OCTOBER 29, 2018

By S C Jain, Partner RSA Legal Solutions

THE cumbersome process of Special Valuation Branch (SVB) Investigation was previously governed by the CBEC Circular No. 11/2001-Cus dated 23.02.2001. The said process entailed deposit of Extra Duty Deposit (EDD) @ 1% or 5% pending SVB Order. The said SVB order was to get renewed after every 3 years. The said SVB orders were contrary to the adjudicating process where own order was to be reviewed by the same officer after every 3 years. The said SVB orders were passed without any lis between the parties. Besides, the said SVB orders lacked jurisdiction because it is totally inconceivable as to how an officer who has passed the SVB Order from Delhi can be binding on the proper officer in respect of the goods imported at Nhava Sheva. The expressions 'Proper Officer' used at various places in the Customs Law has its connotations and limitations. There was no notification under the Customs Act whereby the SVB officers were appointed as the proper officer. In nutshell, the entire practice and approach in this regard was totally illegal as it did not flow from legal provisions.

2. Looking into the difficulties and infirmities in the SVB process flowing from the Circular No. 11/2001-Cus, CBEC issued two new Circulars No. 4/2016 and 5/2016 both dated 09-02-2016. From the tenor of the said circulars, it appeared that now the CBEC has simplified the SVB process to facilitate the Ease of doing business in India particularly for the Multinational companies who set up their manufacturing units or undertake trading activities and bring valuable foreign exchange in the country.

3. In the revised SVB process, the practice of EDD deposit and SVB order was dispensed with and in turn the practice of SVB investigation was initiated. However, over this period of more than 2 years since the application of these two circulars it has been noted that problems being faced by the importers for their imports from their related parties remain unabated.

4. In the name of SVB investigation, frivolous information and documents are demanded by the SVB officials. The import consignments are held up at various ports in the name of the clearance from the SVB branch. Sometimes even their production is stopped for want of NOC/Investigation report/ clearance from the SVB.

It is unnecessary and wasteful exercise

5. In fact, there is no need of any SVB Investigation or SVB order as it serves no purpose at all. From the following points it would be clear that it is absolutely meaningless exercise which does not serve any purpose:

I. All persons importing the goods from their related parties essentially have to go through the process of transfer pricing under the income tax law. Under the provisions of the income tax law, an in-depth study is carried out. The spectrum of analysis under the 'transfer pricing' is much wider as compared to SVB process as it includes the import of services and export of goods as well within its ambit.

II. The income tax authorities examine the issue to see as to whether the goods are being overvalued in order to show the lower amount of profits in India to minimise the income tax in India. From the perusal of the balance sheets of the various Multinational companies, it would be seen that the value of their imported goods is always on the higher side and maximum margins of 10-15% are left for the related parties in India so as to satisfy the requirement of the 'transfer pricing'. Obviously, no person would like to undervalue the goods because in that event its income tax liability would be more where it is liable to pay the income tax about @ 35%. Thus the parallel SVB investigation hampers their business operations in India. In case of need, the TP report itself should be considered as valid by the assessing groups.

III. There is no legal sanction for this SVB process: It is well settled legal position that the circulars are issued only to clarify the existing statutory provisions of the Act or Rules. Circular per se cannot prescribe a detailed law which is not supported by any legal provision. In fact, it is Rule 3(3) of the Customs Valuation Rules, 2007 which deals with the import of goods from related parties. The said provision is as under:

3(3) (a) Where the buyer and seller are related, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicate that the relationship did not influence the price.

(b) In a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value of the goods being valued, closely approximates to one of the following values ascertained at or about the same time. 

(i) the transaction value of identical goods, or of similar goods, in sales to unrelated buyers in India; 

(ii) the deductive value for identical goods or similar goods; 

(iii) the computed value for identical goods or similar goods: 

Provided that in applying the values used for comparison, due account shall be taken of demonstrated difference in commercial levels, quantity levels, adjustments in accordance with the provisions of rule 10 and cost incurred by the seller in sales in which he and the buyer are not related; 

(c) Substitute values shall not be established under the provisions of clause (b) of this sub-rule. 

IV. From the above, it would be seen that there are two limbs of Rule 3(3) which mandates the acceptance of the transaction value. One is examination of circumstances under Rule 3(3)(a) with regard to sale of goods to the related parties. The circumstances like existence of TP report, past conduct of the importer, profit margins shown in their balance sheets etc. are self-sufficient to hold that transaction value has to be accepted. In case, TP report is there accepting the transaction value, or there has been no fraudulent case against the importer or the margin of profit as available from the audit balance is within the range of 10-15% of the turnover, then the transaction value should be accepted by the assessing group. At best, an affidavit in this regard may be taken from the importer. But certainly, there is no need for any detailed SVB study / investigation etc because the surrounding circumstances suggest that the 'transaction value' is fair.

V. In cases where the situation does not fit in Rule 3(3)(a), then the importer may be asked to produce a CA certificate and an affidavit confirming that the prices are at an arm's length by way of any of the methods specified in Rule 3(3)(b). Again, there is no need for a separate and detailed SVB investigation. If at any point of time, it is noted that the value declared is incorrect, then the action can always be taken against the erring importer. In other words, even to satisfy the rigours of Rule 3(3), there is absolutely no need for the cumbersome SVB process.

VI. Besides this Rule 3(3), there is no provision under Section 14 or any other rules from which it can be inferred that this type of procedure is needed. It is also noteworthy that the related party concept normally applies to the multinational companies which are otherwise very renowned and reputed companies and all their transactions are duly recorded in books of accounts. Therefore, even otherwise, in case of any under valuation, routine investigation at any point of time can be carried out and differential duty can be demanded under section 28 without resorting to SVB procedure. Thus, it can be said that the procedure of SVB as prescribed by Circular No. 4/2016 and 5/2016 both dated 9.2.2016 is in the nature of the substantive law and not a clarification of the existing provision of law. In other words, the SVB investigation procedure by way of circulars has no legal sanctity and should be scrapped.

VII. From the factual matrix, all of us know that Indian markets are flooded with Chinese products. Majority of the goods imported from China are highly undervalued. In fact, a solid mechanism needs to be made to curb these types of malpractices in respect of the goods imported from the countries like China. Pathetically, no reliable mechanism is in place in respect of the goods imported from the countries like China (from where there is actually huge duty evasion by unrelated parties) but an unnecessary system is in place for the multi-national companies in the garb of SVB investigations where all transactions are duly recorded.

VIII. If the SVB orders (and now the SVB investigation) carried out by the SVB authorities are analysed, it would be seen that in a very few cases, loading is ordered/recommended. Even in those case, appeals are filed and eventually matters are decided in favour of importers. Thus barring few importers where they are willing to accept the loading, there may not be even a single case where the loading in value has seen the light of the day.

IX. The importer has to undergo the very cumbersome process whereby all sort of irrelevant information and documents are demanded. Even if one additional related party is sought to be added, all the standard documents like balance sheet of three years, TP reports etc. are demanded despite the fact that the importer gives a declaration that even for the new related party, same methodology was applicable.

From the perusal of the above stated grounds it can be easily concluded that the SVB investigation is neither mandated under law nor serves any fruitful purpose. It results only and only in harassment and corruption. Besides, it is totally contrary to the concept of ease of doing business. It would, therefore, be a wise move on the part of the CBIC if the so-called investigation by the SVB is scrapped.