9911796707
TMI Blog2014 (5) TMI 753X X X X Extracts X X X X X X X X Extracts X X X X ..... ort/appellant) imported spares from M/s. Sun Microsystems Pte. Ltd. (SunSGP) on payment of customs duty on 'US list price less discount'. The Order-in-Original No.1/2013 dt. 29/03/2013 ('order') has confirmed the demand of customs duty on the US list price without allowing any discount. The US list price has been adopted as assessable value in the order on the ground that various inter-company service agreements entered into by the appellants with SunSGP and M/s. Sun Microsystems Inc. (SunUS) has resulted in undervaluation of spares imported by the appellants. 2. The gist of challenge to Order-in-Original is as follows:- Duty demand confirmed Rs.146.01 crores (Bangalore) Rs.9.13 crores (Chennai) Redemption fine Rs.35 crores Penalty u/s 114A Rs.155.13 crores. Amount appropriated Rs.5.65 crores Bank guarantee enforced against redemption fine : Rs.10.40 crores. Further finalization of Bills of Entry provisionally assessed for the subsequent periods not covered by the order have been ordered to be finalized adopting the value as per the US List price. 3. The Order-in-Original arises from two show-cause notices issued by the DRI alleging large scale underval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reimbursed, on a cost + arm's length mark-up basis. 8. SI has entered into following agreements with Sun SGP: Logistics Services Agreement As per this agreement, Sun SGP (Asia Logistic Centre - ALC) is required to provide replacement of spare parts ordered by SI at the unit price paid by them. Based on this agreement SI has paid Logistic charges (does not include freight for import of spares) to Sun SGP, and these payments are over and above the spares import invoice value raised by Sun, SGP. Marketing and Warranty Support Services Agreement- As per this agreement, SI provides marketing, Pre-Sale support, Warranty and other services for Sun, SGP business in India. Based on this agreement, SI is required to bill the charges at cost plus 10% basis on Sun, SGP and collect the same. Escalated Technical Support Agreement- As per this agreement, Sun, SGP is required to provide technical and other services to SI. Based on this agreement, SI has made payments of amounts billed (called AEC charges) by Sun, SGP. All Sun group companies including Sun, US (holding company), Sun, SGP and SI are signatories to the Spare Parts Agreement. Relevant conditions of this agreement are: (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied subsequently as spares to various Sun Group units. > SI had no option but to export these spares as a contractual obligation. > In the normal course, SI ought to have been reimbursed towards the value of these exported spares. This did not happen and the money value thereof accrued to Sun Singapore/ US. > The above finding is supported by incriminating documentary evidence, such as e-mails and statements given by employees of SI and DHL. > SI began exporting these spares on commercial basis after DRI investigation started. > Appellants have stated that above consideration was recovered by SI from Sun Singapore. Evidence obtained from the Banks is to the contrary. > During the period up to March 2008, the total value of such spares exported by SI amounted to Rs. 302 Crores and the duty liability thereon would be Rs. 78.61 Crores. (b) Payment of Asia Logistics Centre (ALC) Charges > In terms of Logistics Services Agreement, SI paid Sun Singapore ALC charges amounting to Rs.63.76 Cr. up to 2007-08. > These charges were paid out of the AMC income earned by SI and are relatable to imported spares. Documentary evidence and statement of concerned persons support these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 9.69 Crores for spares rebalancing. It has been explained by SI that Bill was on account of scrapping of exported defective spares, which could not be repaired and hence, to correct the overcharge, the bill was raised by Sun Singapore. > Respondent has not accepted this argument on the ground that the amount related to imported spares and there could be a rebalancing charge only if there was remittance against export of spares. > Duty involved on this score was Rs.2.52 Crores. (e) Payment of AEC charges > In terms of the Escalated Technical Support Agreement dated 1/7/2003, SI has been paying AE Charges to Sun Singapore. For the period up to March, 31 2008, this amounted to Rs. 18.99 Crores. > No proper explanation was provided by SI as to what were the services being provided to them by Sun Singapore and the basis for arriving at the amount. > Duty involved on this score is Rs.4.94 Crores. 12. The sum and substance of the case made out as per the findings in the order are as follows:- (a) The appellant has undertaken importation of the subject goods at abnormal discounts (61% to 70%) from the US list price from SunSGP during the period under investigation. (b) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been rejected because the relationship has not influenced the price. 16. The learned counsel relied heavily upon the study undertaken by Price Waterhouse Coopers LLP (PWC) with regard to adherence to the statutory provisions relating to transfer pricing of materials between the entities. It was submitted that the basis for fulfillment of statutory obligations as regards transfer pricing is that the transaction should be at arms length between the entities. It was submitted that the PWC report clearly states that the pricing policy of the SunUS for sale of spares to other entities all over the world is at arm' length. 17. The learned counsel made the following submissions on the basis of three reports prepared by PWC which are reproduced below:- Report Finding Report I - Analysed 63 invoices issued by SunUS to SunSGP, Sun Korea, Sun China, Sun Hong Kong and Sun Taiwan (page 440-451 of Vol. B) .. Discounts are offered by SunUS to SunSGP as well as to Sun entities; .. Such discounts are in accordance with the transfer pricing reports and are at arms length; .. There are varying discounts, which depend on various considerations such as geography, market conditions prevai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces provided by the entity in India to SunUS/SunSGP and payments that are to be received and the billing process for the same. The case of the Revenue is not merely based on the sale price from SunUS to SunSGP and from SunSGP to SI but is based on an analysis of various transactions such as provision of service, the fact that spare parts are received only by SI and only for providing AMC and warranty services. No sale of spares by SI has been found by the investigators. Further even AMC services are performed by channel partners and only spares are supplied by SI and that too SunSGP supplies such spares against specific request and on the basis of specific requirement. Therefore the PWC report which relies on only one type of sale from SunUS to SunSGP without considering all other factors and without considering the statutory provisions may not be exactly relevant and appropriate as submitted by the learned special consultant. 20. Report-II of PWC analysed 12 invoices raised by SunSGP to independent third party customers across the world. However, the report does not take note of the fact that these invoices are not exclusively for spares but the spares/components have been sold a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown or into whose hands it may come.' 24. By the time this report was prepared, the offence case had already been registered and show-cause notice had already been issued by DRI with regard to Bangalore imports on 27/02/2009. Therefore these observations have lot of significance. 25. The report takes care to ensure that the report relates to only transfer pricing mechanism and does not certify anything beyond the schedule and letter has been issued to the Director Operations which have been extracted above to ensure that PWC cannot be held responsible if anything wrong is found. 26. It was also submitted that one of the major requirements while examining transactions between related entities is to see whether the sale from one party to another results in loss and for this purpose the learned counsel for the appellant produced some invoices issued by spare parts suppliers to SunUS and those examples showed to us that even after extending more than 60% discount to SunSGP, the SunUS still made profit and therefore it cannot be said that the price was influenced by the relationship. However what has to be seen is whether the price reflects the real transaction value or not and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended from US list price varying from 1% to 20% even though it was submitted by the special counsel that this claim is only by comparing list price for spares arrived at by denial of discounts price charged in the supply of equipment supplied and not exactly based on list price since Sun US has not declared the list price and discount extended either for the equipment or for spares supplied along with equipment. Yet the submissions made by the learned special consultant with regard to supplies made to unrelated buyers by SUNSGP revealed some interesting information. Out of several transactions given in the form of a table, some instances where there were sales of spares at more than the list price were selected and it was found that in these cases the excess billing over and above the list price varied from 1% to 128%. As could be seen from the list submitted by the learned special consultant, majority of the items listed were supplied to Infosys Technology Ltd. which has to be necessarily amongst the biggest customers in India being No.2 Software Company in India. In addition, they were also other customers. The relevant information is extracted from the table and reproduced below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny declared US list price. The invoices for supply of spares to Sun entities are generated by SOLEIL systems. The verification of SOLEIL generated invoices and invoices generated for supply of equipments clearly shows that the pricing pattern for supply of spares to Sun entities and others with equipment are quite different. Further, it is also not possible to arrive at the price based on the sale price in India, since there were no sale of spares by the Sun entity in India and supplies are made only to fulfill warranty obligations and AMC obligations. 30. Another aspect that has been a bone of contention between the department and the appellant is the return of parts which are removed during the course of fulfillment of AMC / warranty obligations. According to the system followed, every time a part is replaced, after replacing, the old part is sent back to the SunUS who refurbish the same and use the same for fulfillment of warranty/AMC obligations. The result is no one knows as to whether the part which is supplied by SunUS through SunSGP to different entities is in reality a newly manufactured one or a refurbished one. While supplying the same to Sun entities also Sun US/SGP do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s confirmed by statement of Shri Anil Kumar, Clearing Supervisor. e. Revenue also relied upon the email dated 15.7.2006 from Shri Anand Kumar, Global Service Finance Services Manger to Shri Radhakrishnan, Finance Controller, Sun SGP wherein he mentioned that DRI have sought details of import information and undervaluation issues may be raised. f. In the month of June 2006, export documentation was changed from NFEI declaration to exports made as commercial shipments and the value declared was list price less discount applicable for importer of new spares. According to the learned special consultant, this clearly shows that prior to June 2006, by dispatches of refurbishable spares were on NFEI basis and therefore, there was no question of any payment from Sun US/SGP to SI. By this time investigation had already started. g. Even though the system was changed in June 2006 but till April 2007, shipping bills were not submitted to the bankers which started only from April 2007. After the DRI started investigation, the appellants changed their bankers from Citibank to Bank of America. h. M/s. Citibank, Bangalore clearly intimated on 12.8.2008 that 'there have been no remittances rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of supply of spares by Sun US/SGP. 34. We find that there is sufficient evidence to show that during the period of dispute, refurbishable spares were not paid for by Sun US/SGP and apparently appellants have made efforts subsequently to make suitable adjustments. We have already taken note of the fact that even to PWC for conducting study of transfer pricing issue, appellants have not disclosed these facts and even the fact that defective parts were paid for and such payment was equal to the cost of new parts supplied by Sun US/SGP was also not brought to the notice of PWC. Therefore we really do not know the implications on this account on the PWC report. The analysis, evidences, annexures, documents and statements of officers of the company and information collected from bankers, courier services would clearly show that appellants have not been able to prove their claim of receiving payments in respect of refurbishable spares. Therefore, the claim of the Revenue that the price charged to SI by Sun SGP cannot be accepted since there were other circumstances besides the relationship between the entities has considerable force. 35. At this stage, it would also be worthwhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the calculation made in the OIO, warranty service accounted for about 40% of the total supplies. SI has been charging to Sun US /SGP amortization charges in respect of parts used for warranty, even though according to their own submissions, they get back the entire amount when a part is replaced and refurbishable part is sent back to US. Charging amortization charges would look rational if the old parts are sent back without payment and new parts are not paid for. This would be towards the cost of storing the parts and warranty servicing. 37. Another issue that has to be taken into account is the fact that appellant has to be considered a buy/sale entity only. They do not store parts to fulfill warranty/AMC obligations. Therefore the appellant cannot be considered as different from other buyers of equipments since the parts are supplied against replacement and old parts are sent back and appellant is reimbursed on the basis of cost plus 10% for the services they render. In such a situation, the discount given to appellant has no meaning since appellant in any case, do not incur any extra cost and AMC / warranty charges do take into account the cost of spare parts that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbilled amount of spares used for warranty. While billing warranty charges on SunSGP, SI has to bill the full value of spares declared in the import invoice used for warranty purpose with 10% mark up. SI had paid for spares imported for warranty also. However SI did not bill the full value of spares used for warranty thereby underbilling of warranty charges has resulted. Shri Ravi Vishwanath in his statement dt. 06/01/2009 admitted that only amortized value of spares with 10% mark up had been billed and not the full value. Shri Anand Kumar, the then GFS Manager, SI furnished amortised value of spares from 2001-02 to 2007-08. Shri Anand Kumar in his statement dt. 19/09/2007 stated that during a particular year total cost of spares imported minus spares exported is amortized over a period of 36 months in line with accounting policy. It was admitted that only amortized cost was billed. Thus while the appellant paid at full cost for providing warranty services received only amortized charges. 42. Only call centre at Singapore and FSC at Singapore maintained the issue of spares located in India either for warranty or for AMC. The actual spares consumption towards AMC or warranty are av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nSGP. SI imports new spares, used them for replacement and re-exported defective spares received. Asia Logistic Centre (ALC) charges amounted to Rs.63.76 crores during the period from 1998-99 to 2007-08. This was paid out of AMC income upon using the spares. The special consultant relied upon E-mail dt. 24/09/2007 between Shri Ravi Vishwanath and Mr. John McGovern (part of SunUS Customs team) to submit that ALC contract terms have additional elements of value that need to be declared on the imported goods. Corrective actions will probably require that other Sun contracts for merchandise or payments outside India be centrally reviewed for Customs valuation additions on SI imports. Shri Ravi Vishwanath also wrote to Mr. John McGovern that they must defend their position and there are some terms in the agreement that could cause pin pricks and they have a lot of work to do on the documentation. The e-mails show that even the company's officers believed that there were elements in the logistic contract which could have an impact on the valuation. Further in another mail, Mr. Toniel Lee wrote to Shri Ravi Vishwanath that he would further decrease the discount as a phase 2 project to rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amounts are charged and received without any basis as to why they were not billed earlier and collected, that cannot be taken into account at this stage. 48. As regards Asia Escalated Charges (AEC ) which according to the worksheet would come to Rs.19 crores, the appellants submitted that these charges are paid by the appellant to SunSGP towards provision of technical and other services. These charges are towards post-importation activity of provision of high-end technical services to customers which SI does not have the capability. The submission in this regard by the special consultant was that no proper explanation was provided as to what were the services being provided by SunSGP and how the amount was arrived at. We have to agree that Department also has not been able to show as to how exactly this related to import activity and why it should be added. 49. As regards spares rebalancing also, admittedly it has been charged for non-usable refurbishable spares exported by the appellants and therefore it may not be appropriate to consider the same. 50. The discussions above would show that on the one hand it becomes quite clear that the transaction value based on US list p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as already observed, it cannot be said with certainty that these reflected the correct position. For example, if we take export of defective spares, the question of amortization charges and whether there was underbilling in warranty would arise. Moreover, the export of defective spares value may include the value of spares used for warranty also. In such a case, figures given in sl.no.1 and 2 of the worksheet for including the flow-back may not be correct. Further we also do not know and no details have been furnished as to what exactly is AEC. If export of defective spares has been fully paid for by SunUS, the question of recovery of overheads and other expenses in respect of ALC services also raise questions since the very idea of defective spares getting the same value from the supplier is totally against any normal trade practice and such a transaction would normally show that it is not based on reality but some imaginary situation. 52. Under these circumstances, there is absolutely no alternative but to levy customs duty on the US list price as arrived at by the Revenue. There are several instances where no discount has been allowed or price has been in excess from 1% to 128% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action value. This decision cannot be applied to the facts of this case. 53.4. Two clarifications issued by US Customs have also been enclosed but we find that those clarifications are not relevant since facts are not comparable. 53.5. In the case of Gem plus India Pvt. Ltd. Vs. CC, Chennai [2005(185) ELT 269 (Tri. Bang.)], the prices of items were mutually agreed between the supplier and the importer depending prevailing market driven prices. The prices were for stock and sale. On the contrary, in this case, spares supplied by the supplier are for replacement both for warranty and AMC services which was only to and through Sun entities. Such sales were not in the nature of 'buy and sell' transactions. 53.6. In the case of Anabond Essex India (P) Ltd. Vs. CC, Chennai [2007(216) ELT 557 (Tri. Chennai)], there were cotemporaneous imports by independent parties and prices were seen to be lower than the ones at which Anabond Essex imported. Therefore this decision is also not applicable to the facts of this case. 54. The last question that is required to be considered is whether the demand can be said to be time-barred and extended period could have been invoked. In this case, all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pees eight lakhs only) c. Shri V. Radhakrishnan -- Rs.6 lakhs (Rupees six lakhs only) d. Shri Anand Kumar -- Rs.4 lakhs (Rupees four lakhs only) e. Shri Reji Kumar -- Rs.2 lakhs (Rupees two lakhs only) 57. Lastly, we have to consider whether penalty is imposable on M/s. DHL Express India Ltd., Bangalore under Section 112(a) of Customs Act, 1962. The learned counsel on behalf of the appellant argued that appellant was not at all involved in undervaluation. M/s. DHL was providing all logistic support including clearances of imported goods from Customs to SI. There were raising freight invoices. They were aware that the consignments were received on freight to collect basis. They have a unique system of identifying 'freight to collect' consignments imported based on account number. Non-declaration of freight element and terms of import resulted in non-payment of duty on freight charges. DHL did not inform CHA to include the freight charges in the assessable value. Even though the learned counsel argued vehemently, and submitted that they had not filed any documents and therefore no penalty can be imposed on them, we find that facts go against DHL totally. DHL is in the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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