (in the form of royalty, license fee etc.) which are required to be added in order to arrive at the transaction value - the application of Rule 10 is not warranted due to absence of financial flows on account of any such cost elements. TPuS method clearly shows that the proposed transaction value is sum total of manufacturing cost (direct cost indirect cost) and administrative expenses, other expenses and profit represented by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued by SVB New Delhi. The order stated that the existing price is not influenced by the relationship between them and the Overseas Company and thus, the transaction value is acceptable for the purpose of customs valuation. 2.3. In 2016, they filed a declaration in the form prescribed vide CBIC circular no. 04/2016 for renewal of aforesaid SVB order. It was intimated by the authorities that the process of renewal of said SVB order is dispensed with, along with the direction issued to Deputy Commissioner of Customs, New Customs House, New Delhi, for finalization of provisional assessments as per the provisions of the said SVB order. 2.4. In 2017, the Directorate Revenue of Intelligence, Mumbai Zonal Unit conducted investigations into the applicant's imports, alleging undervaluation of imported goods. In 2020, the matter was adjudicated by the Commissioner of Customs (Import), ACC, Mumbai, and it was held that the imported goods were sold to unrelated buyers in India at a higher price and therefore, the customs value adopted by the applicant for related party transactions was rejected. Differential duty along with interest and penalty were demanded from the applicant. Being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from sales value to unrelated buyers in India at an aggregate level. The CAR shall be computed in percentage terms, as a proportion of the manufacturing costs. For instance, CAR, as a proportion to manufacturing costs is X%, then the X% CAR shall be applied for each good to be imported into India by the applicant from overseas companies. 2.8. The CAR will be determined for all the subsidiaries of the Overseas Company in different countries to determine the EBIT of similar comparable companies. The value of CAR will be fixed for a defined period (e.g., a financial year). 2.9. The value of CAR will be determined before the import of products in India based on the estimated sale value and target EBIT. The Customs duty liability will be discharged on the entire value including manufacturing costs and CAR value at the time of actual import. 2.10. At the end of the financial period, the value of CAR will be reviewed. The applicant expects that there should be no significant deviation between the estimated CAR value and the CAR value emerging from the year-end review. 2.11. In view of above, the applicant, in order to obtain certainty on treatment of declared value under the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the transaction value as detailed above is not acceptable as Customs value, then the said value should be determined sequentially on the basis of Rule 4 to 8 of CVR, 2007. 2.20. Most of the goods imported by the applicant are customized as per the customer's need and enjoy a brand value associated with the applicant. They cannot be compared to any unbranded product / other brand's product imported into India. Further, post adoption of TPuS, the overseas Company will export such products to only the applicant and no other importer in India. Hence it will not be feasible to apply Rule 4 to imports by the applicant. 2.21. The goods imported by the applicant enjoy a distinct brand value and therefore, cannot be compared with any other products. Hence, it is not feasible to apply Rule 5 to the imports of the applicant. 2.22. Rule 6 states that if the value of imported goods cannot be determined under the provisions of Rules 3, 4 and 5, the value shall be determined under the provisions of Rule 7 or, when the value cannot be determined even under Rule 7, then recourse under Rule 8 should be taken. 2.23. Rule 7 provides for arriving at the value on the basis of dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss for arriving at valuation of imports for transactions between the applicant and its related entities, i.e. the Overseas Company and its entities, is consistent with the principles prescribed under Section 14 of the Customs Act, 1962 and the CVR, 2007. Hence the transaction value arrived at, by application of the said methodology, is acceptable as Customs value under Indian Customs Act, 1962 and the CVR, 2007, which may be considered for SVB Investigations. Applicant's CAAR-1 application seeks a ruling on whether the principles to be adopted for valuation of goods under a process called Transfer Price System and Steering Concept ('TPuS') (for determination of price at which the goods will be imported by Sick India Private Limited ('the Applicant') from Sick AG, Germany and other related entities ('Overseas Company'), are consistent with Section 14 of the Customs Act, 1962 ('the Customs Act') read with the Customs Valuation (Determination of Values of Imported Goods) Rules, 2007 ['the CVR, 2007']. Based on these submissions the applicant requested to issue the ruling. 3. A personal hearing was held on 17.11.2022. The applicant was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch. It is important to note that the methodology proposed to be adopted by the applicant for arriving at transaction value for the purpose of levy of Customs duty w.e.f. 1 st May 2023 is different from the methodology adopted till today. The applicant has submitted that the most of the goods imported by the applicant are customized as per the customer's need and enjoy a brand value associated with the applicant. They cannot be compared to any unbranded product / other brand's product imported into India. Further, post adoption of new method of valuation w.e.f. 1 st May 2023, the overseas company will export such products to only the applicant and no other importer in India. Due to this submission of the applicant I find that the discussion of past activities involving SVB compliance as well as DRI investigation is not appropriate here. I also agree with the contention that the application has been correctly submitted with by the applicant with respect to Sr. No. 11 and 12 of CAAR-1 form. 4.3 Section 14 of the Customs Act, 1962 governs the valuation of goods for the purposes of the Customs Tariff Act, 1975 or any other law for the time being in force. It stipulates tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of manufacturing costs of Overseas Company and an amount based on the CAR- Commercial Adjustment Rate percentage ('CAR%'). The CAR value will be determined after deducting all costs and a target operating margin ('EBIT') of the applicant from sales price charged to unrelated buyers in India at an aggregate level. The CAR shall be computed in percentage terms as a proportion of the manufacturing costs. The CAR% will be determined before the import of goods in India on the basis of the estimated sale price charged to unrelated buyer and target EBIT of the importer (an applicant). The Customs duty liability will be discharged on the value representing the sum of manufacturing costs and CAR value at the time of actual import. The CAR will include administrative and other expenses of the overseas company and its profit. The Oversees Company will recover all its costs and a profit from the applicant under TPuS. At the end of the financial period, the value of CAR will be reviewed. The applicant expects that there should be no significant deviation between the estimated CAR value and the CAR value emerging from the year-end review. Applicant has submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inquiry, he should give the importer an opportunity to supply such further detailed information as may be necessary to enable him to examine the circumstances surrounding the sale. In this context, the proper officer of customs should be prepared to examine relevant aspects of the transaction, including the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at, in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and seller, although related under the provisions of rule 2(2), buy from and sell to each other as if they were not related, this would demonstrate that the price had not been influenced by the relationship. As an example of this, if the price had been settled in a manner consistent with the normal pricing practices of the industry in question or with the way the seller settles prices for sales to buyers who are not related to him, this would demonstrate that the price had not been influenced by the relationship. As a further example, where it is shown that the price is adequate to ensure recovery of all costs plus a profit which is representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods being valued; Provided that such transaction value shall not be the value of the goods provisionally assessed under section 18 of the Customs Act, 1962. (b) In applying this rule, the transaction value of identical goods in a sale at the same commercial level and in substantially the same quantity as the goods being valued shall be used to determine the value of imported goods. (c) Where no sale referred to in clause (b) of sub-rule (1), is found, the transaction value of identical goods sold at a different commercial level or in different quantities or both, adjusted to take account of the difference attributable to commercial level or to the quantity or both, shall be used, provided that such adjustments shall be made on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustments, whether such adjustment leads to an increase or decrease in the value. (2) Where the costs and charges referred to in sub-rule (2) of rule 10 of these rules are included in the transaction value of identical goods, an adjustment shall be made, if there are significant differences in such costs and charges between the go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deductions . (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. Further the Interpretative Note to rule 7 states as follows; l. The term unit/price at which goods are sold in the greatest aggregate quantity means the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a manufacturing cost, all other expenses, and profit of the related party exporter. Applicant is proposing to effect an adjustment that is required to be made to such declared price upward or downward after the end of financial period/ financial year and discharge the remaining Customs duty and other liabilities accordingly, if any. 4.7 The applicant is seeking a ruling on whether the value arrived by using the above method is consistent with the provisions of Section 14 of the Customs Act, 1962 read with the CVR, 2007. In this context, I find that the CBIC has issued a Circular no. 5/2016 dated 9.02.2016 on the issue of Procedure for investigation of related party import cases and other cases by the Special Valuation Branches . On examination of the contents of the application as well as arguments put forth during the course of hearing I find that the CBIC Circular No. 5/2016-Customs dated 9th February, 2016 is relevant for all related party transactions Moreover, CBIC circular 5/2016 dated 09.02.2016, as stated in para 2 therein, has taken cognisance of WCO's Guide to Customs Valuation and Transfer Pricing (June 2015) which recognises TPuS method, however there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R, 2007 4.2 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. It is observed that the Rule 10 of CVR, 2007 stipulates addition of price elements on account of certain goods and/or services to the transaction value ill the correct transaction value. CBIC Circular provides that the transactions where any payments are sought to be made which are in the nature of instances given at (a) (Rule 10(1) (c)), (b) (Rule 10(1)(d)) and (c) (Rule 10 (1)(e)) above, shall be examined with respect to the need for S VB investigations. The applicant has stated that they are not making any such payments (in the form of royalty, license fee etc.) which are required to be added in order to arrive at the transaction value. I find, in the instant case, that the application of Rule 10 is not warranted due to absence of financial flows on account of any such cost elements. TPuS method clearly shows that the proposed transaction value is sum total of manufacturing cost (direct cost indirect cost) and administrative expenses, other e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from benchmark price are similar to those prescribed in Interpretative note to Rule 7 of the CVR, 2007. Applicant has mentioned that at the end of the financial period, the value of CAR will be reviewed and finalized. Applicant has proposed to effect an adjustment that is required to be made to such declared price (transaction value) - upward or downward - after the end of financial period/financial year and discharge the remaining Customs duty and other liabilities as per the law accordingly, if any. It goes without saying that, since all elements of transaction value cannot be definitively determined at the time of imports, the assessment has to take place on provisional basis until adjustments are made based on actual accounting data and further acceptance by the concerned Customs authorities. 5. On the basis of foregoing discussion, I rule that the applicant's proposed valuation method, Transfer Pricing System and Steering Concept (TPuS) method also known as Resale Price method/Resale Minus method, for determination of transaction value under Section 14 of the Customs Act 1962 for goods proposed to be imported from the related party suppliers, after compliance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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