TMI Blog2023 (6) TMI 856X X X X Extracts X X X X X X X X Extracts X X X X ..... xporter even if there is no value addition on account of manufacturing or processing - there are no role of the department or a legal framework under the Customs Act, 1962 in it. As stated earlier this accumulation is entirely attributable to the way the transaction is organized among the three transacting entities. Hence accumulation of IGST credit (ITC) is not a correct legal ground for seeking an advance ruling. Addition or otherwise of 3% amount earned by the applicant to the declared import transaction value - HELD THAT:- It is on record that the applicant company is a subsidiary of Ingrasys (Singapore) PTE Ltd. which holds 99% of the share capital of the applicant company. They are related parties in terms of Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. In such a situation the import transactions will be subjected to the rigor of procedure laid down under the CBIC circular no. 5/2016-Customs dated 9.2.2016 related to the procedure to be followed in related party import cases and other cases by the Special Valuation Branch. It is found that here the questions remain as to: (1) why the price agreement is entered into betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary of Ingrasys (Singapore) PTE Ltd (hereafter referred to as Ingrasys Singapore ) which holds 99% of the share capital of the applicant company. The applicant imports various electronic products, components, etc., from Ingrasys Singapore and engages in the manufacture and sale of network cabinets and server cabinets. The applicant is also engaged in a trading activity whereby they import goods like server racks from Ingrasys Singapore and then sell the same in the domestic market. This application for Advance Ruling dated 19.11.2022 is pertaining to the Customs valuation of imported goods for trading activity. 3.1 Applicant's submissions are reiterated as follows: M/s Amazon Data Services Private Limited (hereafter referred to as ADSPL), a third party buyer, has contracted with M/s Ingrasys Singapore (foreign parent company of the applicant) for the purchase of server racks and the terms of the contract are agreed to between them and this agreement is for the global operations of ADSPL. In pursuance of the same, the applicant imports the goods based on purchase order (PO) raised by ADSPL on them and in turn the applicant raises a similar PO on Ingrasys Singapore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I has issued summons to the executives of the applicant company and also recorded statements from them. The applicant has chosen to pay the differential customs duties along with interest and penalty in terms of Section 28(2) of the Customs Act and paid differential customs duty of Rs. 6,68,83,559, interest of Rs. 7,143,766 and the matter was closed in terms of Section 28(2) ibid. Hence the issue is no more pending. The applicant wishes to submit that they are of the view that the addition of 3% trading margin earned by them in the assessable value of imported goods is not in accordance with the provisions of the Customs law and it also leads to the accumulation of Input Tax Credit of IGST paid on imports. 3.5 The applicant by way of example, explains the method of determination of Assessable value being followed by them. S. No. Details Prior to 20.10.2021 Post 20.10.2021 1 Basic import price Rs. 97 Rs.97 2 Freight borne by ADSPL Rs. 7 Rs.7 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec. 14 of Customs Act, 1962 (Customs Act) Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CV Rules) The extract of the above provisions is reproduced below: SECTION 14. Valuation of goods. (1 ) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf: Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely :- (i) materials, components, parts and similar items incorporated in the imported goods; (ii) tools, dies, moulds and similar items used in the production of the imported goods; (iii) materials consumed in the production of the imported goods; (iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods; (c) royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; (d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller; (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. Explanation. Where the royalty, licence fee or any other paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of 1,000 units, the producer has already produced 4,000 units. The importer may request the proper officer of customs to apportion the value of the mould over 1,000 units, 4,000 units or 10,000 units. Rule 10(1)(b)(iv) 1. Additions for the elements specified in rule 10(1)(b)(iv) should be based on objective and quantifiable data. In order to minimise the burden for both the importer and proper officer of customs in determining the values to be added, data readily available in the buyers commercial record system should be used in so far as possible. 2. For those elements supplied by the buyer which were purchased or leased by the buyer, the addition would be the cost of the purchase or the lease. No addition shall be made for those elements available in the public domain, other than the cost of obtaining copies of them. 3. The case with which it may be possible to calculate the values to be added will depend on a particular firm's structure and management practice, as well as its accounting methods. 4. For example, it is possible that a firm which imports a variety of products from several countries maintains the records of its design centre outside the country of importation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction value of imported goods shall include, in addition to the price actually paid or payable for the goods, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules. Therefore, transaction value is subject to adjustments by way of inclusion of certain expenses which have not been included. 3.10 As per Rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (in short CV Rules ) the value of imported goods shall be the transaction value adjusted in accordance with provisions of Rule 10 but subject to Rule 12 which states that if the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any imported goods, he may seek documents or information and the importer has to demonstrate the accuracy of declared value. 3.11 Rule 10 (1) (a) of CV Rules mandates inclusion of the following items to the extent they are incurred by the buyer but are not included in the price actuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inclusion of all other payments which are a condition of sale. Therefore, an inclusion to the TV must meet the criteria of these Rules. It can be inferred that only such items which would go to add to cost of the goods or expenses which are incurred by the buyer (importer) can be added. 3.13 In this case, the profit margin of 3% earned by the Applicant upon sale of the imported goods is an income earned by the applicant while selling the goods to ADSPL. It is the profit earned by the applicant post importation on sale of the goods in India. This amount does not satisfy the term commission incurred by the buyer as per Rule 10 (1) (a) (i) of the CV Rules. Under Rule 10 any payment or expense incurred by the buyer/importer requires examination for inclusion in TV. The profit margin in this case is not incurred but earned by the applicant and it is not an item of expense or outgo but income for the applicant. It is also not a commission which is to be understood as a fee paid for services to an agent and in the context of trade in goods it may be for arranging for or facilitating such transaction. The applicant herein is not acting as an agent to source buyers or goods for eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductive value method seeks to exclude commission or profits in relation to sale of imported goods in India and computed value method seeks to include profits in the country of the producer that is, before goods reach India. There is no statutory mandate to include profits made by importer after importation. It is clear that profits of the importer are not eligible to Customs duty. An analysis of the additions under Rule 10 also shows that what is sought to be included is only such amount which would flow to foreign seller without being part of invoice price or landed cost and is relatable to sale of goods. Analysis of the provisions vis- -vis the transaction under this application 3.17 Absence of legal basis for inclusion of margin in Transaction Value: For determination of value of the goods imported i.e. for arriving at the assessable value (AV) which is the transaction value (TV) as adjusted, Section 14 of the Customs Act is very relevant. As per the said Section, besides the price actually paid or payable for the imported goods, certain amounts paid for services like engineering, design work, brokerage, insurance, costs of transportation to the place of importation, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork governing import valuation is spelt out by way of Section 14 of the Customs Act, 1962 read with Customs Valuation (Determination of value of imported goods) Rules, 2007 (CVR, 2007), interpretative notes to the CVR, 2007 and the Special Valuation Branch related CBIC circular of February 2016. However, in view of incomplete data in the applicant's submissions the applicant's representative was requested, during the course of hearing, to submit the reply to following questions. 1. Why there is no direct import transaction between ADSPL India and Ingrasys when the price of goods is agreed between two unrelated parties Ingrasys Singapore and ADSPL? Price agreement copy is essential to understand the exact role of Foxconn Technology India Limited. In this case how the transaction between the Ingrasys and Foxconn can be treated as a transaction on principal to principal basis when the price was finalized between Ingrasys Singapore and ADSPL? 2. Any agreement between ADSPL and Foxconn Technology (India) Limited on the issue of payment of import freight by ADSPL though it is required to be paid by the importer Foxconn Technology (India) Ltd.? Agreement in support of freigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riff and the Basic Customs duty is exempted for the same, but IGST at the rate of 18% is payable. The freight for import of the goods is paid directly to the carrier / freight service provider by ADSPL in terms of the master agreement between ADSPL and Ingrasys Singapore. The applicant does not engage in trading of goods in this model with any other domestic purchaser. 5.5 The applicant does not undertake any value addition on the goods. It earns a margin of 3% while trading imported goods. The assessable value for payment of customs duties has been determined by the applicant as the sum of price at which the goods are sold by Ingrasys Singapore to the applicant plus freight. It is noted that such freight is directly paid by ADSPL, a third party. 5.6 It is on record that the transaction of import by the applicant from Ingrasys Singapore, i.e., foreign parent company was investigated by the Special Valuation Branch (SVB), as the parties are related to each other and as per the order dated 31-1-2019, the price was found to be at arm's length or uninfluenced by the relationship between the seller/exporter (Ingrasys Singapore) and importer/buyer (FTIPL/applicant). The method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para the assessable value for payment of customs duties has been determined by the applicant as the sum of price at which the goods are sold by Ingrasys Singapore to the applicant and freight charges. It is noted that freight is directly met by ADSPL, a third party. In the value chain the price offered to the third party subsequent to import should have been higher than the assessable value declared but for direct freight payment by the third party to the supplier- exporter even if there is no value addition on account of manufacturing or processing. But the present case is peculiar and I observe value deletion instead of value addition subsequent to import. I observe from the accounting demonstration in para 3.5 that the applicant has accumulated IGST- ITC (Input Tax Credit) in their books of account due to higher import price and lesser first post-import resale price. This paradoxical situation is created by the applicant themselves due to the way the transactions are structured. Element of freight cost is included in import transaction value and the same element of cost is deducted from the price offered on post-importation resale due to direct freight payment by the third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the applicant-importer is merely a commission agent appears legally correct, notwithstanding the issue whether such commission is includable to arrive at transaction value under section 14 of the Customs Act, 1062 or not. Moreover, if the stand taken by the DRI was not acceptable to the applicant then why they paid the liability worked out by the DRI is not clear. Neither the applicant has given any reason for this. Finally, I turn to the applicant's approach to the transaction value determination under the section 14 of the Customs Act, 1962. 5.10 As discussed in para 5.9 earlier two factors - direct price agreement by exporter Ingrasys Singapore with a third party and freight payment by a third party instead by the applicant importer are contrary to the applicant's claim of having principal-to-principal basis transaction. Even if the applicant is assumed to be a commission agent in the instant case the valuation method of the applicant is required to be examined under the legal framework for valuation i.e. Customs Valuation (Determination of value of imported goods) Rules, 2007 read with section 14 of the Customs Act, 1962. 5.11 I observe that the fundamental issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) (a) (i) of the CV Rules, 2007. Under Rule 10 any payment or expense incurred by the buyer/importer requires examination for inclusion in transaction value. The profit margin in this case is not incurred but earned by the applicant and it is not an item of expense or outgo but income for the applicant. It is also not a commission which is to be understood as a fee paid for services to an agent and in the context of trade in goods it may be for arranging for or facilitating such transaction. The applicant herein is not acting as an agent to source buyers or goods for either M/s Ingrasys Singapore or ADSPL. Applicant has further stated that it is just an independent business entity importing goods and selling the same. Margin earned by the applicant is not the commission as envisaged in Rule 10(1)(a)(i). Applicant has further stated that the said Rule excludes buying commission but calls for inclusion of selling commission incurred by the buyer. The profit margin earned in this case is neither buying commission nor selling commission paid by the applicant to any other person and the said rule is not applicable. 5.13 It is on record that the applicant company is a subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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