F.No.Val/Policy/22/2005                                          Mumbai, 29^th September, 2005

 

 

To,

The Chief Commissioner of Customs

Mumbai Zone I / Mumbai Zone II / Ahemdabad / Chennai / Delhi / Kolkatta.

 

 

Sir,

 

                Sub : Conference of Chief Commissioners on Valuation – reg.

 

 

            Please refer to this Directorates letters dated 23^rd and 28^th September, 2005 concerning the above cited matter.

 

2.         Please find enclosed the brief and comments of the Agenda points A to H, approved for discussion in the conference on Customs Valuation issues to be held on 1^st October, 2005 in Mumbai.

 

 

Yours faithfully,

Sd/--

N. SASIDHARAN

COMMISSIONER (VALUATION)

 

 

Encls : As above (by e-mail)

 

 

F.No.Val/Policy/22/2005                                          Mumbai, 29^th September, 2005

 

 

To,

The Chief Commissioner of Customs

Mumbai Zone I / Mumbai Zone II / Ahemdabad / Chennai / Delhi / Kolkatta.

 

 

Sir,

 

                Sub : Conference of Chief Commissioners on Valuation – reg.

 

 

            Please refer to this Directorates letters dated 23^rd and 28^th September, 2005 concerning the above cited matter.

 

2.         Please find enclosed the brief and comments of the Agenda points A to H, approved for discussion in the conference on Customs Valuation issues to be held on 1^st October, 2005 in Mumbai.

 

 

Yours faithfully,

Sd/--

N. SASIDHARAN

COMMISSIONER (VALUATION)

 

 

Encls : As above (by e-mail)

 

 

Copy to :

1.       Shri. A. P. Sudhir, Member (Cus.), CBEC, North Block, New Delhi.   

2.       Shri. S. Dutt Maujumder, Commissioner of Customs, Pune. 

3.       Ms. Kameswari Subramanian, Joint Secretary (Cus.), CBEC, North Block, New Delhi.

4.       Shri. M. K. Singh, Director (ICD), CBEC, North Block, New Delhi.

 

AGENDA POINTS FOR THE VALUATION CONFERENCE TO BE HELD

ON 1.10.2005 AT MUMBAI

 

AGENDA POINT NO. A :

 

Issues related to the assessment of Crude oil/bulk liquid cargo 

 

(i)                  Issue of inclusion of demurrage charges (after 2.3.2001) in the assessable value of the imported goods;

(ii)                Finalisation of assessments pending on the issue of determination of the quantity (Shore tank v/s Ship Ullage quantity) for assessments of the imported bulk liquid cargo;

(iii)              Computation of freight of time chartered/daughter vessel and its inclusion in the assessable value as extended cost of transportaion.

 

 

AGENDA POINT NO. B:

Fixation of Tariff Value in respect of sensitive commodities i.e. Spices/ Wet Dates, HR/CR Coils, PFY/POY, Old & Used Tyres etc.

 

AGENDA POINT NO. C:

Revision of the Guidelines for Valuation of Ball & Roller Bearings

 

AGENDA POINT NO. D :                     

            Reorganization of Special Valuation Branch

 

AGENDA POINT NO. E:

Transfer Pricing

 

AGENDA POINT NO. F:

Application of Valuation tools and guidelines issued by the Directorate of Valuation

 

AGENDA POINT NO. G:

Implementation of Standard Units of Quantity

 

AGENDA POINT NO. H:

Valuation Data Quality issues

 

 

Agenda Point No. A (i) :

 

Issue of inclusion of demurrage charges (after 2.3.2001) in the assessable value of the imported goods;

 

1.         The issue of inclusion of demurrage charges in the assessable value was the subject matter of dispute in the case of Commissioner of Customs, Calcutta Vs M/s IOC before the CESTAT. It was therein held (2000 (122) ELT 615 (Trib-LB)) that the demurrage charges is an expenditure which arises in extraordinary situations and therefore was not includible in the assessable value, as it was not payable ordinarily. Department’s appeal against the said order was dismissed by the Supreme Court vide order dated 17.2.2004 (2004 (165) ELT 257 (SC)) observing that it was not necessary to determine the further issue whether in the absence of the Board’s Circular, demurrage would still be includible in the assessable value of the imported goods. It was held that for the purposes of these appeals demurrage was wrongly included by the adjudicating officer in the assessable value contrary to the directive of the CBEC at a time when the circular had not been withdrawn. A review petition was filed by the department, which was dismissed by the Hon’ble Supreme Court vide order dated 2.3.2005 on grounds of delay as well as on merits. The said CESTAT order has therefore now attained finality in view of the dismissal of the said Review Petition. Hence no dispute remains with regard to the fact that the demurrage charges would not be includible in the assessable value in respect of cases prior to 2.3.2001.

 

2.         The CESTAT in the case of Panchmahal Vs Collector of Customs Rajkot (1998 (101) ELT 399) had held that demurrage charges were pre landing charges and hence includible in the assessable value. This case was relied upon by the department while defending the aforesaid case. The decision of the Supreme Court in the case of Garden Silk (1999(113) ELT 358) on includibilty of landing charges was also relied upon, but the same was not considered as it did not construe Valuation  Rules 1988 framed on the basis of GATT Valuation code.

 

3.         The Board’s Circular (F. No. 467/21/89-Cus-V dated 14.08.91) Annexure A/I/1 referred to in the aforesaid order of the Supreme Court stated that dispatch money and demurrage charges being in the nature of penalties or rewards by virtue of a contract between the carrier and the charter and thus in no way could be conceived as being part of the freight or for that matter part of the price actually paid or payable for the goods. This circular was however withdrawn vide Board’s circular no.  14/2001-Cus.V dated 2.3.2001 (Annexure A/I/2).   

 

4.         However, in view of the Hon’ble Supreme Court not determining the issue whether demurrage would still be includible in the assessable value of the imported goods, in the absence of the Board’s Circular, and in view of contradictory decisions by the CESTAT, the issue of inclusion of demurrage charges after 2.3.2001 is still not crystallized and needs to be decided.  

 

Comments of DGOV:

1)       SC decision, decided on 17-2-2004, went in favor of IOC not on merits of includability or otherwise of demurrage charges but because import took place in the period when CBEC Circular of 14-8-1991 was still operative and SC held that due to Constitution bench decision in Dhiren Chemicals, departmental instructions are binding on officers and thus SCN was void.  Garden Silk decision of SC, though advocating inclusion of all costs upto the time, goods are delivered to the importers, could not help the department, since it was on landing charges and not on demurrage and it covered imports made prior to incorporation of Customs Valuation Rules, 1988 in statute. Panchmahal judgement of CESTAT of 1998, though included demurrage charges in value, was an ex-parte judgement and CESTAT orders lack the authority of Article 141 of the Constitution and could not eclipse the Board Circular of 1991. However, after withdrawal of 1991 Board Circular in 2001, SC order in IOC is not applicable for non inclusion of demurrage charges in value.

 

2)       Inclusion of demurrage charges in the case of transportation is an international practice and hence, for inclusion in value of goods assessed on CIF basis.

 

3)       After implementation of WTO Agreement in Customs Valuation, it is mandatory to take actual cost of transportation as per Rule 9(2)(a) of Customs Valuation Rules 1988.  The actual cost includes demurrages charges, paid to vessel owners under the charter party agreements. In fact, importers have been taking credit for less payment to ship owners than earlier agreed, and therefore, they should give debit for demurrage charges also.

 

4)       Demurrage is not an extra-ordinary payment and is not hit by the word ‘ordinarily’ in Section 14 of the Customs Act. The word ‘ordinarily’ simply means arms length transaction, and all costs, actually incurred till the point of importation (delivery) should be included in value.

 

Points for discussion:-

·         Whether demurrage charges should be included in the assessable value of imported goods in terms of Customs Valuation Rules.

·         Legal position before 02.03.2001 in view of Supreme Court decision dated 17.02.2004

·         Position on or after 02.03.2004 when Board’s Circular dated 14.08.1991 was withdrawn.

 

Agenda Point No. A (ii):

 

Finalization of assessments pending on the issue of determination of the quantity (Shore tank v/s Ship Ullage quantity) for assessments of the imported bulk liquid cargo;

 

As per Board’s Circular No. 96/2002-Cus. dated 27.12.2002 (Annexure A/II/1), in the case of bulk liquid cargo imports, whether for home consumption or for warehousing, the shore tank receipt quantity should be taken as the basis for levy of customs duty. The said circular is based on the Supreme Court judgment, dated 20.02.02, in Civil Appeal No.6764/1999 in the case of Commissioner of Customs (Import), Mumbai Vs. M/s. NOCIL.

 

2.         The issue was also discussed in the Conference on “Customs Valuation and Customs Procedures” held on 21^st and 22^nd August 2003, at Mumbai. The conference was of the view (point no.19) that the assessment of bulk liquid cargo should be based on invoice price, which is the price paid or payable for the imported goods, i.e., transaction value, irrespective of quantity ascertained through shore tank measurement or any other manner.

 

3.         It has been informed that the assessment are being done on the basis of quantity received in the shore tank wherein the assessable value is taken proportionately considering the actual quantity received in the shore tank vis-à-vis the invoiced quantity. Normally, the quantity received in the shore tank is less than the invoiced quantity; the assessable value would be less than the invoice value. Hence, demands have been issued or assessments have been kept provisional.

 

4.         One view is that since the customs duty is on ad-valorem basis it is the transaction value i.e. invoice price, which is relevant, and not the quantity actually received. There should be no question of proportionally reducing the invoice value of the quantity in the shore tank. Since there is no remission of an amount, which is less than the invoice value, no reduction in invoice value should be allowed. However, for the CVD portion, which in some cases is specific, the shore tank quantity should be taken into consideration and not the bill of lading quantity or the Ullage quantity, in view of the Board’s Circular dated 27.12.2002.

 

5.         Oil companies are of the view that the value taken for assessment should be for the actual quantity delivered and not the full invoice value.

 

DGOV Comments :

6.         The Customs Valuation Rules apply to all goods where duty of customs is chargeable by reference tot heir value.  Thus Customs Valuation Rules are applicable to assessment of Crude Oil/Bulk Liquid Cargo since they are chargeable to ad valorem rate of duty. Rule 4 of the Customs Valuation Rules says that the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India. It is well known in bulk oil trade that transit losses are bound to occur during transportations and no compensation or refund is made by the seller for such transit losses. In other words, the pricing pattern of such bulk cargo should normally take into account the possible transit losses. The oil companies are paying to their suppliers as per invoice value irrespective of the quantity received by them in their shore tanks and, therefore, the same invoice value should be used as the basis for assessment.

 

7.         Moreover, the Oil Companies are paying to vessel owner full freight based on the Bill of Lading Quantity, irrespective of any shortage of quantity received in shore tanks.  Similarly, insurance companies are also not reimbursing Oil companies for the normal transit losses.  Thus, it is an international practice and the value of such normal transit loss is already inbuilt in the invoice value.  Therefore, payment of customs duty cannot be on a different parameter than the payment to supplier, vessel owner and insurance company.

 

8.         Moreover, this approach may not amount to contempt of judgment of Supreme Court in case of NOCIL or Mumbai High court in the case of Godrej Industries.  In both the judgments, the issue for decision before the Court was to choose a particular quantity amongst the three quantities available for assessment, namely quantity as per bill of lading, quantity as per ship ullage survey at the port of discharge and quantity receipt in shore tanks / tanker lorries.  Thus the above view of taking invoice value as the basis for assessment is not dependant on the quantity to be considered for assessment.

 

Points for Discussion :

·         Basis for valuation of bulk liquid cargo found short upon short tank measurement

 

·         Further action to be taken to finalise the provisional assessments.

 

 

Agenda Point No. A (iii) :

 

Computation of freight of time chartered/daughter vessel and its inclusion in the assessable value as extended cost of transportaion.

 

1.         While both imported crude and finished petroleum products are transported to Indian coasts in larger vessels on voyage charter basis (CNF/FOB), Industry charters certain vessels on time charter basis mainly to be used to lighter bigger vessels bringing the cargo from foreign ports. The mother vessels which bring the cargoes usually cannot be berthed at almost all the ports in India and hence required to be lightered partly/fully. There is no set pattern for movement of time charter vessels and they operate in zig-zag fashion depending on the requirements and sometimes carry cargoes for multiple ports in the same voyage and the cargo sizes is also not predetermined. The payment to time charter vessel is not on voyage basis but on monthly hire basis. In addition to the charter hire, the industry bears the cost of bunkers and the port charges for these vessels. In view of this the actual transportation cost for any particular voyage cannot be directly identified. 

 

2.         The issue regarding computation of freight of time chartered/ daughter vessel and it’s inclusion in the assessable value was taken up in detail by the committee headed by Shri R. K. Chakroborti, the then Member (L&J), and it was agreed to that the freight of daughter vessel would have to be treated as extension of freight and not as part of landing charges. It was also suggested that the same should be calculated on normative basis on the World Scale Norms. The World scale gives the rate in terms of US $ PMT annually for a standard vessel of capacity 75000 MT, and for different sizes of vessels, the rate can be determined after applying a multiplying factor (monthly average freight rate assessment) arrived on the basis of market trends world over.

 

3.         Rule 9(3) of Customs Valuation Rules require addition of freight, insurance, loading, unloading and handling expenses on the basis of objective and quantifiable data. Ideally, it would therefore require the actual cost elements. Whether, in view of this, the WS norms can be adopted for computation of freight of time chartered/ daughter vessel is one issue. Also the practical applicability and availability of data for the computation in respect of all minor ports has to be seen.  The detail working on computation of the said freight element on World Scale norms and an assessment on revenue implications may also have to be seen, for decision on this issue.

 

Comments of DGOV:

4.         DGOV had submitted its comments on the recommendations of Chakraborty Committee vide its letter F.No.Val/Tech/8/2002 dated 27.10.2003 (Annexure A/III/1).  It was stated that the DGOV was broadly in agreement with the Committees recommendations as they were largely based on comments already submitted by DGOV.  There are two alternative methods for computation of cost of transportation for daughter / time chartered vessel.  The first option contemplates assigning the cost of transportation in respect of daughter / time chartered vessel on a normative basis by following the published World Scale freight rates and AFRA (Average Freight Rate Adjustment).  While the World Scale rates are published annually, AFRA rates are published monthly.  The second option entails assigning the cost of transportation of daughter vessel / time chartered vessel on the basis of principle adopted by World Scale Association for arriving at the World Scale freight rate index between two ports.    The Cost elements required for freight rate working along with the supporting documents to be submitted by the importer and modality for calculation based on the Committee’s Recommendation have already been communicated to the Board in the DGOV letter dated 29.102003. 

 

5.         Before finalizing its comments, DGOV had asked M/s.IOC to submit detailed working of freight rates for 10 voyages for both options.    It was found that the first option was simpler as only two parameters namely WS rate and AFRA rates are required and calculation is very elementary in nature.  The second option, however, required the actual data on at least ten parameters and the calculation is complicated and time consuming.  Moreover, the freight rates were comparable in both the options.  However, for certain minor ports, World Scale rates are not available and therefore for such ports, second option of calculation of voyage freight may be considered.  Wharfage and transshipment charges recommended by the Committee shall be added in both the options.  The calculations and supporting documents submitted by Oil Companies need to be verified on case to case basis for finalizing the provisional cases. Accepting certification by cost accountants can be considered as a practical solution for accepting the calculations. 

 

6.         Rule 9(3) of Customs Valuation Rules require addition of cost elements on the basis of objective and quantifiable data.  Oil Companies have informed that WS rates are available for majority of ports including newer ports where Oil import takes place. Oil Companies have agreed to provide details after obtaining them from WS Association.  Oil Companies also informed that on adoption of WS norms, the derived freight will be nearer to apportioning the expenses to the voyage by treating and arriving them as direct expenses for T/C vessel and if WS norms are treated as actual, the same can be said to be revenue neutral.

 

7.         The practical issues, however, will have to be examined on the basis of comments from the Commissionerates where assessments are pending.  On the question of objective and quantifiable data stipulated under Rule 9(3), it may be noted that assessments could be done under Rule 8 which allows flexible application of Rule 4 read with Rule 9.  Hence, freight  element approximations based on WS norms could be accepted.  

 

Points for discussion:-

• Mechanism to be adopted for computation of freight element for the chartered vessels – whether  DGOV recommendation could be accepted.

·         Practical aspects concerning finalization of provisional assessments.

AGENDA POINT No. B :

 

 

Fixation of Tariff Values in respect of Sensitive Commodities

 

 

            The Board has conveyed the directions of Secretary (Revenue) to carry out a study regarding identification of new commodities for fixation of tariff value vide letter F.No.467/78/2001-Cus.V dtd. 01.4.05.  The Directorate had accordingly carried out a study in this regard on the basis of information in the NIDB and other details available to it.  The study also has taken into account various representations received from the trade alleging under-invoicing on importation of certain commodities

 

2.         Findings of the initial study on selected commodities are tabulated in the Annexure B/I.  This Annexure gives analysis in respect of 10 commodities which have been scrutinized in this regard and report submitted to the Board on 19.4.2005.  Further study was carried out by the Directorate in respect of 12 more commodities which have been identified as sensitive on the basis of Directorates analysis and reports received from field formations.  The commodities suggested by DGRI vide letter F.No.21/33-Pol./2005 date 28.4.2005 were also included in the study.  The results of the study are tabulated in Annexure B/II. A report in this regard was also submitted to the Board on 12.8.2005.  A further study report carried out for the period ending 31^st August, 2005 is at Annexure B/III. 

 

3.         Briefly, the findings of study are as follows :

(A)        Agricultural Commodities -   For Garlic, Pistachio, Cloves and Gum Arabic the weighted average assessed values for the period from January to March 2005 have been worked out on the basis of NIDB information.  The assessed values were generally on the lower side compared to the international prices reported.  However, international prices cannot be directly compared in view of the fact that these prices are quoted for other markets such as New York and Hamburg.  There are also different varieties and grades within these commodities giving a range of assessed values and hence the weighted averages worked out do not fully correspond to the grades for which the international prices are reported.  Hence, tariff value fixation was not recommended.

 

(B)                Metal scraps – In respect of aluminium scrap it is found that the international prices are available for about four grades consisting 40% of the total import of aluminium scrap.  The current valuation practice in respect of these grades (assessed values) are comparable with international prices.  Similarly, in respect of copper scrap it was found that the international prices are available for three grades which constitute about 25% of the total import of copper scrap and the assessed values of these grades are comparable with relevant international prices.  However, in respect of those imports where international prices are not available, it has not been possible to make any comparisons to check the practice of valuation. The composition of metal in these scrap materials vary widely and this information is not captured in the import data.  Tariff value fixation is not feasible in such cases in the absence of precise specifications and reliable international price data.  Further, there is no evidence of gross undervaluation.  However, suitable instructions could be issued to the field formations to compare the declared values on the basis of estimated price of metal content calculated from the LME prices of corresponding metals.

 

(C)                PFY/POY -  The updated data for PFY/POY is given in Annexure B/III.  From the  annexure it can be seen that the international price is available only in 150 den. DTY, FDY 230 den. POY 167dtex POY. The most common grades of PFY/POY being imported are not covered by the international prices reported (Technon Orbi Chem).  There have been representations regarding undervaluation in respect of these commodities.  The Directorate had studied the matter and issued Alert Notices (Annexure B/IV & B/V) giving guidelines to check undervaluation.  Fixation of tariff value will be a drastic step in view of the wide varieties imported and the absence of international price data.    

 

(D)                Used tyres -  The valuation trend of imported used tyres is given in Annexure B/VI.  From the annexure it can be seen there is no standard international prices are available for used tyres.  Hence, fixation of tariff value is not feasible.

 

(E)                Primary Plastics : the study revealed that assessed values are generally comparable with PLATT prices and hence no tariff value fixation is needed.

 

(F)                Marble and Ceramic Tiles : wide variety of grades.  No international price data available. 

 

General Comments :-

 

5.         The WTO Agreement on Customs Valuation prohibits fixation of minimum values by the contracting parties.  In the past attempts have been made to make a distinction between tariff value fixed under the Indian Customs Act and the minimum value specified in the WTO Agreement.  The practice of fixation of tariff value followed by India is under scrutiny by the WTO committee on Customs Valuation and it is found difficult to justify it as distinct from minimum value.   In fact tariff value acts as minimum value as no importations are assessed below the tariff value.  The only way to defend the tariff value approach is to take the plea that the commodities on which such measure is taken are highly sensitive to value manipulations having significant impact on government revenues and that such measures are not explicitly barred in Article VII of GATT.   However, in such cases it will have to be ensured that the tariff values fixed are very close to the prices at which actual transactions are taking place in the international market.  This will be possible only in respect of those commodities where reliable international price information is available.

 

6.         In view of the above, the Directorate has developed the following criteria to select commodities for recommending tariff values  :

(i)                   Large volume of imports and significant revenue contribution;

(ii)                 High rates of duties and sensitivity of under-valuation;

(iii)                Wide fluctuation in assessed values at different Customs stations;

(iv)                Reliable information concerning international price is available;

(v)                  Adequate information and data are available for periodic review of the tariff value so as to keep it as close to international prices.

The above criteria have been adopted keeping in view the situation prevailing in respect of the commodities on which tariff value mechanism is in force (Palm oil products, Soyabean oil and Brass scrap).  It would also help to justify fixation of such tariff values at levels as close as the prevailing market prices at which transactions are taking place. 

 

7.         Member (Cus.) in his letter dated 05.09.05 indicated that commodities like Cashew, Garlic, Pistachio, Cloves could  be considered for fixation of Tariff values since the commodity price indinces are usually available and are being updated on a regular basis in the relevant publications.  In this regard, it may be noted that commodities indexing show the wholesale price of Indian agricultural products and do not show the price at which imported goods are being sold.  In cases where the local selling price of the imported goods are available it may be possible to work out the estimated assessable values by the deductive value method.  However, this approach for fixation of tariff values should take account of the fact that the commodity price may vary for different markets within the country.  On way is to ascertain the local selling price at all important commodity markets and arrive at the average selling price for working out the possible tariff value.  This will be a complex process in view of the need for a wide market intelligence network for timely update on commodity market prices.  Fixation of specific rate of duty in respect of commodities identified as being heavily undervalued could be a possible alternative.       

 

Points of Discussion :

 

• Need for fixation of tariff values for more commodities
• Criteria to be followed for tariff value fixation (selection of commodities and the basis for value)

·         Alternative approach to safeguard revenue in respect of commodities which are vulnerable to under valuation (eg. Prescribing specific rates of duty, Valuation guidelines).

Agenda  Point No. C:

 

Revision of the Guidelines for Valuation of Ball & Roller Bearings

 

Brief by Mumbai Custom House :

 

1.         There are more than 1,00,000 types and sizes of bearings in demand in the market. The valuation of bearings has always been a contentious issue with various brands of different origins. The price differences between identical bearings of different brands are high.  This Customs house had formulated a policy in 1997 on valuation of ball / roller bearings which was circulated to all the Commissionerates. The said policy was amended from time to time. The various price lists of different brands and origins, received in this Custom House were sent to DRI, Delhi for verifying the authenticity of the said price lists. The assessments were done on provisional basis pending verification of the price lists. Besides, a minimum cut off price based on the prices of raw materials used in the manufacture of bearings was fixed. However, the process of verification through DRI took a very long time and provisional assessments kept on piling. A meeting was convened between Commissioner (Valuation), Commissioner (JNPT) and Commissioner (Import) on 21.12.2004 wherein it was decided that wherever, no reply is received within 6 months from the DRI, the matter will be finalized on the basis of available evidence. Besides it was decided to explore and devise a means of tariff structure  which would provide a cushioning effect to the revenue and absorb the variation of prices on account of bearings being unbranded or being originating from highly competitive manufacturing economies. It was proposed to bifurcate the bearings into certain groups probably on the basis of size and weight and fix the tariff values accordingly. 

 

2.         In order to bring uniformity, this Custom House has devised fresh guidelines which have also been circulated to all the Commissionerates on 08.09.2005. In view of the escalation of input costs including steel in international markets ,the minimum cut off prices has been increased to 2 USD from 1.5 USD( fixed in 2001). Further, the practice of provisional assessments in all bearings of Chinese origin has been done away with. It has been proposed to assess all consignments on final basis on the strength of available evidences and NIDB data subject to the minimum cut off price. It has been proposed to finalise all the pending provisional assessments on the basis of available and comparable price lists subject to the cutoff prices which were used for assessing the Bills of Entry at the relevant time.

 

3.      It is debatable that fixing of minimum cut off prices for valuation may not be legally sustainable and is against the Valuation Rules. These methods have been devised to check gross undervaluation. Further, hundreds of provisionally assessed cases have been pending. The same is the case all over India in all the Commissionerates. It is strongly felt that tariff values which were removed in 1999-2000 should be re-introduced to ease the Valuation norms and to bring uniformity in valuation. The tariff values can be fixed on the basis of size inner (diameter), weight, and brand. The tariff values can be calculated on the basis of international prices of bearing grade steel bars of specification SAE 52100 which are more or less comparable across the countries and is at present 850 to 950 USD per tonne. The tariff values can be reviewed as and when there is significant change in the international prices of bearings. The process costs can be proportionately taken for different class of bearings depending on the complexity of the processes involved.  Specific rates need to be fixed for basic customs duty as well as counter veiling duty in order to remove ambiguity in the assessments. It may result in reduction of revenue but in the long run, it will benefit the trade and country in bringing the quality products.

 

Comments of DGOV:

 

4.         The general comments on fixation of tariff values in respect of Point B applies in this case also.  Fixation of tariff values will have to be done cautiously in view of the limitations under the WTO Agreement on Customs Valuation prohibiting minimum values.  Further, reliable information concerning international prices and costing data should be available to ensure that the tariff values fixed are very close to the actual transaction price.

 

5.         In respect of bearings the mere fact that thousands of varieties are imported make the tariff value fixation a difficult task.  Raw material price could be the basis as suggested by Mumbai Customs; however the cost of manufacture of different varieties and brands would require reliable data which are not domestically available.  The suggestion for specific rate of duty could be considered as a better alternative.

 

Points for discussion:-

• Fixation of tariff value for ball and roller bearing
• The basis for tariff values if such a measure is agreed upon
• Other possible measures to check undervaluation of bearings (specific rates of duty, valuation guidelines, etc.).

Agenda  Point  D :                 

 

Reorganization of Special Valuation Branch

1.         Circular No. 11/2001-Cus dated 23.02.2001 in supersession of earlier Circular No. 1/98-Cus dated 1-1-1998 of Board provides detailed guidelines on working of SVBs, functioning at Mumbai, Delhi, Kolkata and Chennai.

 

2.         A proposal dated 17/1/2003 on reorganization of SVBs was submitted by DGOV to then Member (Customs) advocating that the SVBs in the major Custom Houses may carry out their work under the control and guidance of DGOV. DGOV as per this proposal was to allot central registration number for all cases nationally and would decide which SVB case warranted investigation and allot that case for investigation and decision to the SVB of its choice, apart from maintaining Central Registry of cases. However, this proposal was reviewed and a new proposal for re-organization dated 12/5/2003 was submitted to Board, where it was recommended that SVBs shall work under direct supervision of the Chief Commissioner and SVB orders shall be passed by a Commissioner rank officer while registration of all cases shall be done at DGOV on recommendation of concerned Chief Commissioner. It was also suggested that DGOV should provide guidance to SVB units on important policy issues in specific cases, whenever such guidance was sought. In the Chief Commissioners Conference of Mumbai held in August 2003, this proposal of DGOV was not accepted.  Instead it was decided that the level of decision making in SVB cases should be raised to level of Joint Commissioner in all SVBs.  The DGOV mandate of maintain Central Registry of SVB cases, as contained in Board Circular referred to above was reaffirmed.

 

3.         The second issue relating to functioning of SVBs pertain to liquidation of huge pendencies. At Kolkata Conference of January, 2004, Mumbai SVBs was directed to dispose off all cases pending over 1 year by 30.6.2004 and other SVBs was asked to dispose of all cases of more than one year by 31.3.2004. To check the status of pending SVB cases, information was sought from all five SVBs concerning disposal in the last 2 financial years and in current year upto August 2004 as well as age wise break-up. The disposal performance reported by of various SVBs is given in Annexure D.

 

4.         As per the above Circular, investigation and finalization of SVB cases must be completed within 4 months of registration, failing which extra duty deposits should be discontinued. However, as the table below shows age-wise breakup of pending cases, it appears that targets set in Kolkata Conference have not been achieved.

 

	< 4 months	4-12 months	1-3 years	>3 years	Total
Mumbai	31	65	91	69	256
Delhi	17	9	2	1	29
Chennai	29	47	10	3	89
Kolkata	5	17	31	13	66
Bangalore	0	0	3	0	3
Total	82	138	137	86	443

 

Thus 86 cases are pending for more than 3 years. Kelkar Committee had taken an adverse view of the delay in finalization of SVB investigations timely. Mumbai accounts for 58% of the total pendency and 80% of the pendency of more than 3 years.

 

5.         Directorate of Valuation was made a nodal agency to maintain a Central Registry of SVB cases. DGOV has since prepared a Central Registry Database (CRD) of SVB cases, in the form of an electronic database, available at the website of DGOV (www.dov.gov.in) and this became operational from 19-4-2004. The CRD can be accessed by assessing officers by using NIDB username and password. All zonal SVB units have been assigned separate passwords for doing online registration of new cases and also to update existing cases, when decisions are taken.  However, it is found that SVB units are neither entering details of new cases registered nor amending the status of cases on which decisions have been taken. The following table shows the position:

	New cases As per CRD (Apr-Aug05)	New Cases As per Reports (Apr-Aug05)	Cases Decided As per CRD (Apr-Aug05)	Cases Decided As per Reports (Apr-Aug05)	Pending Cases As per CRD (on 31-8-2005)	Pending Cases As per Reports (on 31-8-2005)
Mumbai	0	45	1	85 (53)	1503	256
Delhi	0	18	0	4	44	29
Chennai	0	36	0	11	966	89
Kolkata	0	4	0	7	176	66
Bangalore	0	0	0	8	22	3

*Mumbai has transferred 53 cases out of 85 cases shown as disposed to various commissionerates about which no information is available with DGOV.

Thus, in the absence of correct information concerning SVB cases reflecting in CRD, the central monitoring by DGOV is defeated.

 

6.         In Kolkata Conference, it was decided that copies of SVB orders shall be endorsed to the DGOV so that they can monitor the quality of these orders and also uniformity in application of Valuation Rules.  Directorate General of Inspection (DGI) was asked to study success rate of SVB cases in appeal.   The DGOV has not been receiving the SVB orders regularly for scrutiny.  Further DGOV has no infrastructure or resources to take follow up action on SVB orders.  The results of studies done by DGI regarding success rate in appeals is not known.  There is an urgent need to have a focused approach on SVB matters in view of the delays in disposals, lack of coordination and non updating of data.  Further, SVB matters are closely related to Transfer Pricing which is assuming importance.  This is separately being discussed under Agenda Item E.  It would be necessary to create a separate division within DGOV for the effective monitoring and harmonization of SVB work.  The responsibilities of DGOV in relation to SVB work also need to be defined..

 

7.         Another issue relates to decision making authority for SVB cases. It was decided in Mumbai Conference of August 2003, subsequently reaffirmed in Shillong Conference of May 2004 that the decision making authority be raised at least to Joint/ Additional Commissioner. While Mumbai seems to have implemented this decision, no feedback has been received from other zones.

 

Points for discussion:-

• Action Plan for speedy disposal of SVB cases at all SVB branches especially for those pending above one year.
• Mechanism for regular updating of Central Registry Database (CRD) by various SVB units for making it an effective valuation tool and source of updated information on SVB matters.
• Decision making level at SVBs – implementation of Conference Decision of August 2003.
• Role of DGOV in relation to SVB work for ensuring effective monitoring and coordination.

Agenda Point E :                                          

 

Transfer Pricing

            Transfer pricing is the mechanism adopted by multinational Enterprises for valuing the goods and services traded with their Subsidiaries or Associate Companies abroad so as to lower taxes and to maximize profits. The yardstick for acceptance of such transfer pricing is the “Arms Length Price” which should represent the price charged in comparable transactions between independent parties, where price is not influenced by the relationship or business interest between the parties in the transaction. The Transfer Pricing policies of several countries are based on the OECD (Organization of Economic Cooperation and Development) Guidelines on the subject. 

 

2.         Transfer Pricing law has been enacted for Income Tax purposes in 2001 by amending the Income Tax Act, supplemented by Transfer Pricing Rules, which are broadly based on OECD Guidelines. While Article VII of the GATT and the WTO Agreement on Customs Valuation (ACV) do not refer explicitly to transfer pricing, in the case of related party transactions the Agreement indirectly accepts the arm’s length principle. The Customs Valuation Rules, 1988 (CVR) also provide for transaction value of identical / similar goods, deductive value and computed value methods which are similar to valuation methods in the Transfer Pricing Rules under the Income Tax Act.  A paper concerning harmonization of Regulatory Controls under the Custom and Income Tax Laws is at Annexure ‘E’.

 

3.         The Income tax and the Customs authorities are driven by diametrically opposite approaches to valuation in view of the conflicting interests involved for measuring the tax incidence.  While the Income Tax authorities may seek to avoid diversion of profits to the exporting country by assessing lower transaction price on imports, the custom authorities would prefer to determine a higher transfer price to enhance customs revenue.  It would, therefore be desirable to have a coordinated approach to valuation of imported goods in cases involving transfer pricing so that the same price is adopted for both purposes after necessary verification for authenticity.       

 

4.         The transfer pricing rules under the Income Tax treat enterprises as related even on the grounds of consumption of raw materials, dependence on patents, technology etc. whereas, the concept of relationship under CVR is limited. This difference between the CVR and transfer pricing rules could lead to one department treating the same transactions as between related parties and the other taking a contrary view. Thus, while customs may accept the declared price as at arm’s length, the tax authorities may not and may reduce the declared price. Harmonization of definition of related parties is a possible solution. However the definition of “related party” in Customs Valuation Rules (CVR) is based on the WTO definition in the ACV  and cannot be revised at national level. There are certain common areas where the definitions are similar and the coordination between the two departments could focus on these areas.

 

5.         In order to circumvent transfer pricing provisions, certain taxpayers structure international Transactions between group companies by involving a third party. In order to plug this loophole, Section 92B(2) in the lncome Tax Act was introduced. The Customs Valuation Rules could be amended to take care of this situation.

 

6.         Income Tax and Customs officials proceed independently to establish arm’s length valuations in related-party import transactions. This may lead to different results which may be far from reality. Legislative action and agency cooperation should create an environment in which the Income tax and Customs authorities can coordinate import valuations as a unified force. In USA, Section 1059A has been introduced to prevent a U.S. importer from jeopardizing the government revenue by valuing merchandise inconsistently for customs and income tax purposes. Under section 1059A, importers are barred from declaring a transfer price that exceeds the value declared for Customs valuation purposes. In USA, the IRS and Customs have executed a document entitled “Working Arrangement for Mutual Assistance and Exchange of Information Between the U.S. Department of the Treasury U.S. Customs Service and the Internal Revenue Service Regarding International Compliance and Importation lssues “ (the “Mutual Assistance  Agreement” ) that is designed to facilitate communication and cooperation between the agencies. A similar legal basis could be introduced to harmonize the Income tax and Customs approaches in India also 

 

7.         The Documentation requirements under Income Tax Transfer Pricing Rule 10D are quite exhaustive. The documentation requirements under the Customs Act, (Valuation Rules) are however not specific. In case of an adjustment of import valuation by Customs or Income tax, the importer should be obliged to disclose such adjustments to the other department. As there is no such provision in the law as of now, suitable amendments could be made. Transfer pricing documentation including Cost Accountants certificate submitted to Income Tax Authorities could also be mandatory for submission to the Customs department handling special valuation (SVB) cases of related party transactions.

 

8.         For effective administration of transfer pricing policies, a very comprehensive Database is required.  There are several databases available with Income Tax and Customs departments, each of which provides information of a niche area. Some of the Databases/Information resources maintained by Customs Department are NIDB (National Import Database), Export Commodity Database (ECDB), Special Valuation Branch Database(SVB), Valuation instructions Valuation Alerts and the Valuation Bulletin. Similar databases will be available in the Income Tax department.  Sharing information contained in these databases would be beneficial to both the departments in taking considered decisions as Transfer Pricing questions. 

 

9.         Transfer Pricing under the Income Tax Act  is administered by the Directorate General of Transfer Pricing in the Income Tax Dept.  In the Customs Department, the Special Valuation Branch (SVB) presently functioning at major customs stations (Mumbai, Delhi, Chenna, Bangalore, Kolkata) examine the relationship based imports which include Transfer Pricing. For effective coordination between Customs & Income Tax Departments, it would be necessary to bring the SVBs under a single authority. Directorate General of Valuation which is handling all Customs valuation related matters is best suited or the purpose. This would also facilitate sharing of data bases maintained by the Customs Department and Income Tax Department. 

 

10.        Income Tax and Customs Departments may also exchange data regarding adjustments/revisions made during assessments for uniformity in approach. It is also desirable to have joint action plan in important areas such as valuation rulings, documentation, and audit controls for effective coordination over the Transfer Pricing controls of Multinational Enterprises. These would also reduce transaction costs to the trade. Joint programme for training of officers on the Income Tax and Customs Laws relating to transfer pricing is also recommended.

 

11.        Finally, an institutional mechanism for harmonization and coordination of transfer pricing matters between Income Tax and Customs departments with adequate legal backing is desirable.

 

Points for Discussion:

·         Legal and procedural changes needed for effective handling of transfer pricing on the Customs side.

·         Mechanism for coordination of transfer pricing work with Income Tax department.

·         Integration of SVBs and Transfer Pricing work

Agenda Point F :

 

Application of Valuation Tools and Guidance Material provided by the Directorate General of Valuation

 

1.         The Directorate General of Valuation (DGOV) develops valuation tools and guidance materials for the use of assessing officers so as to enable them to take considered decisions on the valuation of imported goods and to prevent leakage of Customs Revenue due to under valuation.  The major valuation tools developed and guidance material provided by DGOV are :-

 

(i)                   National Import Database (NIDB)

(ii)                  Export Commodity Data Base (ECDB

(iii)                Central Registry Data (CRD)

(iv)                Valuation Bulletin

(v)                  Valuation Alerts

(vi)                Valuation Guidelines

(vii)               DOV Website (www.dov.gov.in) providing access to all the tools listed above, also contains a lot of valuation related information like case laws, WTO and WCO decisions, Boards instructions, international price movements of sensitive goods etc. which can be used for valuation related work.

 

2.         As there was some lack of clarity with regard to the manner in which the valuation tools and guidance materials provided by the Directorate should be made use of by the field formations while doing the actual valuation of goods, the Board has issued Circular No. 91/2003 dated 14.10.03 (Annexure F/I) with regard to application of Rule 10A of the Customs Valuation Rules, 1988. It provides for a step by step procedure to be followed in cases of suspected undervaluation. It clearly stated that loading the declared value is not permitted and that after rejection of the declared value, the prescribed procedure should be followed and the goods should be revalued in accordance with the subsequent methods laid down in the Valuation Rules. 

 

3.         However, it appears that the practice of declared values the NIDB data and other valuation information being provided by the Directorate is still continued by many assessing officers and that it creates a lot of resentment among the trade.  In the circumstances it may be useful to issue some sort of clarification on how to make use of the information and data being made available by the Directorate to the field formations.  It could cover the following elements :

(i)                   A check-list covering the valuation factors to be looked into by the assessing officers.  These should include yes or no answers to points like reference to NIDB, Valuation Bulletin, Valuation Alerts and other details provided by the Directorate.

(ii)                 Clarification to the effect that the information and data being provided by the Directorate is only for reference purposes to compare with he declared values and that officers should refrain from substituting the NIDB prices or international prices in place of declared values.

(iii)                For the purpose of marking outliers NIDB works out the weighted average of identical goods for a particular week and compares the assessed values of individual consignments.  Those assessed below 10% of the weighted average is marked as outliers.  This is, however, a rough estimate and cannot be applied across the border for all commodities.  Therefore, the question as to what should be the percentage variation for taking up a particular case for raising the doubt for the purpose of Rule 10A would depend on the nature of the commodity, its sensitivity to undervaluation, category of importer, supplier, etc.  These are matters to be decided at the local level by the Commissionerates rather than the Directorate fixing any specific criteria for the purpose.

(iv)                The procedure prescribed under Board’s Instructions under Rule 10(A) does not necessarily mean that declared value should be rejected in all cases where it is lower than the contemporaneous prices indicated in the NIDB.  In cases where the importer is able to provide supporting information regarding the genuineness of the declared value as representing the true transaction, the same should be accepted.  However, it would be useful to the record reasons for accepting such lower prices for reference by audit and other agencies for review at a later stage.  The provision for recording such observations already exists in the EDI system under the title “departmental comments”.

(v)                  NIDB prices in respect of identical / similar goods may be used to revalue the goods in cases where declared value is rejected, after necessary adjustments as required under in Rule 5 and 6 of Customs Valuation Rules.

(vi)                In respect of outliers marked in NIDB it has been clarified several times that they are only indicators of potential undervaluation and that these cases maybe taken up for review by the concerned Customs stations for ensuring that the assessment have been done correctly.  This is a kind of post clearance audit which enables the department to examine supplementary information and details, after carrying out necessary enquiries and obtaining additional information for the import to see whether undervaluation has taken place or not.

  

POINTS FOR DISCUSSION

·         Effective Use of Valuation Tools and guidance material provided by the Directorate General of Valuation.

·         Whether Boards instructions concerning the application of rule 10(A) are adequate for above purpose.

·         If further guidelines or instructions are needed, what are the points to be included

·         Whether DGOV should provide clarification / advise on individual cases upon request from field formations.

Agenda Point G : 

 

Implementation of Standard units of quantity

 

1.         Use of different units of quantity for the same goods has been causing serious problems in data analysis for NIDB.  Very often importers describe the same Unit differently (number, piece, unit, etc.).  Unacceptable units like sacks, cartons, bundles are often used in respect of certain goods ( Plastic granules, Apples, Carpets etc.).  Different kinds of units being used for the same goods is another serious problem (eg. Petroleum quantified oil in Litres, Kilo liters, Kg, MT, Drums, etc.).  Incomprehensible units are used in some cases (eg. Number in respect of cloves).  Illustrations of different  kinds of units declared by the trade are given in Annexure G/I.  These practices make it difficult to do value comparison for such kind of goods.  Data analysis and Risk Management also will run into difficulties due to such inconsistent use of Units of quality.   

 

2.         This situation could be avoided, if the standard units already prescribed in the customs tariff against each tariff heading (eight digit level), are enforced. DGOV took up the matter with the Board as early as 2002 for suitable amendment of the EDI Software to incorporate the Standard Units of Quantity (UQC) specified in the Customs Tariff Schedule.  The Standard Units prescribed in the Customs Tariff are based on the WCO recommended standard Units for the harmonized 6 digit codes.  These standard units have been arrived after considerable deliberations in the WCO concerning the international trade practice of Unit Quantity Codes.  Many countries have accepted the WCO recommendation and have implemented it.  Some countries follow the practice of having two quantity fields; one for Standard Unit and the other for the units of choice by the importer.  This enables assessment and generation of statistical data in terms of the Standard units prescribed.   

 

3.         There have been several correspondence with the Board and DG (Systems) and several with regard to enforcement of standard units of quantity.  The difficulties in implementation of Standard units of Quantity (SQC) which emerged during the discussions are as follows:

(i)                   Reluctance on part of the trade to use Standard units which are different from those used in the commercial documents (Invoices, Price of Lading)

(ii)                 Non-compatibility of certain units prescribed in the Customs Tariff Schedule with regard to goods actually imported.

 

4.         In order to resolve the difficulties that may be experienced by the trade in the use of Standard Unit of Quantity use of dual units could be considered.  Another alternative is to identify the 8 digit tariff Codes on which trade has difficulties in implementation of the prescribed units and make suitable modifications to the prescribed standard units for uniform application of single unit codes through out.  This is, however, not easy due to possible differences among trade associations on the choice of acceptable units.    

 

Points for Discussion :

·         Steps to be taken for enforcing Standard Units of Quantity prescribed in the Customs Tariff

·         Allowing an additional Unit of Quantity apart from the Standard unit of Quantity in import entry declarations.

·         Possible modification of prescribed standard units in identified areas of difficulty in consultation with the trade.

 

Agenda Point H :

 

Data Quality Issues

 

1.         The quality of import data and export data captured will be very crucial for achieving reliable risk assessment while implementing the Risk Management System (RMS).  The Directorate has been experiencing difficulties on account of poor data quality in the context of NIDB.  Declaration of incomplete or inaccurate information concerning the goods and the absence of details like brand, model and specifications as well as use of different units of quantity for the same goods have been the important areas causing considerable problems in NIDB data analysis and giving inaccurate results.  The Directorate has been repeatedly requesting the Customs stations to take concrete steps to improve the quality fo data captured, but the situation still needs considerable improvement with intervention at senior levels and closer monitoring.  Inconsistency in the ways in which goods are described is also an area of concern.  For example, mobile phone is described in a number of ways such as cellular phone, cell phone, GSM phone, WLL phone etc.  Mulyankan software which does analysis on cluster of similar goods, often forms different clusters of the same goods which results in inaccurate analysis on valuation trends.  

 

2.         The same product is often classified under different tariff headings by importers. If the rate of duty is same, then these classifications are often not corrected at the field offices whereas for the accurate data analysis by Mulyankan, correct classification of commodities is of crucial importance.  Even within an 8-digit CTH, there can be many product descriptions which need to be accurately declared.  An approach Paper on the subject was prepared by the Directorate and submitted to the Board for consideration (Annexure H/I).  The Directorate has also written to the Chief Commissioners in this regard (Annexure H/II). 

 

3.         As a possible solution, the Directorate of Valuation has been advocating a three-stage process. First is a validation check at the data entry stage wherein a selective manual check based on a standard list of sensitive items where the full description along with brand and model declaration should be checked. The second step is  at the time of assessment where the appraising officer should check all particulars for their completeness. The third step is at the time of examination and clearance where the goods could be matched with the original commercial documents and the missing details could be captured by asking for amendment of the bill of entry before clearance. 

 

4.         Although over a period of time, there has been some improvement in the data quality, it leaves much to be desired.  The problems identified are: (i) lack of resources with the Customs in terms of staff for checking and validation of declarations, (ii) attendant delays for checking such details at the assessment /clearance stages and (iii) the rigid procedure for amending the bill of entry declarations. 

 

  5.       In the final analysis, it is considered that a stage-by-stage approach as described above would help to improve data quality to a great extent over a period of time. In all situations where the declarations were found deficient in completeness or accuracy, the importers should be advised to make good those deficiencies in future declarations. A system of administrative penalty could also be considered for improving compliance. A stricter approach by the Customs in data quality will drive home the point that the importers have to discharge their responsibility of giving full and accurate declaration concerning the goods if they have to benefit from faster clearance procedures introduced by the Customs Department.

 

Points for Discussion:

·         Measures for improving data quality

·         Faster clearance procedures in cases of full and accurate declaration by importers.

·         Introduction of administrative penalty in cases where the import declarations are found to be deficient in completeness and accuracy.

 

Annexure E/I

 

TRANSFER PRICING:

 

Harmonization of Regulatory controls in India under the Customs and Income Tax laws

 

(N. Sasidharan and R. R Bangar, Directorate General of Valuation, CBEC, Mumbai)

 

 

A.         Introduction:

 

            Transfer pricing is the mechanism adopted by multinational Enterprises for valuing the goods and services traded with their Subsidiaries or Associate Companies abroad so as to lower taxes and to maximize profits. The yardstick for acceptance of such transfer pricing is the “Arms Length Price” which should represent the price charged in comparable transactions between independent parties, where price is not influenced by the relationship or business interest between the parties in the transaction.

 

2.         The Transfer Pricing policies of several countries are based on the OECD (Organization of Economic Cooperation and Development) Guidelines on the subject, which broadly defines the controls between enterprises indulging in Transfer Pricing, the methods for determination of “arms length price” and the administration of Transfer Pricing Regulations.

 

3.         According to the OECD, the role of Multinational Enterprises (MNEs) in world trade has increased dramatically from the mid 70s. It is estimated that MNEs account for almost 60% of international trade and the intra group transactions involving Transfer Pricing cover more than 50% of this trade. By resorting to Transfer Pricing, business entities are in a position to shift the profits arising out of such transactions to more friendly tax jurisdictions, thereby reducing the total tax liability for the group as a whole.

 

4.         The chief method used by business entities to achieve the above objective is to adjust prices charged between their related concerns (Subsidiaries and associate enterprises) in such a manner that the higher taxing jurisdiction is left with none or miniscule profits to tax. These practices which result in erosion of revenues in high taxing jurisdictions. The regulatory and procedural controls to check these trends are broadly covered under the "Transfer Pricing" issues handled by tax administrations.

 

5.         Many countries like USA, UK, Germany, Australia, Canada and France have already laid down specific provisions in national laws and administrative procedures to regulate Transfer Pricing practices.  These are measures mainly based on the OEID guidelines to check the pricing pattern in international transactions between the related parties for ensuring the adherence to arm’s length price principle.

 

6.         During the last 15 years, India has been actively integrating itself within the global economy. In tandem, Indian companies, have started expanding rapidly into overseas markets in order to become multinational groups. Foreign MNEs are also expanding their investments in India. Effective laws and procedures, both for the Income Tax and Customs purposes, to regulate the "Transfer Pricing” thus assume importance in India today.

 

 

 

B.         Transfer Pricing  under I.T. Law.

 

 Relevant Provisions of I.T. Act

 

7.         In November 1999, The Central Board of Direct Taxes (CBDT) appointed a six member expert group to recommend changes in the provisions of the Income Tax Act, so that transfer pricing abuses in respect of cross border transactions are effectively curbed. Based on the report of the expert group, Income Tax Act was amended in the Finance Act, 2001, to incorporate suitable provisions in sections 92 to 92 F, and section 27 so as to regulate Transfer Pricing. These were broadly based on the OECD guidelines. Supplementary provisions in Income Tax Rules were incorporated to prescribe the procedures on Transfer Pricing controls.

 

8.         A summary of these legal provisions is given below:

 

Section	What it provides
92	Computation of Income from International transactions involving transfer pricing having regard to ''Arm’s length price''
92A	Meaning of ''Associated Enterprise''
92B	Meaning of ''International Transaction''
92C	Computation of ''Arm’s Length Price''
92CA	Reference to Transfer Pricing Officer
92D	Maintenance of Documents and Information
92E	Requirement of Audit Report
92F	Important Definitions.
271(1)(C)	Adjustment to income on account of Transfer Pricing Provisions to be regarded as concealed Income.
271AA	Penalty for failure to keep and maintain information and documents
271BA	Penalty for failure to furnish Audit Report
271G	Penalty for failure to furnish information or documents
Rules
10A	Meaning of expression used in computation of ''Arm’s Length Price''
10B	Determination of ''Arm’s Length Price’ under section 92C
10C	Most Appropriate Method
10D	Information and Documents to be kept and maintained under section 92D
10E	Report from an Accountant to be furnished under section 92E

 

 

 

9.         The new regulation requires that  "international transaction" between "associated enterprises" should be at an "arm's length price."  international transaction is defined to mean a transaction between two (or more) associated enterprises that has a bearing on the profits, income, losses or assets of such enterprises. Associated Enterprises have been defined to cover those having direct/indirect participation in the management, control or capital of one enterprise by another enterprise. Participation in management and control is determined based on various factors including:

 

a) Direct/indirect holding of 26% or more voting power of an enterprise by the other enterprise or by a same person in both the enterprises, 

 

b) Advancing loan by an enterprise that constitutes 51% or more of total book value of assets of the borrowing enterprise,

 

c) Guaranteeing by an enterprise of 10% or more of total borrowings of the other enterprise,

 

d) Appointment by an enterprise of more than 50% of board of directors or one or more executive directors of an enterprise, or appointment of specified directorships of both enterprises by a same person,

 

e) Complete dependence of an enterprise (for carrying on its business) on the intellectual property licensed to it by the other enterprise,

 

f) Substantial purchase of raw material/ sale of manufactured goods by an enterprise to the other enterprise at prices and conditions influenced by the latter,

 

g) Existence of any prescribed relationship of mutual interest.

 

 

Arms Length Price

 

10.        Section 92 of the Income tax Act states that "Any income arising from an international transaction shall be computed having regard to the arm's length price".  “Arm's length price” is defined as a price, which is applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

 

11.        The legislation requires a taxpayer to determine the arm's length "price" for all international transactions using any one of the following five alternative methods:

 

a) Comparable uncontrolled price method (CUP)

b) Resale price method (RPM);

c) Cost plus method (CPM);

d) Profit split method (PSM);

e) Transactional net margin method  (TNMM);

 

Under CUP method, the Arm's Length Price would be the price charged in comparable transactions by/to non-associated parties. This method is generally applied when market prices from uncontrolled transactions can be used directly to set transfer prices.

 

Under the RPM, the Arm's Length Price is determined by deducting an appropriate discount for the activities of the reseller from the actual resale price. The appropriate discount is the gross margin, expressed as a percentage of net sales, earned by a reseller on the sale of property that is both purchased and resold in an uncontrolled transaction in the relevant market. The RPM is generally used where one of the affiliated parties performs 'routine' distribution functions.

 

Under the CPM, the Arm's Length Price is determined by adding an appropriate mark-up to cost of production. The CPM is generally used where one of the affiliated parties performs 'routine' manufacturing options. 'Routine' functions typically involve standard services that can be contracted out and that can be readily priced using comparables.

 

The PSM is based on the notion that profits earned on a given transaction should be equitably divided between the related parties involved in the transaction.

 

The TNMM is used to compare assessee’s net margins with other comparable companies. This method uses various 'profit level indicators' (such as return on costs or return on sales or return on capital employed etc) for comparisons.

 

12.        Selection of the most appropriate method would depend upon the degree of comparability between the international transactions and the uncontrolled transactions and between the enterprises entering into such transactions. As one travels from CUP method to TNMM, the comparability requirement reduces. The CUP method requires the strongest degree of comparison of relevant economic parameters since it deals directly with price. The RPM and CPM require strong functional similarity as compared to comparability. The TNMM deals with net margins and hence does not require a strong degree of comparability as net margins are generally less affected with small difference in products.

 

13.        The taxpayer has been given the flexibility to choose the most appropriate method as he deem fit among those prescribed, but the appropriate method for a particular transaction would be determined with regard to the nature of the transaction, class of associated persons, functions performed by such persons, or such other relevant factors. The Transfer Pricing officer (TPO) may re-determine the price independently by applying the above methods.  Where more than one arm's length price may be determined by applying the most appropriate TP method, the average of such prices shall be the arm's length price of the relevant international transaction.

 

 

Selection of the most appropriate method

 

14.        The selection of the tested party precedes the selection of the most appropriate method. Out of two associated enterprises, the tested party is generally the one, which is simpler of the two parties. For e.g., if the Indian company X merely acts as a distributor for its US associated enterprise Y, i.e. acts as a mere reseller and all manufacturing and trading activities are done by the said US company Y, it may be easier to test (compare) Indian company X with other distributors of similar products. This is also because Company Y may also own intangibles and it may be difficult to make adjustment for such intangibles. Once company X's results are at arm's length, as a corollary, company Y is automatically at arm’s length since after all transfer pricing is two sides of the same coin.

 

15.        The selection of the most appropriate method requires the taxpayer to analyze transfer prices under the method that provides the most reliable estimate of arm's length prices under the given circumstances. In practice, application of the best method rule requires a careful balance in which the taxpayer selects the appropriate pricing methods, taking into account the circumstances of the controlled transaction, the availability and quality of comparable transactions under each method, and the measures of comparable performance that can be used under those circumstances.

 

16.        In case the Assessing Officer believes (on the basis of material or information available) that the arm's length price has not been determined in the prescribed manner, or adequate and correct documents/ information/ data is not maintained/ produced, he may refer the computation of arm's length price to the Transfer Pricing Officer (TPO). After taking into account all relevant materials, and after giving reasonable opportunity to the assessee, the TPO will re-determine the arm's length price. The assessing officer computes the tax liability on the basis of the decision by TPO. In case of an adjustment to prices, the adjusted amount would not qualify for any export exemptions (under section 10A, 10B)/ deductions (section 80HHC, 80HHE etc.) prescribed by the Act.

 

Documentation:

 

17.        The taxpayer (assessee) has to maintain adequate supporting information and documents in respect of all international transactions between associated enterprises. The Transfer Pricing Rule 10D prescribe the information and documents to be kept and maintained under Section 92D by persons entering into international transactions. The information / documentation requirements prescribed are exhaustive. A synopsis of the requirements is given below:

 

* Description of ownership structure;

* Names and addresses of and relationships with all associated

   enterprises;

* Nature, terms, quantum and value of each international transaction;

* Business overview of the assessee, and description of business of

   associated enterprises;

* Record of any forecasts, budgets or any other financial estimates for 

   the business as a whole and for each division or product;

* Details of property/service involved;

* Description of functions performed, risks assumed, assets utilized;

* Commercial agreements of transactions with associated enterprises

   and third parties;

* Record of transactions considered for determining price of the

   international transaction;

* Data collected and analysis performed to evaluate comparability;

* Description of methods considered, selected and applied;

* Details of comparable data used in applying most appropriate

   method;

* Assumptions, policies, price negotiations, if any;

* Accounts of the associated enterprise potentially relevant to the 

   pricing and tax treatment accorded or likely to be accorded by

   overseas tax authorities;

* Any other information/data/document, as is relevant.

 

The above are primary documentation which shall be supported by certain supplementary documentation viz. Government publications, reports, technical publications, price publications, agreements and contracts, market research reports, correspondence between assessee and associated enterprise.

 

18.        The above-mentioned documentation should exist latest by the due date for filing of Income tax return by the assessee. Further, an accountant's report has to be obtained in the prescribed format in respect of all international transactions between associated enterprises.  If an international transaction is spread over a period of above one year, fresh documentation need not be maintained unless there is any significant deviation in the nature / terms of such international transaction. Primary and Support documentation should be maintained for eight years from the end of the relevant assessment year.

 

Penalties

 

19.        The following penalties have been prescribed for non compliance with the provisions of the transfer pricing code and would run cumulatively:

 

(i)    For failure to maintain prescribed information/ documents – 2%  

       of transaction value.

 

(ii)  For failure to furnish information/ documents before Revenue - 

      2% of transaction value

 

(iii) For adjustment to taxpayer's income - 100% to 300% of tax on

      adjusted amount

 

(iv) For failure to furnish accountant's report-INR 100,000.

 

 

C. Transfer Pricing under Customs Law.

 

Provisions of Customs Valuation Law and Transfer Pricing

 

20.        Article VII of the GATT and the WTO Agreement on Customs Valuation (ACV); do not refer explicitly to transfer pricing.  However, in the case of related party transactions the Agreement indirectly accepts the arm’s length principle. This is evident in respect of transfer of goods between related parties, where the transaction value of identical/similar goods provides the basis for Customs Valuation when the relationship is found to have influenced the price.  The Customs Valuation Rules, 1988 (CVR) also provide for deductive and computed value methods which are similar to RPM and CPM methods under the Transfer Pricing law.

 

21.        ACV Article 1.2 sets out a general principle that the transaction value shall be accepted provided that the relationship did not influence the price. To determine whether the relationship has influenced the price in any given controlled transaction, one has to compare such transaction with similar uncontrolled transaction. Thus, both customs and income tax valuation systems have chosen arm’s length standard as the principle that must govern the relations between related parties.          

 

22.        While the Income Tax authorities may seek to avoid diversion of profits to the exporting country by assessing lower transaction price on imports, the custom authorities as well as anti-dumping authorities would prefer to determine a higher transfer price to enhance customs revenue and anti-dumping duty. There could also be a case wherein a lower import value is declared to customs to pay less duty and a higher transaction price is indicated to income tax to minimize profits.

 

Comparison of Transfer Pricing Rules (notified under the Income Tax Act) and Customs Valuation Rules.

 

23.        The Customs Valuation Rules (CVR) deal with the valuation of tangible goods only while the transfer pricing rules cover international transactions involving both tangibles and intangibles. Both the taxes are however driven by diametrically opposite approaches to valuation in view of the conflicting interests involved for measuring the tax incident.

 

24.        The categories of associated enterprises in transfer pricing rules are much wider in their scope than those specified for related parties under CVR. In CVR the relationship is defined under Rule 2 and is deemed to exist broadly in terms of ownership control of equity/stock or other controls. The transfer pricing rules have a much broader coverage and treat parties as related even on the grounds of consumption of raw material, dependence of patent, technology etc. The definition of “associated enterprises” includes multinational enterprises supplying technology to users world wide as associated enterprise (related parties). The use of technology could be by way of transfer of know-how, patents, copyrights trademarks, licenses franchises or any other business or commercial rights of similar nature. The definition excludes technology for services e.g. software from its scope.

 

25.        Despite a relationship, the CVR permits the acceptance of declared price if the relationship did not influence the price. In cases where it is held as influencing the price, the importer has the option to demonstrate, with the help of test values, that the declared price is closer to the arms length price. In transfer pricing rules, the arm’s length price has to be determined by the application of any of the methods prescribed. Though the assessee can chose his own method for such a determination, the Assessing Officer, in the course of the assessment proceedings, can re-determine the arm’s length price if he is of the view that the prescribed information is not maintained/furnished or data used for computing such price is not reliable or not in accordance with the prescribed provisions. However, the tax authorities shall not make any adjustments to the arm’s length price adopted by the taxpayer if such price is up to 5% less or 5% more than such price determined by the Assessing Officer.

 

26.        Under the CVR, the custom officer has the discretion to entertain doubt about the genuineness of the declared price and initiate a proceeding to verify the price under Rule 10A. In such a situation the burden proof is shifted to the assesse (importer).  Though such a provision is missing in the transfer pricing rules, the burden of proof is always on the assessee and the tax office may determine the transfer price at its own discretion.

 

27.        The Income Tax Act provides for the application of the most appropriate method, whereas in CVR after the rejection of declared transfer price, the hierarchy of the Valuation methods must be followed strictly to re-determine the price for assessment.

 

28.        However, there are several common areas in both systems and efforts could be made at national level to coordinate the approaches. The first three valuation methods of the Income Tax Act, namely, (a) comparable uncontrolled price method; (b) resale price method; and (c) cost plus method are very similar to the identical/similar goods value method, deductive value method and computed value method under the Customs Valuation Rules.

 

 

D. Possible Approaches to Harmonize the Income Tax and Customs treatment of transfer pricing

 

29.        The transfer pricing rules under the Income Tax treat enterprises as related even on the grounds of consumption of raw materials, dependence on patents, technology etc. whereas, the concept of relationship under CVR is limited. This difference between the CVR and transfer pricing rules could lead to one department treating the same transactions as between related parties  and the other taking a contrary view. Thus, while customs may accept the declared price as at arm’s length, the tax authorities may not and may reduce the declared price. Harmonization of definition of related parties is a possible solution. However the definition of “related party” in Customs Valuation Rules (CVR) is based on the WTO definition in the ACV  and cannot be revised at national level. There are certain common areas where the definitions are similar and the coordination between the two departments could focus on these areas.

 

30.        In order to circumvent transfer pricing provisions, certain taxpayers structure international Transactions between group companies by involving a third party. In order to plug this loophole, Section 92B(2) in the lncome Tax Act was introduced. The Customs Valuation Rules could be amended to take care of this situation.

 

31.        Income Tax and Customs officials proceed independently to establish arm’s length valuations in related-party import transactions. This may lead to different results which may be far from reality. Legislative action and agency cooperation should create an environment in which the Income tax and Customs authorities can coordinate import valuations as a unified force. In USA, Section 1059A has been introduced to prevent a US importer from jeopardizing the government revenue by valuing merchandise inconsistently for customs and income tax purposes. Under section 1059A, importers are barred from declaring a transfer price that exceeds the value declared for Customs valuation purposes. In USA, the IRS and Customs have executed a document entitled “Working Arrangement for Mutual Assistance and Exchange of Information Between the U.S. Department of the Treasury U.S. Customs Service and the Internal Revenue Service Regarding International Compliance and Importation lssues “ (the “Mutual Assistance  Agreement” ) that is designed to facilitate communication and cooperation between the agencies. A similar legal basis could be introduced to harmonize the Income tax and Customs approaches in India also 

 

32.        The Documentation requirements under Income Tax Transfer Pricing Rule 10D are quite exhaustive. The documentation requirements under the Customs Act, (Valuation Rules) are however not specific. In case of an adjustment of import valuation by Customs or Income tax, the importer should be obliged to disclose such adjustments to the other department. As there is no such provision in the law as of now, suitable amendments could be made. Transfer pricing documentation including Cost Accountants certificate submitted to Income Tax Authorities could also be mandatory for submission to the Customs department handling special valuation (SVB) cases of related party transactions.

 

33.        For effective administration of transfer pricing policies, a very comprehensive Database is required.  There are several databases available with Income Tax and Customs departments, each of which provides information of a niche area. Some of the Databases/Information resources maintained by Customs Department are NIDB (National Import Database), Export Commodity Database (ECDB), Special Valuation Branch Database(SVB), Valuation instructions Valuation Alerts and the Valuation Bulletin. Similar databases will be available in the Income Tax department.  Sharing information contained in these databases would be beneficial to both the departments in taking considered decisions as Transfer Pricing questions. 

 

34.        Transfer Pricing under the Income Tax Act  is administered by the Directorate General of Transfer Pricing in the Income Tax Dept.  In the Customs Department, the Special Valuation Branch (SVB) presently functioning at major customs stations (Mumbai, Delhi, Chenna, Bangalore, Kolkata) examine the relationship based imports which include Transfer Pricing. For effective coordination between Customs & Income Tax Departments, it would be necessary to bring the SVBs under a single authority. Directorate General of Valuation which is handling all Customs valuation related matters is best suited or the purpose. This would also facilitate sharing of data bases maintained by the Customs Department and Income Tax Department. 

 

35.        Income Tax and Customs Departments may also exchange data regarding adjustments/revisions made during assessments for uniformity in approach. It is also desirable to have joint action plan in  important areas such as valuation rulings, documentation, and audit controls for effective coordination over the Transfer Pricing controls of Multinational Enterprises. These would also reduce transaction costs to the trade. Joint programme for training of officers on the Income Tax and Customs Laws relating to transfer pricing is also recommended.

 

36.        Finally, an institutional mechanism for harmonization and coordination of transfer pricing matters between Income Tax and Customs departments with adequate legal backing is desirable.

           

D.  Conclusion

 

37.        Transfer Pricing is an area, which is emerging as very important in the application of customs and income tax laws in India. This is on ascent with the opening of FDI and multifold increase in NME transactions. Effective coordination between the Customs and Income Tax Departments by necessary legal and administrative provisions are urgently needed to improve the efficiency of transfer pricing administration not only for ensuring the interest of revenue but also for facilitating the trade and FDI.

 

Annexure F/I

Circular No. 91/2003-CUS
14^th October, 2003

F.No.467/09/2001-Cus.V
Government of India
Ministry of Finance
Department of Revenue

Sub :- Rule 10A in the Customs Valuation Rules, 1988 – reg.     

I am directed to state that during the Valuation Conference held at Mumbai on 21^st and 22^nd August, 2003, views were expressed that the Board’s Circular No.16/2003, dated 17.03.2003 needed a review since it mandated the issue of a speaking order under Rule 10A of CVR, 1988, in “all cases” where enhancement of value was resorted to. It was pointed out that it might not be practicable/desirable to issue a speaking order in all such cases particularly where the enhancement of value has been done and that on many occasions, the importers agree to the enhancement of value based on the higher contemporaneous value noticed in the National Import Data Base( NIDB) made available by the Directorate of Valuation.  

 

2.         The matter has been examined in the Board.  It is hereby clarified that Circular No.16/2003, dated 17^th March 2003, was issued in the context of representations from the trade that in some cases, officers had arbitrarily enhanced the values without assigning any reasons and that no speaking orders were being issued inspite of requests by the importers.  Such a situation, it was felt, was not desirable. Rule 10A of CVR ,1988 empowers the department to question the truth or accuracy of the declared values so that the proper officer may ask for further information/documents. At the request of the importer, the proper officer is required to intimate in writing, the grounds for doubting the truth or accuracy of the declared value and provide a reasonable opportunity of being heard, before taking a final decision. However, it may not be necessary to issue speaking orders in all such cases where enhancement of value has been resorted to with the consent of the importer.  However, care would have to be taken to obtain the consent of the importers in writing so that subsequently, they may not allege arbitrary enhancement.

N.J. Kumaresh
Under Secretary to the Government of India.

 

Annexure G/I

LIST OF ITEMS WHERE UQC BEING FOLLOWED IS TO BE CORRECTED
CTH	ITEMS	UQC RECOMMENDED	UQC BEING FOLLOWED
8081000	APPLES	KG	CTN, BOX, KG
22082010, 22083020, 22084010, 22086000	ALCOHOLIC BEV.	LTR	CAS, NO, LTR
23099090	FISH FOOD	KG	CTN, KGS, NOS, LTR
27101980, 27101990	LUBRICATING OIL	KG	KGS, LTR, NOS
29362310, 29362390	VITAMIN B12	KG	NO, KG
33030010, 33030090, 33072000, 33074900, 33079090	AIR FRESHNER	KG	CTN, NO, DOZ
33041000, 33049990	LIP MAKE UP PREP	KG	NO, DOZ, BOX, CTN, GRS, BAG, PAC, PCS, KG
33042000, 33049990	EYE MAKE UP PREP	KG	NO., DOZ, BOX, CTN,  PCS, SET, KG
39199010, 39199090	SELF ADHESIVE TAPE	KG	ROL, RLS, NO, KG, MTR, SQM, BOX, CTN, KG
84828000	BEARING		PCS, NOS, SET, UNT, PRS, KGS, PLT,MTS, PSC, MISC
18069010	CHOCLATE		CTN, KGS, BOX, NOS, PCS
91091900 91091100 91099000	CLOCK MOVEMENT		NOS, SET
72091692, 72193111	CR COILS		MTS, KGS
85411000	DIODE		PCS, NOS, SET, THD, KIT, DOZ
58110090	ELASTIC WEBBING		MTR
9403	FURNITURE		PCS, NOS, SET, UNT, MTR, CTN, PAC, ROL, LOT, MISC
44111990	HARD BOARD		NOS, SHT, PCS, SQM
68029100 - 68029100	MARBLE		SQM, PCS, NOS, MTS, SQF, CMS, SET, CRT, BOX, MISC
44111110, 44112110	MDF		CBM, NOS, SET, PCS, CTN, MTS, SQM, KGS
84595190	MILLING MACHINE		NOS, SET, UNT, PCS, PAC
50020010	MULBERRY RAW SILK		KGS
44103110 44102900	PARTICLE BOARD		SQM, CBM, PCS, NOS
39269099	PLASTIC ARTICLES		PCS, NOS, DOZ, MTR, SET, GRS, KGS, CAS, CTN, MISC
39241090, 39249090	PLASTIC WARE		PCS, SET, NOS, DOZ, CTN, GRS, CAS, UNT, PAC, MISC
44121990 44122990 44129990	PLYWOOD		CBM, NOS, PCS, SQM, KGS, MTR, SHT
72101210, 72125090	TIN PLATE		MTS, KGS
9501 -9503	TOY		PCS, DOZ, NOS, SET, CTN, GRS
44081090 44081010 44083920 44083910	VENEER SHEET		SQM
91081100 91081900 91081200 91082000 91089000	WATCH MOVEMENT		NOS, SET
44034910	WOOD IN ROUGH TEAK		CBM, HTS, HPT, KGS, MTS, NOS

 

 

 

ANNEXURE H/I

 

DATA QUALITY ISSUES IN THE CONTEXT OF RMS

 

Analysis of current situation and possible approach towards solution

 

(Paper by Directorate of Valuation)

 

 

The quality of data captured is vital for the success of any business operation involving data processing. This is even more acute in a Risk Management System where the risk factors are evaluated on the basis of information available in the system. Incomplete or inaccurate data would give misleading results in such an environment rendering the system unreliable. Data quality should therefore form an integral part  of any risk management strategy.

 

2.         In the context of import cargo clearance, data is captured from the importers’ declaration and its quality is dependant on a variety of data elements constituting the declaration.  The most important factors having a bearing on revenue are the description of the goods (including brand, model, grade, specification), tariff classification, unit of quantity and the country of origin. 

 

Present situation

 

3.         The import data presently captured for import assessment in the EDI system is either through service centers or by direct electronic filing by importers.  The declarations are not subjected to check before acceptance by the Customs for their completeness or accuracy. Though a format for filing the declaration is prescribed, there is no legal requirement regarding the extent of details to be furnished by the importer.  The checks regarding data quality at the assessment stage is minimal. The appraising officers might call for additional information while doing the assessment, but that additional information is seldom captured in the EDI system.  The same is true at the time of examination and clearance as well. In the end, the data available in the EDI system is whatever declared by the importer at his free will and no responsibility is generally fixed for any wrong declaration or non-declaration of vital details having significant impact on revenue.

 

4.         The data captured from manual processing is no better. Here in many cases the appraising officer may amplify the entry document (bill of entry) with the additional information elicited from the importer while doing the assessment. However, the data entry after assessment (in some cases even before assessment) is done mechanically by data entry staff, who fail to key in all relevant details.

 

5.         The quality of import data captured came to sharp focus in the context of data analysis exercises carried out in the Directorate of Valuation for the purpose of National Import Data Base (NIDB).  The software used for data analysis in the NIDB makes clusters of identical goods, based on tariff classification, description (key words),  country of origin and unit of quantity. It has been noticed that due to incomplete or inaccurate information in the import data, the software fails to identify a large part of identical goods while making clusters.  These entries escape data analysis and detection of irregularities involving under valuation and misclassification. 

 

 

Dimensions of the problem

 

6.         The most important aspect of data quality is the description of the goods. It should be complete and accurate, conforming to some established standards (key words / characters describing the product, its brand, model, etc.) represented in a consistent way at the appropriate columns of the declaration.  Often, it is noticed that the entire details concerning the goods (description, brand, model, quantity, nature of packing, etc.) are declared in the same column (description) and other relevant columns are left blank. In some cases, the goods are ambiguously described without relevant details.  For instance, only the brand (e.g., nokia) is entered and the description (mobile phone) is missing.  Another problem related description is the inconsistent way of describing the same goods. For example, mobile phone could be seen described as cellular phone, cell phone, WLL phone, etc. and unless the software identifies all these as the same product, they will form different clusters.

 

7.         A closely related problem is the wrong classification. The same product is classified under different tariff headings by importers and the classification in many cases is hardly checked by the appraising officers, especially when the duty rates are not affected. The correct classification is also very crucial for the uniform clustering of identical similar goods as it forms part of the string.

 

8.         In one live example, the import data for NIDB was analyzed for all Nokia mobile phones having model number 3315. After analysis, when the query page of NIDB was filled in with the description “mobile phone”, only about 50 % of the entries could be retrieved. On account of alternate descriptions as mentioned above, it was found that around 30% of the relevant data was not picked up for analysis. Another 5% of the records were not picked up because of wrong classification. A further 15% of relevant records could not be captured because the model and brand fields were left blank, though the requisite information was available in the description field.  Thus, roughly half the relevant data was not available for analysis either due to ambiguous representation of data or poor data entry procedures and validation checks.

 

9.         Non-standard unit of quantity often used in declaring the quantity of goods imported is another serious problem having revenue implications. It is often found that units like cartons, bundles, sacks, packets, etc. are declared as units of quantity. These are not measurable units and do not make any sense for data analysis. Further, items like textiles are declared in running lengths without specifying width or as rolls in numbers with out giving the dimension or weight of each roll.  All these cases give misleading results in a data analysis.  It is essential to use recognized standard units of quantity to do any meaningful clustering and data analysis.  These are standard units already prescribed in the Customs tariff against each tariff heading (eight digit level), but they are hardly enforced.

 

10.                           Country of origin of goods assumes great importance in cases where antidumping levy is imposed. It is also important from the valuation point of view as the cost of same goods could vary when produced at different countries.  However, in the absence of standardized rules of origin, the importer’s declaration has to be accepted. This gives ample scope for misdeclaration concerning the origin of goods at the cost of revenue and data quality.

 

 

Towards improving data quality

 

11.        There is no quick fix for solving he data quality problems in a cargo clearance environment where a balance has to be struck between enforcement and facilitation.  In the context of NIDB, the Directorate of Valuation has been advocating a three-stage process. First is a validation check at the data entry stage in the service center or when the direct (on line) filing is done by the importers, before the entry is accepted in the EDI system. This would be a selective manual check based on a standard list of sensitive items where the full description along with brand and model declaration should be made mandatory.  The second step is at the time of assessment where the appraising officer should check all particulars for their completeness and if found deficient, the bill of entry should be returned for rectification by a document amendment to incorporate the requisite details. The third stage suggested was at the time of examination and clearance where the goods cold be matched with the original commercial documents and the missing details should be captured by asking for amendment of the bill of entry before clearance. 

 

12.        Though there has been some improvement in the data quality over a period of time, it leaves much to be desired.  The problems identified are: (i) lack of resources with the Customs in terms of staff for checking and validation of declarations, (ii) attendant delays for checking such details at the assessment /clearance stages and (iii) the rigid procedure for amending the bill of entry declarations.  However, it is felt that a stricter approach by the Customs in data quality will bring home the point that the importers have to discharge their responsibility of giving full and accurate declaration concerning the goods if they have to benefit from faster clearance procedures introduce by the Customs Department.

 

13.                           However, In a Risk Management System driven cargo clearance, the above mentioned checks cannot be fully implemented. It is assumed that, on applying RMS, about 70% consignments will be cleared by the EDI system without human intervention based on the importers’ declaration. It is very important to have reliable databases built on accurate data for screening the entry documents so as to assess the various risks associated with the declaration. The RMS also presupposes accuracy and completeness of the declarations for assessing the risk.  It is therefore desirable that the data quality issues are addressed upfront before starting the RMS process.

 

14.               The first stage of a validation check in respect of import declarations suggested by DOV is thus very relevant for RMS. However, the mechanism to accomplish this will have to be carefully designed so that it would not negate the RMS process itself.  One possible approach is to confine such checks to a selected group of goods where standard descriptions (including brand, model, classification, unit of quantity) could be developed. This could be attempted based on inputs from Customs stations and DOV. These descriptions could be electronically compared with the import declarations before they are admitted to the EDI system, whether they are online declarations or they are filed at service center. Those matching with the standard list could be straightaway admitted and mismatches could be segregated for further scrutiny before admission. Declarations not covered by the standard list could be test checked for completeness of information in all fields. These standardized descriptions should be made available to the importers by giving wide publicity emphasizing the importance of data quality as an incentive for preferential treatment in the RMS. For accredited clients, it should be made a mandatory requirement.

 

 

15.               Data mining software can also be utilized for data validation. With the help of data mining tools, for any given 8-digit CTH, it would be possible to segregate the set of descriptions commonly appearing in the past database. Once an experienced officer validates these descriptions, it would be possible to withhold a B/E that has a completely new description. Such a B/E would enter into the system only after validation by some officer.

 

16.        Another provision may be made in the RMS /ICES software to cull out description and other specifications from each bill of entry filed in the system on a continuous basis (scrolling) on a separate screen. An experienced officer may be made to screen such screen and should direct assessing officers to review the description and /or specification, if deemed fit.

 

17.        The second stage of data quality verification will be a partial one to be introduced at the assessment stage in respect of consignments selected by the RMS for Customs intervention. It should be made obligatory for the appraising officers and examining officers to check the full particulars of the goods and to capture all the missing information. Instruction would need to be issued to all officers concerned with assessment and examination to suitably get the B/E amended in case description and/or specifications are found to be deficient. The present procedure of amendment is quite tedious and it should be modified to allow amendment by officer either at the time of assessment or examination / clearance without causing any hardship to importer. It is observed that due to perceived delays in the amendment process, many a times despite noticing the deficiency in data, the officer does not ask for amendment of the bill of entry, though the officer does take into consideration of additional data while doing the assessment.

 

18.        The third stage of data quality check could be carried out at the post clearance audit where it should be made a mandatory process in respect of all documents subjected to audit. The missing details should be captured and descriptions standardized with reference to the database on standard descriptions used at the declaration stage. In cases where standard descriptions are not available appropriate descriptions could be developed and incorporated. It should be ensured that the documents are amended at this stage also.

 

19.        Finally, all the post audited bills of entry should be subjected to a data mining process (using appropriate data mining tools) to capture the most frequent clusters which should be manually checked by an expert team for standardization of descriptions (including classification, unit of quantity, etc.) and the accepted ones should be added to the standardized descriptions database for reuse at the stage of document admission.

 

Use of Data Quality Management Software Suites

 

20.  It would be desirable to make use of the latest data quality management software for preserving data integrity for RMS. For example, a DataFlux offers a suite of data quality and data integration tools that can assist significantly in the development of a bulletproof data foundation integral to any data-driven business intelligence endeavor. DFPowerTM Studio 4.0 is also a comprehensive data quality and data integration solution that focuses on many data quality management. 

21.    Similarly, the SAS Data Quality Solution bundle includes SAS Data Quality - Cleanse, award-winning SAS/Warehouse Administrator, and the Dataflux DFPower Studio and Match modules. SAS Data Quality - Cleanse is a new SAS product that enables to analyze, cleanse, and standardize data. More importantly, these technologies are delivered via an intuitive interface, and are packaged with many other enabling technologies such as database access, providing an easy-to-use and easy-to-implement multi-faceted data quality solution.  Another software Teradata Warehouse Miner can be used to design and implement comprehensive, adaptive data quality solutions.

 

 

Conclusion

 

22.               It is considered that a stage-by-stage approach as described above would help to improve data quality to a great extent over a period of time. In all situations where the declarations were found deficient in completeness or accuracy, the importers should be advised to make good those deficiencies in future declarations. A system of administrative penalty could also be considered for improving compliance. For this purpose, there is a need to amend the provisions of the customs law so as to enforce  the declaration of full and accurate details concerning imported goods. There is also a need to review the status of all the fields in EDI with a view to convert some of them as "mandatory". It would also be necessary to suitably amend the Bill of Entry (Forms) Regulations, 1976 as well as Bill of Entry (Electronic Declaration) Regulations, 1995.

 

 

Annexure  H/II

 

 

F.NO. VAL/NIDB/20/2004                                                              Mumbai 4^th April 2005

 

To,

All Chief Commissioner of Customs

All Chief Commissioner of Customs and Central Excise

 

Sir,

 

Subject : Improving Quality of import data

 

            The import data captured in the EDI and Manual modes of assessment are deficient in several respects which seriously affects the quality of data and accuracy of analysis for the National import Database (NIDB).  In particular, full description of goods, brand, model, grade and specifications are not often captured making it difficult to check the valuation and classification or to make comparison for NIDB analysis.

 

2.         Another serious problem is the use of multiple units of quantity for the same category of goods.  In certain cases unacceptable units such as cartons, sacks, bags, rolls, etc.  are used.  In this context, your attention is invited to the standard units of quantity prescribed for each tariff subheading (eight digits) in the Customs Tariff for capturing statistical data.

           

3.         The deficiencies concerning data quality will have serious implications on the accuracy of assessments and significant impact on revenue. Further , the Department is planning to introduce to Risk Management System (RMS) shortly and it operates on the basis of information declared by the importer, for evaluating the respective risk.  Full and accurate information concerning the goods under assessment is therefore vital for the implementation of RMS and improving the quality of NIDB.

 

4.         You are therefore requested to take urgent measures to enhance the quality of data captured in respect of import consignments.   The following measures may be introduced in respect of EDI assessments :

 

(i)                   (i)                   In case of declarations filed at the service center, the CMC personnel should be instructed to ensure that all columns are filled in and that documents with incomplete information should not be accepted.  Further, one or two examining officers should be posted at the service center to test check the declarations.

(ii)                 (ii)                 In respect of Bills of entry filed through ICEGATE, the declarations should be screened for completeness before accepting for assessment.

(iii)                (iii)                The appraising officers in the groups should return the documents found deficient in the required information for capturing the missing details by amendment of the document.  Assessment should be done only after the defects are rectified.

(iv)                (iv)                The officers examining the goods at the clearance stage should verify the original commercial documents and ensure that all relevant information has been captured in the EDI system.  Missing particulars should be incorporated by amending the document before allowing clearance of the goods.  Suitable penal action should be initiated for misdeclarations, if any, noticed.

 

5.         In respect of Manual assessments, similar checks may be carried out by the assessing officers so as to ensure that full and accurate information are incorporated in the Bill of Entry.  All such relevant information should be captured while doing the data entry of creating electronic files of these Bills of entry.

 

6.         The above procedure may be ensured through adequate supervision at senior levels.  Necessary Public Notice also may be issued requiring the importers to furnish full and complete declaration concerning the goods as well as the standard unit of quantity.

 

7.         A report on the action taken may be sent to this Directorate.

 

 

 

Yours faithfully,

 

 

S. S. RENJHEN

DIRECTOR GENERAL

 

 

Copy to :

 

(i)                    Member (Customs), CBEC, New Delhi.

(ii)                  Director General, DRI, New Delhi.

(iii)                 Director General (Systems), New Delhi.

(iv)                 All other Directorates.

 

 

Additional point J: (jnch)

 

I Relevant date for valuation of metal goods appearing in metal bulletin, whether the same should be date of contract or date of import (date of bill of lading)

 

The assessment of virgin as well as metal scraps appearing in Metal Bulletin ( a Journal published from London, U.K) is being done on the basis of average (mean) prices quoted in Metal Bulletin.  As the Journal reflects FOB prices, the elements of freight and insurance are added to the price to arrive at CIF prices for levy of customs duty.

 

PRESENT PRACTICE OF ASSESSMENT

 

            Present practice of determining relevant date for taking Metal Bulletin prices is as per para 5 of Standing Order No.7405 dated 13.12.1999, which is reflected below:

 

            “i)  If the goods are imported against a contract/indent backed by an irrevocable Letter of Credit and shipment has been done within the validity period of L/C, the assessment shall be done at prices mentioned in Metal Bulletin applicable on the date of opening of L/C and not on the date of indent/contract.  The contract shall be registered at the port of import before filling first bill of entry.

 

            ii)    If a contract/indent is backed by L/C and more than one consignments are imported against same contract/indent, the prices mentioned in Metal Bulletin prevailing in the week prior to the date of opening of L/C shall be taken if L/C is opened for whole consignment as per the contract/indent.  However, if for each consignment, separate L/C has been opened against one contract/indent, the prices mentioned in Metal Bulletin, applicable for each L/C, shall be taken for assessment.  Such contract shall also be registered at the port of import before filing first bill of entry.  However, if such contract is registered with the Custom House(s), the procedure as per para (iii) below shall be followed.

 

            iii)   If the import is based on a contract not backed by Letter of Credit, the same shall be registered with Custom House within seven days of the contract and in such case value shall be taken on the basis of the prices mentioned in Metal Bulletin on the date of contract subject to the condition that the first shipment is made within twenty one days of the date of contract and the remaining shipments are made within 90 days or original contract period whichever is earlier.

 

            iv)   An account of the contracts, so registered, shall be maintained in the Custom House in specified proforma. Every application for registration of contract will be addressed to the Deputy/Assistant Commissioner.  The particulars of contract will be entered in the prescribed register and will be submitted to the Deputy/Assistant Commissioner who will sign the contract as well as the register as a token of having registered the contract.  Every contract submitted for registration should be duly acknowledged by the respective groups.  To have an effective check, consignment-wise imported quantity will be debited from the contracted quantity by the respective Appraising Officer, at the time of assessment and the registration no. and date will be mentioned in the ITC column of the Bill of Entry to indicate that the goods have been assessed against the contract registered in the Custom House.  In case the imports against the registered contract, are to be effected through the ports other than the port of registration, the Custom House, at the port of registration, shall debit the account and send a release advice to the Custom House at the port of importation.    The quantity imported shall be debited and Appraiser while assessing Bill of Entry shall ensure that the contract is registered and shall sign in the relevant column.  He shall ensure that quantity imported at the contracted rate does not exceed the quantity contracted and entered in contract register.  AC/DC of the concerned group shall be check the genuineness of the registration atleast in 5% cases from the register while accepting bill of entry.

 

            v)   If a contract is not backed by L/C and is not registered with the Custom House, the price on the date of Bill of Lading or on the date of contract, whichever is higher, shall be taken for assessment.  All the contracts which are more than 7 days old, shall be registered within 7 days of issue of this order and if same are not registered within 7 days, the assessment shall be done at the price prevailing on the date of Bill of Lading or date of contract whichever is higher and not on the date of contract.

 

The problem arises in cases,  where the contract is registered in the Custom House but the prices show declining trend in the international market.  In such cases, the importers decline to import the goods against aforesaid contract, as the value as on date of contract reflects higher value than those on the date of import and it becomes difficult to monitor such cases, as the invoice don’t mention any contract No. & date.

 

            There have been divergent views of the Tribunal on the issue.  However, relevant date for determination of value for the purpose of assessment was subject matter of discussion before the Supreme Court of India.  Apex Court in case of M/s.Rajkumar Knitting Mills (P) Ltd.  Vs. Collector of Customs, Bombay reported in 1998 (98) ELT 292 (SC) held that the relevant date for determination of value for assessment of customs duty is the date of importation or exportation and not the date of contract.  The court also observed that the contract between buyer and seller may have a bearing in governing inter se relationship between the two but the relevant date for determining valuation is the date of import. 

 

The moot question to be decided in such cases is, whether the date of import or the date of contract/letter of credit should be taken as relevant date for valuation.

 

DGOV Comments:

            Transaction value is the principal basis for valuation under the Customs Valuation Rules.  Declared prices have to be compared with the ruling international prices on the date of importation for their acceptance.  Rule 10A procedure is available for dealing with suspected cases of undervaluation. The declared values which are comparable with the prevailing international price and the contemporaneous import values should be accepted.

 

The contract prices are acceptable where undervaluation is not suspected.  However registration of contracts for future shipments should not be allowed unless the importer has a definite programme for imports and there is a commitment for completion of imports within a definite period under the terms of the contract.  Subsequent fall in international prices should not be allowed to influence the valuation for any imports from the same source during the period of contract

 

 

           

The Standing Order No.7405 dated 13.12.99 needs to be reviewed to avoid fixation standard prices and to provide valuation guidelines.  As per the decision to this effect taken in the Conference of August 2003, DGOV had requested all the Custom Houses to forward the Standing Order that are prescribing standard values along with their comments so that the DGOV can issue valuation guidelines which can be followed uniformly all over India.  This was done in the case of Stainless Steel flat products which was forwarded to all Custom Houses.  Nhava Sheva Custom House issued Standing Order No. 19/2004 dated 11.5.2004 on this issue.

 

The relevant date for valuation of imported goods shall be the date of bill of lading, as laid down by the Supreme Court in the case of M/s. Rajkumar Knitting Mills (P) Ltd., Vs. Collector of Customs, Bombay reported in 1998 (98) ELT 292 (SC).

 

Additional point k: (jnch)

 

II Valuation Alerts issued by the Directorate of Valuation / Investigating Agencies should be backed legally acceptable evidence 

 

It is noticed that various Custom formations issue Alerts on Valuation of Various Commodities based on the cases booked or study conducted by them.  The Directorate of Revenue Intelligence, New Delhi based on various investigations taken up by its Zonal Offices issues such Alerts.  Similarly,  Directorate of Valuation also issues Valuation Alerts from time to time on the basis of study carried out by them.  Such Alerts are welcome as far as keeping the field formations abreast about the latest trends of valuation of such commodities and the modus operandi adopted by unscrupulous importers.  However, it has been noticed that the Alerts issued by the investigating agencies are at times circulated without any legally acceptable evidences. 

 

Similarly alerts also lack adequate evidences issued by Directorate of Valuation.  Alerts which are issued based on logic, inferences drawn are at times found insufficient to stand the legal scrutiny.  The officers at field level at times find it difficult to act upon the Alert issued in such fashion.  It may be noted that, progressive reforms and liberalization has become all pervasive and the work culture of the field formation has to keep pace with such efforts of the government.  As a culmination to such efforts recently government has passed The Right to Information Act, 2005 which enables any person to ask for any information about the working of the department, without any reason being asked and such information is to be supplied to such person in a time bound manner.  In such circumstances, Alerts alone would be insufficient per-se for the field officers to act upon such alerts.     It is therefore felt that such Alerts must always be backed by suitable and sufficient evidences,  which would facilitate the field officers to take immediate action on such instances noticed by issuing speaking orders expeditiously, which would sustain the legal scrutiny at any appellate forum.  

 

The issue needs deliberation and consensus approach.

 

 

 

DGOV Comments:

            The DGOV Alerts are issued after careful study of the valuation trend of the commodity in question and the relevant international and domestic market price data.  The Alert Notices are usually will reasoned giving the results of the study.

 

Alerts only give indication of possible undervaluation.  They are meant to supplement the information available in respect of the relevant commodity which would help the assessing officers to take considered decisions.  It does not advocate rejection of declared values in cases where there are no reasons to suspect undervaluation.  Rule 10A procedure is still required to be followed in cases covered by the Alert  (See also comments in respect of Agenda Item F sponsored by DGOV).

 

Additional point L: (jnch)

 

Valuation of Polyester Filament Yarn (PFY) and Partially Oriented Yarn (POY)

 

The price of PFY and POY depends on various factors/elements viz. denierage,  number of filaments, grade (A/AA) and types (semidull/bright trilobal) “Technon-Orbichem” (a Journal) reflects international prices of PFY of 150 denier.  These prices are mentioned/quoted in the Journal based on survey.  Such prices are in the nature of quotations and they are further negotiable.  The prices don’t reflect actual transactions as in case of Metal Bulletin prices, which mention actual transaction effected on a particular date at London Metal Exchange.  The unit price for such goods has therefore been adopted after allowing 20% variation from the prices reported in ‘Technon-Orbichem’.

 

            As the prices are in the nature of FOB, US$ 50/PMT is further added towards element of freight and insurance to arrive at the CIF prices.  Courts/Tribunals have held that the price reflected in international Journal can be adopted only after allowing proper variation from such prices. 

 

Basic issue for determination is whether such a variation from the prices reported in Technon-Orbichem should be allowed to arrive at value?

 

 

DGOV Comments:

            Technon Orbi Chem reports give the range of prices on which transactions take place on a weekly basis.  Wide variation from these prices will have to be justified by evidence of negotiation indicating the base price and discounts allowed.  The basis for the figure of 20% indicated in the brief is not clear.  Each case will have to be examined on merits to satisfy regarding the genuineness of the price declared.

 

The Technon Orbi Chem gives international price of PFY as 150 den FDY China DEL.  The international price of POY is given as 230 den POY Taiwan Export FOB.  The Technon Orbi Chem further states that information contained in this report is obtained from sources believed to be reliable.  During the study of valuation trend on import of PYF for the period from April to June 2005, it is noticed that the international price was around Rs.64 PKG for 150 den while the weighted average of assessed values were Rs.57 per Kg for 75 den were Rs.70 per Kg for 50 den.  Similarly, during the study of valuation trend on imported POY for the period from June to August 2005, it was noticed that the international price of 230 den was about Rs.49, where as the weighted average of assessed values for 125 den was in the range of Rs.43 – 47 PKG.  DGOV accordingly issued Alert No.6 dated 28.10.2004 and Alert No.5 dated 28.10.2004 in respect of PYF and POY, respectively. 

 

Additional point m: (jnch)

Valuation of imported Copper Dross, Copper Residue and Brass Dross

Following commodities are regularly being imported and assessed in this Custom House at minimum value as indicated against each of them:

 

 

The values of these commodities are not published in LME.  This Custom House has been adopting the minimum values at which the imports of the above commodities are assessed, based on LME price of Copper Scrap Dream in the case of Copper Dross, Copper Residue and in case of Brass Dross by linking it with the Tariff Value fixed for Brass Scrap (all grades) and also on the basis of the maximum  transaction  value noticed at this Customs House. This method is being adopted as the Dross /Residue are nothing but inferior/lowest varieties of scrap and as such they are more akin to the scrap of that particular commodity. The above table reveals the values adopted by the Custom House for the purpose of assessment of these commodities in the recent past.

The extraction of the Copper from Copper Scrap involves only one process.  It is directly melted in the factory to obtain refined Copper.  However, the extraction of Copper from Copper Dross involves two or more process i.e. i) Pulverisation, ii) Melting, iii) Re-processing.

Pulverisation :- Cleaning of Copper Dross in pulverizing machine is essential before melting.  By pulverization, impurities such as Iron, Zinc, Cadmium and Soils etc. are removed.

Melting :- After pulverization Copper Dross is melted in the furnace.

 

Re-processing :- After melting, it is reprocessed to make refined Copper ingot.

            Hence, the treatment charges in case of Copper Dross to convert into Copper ingot is 35% more than that from Copper Scrap.

            Further it is pertinent to note that Copper Scrap falls under O.G.L. category,  hence, can be imported freely. Demand for the same in Indian Market is high. However, Copper Dross can be imported only:-

i)                     by actual users who have to register themselves with the Ministry of Environment and Forests; and

ii)                   obtain Certificate from Central Pollution Control Board, where in they are allowed to import fixed quantities of Copper Dross as allocated to them by the CPCB.

Therefore, the demand in the Indian Market for Copper Dross is very less.  In the similar manner, the prices of Copper Residue have also beed  arrived at.  Similarly the Brass  Dross which contain Copper  around 50% and going by the Importer extraction Cost a  link with Tariff value of Bras Scrap (all types) is logical method to arrive at the value of Brass Dross

The Directorate of Valuation (DOV) has from time to time insisted that the value of these commodities should be arrived at by linking the same with the LME prices of the prime grade material instead of linking it with the value of scrap of various grades.  The DOV has not produced any data supporting the value of these commodities in the form of either contemporaneous imports or in the form of any international publication relevant for these commodities.  The DOV has also informed that the value at which these commodities are being assessed at this Custom House were the highest amongst the Port at which the same are regularly imported.

The value of the above commodities suggested by DOV based on LME prices of prime material, which works out equivalent to the value of scrap imported of that commodity, appears unfair. The following  table reveals the comparison between  the reference values adopted by this Customs House and the value based on LME price of the prime material suggested by DOV of these commodities:-

 

 

*           The LME price of  Copper Scrap Dream  – US $ 2050 / PMT

**          The Tariff Value of Brass Scrap (all grade)            – US $ 1867 / PMT

 

The basic question to be decided is whether the value of dross/ residues based on metal content should be linked with the valuation of scrap or prime material ?  

 

 

Comments by DOV

DGOV had issued Valuation Alert No. 12/2005 dated 15.9.2005 in respect of Copper and Brass Dross and Brass residue (Annexure M1). 

1.  Dross / Scrap:

The JNCH in the brief has stated that Dross and Residue are nothing but inferior / lowest varieties of Scrap.  It may be noted that Dross and Scrap are two different items.  ‘Dross’ is an impurity in oxide form found on the surface of molten metal where as ‘Scrap’ is the metal waste from the manufacture or mechanical working of metals which are not usable as such because of breakage, cutting up, wear or other reasons.  Dross contains lower percentage of metal when compared to Scrap.

 

2.  Extraction Charges:

            The JNCH in the brief has stated that extraction of Copper from Copper Scrap by only one process i.e. melting while extraction of Copper from Copper Dross involves two or more process i.e. Pulverisation, Melting and Re-processing.  So, the charges for process of Pulverisation (removal of impurities such as Iron, Zinc, Cadium and soils etc.) are taken as 35% of the value of the dross / residue for which no details or the source has been mentioned.  However, on DOV’s enquiry it is found that the cost of retrieval of Copper is approx. USD 200 PMT (Rs.8–9/KG).  This has been incorporated in the Alert after discussion with the industry sources.

 

3.  LME price:

 

JNCH has taken LME price of Copper Scrap (Dream) as US$ 2050 PMT for arriving at the reference values for Copper Dross and Copper Residue.  The LME price of Copper Scrap (Dream) is not published in the Metal Bulletin.  The prices of 3 grades of Copper Scrap published in the Metal Bulletin are as follows:

1.       Berry – US$ 3090 PMT

2.       Candy – US$ 2918 PMT

3.       Birch / Cliff – US$ 2825 PMT

 

The average LME prices for the 6 months period i.e. March – August 2005 are mentioned for all the three grades which are 38 – 50% higher than the LME price of Copper Scrap (Dream) taken i.e. US$ 2050 PMT.  It is also not known by Copper Scrap (Dream) is taken as the basis for calculation and not the cost of primary Copper.

 

DOV in its Alert had suggested to use the LME price of Primary Copper available in Metal Bulletin and the percentage of Copper verified in the Copper Dross, Copper Residue and Brass Dross for arriving at a reference price after giving due discount for extraction charges, etc.

 

ADDL POINT N ( NCH MUMBAI)

PAYMENT OF ROYALTIES & LICENCE FEE

Comments of DGOV:

1)       It is clear that establishment of relation between supplier and Indian buyer under Rule 2(2) and addition of value of cost and services under Rule 9 (1) (c) are two totally independent matters. There may be a need to add value of royalties and license fees if they have not been included in value of imports provided they relate to the imported goods and form a condition of sale as specified in Rule 9 (1) (c) even when the parties are not related as in the case of Essar Gujarat Ltd [1996(88)ELT 609(SC)]. The additions of Rule 9 are to be made as per Rule 4(2)(d) while related party valuation is governed by Rule 4(2)(h) and Rule 4(3). It appears from the brief that addition of royalties is made contingent on relationship and if department is not able to establish relationship before Court/ Tribunal, the addition of royalties is also set aside. This approach, which is not legally correct, seems to cause the confusion.

2)       The issue with respect to inclusion of royalty and  licence fees as per Rule 9(1)(c) in the value of imported goods shall have to be examined after proper study of several factors, such as the terms of agreement between the buyer and supplier (the purposes for which royalties are payable), the nature of supply agreement (whether exclusive.i.e. the buyer can not buy from anyone else or seller cannot sell to anyone else or not), the prices charged by supplier to other buyers for identical goods, the method of payment (whether lump sum or as percentage of sale), etc. The facts of each case shall vary and so shall the decision to judge whether royalties are to be added to value or otherwise.

3)       However, in general, it has been found that where royalties are paid in terms of percentage of net selling price, rather than as lump sum, the Courts/ Tribunals seem to take the view that such royalties are not related to imports and thus cannot be added, as in case of Maruti Udyog. In this case, however, it was not considered that: a) Maruti has no flexibility to import components from other suppliers, such as Honda or Toyota; b) Suzuki does not sell these components to unrelated buyers and thus objective and independent prices are not available; c) the components imported can be fitted only on Suzuki cars and these cars can not be produced unless royalties are paid for manufacture of these cars to Suzuki and therefore, indirectly, the royalties, though paid on local manufactured goods, are inevitably linked to imported components. This situation can be differentiated with another situation where royalty is purely for technical know-how for domestic manufacture and no capital goods, raw materials or components are imported by the buyer from the supplier of technical know how as was found in the case of S.D.Technical Services as well as Panalfa Dongwon. In the case of Mahindra and Mahindra, prices charged to independent and unrelated buyers were the same as those charged to Mahindra by the supplier, even though Mahindra was paying royalty and since royalty was for other considerations, the same was not found correctly loaded on value of imported goods.

 

ADDL POINT P ( ACC SAHAR MUMBAI)

PAYMENT OF ROYALTIES & LICENCE FEE

 

Comments of DGOV:

This is simply a matter of request by ACC Mumbai to Commissioner in charge of GVC Cell to review an OIO passed by DC, GVC Cell and is thus an individual case not fit for discussion in the Conference.

 

Subject:  Assessment of Bulk Liquid Cargo

 

There was a dispute between the Oil Companies and Customs regarding the quantity to be considered for assessment of customs duty on Bulk Liquid Cargo.  Three quantities were available (i) quantity mentioned in Bill of lading (ii) quantity determined on basis of ullage survey at the port of discharge (iii) quantity determined on the basis of Shore Tank Receipt.  High dip measurement measurements in tanks on shore into which the liquid cargo is pumbped from the tanker.  Supreme Court in the case of NOCIL accepted that the duty shall be levied on the quantity i.e. pumped into shore tanks.  CEGAT, Mumbai hold that Bulk Liquid Cargo would be considered to have cross the customs carrier only when they are pumped into the shore tanks.  Based from the above Circular No.96/2002 dated 27.12.2002 were issued.  In those cases there Bulk Cargo was not discharged through pipeline and shore tank measurement was not available.  The Circular stated that in such cases assessments shall be done as per ulllage survey report.  Howver, Mumbai High Court in case of M/s.  _______ Industries issued order in May 2004 described with the use of ullage survey report and said that by any method the actual quantity received by the importer can be determined then it is necessary to assess the cargo on the basis of ullage report.  Such as liquid cargo discharged directly into the tank lorries.  Mumbai I Zone sponsored a point on the subject in Conference held on 21^st and 22^nd August 2003 where a new issue was raised regarding the valued adopted for assessment in such cases.  It was agreed that transaction value should be basis for assessment and this shall not be inconsistent with the Supreme Court decision in case of NACEN which addressed a different issue determined quantity relevant for assessment of bulk cargo.  Hon’ble CEGAT in case of EXIM India Oil Ltd., and M/s. Binani Zinc in cases where threwere losses in transit.  It was also stated that duty of fuel products are charged on advalorem basis and as per Rule 1(3) of Customs Valuation Rules, 1988 these rules are applicable to imported fuel products.  It was further observed that importers are always product costs fuels to the suppliers and paid to the vessel owner and even insurance as also paid without any compensation from insurance companies and such transit losses upto 1% during transportation is expected international practice and such losses is already inbuilt in the invoice value and therefore in point 19 of the minutes of Mumbai Chief Commissioners Conference of August 2003, it was agreed that valuation of bulk liquid cargo shall be on the basis of transaction value and the same was also communicated by this office letter no. Val/Tech/66/2004 by Commissioner (Valuation) to Board.

 

ADDL POINT P ( ACC SAHAR MUMBAI)

PAYMENT OF ROYALTIES & LICENCE FEE

 

Comments of DGOV:

This is simply a matter of request by ACC Mumbai to Commissioner in charge of GVC Cell to review an OIO passed by DC, GVC Cell and is thus an individual case not fit for discussion in the Conference.