By TIOL News Service

CHENNAI, OCT 18, 2014: THE brief facts of the case are that the appellant is registered with Software Technology Park of India for development of software and Information Technology Enabled Software and export thereof. They are availing full exemption from payment of Customs duty under Notification No.52/2003-Cus on imports i.e. Desktops, Laptops etc. from various suppliers and other equipment from Google Inc. USA. Since Google Inc. (Supplier) holds one share (0.001%) in the appellant-company and Google International LLC holds 99.99% of shares in the Indian company i.e. appellant. and the Board of Directors of the appellant-company are also represented by employees of Google Inc., USA, the Customs Special Valuation Branch, Chennai had questioned the valuation and the Deputy Commissioner (Customs), Special Valuation Branch, Chennai vide o-in-o held that both the appellant and Google Inc., USA are related in terms of Rule 2 (2) of Customs Valuation Rules, 2007 & rejected the declared invoice price and ordered for loading price by 20% and 41.125% if the invoice is CIF or FOB basis respectively.

The Commissioner(A) upheld this order and, therefore, the appellant is before the CESTAT.

The Bench after considering the submissions made by both sides observed –

++ We find that appellants are registered with STPI for development and export of computer software under information technology to overseas. Being a STPI unit, they availed exemption on all their imports at NIL rate of duty under Notification No.52/2003-Cus. dt. 31.3.2003. In spite of appellant being a registered STPI unit, the Special Valuation Branch examined the relationship for valuation and the Lower authority has ordered for loading the invoice price on all imports supplied by M/s.Google Inc. USA under Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and the same was upheld by the Lower Appellate Authority.

++ We find that out of four issues on which loading has been ordered by the lower authority, namely freight, insurance, overheads, profit margin, the appellants are not contesting the loading of freight and insurance elements in their invoice price. They are contesting only on the two issues of loading of overheads (10%) and profit (10%). Accordingly, we proceed to discuss the issue in respect of these two issues.

++ As regards overheads, we find that lower authority has ordered for 10% of loading on the invoice price on account of overheads for the period from 2006-08. As seen from the records, the works sheets and other documents produced by the appellants, we find that for the period after April 2008, M/s.Google Inc. USA has started computing the Material Overhead (MOH) on all the goods supplied to the appellants…It is seen from records that since the invoice price for all the imports made after April 2008 the cost of overheads already built in the invoice price, further addition of 10% as overheads on the invoice price will certainly amount to loading overheads twice.

++ For the shipments made from April 2006 to April 2008, the appellants have admitted that their supplier has not made any addition of overheads in the invoice price. The lower authority by taking into various factors has ordered for loading only a nominal 10% which appears to be well within the provisions of the Rules. Considering the fact that for the post-2008 imports, the percentage of overheads as arrived by the supplier from 5% to a maximum of 38%, whereas the lower authorities have ordered for only 10% which is just and reasonable. Accordingly, we are of the considered view that addition of 10% under 'overheads' on the imports made from April 2006 to April 2008 is justified.

++ As regards loading of 10% profit in the invoice price, on perusal of records and the findings of the adjudicating authority, we find that the lower authority has not brought out any reasons for arriving the quantum at 10% towards profit margin….It is also seen that lower authority has held that on the basis of common trade practice that any supplier of the imported goods normally adds profit margin in the normal course of transaction value. We find that although there is no dispute on the fact that both the supplier and the appellants are related persons in terms of Rule 2 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, M/s. Google Inc. USA are not selling the goods and buying for trading purpose but being a principal company of the appellant, they have procured the goods on the global basis for supply to their own affiliated group companies located across the world.

++ It is evident that the goods supplied to the appellant are not for making any profit. The lower authority has ordered for loading of 10% on notional basis which is purely based on the trade practice. We find that in terms of the Valuation Rules, notional profit element shall be added to the invoice price for arriving at the transaction value. Therefore, taking into consideration the above facts, we find that the loading of 10% profit margin on the invoice value appears to be on the higher side. We are of the considered view that since the appellant is a STPA unit and also taking into the fact that the imports made by the appellant from the supplier i.e. Google Inc. is only for the purpose of development of software and export and also taking into consideration that the principal supplier has not sold these goods to any third party but supplied to their affiliated companies only, loading of a nominal profit of 1% (one percent) on the declared value would suffice.

Conclusion:

(a) 10% of loading of overheads on all imports made prior to April 2008 is upheld.

(b) 10% of loading of overheads on imports made post - 2008 is liable to be set aside.

(c) Loading of 10% notional profit for all imports made would be reduced from 10% to 1%.

The appeal was partly allowed.

(See 2014-TIOL-2028-CESTAT-MAD)