FEBRUARY 22, 2016

By Dinesh Kumar Agrawal, CA, Ex-IRS

BOARD Circulars 4/2016 and 5/2016 both dated 9.2.2016 have comprehensively revised the procedure for examination of related party transactions by the Special Valuation Branch ('SVB').  Presently SVB investigates transactions involving relationship and certain other special features like technical collaboration etc. between the supplier and the importer to determine influence of the relationship on the invoice value of the imported goods. Presently SVBs housed in Mumbai, Delhi, Chennai, Kolkata and Bangalore takes up cases of the importer most proximate to their corporate office. Usually SVB mandates provisional assessment with 1% Extra Duty Deposit ('EDD') till finalization of the case, and case is finalized by issuing an appealable order subject to periodical review after every 3 years.

Circular 4/2016

+ Automatic renewal of existing SVB orders pending renewal by filing One Time Declaration by 31 May 2016 if there are no change in the circumstances surrounding the sale of goods between the parties. EDD shall be discontinued and provisional assessments shall be finalized based on SVB order under renewal.

+ If any change in the circumstances surrounding the sale of goods between the parties is reported by the importer enquiries shall be initiated as per Circular 5/2016.

+ In case of pending SVB investigation where importers have provided requisite information and documents, EDD shall be discontinued forthwith.

Circular 5/2016

+ Initial 1% EDD pending SVB investigation is dispensed with. 5% EDD shall be collected for a period not exceeding three months if requisite information and documents are not submitted within 60 days of the requisition. At the option of the importer, EDD can be either by cash or Bank Guarantee.

+ Investigation by SVB in the following cases dispensed with:

a. Import of samples and prototypes from related sellers

b. Imported goods are unconditionally fully exempt from customs duty or nil

c. Value of imported goods is less than Rs. 1 lac per transaction provided cumulatively value of imported goods do not exceed Rs. 25 lacs.

+ Importer to furnish requisite information at the time of first import to enable the jurisdictional Commissioner to judiciously decide on the reference of cases to SVB for further investigation.

+ Appraising officers are allowed to decide cases involving royalty, license fee and flow back without referring to SVB. Importers are advised to file advance Bill of Entry to allow sufficient time to make a decision on reference of the case to SVB.

+ SVB to investigate and quantify the extent of influence on the transaction value and submit an investigation report ('IR') to the jurisdictional Commissioner for issuance of a show cause notice to the importer by the proper officer. Wherein it is found that relation has not influenced the transaction value, provisional assessment shall be finalised forthwith without any notice or speaking order.

+ SVB shall complete the investigation within 2 months of receipt of requisite information and documents from the importer which can be extended by the Commissioner for a period of another two months and by the Chief Commissioner for an appropriate period where the investigation is not completed within 4 months. All pending investigation (commenced upto 31.12.2015) shall be completed by 31.10.2016

Dispensing with periodic renewal of SVB order and EDD are laudable steps that will go a long way in boosting 'Ease of Doing Business' and 'Make in India' initiatives by reducing transaction cost and SVB pendency.

It was expected that CBEC will show leadership in these noble initiatives but, alas , the Board has gone for a myopic overhaul in laying down new SVB procedures.

Before we proceed further, we must know what is plaguing the existing system. Every single related party importer complaints about rampant corruption, inordinate delays in completing investigation, loading on invoice value on flimsy grounds, inordinate delays in finalising provisional assessments on the basis of SVB orders, and finally rejection of refund of EDD where invoice value has been accepted again on flimsy grounds like non-submission of import documents, unjust enrichment etc.

In earlier drives to reduce SVB pendency, files were distributed to officers in charge of other sections. These officers neither had time nor energy or motivation to judiciously decide the case and therefore most of them ordered loading of value ranging from 20% to 100% on the invoice value. All such orders were remanded by the appellate authority resulting in piling of the remand cases in SVB. Therefore direction to complete all pending investigation (commenced upto 31.12.2015) by 31.10.2016 looks laudable but its implementation, if we go by our past experience, will leave a very bad taste in the mouth of the trade until and unless the Board fix accountability for such injudicious orders on the concerned DC/AC as well as Principal Commissioners/ Commissioners.

Under the existing system of adjudication, proper officer of the SVB, after granting personal hearing was passing an appealable order. Thereafter, the importer has to approach the concerned assessing officer for finalizing provisional assessments. As this lead to multiple streams of appeals for the trade, Board under new procedure has prescribed SVB to submit IR to referring customs formation for issue of show cause notice where loading is proposed. Now, it is quite possible that an importer may be clearing goods through various ports. Thus, there would be multiple show cause notices to the importer from each such location from where he has imported. Board has foreseen this possibility and therefore has directed the jurisdictional commissioner of the SVB to make a proposal to the Board for appointment of a common adjudicating authority for the purpose of passing order for finalization of the provisional assessments.

The above procedure will lead to chaos and undo everything which the Board has sought to do in furtherance of 'Ease of Doing Business' and 'Make in India' initiatives. Let's assume that an importer import goods from related party at Chennai and Mumbai port. Based on the IR submitted by SVB, Chennai and Mumbai customs issues show cause notice to the importer and Board appoints Commissioner of Customs, Mumbai as the common adjudicating authority. Common adjudicating authority orders for loading of value say by 10% on the invoice value. Being aggrieved with the speaking order, the importer has to file an appeal in the Tribunal. As per the existing practice, importer has to file two appeals one before the CESTAT, Mumbai and another before the CESTAT, Chennai as cause of action (show cause notice) arose in their respective jurisdictional territories Ambica Industries - 2007-TIOL-97-SC-CX.

Now let's proceed further. All assessments subsequent to speaking order would be subjected to loading and therefore against each such assessment order, the importer would be required to file an appeal. The importer would not be able to get consequential relief on such subsequent imports if the said speaking order is quashed in appeal proceedings as consequential relief would be subject to the judgments in the cases of Flock (India) Pvt. Ltd. - 2002-TIOL-208-SC-CX and Priya Blue Industries Ltd. - 2004-TIOL-78-SC-CUS. Thus, there are bound to be multiplicity of appeals in multiple forums till final disposal of the case, may be, by the Supreme Court which may take a decade.

Under the new procedure, appraising groups have been asked to decide on cases involving involving royalty, license fee and flow back. One is not clear as to how appraising groups will decide in cases involving lump-sum payment of royalty or license fee. Further, each appraising groups of same customs house or different custom houses will adopt different methods to determine the quantum of loading. Thus, situation would be ever fluid for the importer.

It seems that Board has found a cure for the SVB woes which is more horrendous than the disease itself. Board must shed its ambivalent and hand-off approach and proactively compile a manual of valuation clearly spelling out the circumstances under which loading is required to be made and also the circumstances under which no loading can be made. Further SVB should continue to issue appealable orders but wherever loading is proposed, such loading should be preceded by a show cause notice clearly spelling out the grounds of such loading. Furthermore, SVB officer must be designated as proper officers under Section 17 and 18 of the Customs Act having all India jurisdiction for finalisation of all provisional assessments made at any port in India. SVB orders must quantify the demand/refund, if any, arising on finalisation of such assessment. This would obviate the requirement of corresponding orders at the importing port for finalisation of provisional assessments. Thus, SVB orders should be deemed to be an order for determination of value in case of related party transactions as well as assessment order under Section 18 of the Customs Act. And, last but not least, SVB officers must be re-trained to adhere to the best practice followed internationally.

Ease of Doing Business' and 'Make in India' initiatives sounds hollow when foreign investors are made to face never ending gruelling experience of SVB. Every foreign investors participating in 'Make in India' initiatives, at one point of time or other, would import goods, services and technology. If we continue to have a regime which results in perpetual fluid situation and multiple litigation, the damage would be irreversible and irreparable. It's high time that Board must choose correct prescription and deliver to the nation.

[The author is executive director of Khaitan & Co, Advocates and the views expressed in this article are his personal.]