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TMI Blog2023 (6) TMI 856X X X X Extracts X X X X X X X X Extracts X X X X ..... erver 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 for import of the required products. The said goods are classifiable under Chapter heading 8471 of the Customs Tariff and the Basic Customs duty is exempted for the same, but IGST @ 18% is payable. The freight for import of the goods is paid directly to the carrier / freight service provider by ADSPL in terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 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 Assessable Value Rs. 104 4 BCD NIL 5 IGST @ 18% on Rs.104 Rs. 18.72 6 Profit margin Rs. 3 7 Selling Price to ADSPL Rs. 100 8 IGST on Sales Rs. 18.00 9 ITC available Rs. 18.72 10 Accumulation of ITC Rs. 0.72 11 Profit margin to be added in Assessable Value Rs. 3 12 Assessable value Rs. 107 13 IGST @ 18% on Rs.107 Rs. 19.26 13 Selling Price to ADSPL Rs.100 IGST on Sales Rs. 18.00 ITC available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyer and the seller shall be deemed to be related; (ii) the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case; (iii) the manner of acceptance or rejection of value declared by the importer or exporter, as the case may be, where the proper officer has reason to doubt the truth or accuracy of such value, and determination of value for the purposes of this section: (iv) the additional obligations of the importer in respect of any class of imported goods and the checks to be exercised, including the circumstances and manner of exercising thereof, as the Board may specify, where, the Board has reason to believe that the value of such goods may not be declared truthfully or accurately, having regard to the trend of declared value of such goods or any other relevant criteria. Provided also that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under section 46, or a shipping bill of export, as the case may be, is presented under section 50. Customs Valuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss after importation of such goods. Note to rule 10 In rule 10(1)(a) N, the term "buying commissions" means fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued. Rule 10(1)(b)(ii) 1. There are two factors involved in the apportionment of the elements specified in rule 10(1)(b)(ii) to the imported goods - the value of the element itself and the way in which that value is to be apportioned to the imported goods. The apportionment of these elements should be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. 2. Concerning the value of the element, if the importer acquires the element from a seller not related to him at a given cost, the value of the element is that cost. If the element was produced by the importer or by a person related to him, its value would be the cost of producing it. If the element had been previously used by the importer, regardless of whether it had been acquired or produced by such importer, the original cost of acquisition or production would have to be adjusted downward to reflect its use in order to arrive at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtation as a general overhead expense without allocation to specific products. In this instance, an appropriate adjustment could be made under the provisions of rule 10 with respect to the imported goods by apportioning total design centre costs over total production benefiting from the design centre and adding such apportioned cost on a unit basis to imports. 6. Variations in the above circumstances will, of course, require different factors to be considered in determining the proper method of allocation. 7. In cases where the production of the element in question involves a number of countries and over a period of time, the adjustment should be limited to the value actually added to that element outside the country of importation. Rule 10(1)(c) 1. The royalties and licence fees referred to in rule 10(1)(c) may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value. 2. Payments made by the buyer for the right to distribute or resell the import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of this Application of Advance Ruling, the first clause (i) above is relevant. That isn any commission or brokerage. except buying commission is to be added for determining the value for the purpose of paying customs duty. In addition to the above, Rule 10(1)(e) mandates that, for determining the transaction value, 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. This provision seeks to include any payment that the buyer is required to make as a condition of sale of the imported goods. This further covers the situation of payment to third party by the importer-buyer so as to satisfy the obligation of the foreign seller vis-å-vis such third party. Rule 10(4) provides that no addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule. Based on the above provisions, it is clear that Sec. 14 of the Customs Act provides a clear mandate to accept tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 3.14 The applicant is neither acting for or on behalf of either Ingrasys Singapore or ADSPL and nor Ingrasys Singapore is sourcing any buyer for the applicant but the transaction is purely on principal-to-principal basis. The scenario envisaged in the said Rule is not present in the transaction of import by the applicant. The margin represents the profit earned by FTIPL the importer/buyer and is not something that is "incurred by the buyer". In fact, whether the applicant earns a margin or incurs a loss is not of consequence as far as customs valuation is concerned. The fact that price is at arm's length or untainted by relationship as established by TP study or as demonstrated to SVB is relevant to conclude that the AV as computed by the applicant is not a tainted one and is acceptable for customs purposes. It is seen from the computation chart submitted to SVB that the applicant is earning a reasonable margin after including various expenses towards selling and administrative expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties Ingrasys Singapore and ADSPL. The applicant imports the goods from Ingrasys Singapore and sells it to ADSPL. The price at which it imports the goods allows it to earn a margin of 3% on further sale to ADSPL. The arrangement is in line with the transfer pricing provisions under Income Tax Act, 1961. Such price has been accepted by SVB also. Further, in the SVB Order dated 31.01.2019, the customs authorities have analyzed the provision of Rule 10 of CVR 2007 and came to the conclusion that no addition or adjustment under Rule 10(1) of the CV Rules is required to be made to arrive at the transaction of the imported goods. 4. Therefore, it is prayed that Hon'ble Authority may be pleased to issue a ruling to the effect that: (i) The applicant is only a Trader for the purpose of import of the goods from its related party and not a commission agent. (ii) The trading margin earned by the applicant upon sale of the imported goods in India is not required to be included in the assessable value for customs purposes. 5.1 I have gone through the records of the case and submissions made by the applicant. A personal hearing in this matter was conducted on 6/1/2023. Advocate G. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttention is invited to the provisions of the Section 28L of the Customs Act, 1962. Powers of Authority - (1) The Authority shall, for the purpose of exercising its powers regarding discovery and inspection, enforcing the attendance of any person and examining him on oath, issuing commissions and compelling production of books of account and other records, have all the powers of a civil court under the Code of Civil Procedure, 1908 (5 of 1908). 5.3 At the outset I find that the applicant company M/S. Foxconn Technology (India) Private Limited (hereinafter referred to as FTIPL / applicant) is engaged in the business of manufacturing and trading electronic products, particularly communication network products and components, computers and computer parts, devices and systems for use in various industrial and domestic sectors. Applicant is a 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 als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third party, ADSPL, by adding 3% profit margin. 5.7 I have observed that, pursuant to investigation / inquiry by the Directorate of Revenue Intelligence (DRI) in 2021, the applicant started adopting a different approach to valuation from the one adopted earlier. Earlier approach was approved by SVB to determine the value of imported goods for payment of customs duty purposes. The contentions of the DRI on the basis of the investigation is that, the assessable value of imported goods should be the sum of basic value, transportation cost and the margin of 3% earned by the applicant upon sale of the imported goods to ADSPL. In other words, DRI alleged that the applicant is only a commission agent and the margin earned by them upon sale of the imported goods is nothing but their commission, which also needs to be included in the assessable value for customs purposes. In this connection, DRI had 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short, the genesis of accumulation of IGST credit (ITC Credit) lies in higher transaction value declared for import and lower transaction price offered to the third party in a first resale after import. I do not see any 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. 5.9 Now I turn to the issue raised by the applicant on its status as a trader or as a commission agent in this whole transaction. In order to examine the nature of transaction in further details questions, already mentioned in para 21, were raised before the applicant's representative on 6.1.2023. Answers to these questions are required in order to examine the applicant's claim to principal to principal basis transaction as well as an exact role of the applicant in the whole transaction. Applicant has emphasized that the transaction between the exporter Ingrasys Singapore and applicant M/S. Foxconn Technology (India) Private Limited is on princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL. The applicant has stated that they are not acting as any commission agent. In such circumstances, it is to be examined whether such inclusion has legal sanction as per the relevant statutory provisions. Rule 10(1)(a) of CVR, 2007 mandates inclusion of the following items to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods: i. commissions and brokerage, except buying commissions; ii. the cost of containers which are treated as being one for customs purposes with the goods in question; iii. the cost of packing whether for labour or materials. As rightly pointed out by the applicant I agree that, for the purpose of present application of Advance Ruling, the first clause (i) above is relevant. That is, any commission or brokerage, except buying commission is to be added for determining the value for the purpose of paying customs duty. In the transaction undertaken by the applicant, Rule 10 (1) (a) (i) of the CVR, 2007 provides for the inclusion of commission to the extent they are incurred by the buyer but not included in the price. This means the inclusion of commission, if any, is conditional to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BIC 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. I find that here the questions remain as to (1) why the price agreement is entered into between the exporter supplier M/s Ingrasys, Singapore & a third party buyer M/s ADSPL leaving aside the importer-applicant (claimed to be principal to the transaction), who claims to be an independent business entity. The copy of price agreement is necessary to examine the role of the applicant in the transaction, (2) why the principal (importer) in this transaction has not borne the burden of the freight that would have resolved the issue of accumulation of ITC, (3) whether 3% amount earned by the applicant is a "profit margin" or "a business revenue' of the applicant. It is important to note that the business profit and business income are not same and interchangeable terms, (4) why there is no statement/submission on the grounds for payment of Customs duty and interest subsequent to DRI investigation when the applicant is of firm belief that the 3% margin earned by them is not a commission and hence not includible in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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