NOVEMBER 07, 2014

By Subhash Chand Jain, Advocate

1. CENTRAL Board of Excise and Customs (CBEC) has set up Special Valuation Branches (SVB) in Custom Houses of big cities viz. Delhi, Kolkata, Chennai, Mumbai and Bangalore. The objective behind setting up of these SVBs was that these branches will be manned by expert officers of Customs who have in-depth knowledge of Customs Valuation and of all intricate matters incidental there to in cases where the goods are imported from related parties. The idea behind such SVBs was to see whether the 'transaction value' in the case of transactions between related parties is genuine and is based on purely commercial considerations or has been influenced because of the relationship between the parties. In this article we will examine whether these SVBs are relevant in any manner in the ground realities of the modern day world.

Legal Basis

2. There is no provision under Section14 of the Customs Act, or under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 providing the examination of transaction value by a specifically constituted SVB. Rule 3(3) of the Customs Valuation Rules, 2007 merely proposes an obligation on the importer to establish the genuineness of transaction value by any of the Customs Valuation Rules (viz. deductive value, computed value or identical/ similar goods method etc.) or to establish that circumstances of the case indicate that the transaction value is based on purely commercial considerations. Beyond the probable inference from the provisions of Rule 3(3) of the Customs Valuation Rules, there is no statutory support anywhere under the law for the setting up of such SVBs. The said satisfaction of the correctness of the transaction value has to be done before the proper officer of the customs at the respective port of import from where the goods are imported. It is the assessing officer who has to be satisfied with regard to correctness of the value of the imported goods between related parties.

3. The entire scheme of SVB flows from Circular No. 11/2001-Cus dated 23.2.2001 which prescribes the setting up of SVBs manned by the expert persons for the examination of the valuation aspect in the case of transactions between related parties. The said circular also provides the deposit of 1% or 5% EDD till the time SVB order is passed. The said deposition - pending the finalisation of the order, are purely arbitrary in nature as they do not flow from any legal provision. Likewise, the other propositions like review of the order after the expiry of every three years do not have any legal backing. Further calling such SVB orders as adjudicating orders is highly improper particularly when these orders are quite frequently amended by issuance of addendum or corrigendum or are reviewed by the same authority from time to time.

4. In nutshell the SVBs have been set up on the basis of circular issued by CBEC which does not flow from any statutory provisions.

Manpower of SVBs

5. The said SVBs are supposed to be equipped with expert officers having in-depth knowledge in the customs valuation. But unfortunately over a period of time, in majority of cases, the persons who are facing some vigilance inquiries are transferred to SVBs considering them as 'non-sensitive' postings. Majority of persons working in SVBs do not have even the basic knowledge about the valuation provisions under the customs law.

6. As a consequence the very idea that these branches would be equipped by experts has failed and lost its sanctity. Further, even the Deputy Commissioner/ Assistant Commissioner In-Charge of the SVBs are burdened with multiple charges and as a result do not have any time to devote for SVBs. Consequently, hundreds of cases of various importers are pending for years despite the mandate in the aforesaid circular that the SVB order has to be passed in four months. The importers in the meanwhile are compelled to pay the EDD of 1% or 5% (even though the Circular No. 11/2001-Cus provides that no loading would be done if the SVB order is not passed within four months from the date of submission of questionnaire). At some ports the consignments of the imports are held up by the assessing officer for want of SVB order and the importer has to run from the pillar to post to clarify that the pendency is not on account of his fault but it is because of lethargic attitude of the customs officers manning the respective SVB.

7. In nutshell, the said SVBs have become the burden on the Customs and also on the importers due to lack of proper manpower and due to non-passing of timely orders. The sooner these SVBs are wound up, the better it would be in the interest of the Customs, importers and the country as a whole as they do not serve any useful purpose.

Tendency of the Importer

8. The most important question that arises for consideration is whether the importer importing the goods from its related companies overseas would tend to import the goods below the commercial value or over its commercial value. This aspect has to be examined seriously and in ground reality of our economy.

9. In our country, parent/controlling companies of majority of the MNCs are located abroad. The Indian companies are their subsidiaries who act upon the direction of their parent companies. The parent companies' tendency logically would always be there to supply goods at the maximum possible value so that the maximum profit is earned by the parent company at the time of supply of goods itself. It would be quite illogical that the parent company abroad would supply its goods below normal price in order to save customs duty because any short payment of the customs duty as a result of strategic planning would result in more profit and consequently will attract more income tax in India.

10. It is ironical to note that the multinational companies in India have to pass through the rigorous test before the income tax authority and also customs authority. Both the authorities are working under the same finance ministry but the objective of authorities is contrary to each other. Income tax authorities examining the valuation of the goods see whether the imported goods are being valued fairly or they are over-valued in order to save the income tax. Whereas customs authority examine from the point of view whether the transaction value is correct or the goods are under-priced in order to save the customs duty. Obviously, the tendency of each controlling company abroad would be there to supply its goods at the highest possible price so that it can get the maximum profit in its own country leaving the bare minimal margin to this subsidiary company in India. This fact can be verified from the balance sheets of these companies where one would see that after meeting the expenses all companies earn the profit in the range of 3-8%.

11. The logic of tendency to do the overvaluation is very simple instead of doing the undervaluation. In case of undervaluation, the importing company would save the custom duty of Rs.23% approx. (10%+12% +cess) but would result in payment of more income tax. For example if a company undervalues its imported goods by Rs.100/- then it may save Rs.23 but its income would increase by Rs.100 on which it would be required to pay the income tax of Rs.33. Obviously, no prudent company will do it. Moreover, on the remaining income in hand of the Indian company, it would be required to pay the dividend tax as and when the profit is distributed by way of dividend to the foreign company.

12. In nutshell, a foreign related company would always be interested in over-invoicing its goods and not under-invoicing as it serves no purpose. Therefore, from objective point of view also, these SVBs serve no purpose.

13. From the orders passed by the SVBs from time to time wheresoever loading has been ordered the same have been set aside by the higher appellate authority (in majority of the cases) as the said loading was found to be arbitrary and contrary to the statutory provisions. This fact can be independently verified from these SVBs working under the customs.

Conclusion:

14. The SVBs set up under the Customs are of no use. There activities merely result in unnecessary correspondence and litigation. In case of any doubt on the valuation of the imported goods, the respective assessing officers can examine the price by asking more information from the importer. Therefore, these are merely wastage of manpower and money and should be disbanded as early as possible in the interest of the Customs department, importers and the country as a whole.

(The author is Managing Partner of RSA Legal Solutions.)