INFLUNECE OF PRICE IN RELATED PARTY TRANSACTIONS

[Mr. M. GOVINDARAJAN]

Related party transactions

The term ‘related-party transaction’ refers to a deal or arrangement made between two parties who are joined by a preexisting business relationship or common interest.  Companies often seek business deals with parties with whom they are familiar or have a common interest. Some, but not all, related party-transactions carry the innate potential for conflicts of interest, so regulatory agencies scrutinize them carefully.   Unchecked, the misuse of related-party transactions could result in fraud and financial ruin for all parties involved.   American regulatory bodies ensure that related-party transactions are conflict-free and do not affect shareholders' value or the corporation's profits negatively.

Related-party transactions must be reported transparently to ensure that all actions are legal and ethical and do not compromise shareholder value.  Now all the tax laws commercial laws require the related party transactions should be disclosed transparently.  Even the Directors are not allowed to attend the Board Meeting who are interested in the agenda of the Board.

Customs Valuation Rules, 1988

Customs Valuation Rules, 1988 deals with the related party transactions.  Rule 2(2) provides that the following persons shall be deemed to be ‘related’ only if-

• they are officers or directors of one another’s business;
• they are legally recognized partners in business;
• they are employer and employee;
• any person directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares or both of them;
• one of them directly or indirectly controls the others;
• both of them are directly or indirectly controlled by a third person;
• together they directly or indirectly control a third person; or
• they are members of the family;
• they are members of the same family.

Rule 4(2)(h) provides that the buyer and seller are not related or where the buyer and seller are related the transaction value is acceptable for customs purposes.

Rule 4(3)(a) provides that where the transaction value shall be accepted provided the examination of the circumstances of the sale of the imported goods indicates that the relationship did not influence the price.

Rule 4(3)(b) provides that in a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value of the goods being valued,  closely approximates to one of the following values ascertained at or about the same time-

• the transaction value of the identical goods or similar goods, to unrelated buyers in India;
• the deductive value or identical goods or similar goods;
• the computed value of the identical goods or similar goods.

In applying the values for comparison, due account shall be taken of demonstrated difference in commercial levels, quantity levels, adjustments and cost incurred by the seller in sales in which the buyer are not related.

Case law

In ‘M/S. MARCUS OILS AND CHEMICALS PRIVATE LIMITED VERSUS COMMISSIONER OF CUSTOMS (PORT) , KOLKATA - 2020 (12) TMI 804 - CESTAT KOLKATA the appellant is a private limited company.   The appellant imported certain raw materials (impure Wax) and equipment, during 2002-2003 to 2006-2007, from their US-based parent company, under 35 Bills of Entry.  Their case was forwarded to Special Valuation Branch (‘SVB’ for short) for detailed investigations.    The SVB issued a detailed questionnaire dated 17.02.2003 and a circular No. 04/2003 to the effect that pending investigation, all goods imported by the Appellant be provisionally assessed with PD Bond and 1% Extra Duty Deposit (‘EDD’ for short).  The appellant responded to the questionnaire.   SVB issued another circular No. 06/2006 enhancing the EDD to 5%.  The appellants submitted various documents directed by SVB to be submitted.  SVB also directed the appellant to submit certain ‘test’ values to support the declared transaction value of the imported capital goods.  Personal hearing was granted to the appellant.   The SVB rejected the appellant's declared transaction value; loaded the value of raw materials by 100% to 290%, after allowing quantity discount of 10%; loaded 10% on capital goods towards technology-related modifications. 

Against the said order the appellant filed appeal before Appellate Tribunal.  The appellant submitted the following before the Appellate Tribunal-

• There are grave and manifest errors of both law and fact apparent on the face of the impugned Orders given the-

•  Arbitrary reference of the Appellant's case of Special Valuation Branch (SVB) ; and
•  the arbitrary and whimsical loading of the transaction value without any proof of their influence of price and based on wholly incomparable data.

• There is nothing on record to even remotely suggest that there existed a prima facie justification for referring the case to the SVB for further inquiry into the declared transaction value.
• The Department did not even send the goods imported by the appellant for testing to ascertain the quality/description of the goods.
• Commissioner of Customs (Appeals) failed to appreciate that the SVB issued the Questionnaire and Circular No. 04/2003 without any jurisdiction.
• The appellant responded to the questionnaire. 
• The department did not communicate to the appellant if the responses were incomplete or partial.
• The department did not seek any clarification, information, documents etc. pertaining to the declared transaction value of imported raw materials (impure Wax).
• the appellant responded to the Department vide letter dated 22.05.2007 and Order-in-Original was passed on 30.05.2007 within a short span of time.
• Order-in-Original was passed without giving any opportunity without considering the documents properly.
• The department needs to accept the transaction value even in cases where the parties are related.
• Before rejecting the transaction value, a duty is cast on the Department to examine the circumstances surrounding the sale and the transaction value may be rejected only if such examination indicates that the relationship between the parties influenced the price.
• Para 2 of Interpretative Notes to Rule 4(3) categorically states that such examination will only be required where there are doubts about the acceptability of the price.
• Where the proper officer has no doubts about the acceptability of the price, it should be accepted without requesting further information from the importer.
• The onus to prove that the price has been influenced by the relation is on the Revenue.
• There is nothing on record to show that similar or identical goods were being imported at a higher price;
• The department wrongly relied upon, the data from the Chemical Weekly Report for the following reasons-

• The appellant themselves submitted the Report, available with them, to the Department in a bona fide manner.
• The  transaction value cannot be rejected on the basis of magazines and journals 
• The comparison is ex-facie devoid of law and logic.
• The  Department did not even know the quality of the imported goods as no test report was obtained at the time of import.
• The  transaction value cannot be rejected in the absence of Test Report.

• The appellant imported inferior/impure quality of raw materials (LDPE Wax).
• The department arbitrarily loaded the transaction value on the assumption that the same were of superior/pure quality, without even considering it necessary or proper to obtain a test report to assess the quality of the imported goods;
• No clarification whatsoever was sought from the appellant as to the relevance (or otherwise) of the Chemical Weekly Report before proceeding to rely on the Report; no opportunity of hearing in this regard was given to the appellants.
• the Order-in-Appeal does not examine or discuss if the requirements of Rule 4(3)(a) were met in the instant case; whether a prima facie case existed for reference to the SVB; whether the original authority has examined the circumstances to indicate influence on price and considered the evidences placed on record by the appellant; whether the Department should have obtained a test report for the imported goods; whether the data available in the Chemical Weekly Report related to comparable goods etc;
•  The impugned order does not even give a reasoned finding on the very first issue of whether the Appellant and the overseas supplier are related parties or not.

The Revenue supported the impugned order and  further submitted the following before the Appellate Tribunal-

• A  number of opportunities were given to the appellant; appellants have delayed the proceedings.
• The questionnaire given 2003 was replied in Jan 2006 and documents were supplied in 2007 after 4 years.
• In terms of Rule 3(a) of CVR, 1988, transaction value can be accepted if examination, of facts and circumstances, indicates that the relationship did not influence the price and in terms of Rule 3(b) ibid, the onus was on the importer to demonstrate that the transaction value approximated to the values ascertained at about the same time. He submits that the importer could not demonstrate the same, value was needed to be loaded.

The Tribunal heard the submissions put forth by the parties to the appeal.  The Tribunal found that that the original authority as well as the appellate authority have gone only on the basis that the buy and seller are related in terms of Rule 2(2) of Customs Valuation Rules, 1988 and proceed to judge transactions in terms of 4(3)(a) and 4(3)(b) ibid.  The original authority has given a finding that that the onus to prove that their relationship has not affected the pricing lies on the importer in terms of the rules cited above. We find that this is not the correct proportion of law. In terms of Rule 3(a) of Customs Valuation Rules, 1988, where the buyer and seller are related, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicate that the relationship did not influence the price.   Neither the original authority nor the appellate authority has given reasons to hold that the relation has indeed affected the price. Rule 3(a)(b) states that provided that in applying the values used for comparison, due account shall be taken of demonstrate a difference in commercial levels, quantity levels, adjustments in accordance to provision of Rule 9 and cost incurred by the seller in sales in which he and the buyer are not related.

The Tribunal further found that the original authority has erred to the extent that though he finds that in comparison to the weekly reports, the quantities imported by the appellants are huge. Yet, he proceeds to compensate the same by 10% quantity discount. The Tribunal found  that this has no legal basis.  It was incumbent on the department to show as to how the relation between the appellants and their overseas sellers has affected the prices.  Then the submissions of the appellants were required to be considered and reasons, if any, for rejecting the same should have been recorded.   No discussion and findings have been given by both the authorities. 

The Tribunal observed that he submissions of the appellant have not been considered and the case needs to go back to the original authority for a proper examination of all the facts of the case, the submissions of the appellants including case law in this regard and to pass a speaking and reasoned order as per law.  The Tribunal directed the appellants to submit all the evidence they wish to rely upon to the original authority and the original authority to consider the issue afresh and to pass an order.