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published on 18 Octobre 2019 | reading time approx. 8 minutes
The process of importing goods in India has undergone a significant change with the introduction of self-assessment system in the year 2011. However, several multinational companies who want to import goods in India still face challenges concerning HSN classification of goods, Customs duty rates and delays in customs clearance.
Specially in cases where the Indian entity imports goods from its related companies located outside India, the Indian importer has to undergo an additional procedure commonly called as the Special Valuation Branch (‘SVB’) process, which is considered to be extremely complex and time consuming. The said examination by the Customs authorities is required to verify whether the goods supplied by the supplier from outside India to its related importer have been invoiced at ”arm’s length price” or they have been “undervalued” for the purpose of reducing Customs Duty liability. The said process is exactly opposite to the Transfer pricing analysis under the Income Tax regulations which try to examine whether the goods supplied between related entities have been “overvalued” so as to reduce Income Tax liability in India.
The impact of the said process on the business is very critical. Incorrect valuation methodologies and submissions can result in a negative investigation report from the Customs authorities which can increase the overall Customs duty costs in the supply chain thereby, significant reducing the profitability of the Indian entity. Further, litigation with the Customs authorities in the aspect of valuation is also time consuming and can lead to additional costs.
Import of goods in India attracts Basic Customs Duty (‘BCD’) at applicable rates under the Customs Act, 1962 (‘Customs Act’) read with First Schedule to the Customs Tariff Act, 1975. Apart from BCD, additional customs duties equivalent to Goods and Services Tax commonly known as “IGST” (‘Import VAT’) and GST Compensation Cess is also applicable. However, GST Compensation Cess is applicable only on few specified commodities.
Further, import of goods in India also attracts an additional levy, so called ‘Social Welfare Surcharge’. The said surcharge is imposed on aggregate of Customs Duty levied at the time of imports, at rate of 10 per cent for majority of goods and 3 per cent for certain specified goods.
Apart from the above mentioned customs duties, specified goods also attract additional Customs Duties such as anti-dumping duty, safeguard duties etc.
Custom Duties are calculated on the ‘assessable value’ of the goods as per Section 14 of the Customs Act, which is the ‘transaction value’ agreed between the supplier and the importer subject to certain inclusions (such as freight, insurance etc) in the transaction value if not already included and subject to the condition that the buyer and seller are not related. In case the buyer and seller of the goods are related, the value is to be determined as per Customs Valuation (Determination of value of Imported Goods) Rules, 2007 (‘CVR’) framed in this regard.
The term “related” has been defined in Rule 2 (2) of the CVR to provide that buyer and seller shall be deemed to be "related" if
Therefore, typically all transactions involving import of goods by an Indian company and its holding company or any associated/affiliated Group company located outside India are considered to be transactions between related parties which are investigated by the Customs authorities.
The SVB is a special unit within the Indian Customs department which specializes in investigating the valuation of the transactions between ‘related persons’, as defined under Rule 2 (2) of CVR. Specific customs officials are posted to this department of customs who carry out the investigation and evaluate whether the intercompany prices of goods are influenced due to the relationship between the parties, with the intention to reduce the Customs Duty liability or not.
Presently, the Customs department has SVBs functioning at five Customs port cities namely; Bengaluru, Chennai, Delhi, Kolkata and Mumbai. As per the guidelines, the importer is free to select any Customs House for undergoing the SVB investigation based on its convenience. However, it is suggested to select the SVB department which is situated closest to the registered office of the related importer in India.
As per the prescribed procedures, following cases are not required be taken up for inquiries by SVBs:
SVB investigation is generally triggered immediately at the time of first import of goods by the importer from its related party imports, when, for the purpose of filing of Bill of Entry for customs clearance, the importer declares that the supplier is ‘related’ to the importer. In case of any unrelated party transaction, the SVB can also be triggered in case the importer declares that it is making additional payments to the supplier as prescribed in Rule 10 of the CVR.
As the SVB gets triggered when the first consignment from related party arrives at the customs port for clearance, given the documentary filing requirements and the subsequent registration process, it is advisable to prepare the said documents well in advance in order to avoid unnecessary delays in clearance of goods and consequent levy of delayed clearance charges.
Step 1:
At the time of import of first consignment of goods in India by an importer from its related suppliers, the importer is required to file several documents along with a so called “Annexure-A” which contains questions relating to relationship between the parties and manner of computation of transfer price. Based on the information/declaration filed in Annexure-A, the appraising cell of the customs authorities determines prima facie whether the declared value of imported goods is in line with the Customs valuation rules.
In case, the declared value of imported goods is acceptable to the authorities at port, final assessment is carried out without any reference of the matter to SVB. A reference number is allotted to the importer on the basis of which, value of subsequent imports between related parties is also accepted by the customs authorities.
However, in case, the authorities at port are of the view that further investigation needs to be undertaken with respect to valuation of imported goods, then the case is referred to the SVB and the imported goods are allowed to be cleared based on the provisional assessment. A case reference number is allotted by the SVB authorities in this case.
In order to facilitate the provisional assessment, the importer is required to execute a bond for provisional assessment with the customs authorities at the port of import. All subsequent imports are provisionally assessed till the final Investigation Report is issued by the SVB. In cases where the matter is referred to the SVB, importers can expect a delay in customs clearance of goods owing to the documentary requirements and a mandatory approval for referring the matter to SVB from Commissioner of Customs (Imports).
Step 2:
On reference of the case to the SVB, the SVB department registers the matter and issues a second questionnaire, a so called “Annexure B”, to the importer under a separate file reference number. The response to the said questionnaire is required to be filed by the importer within 60 days of its issue by the SVB.
In case the importer fails to furnish the response to the Annexure B within the prescribed time period of 60 days, an additional Extra Duty Deposit (computed at the rate of 5 per cent of the declared assessable value of goods) is also collected on subsequent import of goods cleared on provisional basis for a period of 3 months.
Step 3:
Post filing of Annexure B, the importer is required to file detailed written submissions to justify that the relationship between the importer and the supplier has not influenced the transaction value of goods within the framework of CVR. The said submissions are followed by personal discussions with the relevant officers, including additional submissions, if required.
Step 4:
Based on the information submitted and additional documents which may be called from time to time, the SVB authorities issues an Investigation Report (IR) (after obtaining the approval from the Principal Commissioner/Commissioner of Customs) directly to the customs authorities at the port of import with an intimation to the importer. The IR includes 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 within the framework of CVR.
As per CVR, the transaction value is acceptable subject to condition that the importer in India demonstrates that the transaction value declared is not influenced by the relationship with the seller of the goods. This can be done through various methods which are outlining in the CVR including comparison with identical/similar goods imported in India by unrelated importers (Rule 4 and 5), deductive value of imported goods (Rule 7) or computed value of imported goods (Rule 8). The cases relating to valuation have faced severe litigation in the past where the Indian judiciary has also suggested mechanisms for the Customs authorities to accept or reject the intercompany price of goods (for example, goods which are quoted in international databases such as London Metal Exchange, Global pricing of goods used for other subsidiaries internationally, justification based on cost of the imported goods etc).
Every case before the SVB authorities is unique and the submissions have to be prepared considering the facts of each case. In several cases, information is required to be furnished by the supplier located outside India as the manner of computing the pricing of goods is not shared with the importer in India. In case the importer is not able to justify the transaction value under the above discussed rules, CVR allows flexibility to the Customs officer to carry out a best judgement assessment.
As per Rule 10 of the CVR, additional payments made by the importer to the supplier over and above the consideration of goods are analysed in detail by the customs authorities in order to determine whether the said payments have a bearing on the Customs Valuation of goods. Some examples of additional payments typically made by the Indian subsidiaries of foreign companies are as follows:
Such payments made by the importer to the supplier of other associated/affiliated companies has been a subject matter of high litigation by the Customs authorities specially concerning payment of royalties and license fees. The matter has already reached the Supreme Court of India and the Court has pronounced divergent views. Sometimes, such decisions are based on the specific clauses of the intercompany agreements including the manner in which the consideration for such services is calculated. Therefore it is very important for the Companies to evaluate and assess the impact of such payments on the Customs value and draft the Intercompany agreements clearly differentiating the nexus between such payments and the imported goods.
In general, if the customs authorities are able to substantiate that the such payments are related to imported goods and paid as condition of sale of imported goods, then they would proceeded to add such payments in the value of imported goods thereby increasing the customs duty liability in India.
Once the transaction value declared by the importer is accepted by the SVB, the basis for accepting the transaction value is incorporated in the IR and the same is forwarded to the port of import. Based on the said IR, the port authorities carry out the final assessment of the provisionally assessed Bills of Entries which were filed pending the investigation and no separate order is passed. Going forward, the value of all goods subsequently imported by the importer from its associated companies are also accepted by the authorities till the time they do not find any contemporaneous imports to other unrelated parties in India at higher prices.
Once a IR disregarding the transaction value declared by the Importer is issued to the port of import, the proper officer at the port of import will issue a show cause notice to the importer within 15 days from the date of receipt of such IR with an intimation of the same to the SVB authorities. In case goods are imported from multiple ports, after issue of notices by the proper officers in the said locations, a common adjudicating authority would be appointed by the Board for the purpose of passing order for finalization of the provisional assessments at all ports.
In such case, the importer is required to file a detailed written submission against the allegations and justify the basis on which the transaction value should be accepted. The Customs port authorities have the right to take the final decision in this regard, which practically, is highly influenced by the suggestions of the SVB authorities. In case the Customs port authorities also reject the transaction value between related parties, an appellate mechanism is provided under the Customs Act where the importer can file an appeal and pursue the litigation further.
Circular No. 5/2016-Customs does not restrict the importer to import from multiple ports during the pendency or after finalization of the SVB proceedings.
However, practically, in case goods are imported at multiple ports before finalization of the SVB matter, the importer will be required to file Annexure A at all such ports along with a continuity bond and assess the bills of entries provisionally by referring the ongoing SVB investigation at the selected customs house. Further, suitable reference is also required to be made in its submissions before the SVB authorities of such imports through other ports. After finalization of the SVB proceedings, the IR issued by any one SVB is valid at all ports across India.
There is no sunset or validity limit for the IR issued by the authorities. Valuation methodology once accepted shall stay in force until the importer intimates the customs authorities, regarding any change in the circumstance surrounding the sale of goods (such as change in valuation methodology, additional payments by importer to supplier, execution of new intercompany agreements between the importer and its related parties outside India etc.). On filing of the declaration, the customs port authorities shall re-investigate the case based on the new facts and may refer the matter back to SVB for reconsideration.
Due to this, it is extremely important for the importer of goods to keep a track of such changes (for example, a new Intercompany Agreement) and declare the same to the SVB authorities as the re-assessment is based on self-declaration by the importer. Non-intimation/delay in intimation of such changes to Customs authorities may attract penal consequences.
The importer is required to file a declaration in Form Annexure C. Based on the declaration in Annexure C filed by the importer, the proper officer shall examine the transactions as and the jurisdictional Commissioner shall refer the matter to the jurisdictional SVB, where required.
While the documentation created for Income Tax transfer pricing purposes can be useful in explaining the facts to the Customs authorities, they cannot be the sole basis for the Customs authorities to accept the intercompany pricing of goods. This is due to the fact that Customs valuation is carried out under the different set of rules and the purpose of examination (Undervaluation of goods) is exactly opposite to the purpose of examination by the Income Tax authorities (Overvaluation of goods). It should be noted that in recent past, Customs authorities in India have started to request the importer to also submit the documents prepared for Income Tax transfer pricing purposes.
Anand Khetan
Partner
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Atish Laddha
Associate Partner
Devika Gandhi
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