CASE STUDY: INDIA VALUATION CONTROL PROGRAMME

Transcription

1 CASE STUDY: INDIA VALUATION CONTROL PROGRAMME WORLD CUSTOMS ORGANIZATION JUNE 2012

2 TABLE OF CONTENTS 1. INTRODUCTION... 3 Background... 3 Brief overview of the programme... 3 Legal framework... 4 Organizational framework... 4 Special Valuation Branches (SVBs)... 6 Customs valuation law enforcement CURRENT VALUATION CONTROL SYSTEM... 7 Valuation controls at border... 7 Valuation controls in post-clearance environment... 8 Risk Management System... 8 Use of price data as a risk management tool... 9 Source of data Technical description of NIDB Application of NIDB Monitoring mechanism IMPACT EVALUATION CASE STUDY I CASE STUDY II CASE STUDY III FUTURE PLANS SUMMARY ANNEX I: HIGH LEVEL ORGANIGRAMS OF CBEC ANNEX II: CUSTOMS VALUATION LEGISLATION ANNEX III: DATA ELEMENTS RECORDED IN DATABASE ANNEX IV: SAMPLE ALERT ISSUED IN CASE OF TONERS ANNEX V: VALUATION INSPECTION PRO FORMA Prepared with the kind cooperation of the Central Board of Excise and Customs, Department of Revenue, Ministry of Finance, Government of India. Copyright 2012 World Customs Organization. All rights reserved. Requests and inquiries concerning translation, reproduction and adaptation rights should be addressed to copyright@wcoomd.org 2

3 1. INTRODUCTION Background The Central Board of Excise and Customs (CBEC), Department of Revenue, Ministry of Finance, Government of India is the nodal agency of the Government of India in control of administering and overseeing the functions of officers of Indian Customs and collecting revenue on imported goods. This role inter alia involves the implementation of the principles of Customs valuation. The gross revenue receipts of Indian Customs in amounts to approximately USD 30 billion. India is a founding Member of the GATT (now under the auspices of the World Trade Organization (WTO)) and was actively involved in the GATT negotiations (Tokyo Round, ), which resulted in development of the WTO Valuation Agreement ( the Agreement ). India implemented the Agreement in August Until 1997, the work pertaining to enunciating and implementing policies and procedures relating to Customs valuation, as well as representing the position of Indian Customs in various international forums such as the WTO, was handled from the CBEC headquarters. A specialized wing, namely the Directorate of Valuation, was established in 1997 [upgraded to the level of Directorate General of Valuation (DGOV) in 2002] to spearhead research in the area of valuation, develop necessary tools for officers to effectively implement the Agreement and build the capacity of officers in Customs valuation. DGOV developed and implemented a valuation database to assist assessing officers in the acceptance or rejection of declared values. The National Import Valuation Database (NIDB) was implemented in phases starting from November 2001 and became fully operational in December Risk Management System (RMS) was developed initially as a separate project to aid in risk identification and was introduced for the purposes of trade facilitation as part of the Customs Workflow System (called Indian Customs Electronic Data Interchange System, or ICES) in The self-assessment programme was launched in 2011 together with efforts aimed at capacity building of officers and trade. A compendium designed to assist importers and exporters in making self-assessment of duty of imported or export goods has been prepared and hosted on the CBEC website. Brief overview of the programme Invoice (value) manipulation to undervalue or overvalue imported goods, resulting in loss of government revenues and/or aiding in trade-based money laundering, is an area of serious concern to Customs administrations. The Indian Customs Valuation Control Programme was initiated in this context to provide assessing officers with real-time access to valuation trends 3

4 of commodities under assessment, to assist them in making a decision on the acceptance or rejection of the declared transaction values. To meet this end, NIDB was designed and deployed to serve as a repository of valuation trend data. The valuation trends not only include the raw data obtained through assessment of identical or similar consignments across the country but also data analyzed and flagged by the valuation experts of Indian Customs. The other benefits accruing from the development of the database include increased transparency in Customs valuation and enhanced trade compliance, facilitating risk analysis, better monitoring of related party transactions and transfer pricing, enabling the detection of instances where importers shift from one port of the country to another for undervaluing imported goods and checking misclassification of imported goods. Legal framework Indian Customs Law is codified in the form of a statute passed by the national Parliament and called The Customs Act, 1962 (52 of 1962). Section 14 of the Customs Act, 1962 defines the law pertaining to Customs valuation applicable in India. It is based on Article VII of THE GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT), Section 14 of the Customs Act, 1962 authorizes the Union Government to frame detailed rules for the purposes of Customs valuation. Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 consistent with the WTO Agreement on Implementation of Article VII of GATT, 1994, have been framed under the authority of the aforesaid section for the purposes of Customs valuation of imported goods. Similarly the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 have been framed for the valuation of export goods based on the principle of primacy of the transaction value. WTO Decision 6.1, specifying the procedure to be followed in cases where there are reasons to doubt the truth or accuracy of a declared transaction value, is contained in rule 12 of the Customs Valuation (Determination of Value of Imported Goods) Rules, (See Annex II for the text of rule 12). (See or for the text of the legal framework.) Organizational framework (See High Level Organigram at Annex I) 4

5 CBEC headquarters The CBEC headquarters is based in New Delhi and functions as a board. A specialized wing in the board is in charge of preparing the policy briefs on valuation issues. The wing interacts with the DGOV for policy inputs and also communicates the decisions of the board to the DGOV. Directorate General of Valuation (DGOV) The DGOV has been established by the CBEC as an organization specialized in matters pertaining to Customs valuation. The role and activities of the DGOV include: To assist CBEC in policy matters concerning Customs valuation To develop and maintain valuation databases and other valuation tools for effective and uniform application of valuation laws all over the country, including the maintenance of National Import Database (NIDB), Export Commodity Database (ECDB), Central Registry Database (CRD) for Special Valuation Branch (SVB) cases and the DGOV website for the dissemination of valuation-related information among assessing officers and trade To identify sensitive commodities which are prone to valuation malpractices and monitor their valuation trends and take corrective steps To provide guidance to field offices in valuation matters To carry out valuation inspections of field offices to ensure uniform application of valuation laws To coordinate with the World Customs Organization on Customs valuation matters To provide input on valuation trends and sensitive commodities for framing risk rules for the Risk Management System (RMS) To monitor, examine the quality of orders passed by Special Valuation Branches (SVBs) To coordinate with domestic direct tax authorities with respect to identifying linkages between transfer pricing and Customs valuation and to assist in information sharing and the training of direct tax officers in the principles of Customs valuation Compilation and dissemination of commodity-specific information on prevailing international trends Conducting national and international programs for the capacity building of officers of Indian and other Customs administrations, as well as trade or Customs valuation related issues including on the development and use of valuation databases 5

6 Special Valuation Branches (SVBs) SVBs, located at five Custom houses - Chennai, Kolkata, Delhi, Bangalore and Mumbai - are specialized wings dealing mostly with identifying the truthfulness of declared values in the case of related party transactions. Usually, the SVB branch located closest to the headquarters or the corporate office of the importer handles the investigation into the relationship of that importer with its seller. A decision taken by any branch of SVB with respect to the relationship between the two related parties affecting the declared value in the case of imports between the parties is followed by local and regional Customs offices across the country. A case is referred to the SVB branch of the Custom house wherever the importer has declared that the transaction of import is between related persons in accordance with Rule 2 (2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (similar to Article 15 (4) of the Agreement) and the assessing officer is satisfied that the relationship has influenced the declared value, or, when additions regarding costs and services are to be made under the said rules (similar to Article 8 of the WTO Agreement), and, there is, prima facie justification for further enquiry. A reference to the SVB branch is also made in light of intelligence inputs regarding the price of imported goods being influenced due to a relationship between the importer and overseas supplier. The details of cases investigated by the SVBs are recorded and stored in a Central Registry Database (CRD) which is regularly updated right from the time of registration of the case in the SVB. The consignments are provisionally cleared. Once the decision is made - whether the relationship has influenced the price actually paid or payable or not - the assessments are finalized as per the decision. Customs valuation law enforcement The enforcement of Customs valuation law is undertaken through a three-tier structure: Local: through Special Intelligence and Investigative Branches (SIIBs) of the local and regional Customs offices Regional: through Preventive Commissionerates, with jurisdiction over more than one local and regional Customs office National: through the Directorate General of Revenue Intelligence (DRI), a premier intelligence and investigative agency having pan-india jurisdiction, as well as linkages in the international intelligence network. 6

7 2. CURRENT VALUATION CONTROL SYSTEM Valuation controls at border With the introduction of the Risk Management System (RMS), around 55% of consignments are cleared without physical examination or documentary pre-checks through a Green channel, except for some random checks conducted to prevent manipulation of the system by unscrupulous elements. The statute also authorizes the officer to conduct scrutiny of the transaction for the purposes of assessment of Customs duty, based on reasonable doubts, prior to clearance of the consignment. Specified officers are granted the power to assess the imported consignments under the Customs Act, 1962 by taking a decision on its value, classification or eligibility for availment of duty exemption and to allow clearance of the goods. No higher administrative authority can issue directions to such officers to assess any particular consignment in any particular case. During the scrutiny or enquiry, the assessing officer may require either any of the documents relating to the transaction, such as the sales contract, bank documents etc., or laboratory test reports in cases where the composition of the imported goods is essential to determine the rate of duty or value or for compliance with the standards laid down in other statutes controlling or restricting import of certain items into India, such as food items. The Customs Act, 1962 also authorizes the assessing officer to provisionally assess the duty and clear the goods against appropriate security. The provisional assessment and clearance is resorted to in the following cases: when the importer is unable to produce the requisite documents at the time of assessment and requests the assessing officer for more time to produce such documents when the imported goods are required to be tested for the purposes of establishing correct classification to identify eligibility for availment of various Customs duty exemptions when, for the purposes of valuation or otherwise, further investigation is required Statistics Pre-clearance enquiry into valuation aspects is conducted in around 2-4% of the imported consignments. Around 1-2% of the imported consignments, except those pending investigation by the SVB, are cleared provisionally against security. 7

8 Valuation controls in post-clearance environment The post-clearance audit (PCA) consists of two types: Transaction-based PCA This type of audit is conducted on import declarations selected by the PCA module of RMS for further scrutiny based on a number of risk parameters. It is conducted within one year of the import of the consignment. It is a desk-based audit and does not involve site visits or an audit of importer s books and records. On-site PCA (OSPCA) OSPCA has been recently introduced to Indian Customs and includes on-site visits to scrutinize an importer s books and records, to evaluate compliance and verify the correctness of the Customs duty payments made by the importer on a self-assessment basis at the time of clearance. It also reinforces post-import restrictions and controls. CBEC has also introduced an Authorized Economic Operator (AEO) scheme, wherein the AEOs are extended assured levels of facilitation. Statistics A transaction-based post-import audit is carried out on approximately 15 20% of all transactions, and the local and regional Customs offices have the flexibility to alter the percentage of transactions to be audited. Risk Management System The Risk Management System (RMS) strives for an optimum balance between facilitation and enforcement and seeks to concentrate the resources of the local and regional Customs offices on relatively higher risk areas, so that the checks exercised are meaningful and effective. It also significantly reduces the dwell time and transaction costs for compliant importers, while providing an effective enforcement system against non-compliant ones. The main RMS modules are: Import General Manifest (IGM) module, for selecting containers for scanning EDI module, for identifying the extent of facilitation to be accorded to each consignment Post-audit consignment selection module, for identifying cases to be selected for transaction-based PCA. Valuation component in RMS Valuation Risk Assessment Module (VRAM) is an important component of the RMS NIDB provides the support base for VRAM 8

9 Risk rules have been created for those commodities which have a record of non-compliance from a valuation angle. Imports of such goods may not be facilitated. They are forwarded to the assessing officers for assessment and examination. The list of the most sensitive commodities is provided to the RMS Central Team by DGOV, and is based on exhaustive studies of import trends as well as consultations with the local and regional Customs offices, intelligence agencies, PCA teams, etc., for the insertion of pan-india risk rules in RMS. Such a list is uploaded on the RMS Central Server on a monthly basis. The selection of sensitive commodities is an ongoing process and selection criteria are periodically reviewed, based on feedback. Further specific risk rules are inserted in the RMS system in the case of related party imports by selecting the importers and the related suppliers as factors, so that any Customs Declaration meeting these parameters can be interdicted and sent to the assessing officer for proper scrutiny. Local risk rules are inserted by the local and regional Customs offices in consultation with the DGOV for consignments which are specific to that location. Risk rules are also inserted taking suitable parameters and factors based on valuation alerts issued by DGOV from time to time. Use of price data as a risk management tool National Import Database (NIDB) NIDB is an electronic database maintained by DGOV consisting of assessed values of goods imported into India. NIDB uses Mulyaankan, an application developed by the Centre for Development of Advanced Computing (C-DAC), an advanced research and development organization of the Government of India. Though NIDB is primarily a tool for checking the declared values of live consignments, it is also used for assisting in a post-clearance audit. The benefits of using the NIDB include: the prevalence of uniform valuation practices at all ports; an increase in transparency in Customs valuation and enhanced trade compliance; identification of the impact of relationship on declared values in the case of related party transactions; minimization of undue price advantage to importers resorting to valuation malpractices and providing a level playing field to compliant traders and domestic producers; and, the identification of risk parameters for commodities prone to valuation malpractices. 9

10 Quality The quality of data input into NIDB is crucial for effective risk management and hence adequate steps are taken to ensure the quality of available data. It is ensured that: the description of imported goods is complete and accurate and that keywords describing the product conform to established standards or norms prevalent in the trade of the goods in question. the correct Harmonized System nomenclature (HSN) classification of the goods is available. standardized Unit Quantity Code is used (UQC) with respect to declaring the quantities of the imported commodities, as it is felt that comparison becomes difficult when different unit descriptions are used for the same commodity. For example, petroleum oil may be described in liters, kiloliters, kilograms, MT, drums, etc. But for comparison purposes it is desirable that the analyzed data mentions the quantities in a single unit. precise details of the imported consignment, such as specific brand, model, grade or specification, are recorded. These have a bearing on the value and hence the accurate capture of these details is essential for a meaningful database analysis. Source of data The majority of the data in NIDB is obtained from assessed values of previous consignments which are captured on a daily basis. Apart from the assessed values, data is also taken from price lists published by internationally recognized and reputed sources specializing in commodity pricing such as Metal Bulletin, Reuters and Platts, etc. Input of data into NIDB The present version of the Indian Customs Electronic Data Interchange System (ICES) is a centralized pan-india Customs Document Workflow solution, wherein all locations are connected to each other, the National DATA Centre at New Delhi and the Disaster Recovery Centre at Chennai through a Wide Area Network over the Multiprotocol Label Switching system. The data is entered into NIDB from all Customs locations, and receipt of the data is monitored on a daily basis. However, some locations are operating on an older model based on a localized server and some remote locations are not connected to the network. Access to NIDB The data analyzed by DGOV is transmitted to all local and regional Customs offices connected through ICES every week via ICEGATE. The weekly analytical data files are also posted on the DGOV website in a downloadable format. 10

11 For the purpose of providing access to NIDB to the locations functioning on the old version of ICES, the analyzed data is transmitted electronically from the DGOV central server to all local and regional Customs offices every week via ICENET. Weekly transmissions are consolidated at these offices and stored in Microsoft Access file format with easy data search and retrieval facilities. This data is made available to assessing officers at these locations on Intranet and is protected by user IDs and passwords. For locations connected through the new centralized version of ICES and those not connected on the electronic network, NIDB access for assessing officers is provided through the DGOV website on a password-protected basis. However, efforts are in progress to host the NIDB data on the ICES Central Server, access to which is already password protected, providing a single layer of user security for seamless access to the Customs Document Workflow System of ICES and analyzed NIDB data. Technical description of NIDB Functioning of database Data received for the previous week is analyzed early in the following week using Mulyaankan. Mulyaankan categorizes the raw data received from ICES and manual locations, to provide analyzed data to the assessing officers in searchable format and to detect anomalies in declared values. This analysis consists of two types. In the preliminary analysis, the data received from various sources is merged and organized by tariff heading, local and regional Customs offices and country of origin, and the unit price is converted into Indian rupees to facilitate comparison. This analyzed data is only for reference purposes, in order to make a decision about the acceptability of the declared transaction value. The second and final analysis is with respect to the sensitive commodities wherein Mulyaankan, with the help of keywords identified by the DGOV, makes clusters of identical/similar goods and calculates unit values of declared and assessed values as well as the weighted averages of each cluster. It also calculates the percentage deviations of each imported consignment from the current weekly weighted average. Where the assessed unit value is more than 10% lower than the weighted average value, the software flags those imports for post-clearance scrutiny on valuation aspects. Hardware requirements The computer on which Mulyaankan Server, the specialized data mining application of NIDB, is installed is a server class machine containing at least 1 GB of free space in its primary partition and at least 1 GB of RAM. 11

12 Software requirements The server must be preloaded with: Windows NT 4.0 with Service Pack 6 or above Internet Explorer 5.0 or above Microsoft Data Access Component 2.7 or above Microsoft Excel 2000 or above Oracle Server or above a TNS entry must be created, pointing to the database that has been installed. This entry must be named Customs. User skill requirements Any user expected to work on the Mulyaankan Server application must be computer literate. Apart from functional knowledge of the domain, he or she must be able to execute the following basic operations: create a new file of any given type copy a file from one directory to the other copy a file from the hard disk to the floppy and vice-versa move a file from one directory to another zip and unzip a file send with attachments operate the mouse Customization MS Access-based software (NIDB-C) was developed for aggregating weekly NIDB dispatches and converting them into a single database, which can be made available to the users on the Intranet. A personal computer (PC)-based variant of NIDB-C was also developed for smaller local and regional Customs offices (NIDB-Q). This software contains the full NIDB and can be installed on a PC so that weekly dispatches of analyzed data can be downloaded from the Internet to update the database at smaller Customs offices that consist of standalone PCs. Data elements in NIDB Annex III contains details of the data fields captured in NIDB. 12

13 Application of NIDB Use in assessment The principal use of NIDB is to compare declared values with contemporaneous assessed values of identical or similar goods and with international prices in order to arrive at a considered decision on the need for further scrutiny of the declared value. This helps in the identification of potential cases of manipulation of value, which are then taken up for further scrutiny. On receipt of the weekly-analyzed data, the local and regional Customs offices are required to identify the cases flagged as outliers pertaining to the office and to scrutinize the authenticity of the declared values in consultation with the importer. Any difference/variation in the declared value and the databases value(s) is considered along with other potential risk factors in determining further action. These risk factors include: quality of supporting documentation risk profile of importer new commodity sensitive commodity (e.g. fluctuating international prices) It is made amply clear to NIDB users that the database values are to be used only as indicative values, and are not to be used to determine the Customs value of imported goods or as a substitute or alternate set of values of imported goods, nor as a mechanism to establish minimum values. Each case is examined on merit, taking into account the circumstances of the transaction. Wherever it is proposed to reject the declared values, the procedure laid down under rule 12 of Customs Valuation Rules, 2007 (See Annex III) should be followed, unless evidence exists establishing fraud. Use of NIDB data (assessed unit value for contemporaneous goods under rule 4 (transaction value of identical goods method)) with appropriate adjustments to account for difference in quantity level, commercial level and other factors would be appropriate in such cases where valuation is done under rule 5 (transaction value of similar goods) or rule 6 (other methods of valuation). The Valuation Research and Analysis Wing (VRAW) has been created in the major local and regional Customs offices to conduct market research regarding sensitive commodities in terms of valuation practices and analysis of valuation trends and patterns in the international market. Proposals are made to DGOV for reviewing and updating the sensitive commodities list. A few case studies wherein NIDB proved to be an important tool for assisting assessing officers are described in Chapter 3. 13

14 Use in enforcement In cases where manipulation in the declaration of imported goods is detected and evidence of such manipulation is available, NIDB can be used in determining the Customs value under rule 4 (Article 2 of the Agreement pertaining to identical goods) or rule 5 (Article 3 of the Agreement pertaining to similar goods) of the Customs Valuation Rules, It is also useful for identifying fraudulent misclassification of imported goods. A case study wherein NIDB proved to be an important tool for enforcing Customs valuation law is described in Chapter 3. Monitoring mechanism General safeguards The primary safeguard against misapplication of NIDB is through its restricted and password-protected access. The log facility available in NIDB ensures that all the searches made by the user in the database are recorded and available as evidence against any misapplication by the user. Further, even though importer and supplier details are captured by ICES, this information is not made available through NIDB. It is made available to the intelligence and investigation agencies only in cases of fraud investigation. Specific safeguards The specific safeguards against the assessing officers for misapplication of NIDB are through valuation inspections of the local and regional Customs offices, conducted routinely by DGOV. Inspections are primarily carried out to ensure uniform application of Customs valuation laws. During such inspections, the overall performance of the local and regional Customs offices in complying with the regulations and instructions on valuation matters is assessed with reference to the information gathered and the relevant documents. Spot checks of the local and regional Customs offices are also conducted to ensure valuation tools are being used correctly and optimally. The offices are required to provide the information in a prescribed format as in Annex V, prior to the inspection. Price data obtained from other sources NIDB does not contain any price data obtained from domestic industry. This data is provided by DGOV for use of the assessing officers through publication of valuation bulletins on a monthly basis. These bulletins also contain information from international trade sources. Recently, such data has been converted into electronic format for storage and use in NIDB by classifying the published data in compliance with the Harmonized System nomenclature. 14

15 3. IMPACT EVALUATION The system has considerably reduced the scope for importers to shift from one port to another with a view to undervaluing imported goods. There are many case studies available to vouch for the trend. A few are reproduced here for the purpose of appreciating the benefits of the Indian Valuation Control Programme. The first two case studies indicate the usefulness of NIDB in identifying the values of contemporaneous imports as a means to cause further enquiries into the transaction. CASE STUDY I Item of import: Cold Rolled Grain Oriented Steel M3 Grade Facts of the case Customs Declaration dated February 7, 2011 for the clearance of item imported from Country A. NIDB data indicated lowest declared and accepted price of INR /kg or USD 2,500 PMT for the same item from Country A in the contemporaneous period. Declared price of USD 1,600 PMT or INR 79.92/kg appeared significantly lower than that declared for contemporary imports, thereby establishing a need for further inquiry. The importers were asked to produce transaction-related documents which revealed that some discount had been provided in the case in question which had not been provided to other importers. Further, the manufacturer s invoice was also not available. Conclusion of the case The Customs value was determined as INR /kg, based on rule 4 of Customs Valuation Rules, 2007 and accepted by importer. Item of import: Aluminum scrap tread Facts of the case CASE STUDY II Customs Declaration dated December 1, 2010 filed for the clearance of item imported from Country B. NIDB data indicated lowest declared and accepted price of INR 87.88/kg or USD 1,760 PMT for the same item from Country B in a contemporaneous period. 15

16 Declared price of USD 1,550 PMT or INR 72.25/kg appeared significantly lower than that declared for contemporary imports, thereby establishing a need for further inquiry. The importers were asked to produce transaction-related documents which revealed that some discount had been provided in the case in question which had not been provided to other importers. The manufacturer s invoice was not provided. The importer and supplier were found to be related. Conclusion of the case The transaction value was redetermined to INR 87.91/kg based on rule 4 of Customs Valuation Rules, 2007 and accepted by importer. The next case study indicates the utility of NIDB in detecting valuation fraud cases. Item of import: Automobile parts. CASE STUDY III Facts of the case Background There were inputs that several traders were manipulating the invoices pertaining to imports of automobile parts. This was confirmed after causing market enquiries. NIDB data pertaining to import of automobile parts for a six-month time span was taken up for analysis. Reason for doubting declared value The analysis of NIDB data revealed two sets of prices for imports of automobile parts. The declared unit value of automobile parts imported by Original Equipment Manufacturers (OEMs) was much higher than that declared by the individual traders despite the fact that the imports by OEM constituted a larger proportion of imports of automobile parts as compared to imports by individual traders. In many cases of imports by individual traders, the declared value of imported automobile parts was even less than the value of the imported raw materials used for the manufacture of such parts. It was also noticed that most of these individual traders had not declared the details of the imported automobile parts, such as brand, name/model of the vehicle where such parts were to be used, manufacturer, quality, part number, etc. In numerous cases, higher contemporaneous import prices were found in NIDB. Investigation All the details regarding brand, name/model of the vehicle where such parts were to be used, manufacturer, quality, part number, etc. were requested from the importers during investigations and these were then compared with the data available in NIDB. Based on the above analysis, the case was taken up for investigation by the enforcement agency at the local and regional Customs office level. The trader-importers were asked to 16

17 submit complete transaction documents, including negotiation documents with the overseas suppliers as well as invoices raised by manufacturers. Most of the importers failed to submit the required documents. One of the importers submitted a manufacturer s invoice, but its genuineness was doubtful at first glance. His premises were visited by the team of Customs officers who recovered an invoice of the same number and date, issued by the same manufacturer. The duplicate invoice indicated a higher transaction value for the same consignment. Some blank invoices were also found on the premises, which revealed that he was fabricating the invoices in his office. They were not the actual transacted invoices. It was clearly confirmed that there had been manipulation of the transacted value requiring a redetermination of the value. Declared value A table showing the declared FOB value of the importer in euro is shown below: TABLE 1 Sr. no Model Declared FOB (euro) 1 ABCD EFGH IJKL MNOP QRST XYZ 4.20 Rejection of transaction value The above evidence indicating valuation fraud was sufficient to reject the transaction value. The consignment was allowed to be cleared provisionally against payment of adequate security. The transaction value was rejected and the Custom value was determined as per the Indian Customs Valuation Rules, Redetermination of value (under Article 3 of the Agreement) No data was available in the database for determination of the value under Article 2 of the WTO agreement and hence officers resorted to Article 3. The investigations revealed that the items mentioned at Serial No. 2, 3, 4, & 6 of TABLE 2 were also being imported by M/s. X India, which is a Indian subsidiary of M/s. X Inc., the prices of which were available in NIDB. The automobile parts samples imported by the trader and those imported by M/s X India were compared, revealing that the original manufacturer for both the imported parts was M/s. Y Inc. 17

18 Thus, the Customs value could be determined under Article 3 of the Agreement. The values of the automobile parts were determined as under: TABLE 2 Sr. no. Model Declared FOB (euro) Redetermined FOB (Article 3) (euro) 2. EFGH IJKL MNOP XYZ Redetermination of value (under Article 5 of the Agreement) The prices for the other items mentioned at Serial No. 1 & 5 of TABLE 1 could not be found in the database. There was no evidence to determine the value under Article 2 and Article 3 of the Agreement. It was, therefore, decided to determine the market sale prices and the taxes, profits and general expenses incurred on such types of goods. Working backwards, the values were then determined under Article 5, as below: TABLE 3 Sr. no. Model Declared FOB (euro) Redetermined FOB (Article 3) (euro) 1. ABCD QRST Conclusion of the case The outcome of the investigation and the subsequent redetermination exercise resulted in enhancement of the value of the imported automobile parts by approximately 7 times. The importers were penalized for using fraudulent means for evasion of government revenue. However, the case study established use of NIDB as an important and useful tool in developing intelligence as well as establishing the case of invoice manipulation and subsequent redetermination of value. Statistics NIDB is not used as a repository of minimum values or for arbitrary rejection of declared values. In fact, only around 1% of importer declarations have been rejected and values redetermined. Additional penalties have been imposed only in cases of serious frauds like the one mentioned in Case Study III. 18

19 The Indian Customs administration has been using NIDB since 2002 and the consequent extra revenue realized in the last four years is as below: Sr. no. Financial year Additional revenue realized (in million USD)

20 4. FUTURE PLANS NIDB was envisaged and implemented in Since becoming operational, apart from the experience gained by DGOV and the feedback received from the Indian Customs field officers, a number of developments have taken place both nationally and internationally: (a) Introduction of Risk Management System (RMS) by the Indian Customs requiring a real-time identification of risks on-the-fly; (b) Migration to centralized Customs Workflow Management System, thereby affecting the data collection and dissemination processes; and, (c) Advancements in IT hardware and software technology thereby making it possible to collect and analyze a large amount of data from various sources (including online sources) and analyzing the data in real-time without time lag. In order to upgrade the NIDB to meet the rising requirements, Indian Customs plans to develop a more sophisticated version of NIDB (titled NIDB 2.0) which will further improve the quality of data analysis and will be attuned to the requirements of RMS. Some of the features planned in the new version, apart from the inclusion of new technological advancements in database management technology, include: A provision for determining average based on the criteria of exclusion i.e. Not like. Separating and excluding provisionally-assessed imports and imports from related parties when calculating weighted averages for identifying outliers. Additionally, all items excluded from SVB, and provisional assessment cases, would be flagged. In the query module, there would be an option for saving the search results in a Word/Excel/PDF file. Different categories of outliers for different categories of goods, instead of a uniform margin (i.e. 10% deviation of weekly average on the lower side) for outliers. Data input in the NIDB central system to be fully automated. Improved management information system with greater variety of report generation capability. 20

21 5. SUMMARY In the current scenario of globalization of international trade, Indian Customs has recognized that it is neither possible nor desirable to verify, as a matter of routine, all information on the Customs declaration for all imported goods, and more particularly, to verify the veracity of the declared Customs value which could impact on government revenue. Therefore, it was considered prudent to employ effective tools and techniques in order to ensure a harmonious balance between trade facilitation and the safeguarding of government revenue by keeping a check on the unscrupulous non-compliant elements. In this context, two broad approaches were considered; one based on checks on a random selection basis, and the other based on risk-based selection. A risk-based approach has been found to be more effective and more result-oriented than random checking as it led to: a significant reduction in the dwell time of goods; ensuring the predictability and transparency in transactions; and, the promotion of a culture of compliance. Using the valuation database as a risk management tool allowed assessing officers to focus their attention on high-risk transactions. Compared to smaller economies with low levels of transactions of particular products, resulting in derivation of less reliable and less meaningful indicators from the database, the sizeable international trade levels prevalent in India give a significant advantage to the Indian trade databases in providing more statistically accurate price data. 21

22 ANNEX I: HIGH LEVEL ORGANIGRAMS OF CBEC CHAIRMAN MEMBER (Personnel & Vigilance) CHIEF VIGILANCE OFFICER JOINT SECRETARY (Administration) MEMBER (Customs, Export Promotion, Anti-Smuggling & Intelligence) JOINT SECRETARY (Customs) COMMISSIONER (Customs & Export Promotion) JOINT SECRETARY (Drawback) COMMISSIONER (Anti-Smuggling) MEMBER (Budget & Computerization) JOINT SECRETARY (Tax Research Unit I) JOINT SECRETARY (Tax Research Unit II) MEMBER (Central Excise) JOINT SECRETARY (PAC) COMMISSIONER (Central Excise) MEMBER (Legal & Judicial) JOINT SECRETARY (Legal) JOINT SECRETARY (Review) MEMBER (Service Tax) COMMISSIONER (Service Tax) 22

23 HIGH LEVEL ORGANIGRAM UNDER MEMBER (CUSTOMS) OF CBEC MEMBER (Customs, Export Promotion, Anti-Smuggling & Intelligence) DIRECTOR GENERAL VALUATION COMMISSIONER (VALUATION) MUMBAI (Two additional Commissioners and four Deputy Commissioners) DELHI (One additional Commissioner and one Deputy Commissioner) CHENNAI (One additional Commissioner and one Deputy Commissioner) KOLKATA (One additional Commissioner and one Deputy Commissioner) DIRECTOR GENERAL OF REVENUE INTELLIGENCE DIRECTOR GENERAL OF EXPORT PROMOTION ASSESSMENT SETUP SPECIAL VALUATION BRANCH (MUMBAI) SPECIAL VALUATION BRANCH (DELHI) SPECIAL VALUATION BRANCH (KOLKATA) SPECIAL VALUATION BRANCH (CHENNAI) SPECIAL VALUATION BRANCH (BANGALORE) PREVENTIVE SETUP 23

24 ANNEX II: CUSTOMS VALUATION LEGISLATION Customs Valuation (Determination of Value of Imported Goods) Rules, Rejection of declared value. (1) When the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any imported goods, he may ask the importer of such goods to furnish further information including documents or other evidence and if, after receiving such further information, or in the absence of a response of such importer, the proper officer still has reasonable doubt about the truth or accuracy of the value so declared, it shall be deemed that the transaction value of such imported goods cannot be determined under the provisions of sub-rule (1) of rule 3. (2) At the request of an importer, the proper officer shall inform the importer in writing of the grounds for doubting the truth or accuracy of the value declared in relation to goods imported by such importer and provide a reasonable opportunity of being heard, before taking a final decision under sub-rule (1). Explanation: (1) For the removal of doubts, it is hereby declared that: (i) This rule by itself does not provide a method for determination of value, it provides a mechanism and procedure for rejection of declared value in cases where there is reasonable doubt that the declared value does not represent the transaction value; where the declared value is rejected, the value shall be determined by proceeding sequentially in accordance with rules 4 to 9. (ii) The declared value shall be accepted where the proper officer is satisfied about the truth and accuracy of the declared value after the said enquiry in consultation with the importers. (iii) The proper officer shall have the powers to raise doubts on the truth or accuracy of the declared value based on certain reasons which may include - (a) the significantly higher value at which identical or similar goods imported at or about the same time in comparable quantities in a comparable commercial transaction were assessed; (b) the sale involves an abnormal discount or abnormal reduction from the ordinary competitive price; (c) the sale involves special discounts limited to exclusive agents; (d) the misdeclaration of goods in parameters such as description, quality, quantity, country of origin, year of manufacture or production; (e) the non declaration of parameters such as brand, grade, specifications that have relevance to value; (f) the fraudulent or manipulated documents. (See the Central Board of Excise and Customs website for complete text of rules.) 24

25 ANNEX III: DATA ELEMENTS RECORDED IN DATABASE Import data is captured for NIDB in the following fields: 1. Custom House Code 2. Report Date 3. Bill of Entry Number 4. Bill of Entry Date 5. Mode of Transport 6. Bill of Lading Date 7. Description of Goods 8. Custom Tariff Heading 9. Model 10. Brand 11. Country of Origin 12. Importer's Name 13. IEC (Importer/ Exporter Code) 14. Supplier's Name 15. Quantity 16. Unit Quantity Code 17. Declared Value (total) 18. Retail Selling Price 19. Assessed Value 20. Cash Payment Date 21. Mode of Submission EDI or manual 22. Total Duty Paid 23. Anti-Dumping Duty 24. Whether Importer and Exporter are related 25. Custom House Agent Code Number 26. Assessment Group Code 27. Valuation Method 28. Status of Assessment: Final or Provisional The weekly-analyzed data, provided in Excel format, contains the following fields: 1. Custom House Code 2. Bill of Entry No. 3. Bill of Entry Date 4. Country of Origin 5. Custom Tariff Heading 6. Description of Goods 7. Quantity 8. Unit Quantity Code 9. Unit Assessed Value 10. Model 11. Brand 12. Weighted Average for the Week 13. Percentage Deviation 14. Outlier 15. International Price 16. Source of International Price 17. Unit Quantity Code for International Price 18. Bill of Lading Date 19. Unit Declared Value 20. Retail Selling Price 21. Method of Valuation 22. Status of Assessment - Final or Provisional 25

26 ANNEX IV: SAMPLE ALERT ISSUED IN CASE OF TONERS To, All Chief Commissioners of Customs, All Chief Commissioners of Custom & Central Excise Subject: Valuation guidelines Possible Undervaluation and misclassification of Toners Madam/Sir, A representation from Association of Toner Manufacturers of India has been received by Board regarding undervaluation of Toners under CTH A study has been conducted by the Directorate General of Valuation (DGOV) regarding the import of bulk toner & toner cartridge for the period of Nov to Jan In the said study it has been noticed that the average price 6.00 per kgs at which bulk toner is being cleared (irrespective of country of origin). A table of all India Custom House wise weighted average is enclosed. It has also been noticed that some consignments have been assessed at values which were less than 90% of All India weighted average (list enclosed). The concerned Commissionerates may look into the valuation of these consignments and where necessary, suitable remedial action may be taken. 3. Further, the study conducted on toner cartridge revealed that consignments of toner cartridges are being assessed under 15 different CTH such as , , , , , , , , , , , , , , whereas the correct CTH should be This has the potential of corrupting the NIDB as well as further analysis being conducted on the basis of NIDB. 4. It is therefore requested that local and regional Customs offices may be alerted in respect of the valuation of Bulk Toners and classification of toner cartridges while assessing these goods. 26

27 ANNEX V: VALUATION INSPECTION PRO FORMA Directorate General of Valuation Part A: General Information 1. Name of the Custom House/Customs Station : and Code 2. Name and Address of Commissioner in charge : 3. Name and Address of Supervisory officer in : charge of import assessment 4. Name and Address of NIDB liaison : officer/supervisory officer in charge of Valuation Checking Cell (VCC) 5. Composition of VCC : 6. Previous dates of Valuation inspection, if any (Copy of the last Inspection Report to be attached) : Part B: Commodity Information 1. No. of import documents (Bills of Entry) handled during the last 3 years (April March) : 2. Customs Revenue for the last 3 years (April March) : 3. Major commodities imported for the last 3 years (April March): Sr. No. Commodity description Classification (CTH) No. of Bills of Entry per year Average revenue per year (i) (ii) (iii) 27

28 4. Commodities on which undervaluation was noticed for the last one year (specify period): Sr. No. Commodity description Classification (CTH) No. of Bills of Entry per year No. of cases of undervaluation Additional revenue realized (i) (ii) (iii) 5. Major commodities which have been identified as sensitive to undervaluation: Sr. No. Commodity description Classification (CTH) Rate of Duty (i) (ii) (iii) 6. Major importers who have been subjected to misdeclaration or undervaluation investigation during the last three years (April March): Sr. No. (i) Name and Address Commodity usually imported Suppliers Name and Address Country of origin Port of Shipment (ii) (iii) 28

29 Part C: NIDB related information 1. No. of Bills of Entry filed during the last one year (Period ) (a) EDI Mode: (b) Manual Mode: 2. How is the import data entry carried out: (a) EDI Mode (by Custom House, importer/cha, service provider): (b) Manual Mode (by Custom House, importer/cha, service provider): 3. How is the import data extracted and sent to DOV for NIDB analysis: (i) Automatic or Manual system: (ii) Frequency of data dispatches: (iii) Mode of data transmission (ICENET/ ): 4. Receipt of NIDB weekly analyzed data from DOV: (i) Regular or not: (ii) How data is stored (NIDB-Q or NIDB-C): (iii) How the data is distributed to staff (LAN, Standalone PCs): (iv) No. of data access terminals provided: (v) Is the data access by individual officers monitored and, if so, how: 5. NIDB outliers (Sample files may be kept ready for inspection): (i) No. of NIDB outliers indicated for the last one year (specify period): (ii) No. of cases in which follow up action was taken: (iii) Percentage of cases where under valuation was detected: 6. NIDB data quality: (i) Information columns provided are adequate or not (please explain the inadequacy, if any): (ii) Description (complete or not): (iii) Specification (Brand, Model, Grade etc.) adequate or not: (iv) Suggestion for improvement, if any: 29