CBEC issues Circulars laying down procedure for investigation of related party import cases by Special Valuation Branch of Customs

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1 12 February 2016 EY Tax Alert CBEC issues Circulars laying down procedure for investigation of related party import cases by Special Valuation Branch of Customs Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes Circulars 1 issued by Central Board of Excise & Customs ( CBEC ) prescribing procedure for investigation of related party import cases and other cases by the Special Valuation Branch ( SVB ) of Customs. It also prescribes procedure for renewal of SVB orders and ongoing SVB inquiries. Key aspects of the prescribed procedure is laid down below: No security in the form of Extra Duty Deposit ( EDD ) shall be collected from the importers. However, if the importer fails to provide requisite documents / information within 60 days, security deposit (either in cash or bank guarantee) at a rate of 5% of the declared assessable value shall be collected for a period not exceeding three months. SVB shall not issue an appealable order. Instead, it shall convey its investigative findings by way of an Investigation Report to the referring customs formation for finalizing the provisional assessments. In cases involving additions to value on account of royalty, licence fee etc, importers are advised to file a prior bill of entry, preferably 15 days prior to the import. SVBs shall complete the investigations and issue its findings within two months from the date of receipt of information wherever possible. In cases where investigations are not completed within 2 months, SVB shall seek the approval of appropriate authority for extension of time period. Circular No 5/ 2016 dated 9 February 2016 is issued in supersession of Circular No. 1/98 Cus dated 1 January 1998 and 11/2001-Cus dated 23 February [1] [Circular No. 4/2016 and 5/2016 dated 9 February 2016]

2 Background SVB specialises in investigation of transactions involving special relationships between the buyer and the seller or those involving other special circumstances surrounding the import of goods, both of which have a bearing on the assessable value. Detailed instructions were issued vide Circular Nos. 1/98 - Cus dated 1 January 1998 and 11/2001-Cus dated 23 February 2001, prescribing the procedure to be observed by the Custom Houses ( CH ) for referring cases to SVB and time lines to be followed for finalising such cases. However, trade and industry has been repeatedly representing to the Government regarding issues faced by them such as: Delays in finalisation of SVB investigations, Continued incertainty due to provisional assessments, Increase in transaction costs due to EDD, Burdensome procedure of removal of SVB orders Further, the aforesaid Circulars were based upon the Customs Valuation (Determination of Price of imported goods), Rules, 1988, which have since been superseded by the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 ( CVR ). Accordingly, after considering the above and the large number of SVB investigations pending in various CHs, a need had been felt to streamline the procedures relating to investigations done by SVBs. Procedure for investigation of related party import cases by SVB 2 Person in charge of the functions of SVB SVB shall function under the supervisory control of the jurisdictional Chief Commissioner / Principal Commissioner / Commissioner. Previously, Director General of Valuation ( DGoV ) was in charge of the functioning of SVB. They shall continue to support the SVBs by qualitatively monitoring investigation orders issued by SVBs. Jurisdiction of SVBs SVBs are presently functioning at the CH at Bengaluru, Chennai, Kolkata, Delhi and Mumbai. The jurisdiction of the SVBs shall be based upon the principle of location of the corporate office of the importer. Accordingly, as and when imports requiring investigation by SVBs are noticed at any customs formation, the concerned Commissionerate shall transfer all relevant records to the jurisdictional SVB for investigations. However, in cases where the import takes place through CH locations as above, the importer will be free to select the SVB of the CH of import or the CH most proximate to the corporate office, as convenient to him. Extra Duty Deposits Currently, 1% of declared assessable value is being collected from the importer for a period of 4 months during which time he is required to submit required documents and information to the SVB. In the event of non-submission of documents within aforesaid timelimit, the EDD can be increased to 5% till such time the importer complies. Upon the importer complying with the requisition for documents and information, Circular 11/ 2001 provides that EDD shall be discontinued. 2 As per Circular No 5/2016 dated 9 February 2016

3 As per the Circular henceforth, no security in the form of EDD shall be collected from the importers. Imports from related sellers where duty chargeable 3 is unconditionally fully exempted or nil. However, if the importer fails to provide requisite documents and information within 60 days, security deposit at the rate of 5% of the declared assessable value shall be collected by the Commissioner for a period not exceeding three months. Any transaction where the value of imported goods is less than Rs 1 lac but cumulatively these transactions do not exceed Rs 25 lacs in any financial year. Cases which may be considered for SVB investigations: At the same time, the importer shall be granted a further period of 60 days to comply with the requisition. If the importer fails to submit documents / information within this extended period, the Commissioner may consider the use of other provisions of the Customs Act for obtaining the same from an importer. In no case shall the imposition of security deposit exceed the period of three months specified above. Furthermore, the importer would be free to choose whether the security deposit to be provided for the purposes of provisional assessment shall be by way of cash deposit or a Bank Guarantee. No appealable orders Henceforth, SVB shall not issue an appealable order. Instead, it shall convey its investigative findings by way of an Investigation Report ( IR ) to the referring customs formation for finalizing the provisional assessments. Where any importer makes a declaration that the transaction is between related persons 4, it would be necessary to examine whether or not the circumstances surrounding the import of goods indicate that the relationship has influenced the price. In cases involving possible additions to declared transaction value with respect to the following: royalty and licence fee 5 or where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller 6 or where any other payments are made or to be made by the buyer to seller as a condition of sale of imported goods etc. 7 Procedure for considering reference to SVB In cases involving additions to value on account of royalty, licence fee etc, importers are advised to file a prior bill of entry 8, preferably 15 days prior to the import. CBEC has now introduced a questionnaire to be filled by the importer which would enable the jurisdictional Commissioner to take a decision on whether a case needs to be referred to SVB for investigations. Cases not be taken up for inquiries by SVBs: Import of samples and prototypes from related sellers. The importers are also advised to provide prescribed information at the time of filing of the Bill of Entry itself. This would be necessary only in the first instance of import. Once a decision has been taken regarding referring the matter to SVB or not, there would be no need for such advance filing of the Bill of Entry for subsequent import. 3 Includes additional duty of Customs 4 As defined under Rule 2 (2) of CVR 5 As per rule 10 (1)(c) of CVR 6 As per Rule 10(1)(d) of CVR 7 As per rule 10(1)(e) of CVR 8 As provided under the second proviso to section 46 (3) of the Customs Act, 1962

4 Upon filing of the Bill of Entry, and receipt of information, the proper officer ( officer ) shall proceed to determine whether, prima facie, there is a need for investigation by the SVB. He shall complete such examination within 3 days of the filing of Bill of Entry. The matter will be submitted before the Commissioner. questionnaire, all related records shall be transferred to the jurisdictional SVB, and in no case later than 3 working days of the release of the goods. The documents received from the importer shall be duly acknowledged by the SVB. Procedure in Special Valuation Branch The officer shall examine the case on parameters such as transfer price, the basis on which it is derived, etc. After examining the transaction on the above lines, the officer shall submit the findings to the Commissioner for a decision on whether the case is fit for being referred to the SVB for investigations. The Commissioner shall after due consideration of the preliminary findings, take a considered view whether: the matter be referred to the SVB for further investigations and the goods be provisionally assessed to duty9 or the transaction does not merit investigations by SVB and that assessment be finalised on the basis of enquiries to be conducted by the officer 10 or the transaction be assessed in terms of rule 3 of CVR. Procedure post reference to SVB: In the event of the Commissioner directing investigations by SVB, the officer shall promptly carry out provisional assessment in terms of section 18 of the Customs Act, 1962 and alongside requisition further information from the importer. The importer should be advised to furnish the documents and a duly indexed reply to the questionnaire to the jurisdictional SVB within 60 days. Upon completion of the procedure for provisional assessment and issue of the Upon receipt of information, SVB shall commence inquiries. The Deputy Commissioner / Asst. Commissioner (SVB) may call for further documents or information as required. The importer shall also be given suitable opportunity to submit evidence in support of the declared value. SVBs shall, as far as possible, complete the investigations and issue its findings within two months from the date of receipt of information. In cases where investigations are not completed within 2 months, the SVB shall seek the approval of the jurisdictional Commissioner for such extended time period as is deemed necessary to complete investigations. However, where investigations are not completed within 4 months from the date of receipt of information, the matter shall be submitted before the Chief Commissioner for extension of period as is deemed fit. Upon completing investigations, the SVB shall submit the findings before the Principal Commissioner/Commissioner, quantifying the extent of influence on the transaction value due to the relationship or payments towards royalty or licence fee or other payments actually made or to be made as a condition of sale of the imported goods. Upon approval by the Principal Commissioner / Commissioner, an Investigation Report ( IR ) shall be prepared incorporating all relevant facts, submissions made by the importer, 9 As per section 18 of the Customs Act 10 As per Rules 4 to 9 of the CVR

5 investigative findings, grounds for acceptance or rejection of transaction value, and the extent of influence on declared transaction value, if any. A copy of the IR shall also be sent to the DGoV. Finalisation of assessments Upon receipt of the IR from the SVB, where investigative findings are that the declared value is found conforming to rule 3 of the CVR, the customs stations where provisional assessments have been undertaken shall immediately proceed to finalize the same. However, when investigative findings are that the declared value has been influenced by the circumstances surrounding the sale, the officer shall issue a show cause notice to the importer within 15 days of the receipt of the IR, under intimation to the concerned SVB. The adjudicating authority shall, after following the principles of natural justice, pass an order quantifying the extent of influence on the declared transaction value. Changes in circumstances surrounding the sale In any case where, the circumstances of sale or terms and conditions of the agreement between the buyer and related seller change, or any other payments 11 become payable, the importers shall be required to declare the same at the place of import in the prescribed format. Monitoring of SVB investigations DGoV shall monitor the progress of the investigations and report to the Board cases involving any inordinate delays. Circular No 5/ 2016 dated 9 February 2016 is issued in supersession of Circular No. 1/98 Cus dated 1 January 1998 and 11/2001-Cus dated 23 February Procedure for renewal of SVB orders and ongoing SVB inquiries 12 To facilitate quick disposal of cases currently pending with SVBs for renewal, a system of one-time declaration is being provided. Importers shall submit to the jurisdictional SVB, a declaration in the prescribed formats by 31 May In case the importer files declaration in Annexure 1 (declaring no change in circumstances surrounding sale of goods), the process of renewal would be treated as dispensed with. Consequently, the SVB shall immediately inform the Custom stations where provisional assessments have re-started due to the process of renewal to immediately discontinue collecting EDD and finalize the related provisional assessments, without any further reference to the importer. The communication from SVBs to the Customs formations / Appraising groups must be sent by 30 June In all such cases, the officer shall examine the transactions as per procedures laid out above and the jurisdictional Commissioner shall refer the matter to the jurisdictional SVB, where required. In view of the above, the system of renewal of SVB orders has been discontinued with immediate effect. In case the importer files declaration in Annexure 2 (declaring change in circumstances surrounding sale of goods), SVB inquiries shall be initiated as per the prescribed procedure 13. Pending SVB Investigations All pending SVB investigations (other than renewal cases), where EDD is being 11 As referred under Rule 10 (1) (c), (d) & (e) of the CVR 12 Circular No 4 / 2016 dated 9 February In terms of the procedure stated in Circular No. 5/2016 dated 9 February 2016

6 obtained are required to be reviewed as per the new procedure prescribed above. EDD shall be discontinued where the importer has provided the required information and documents. This exercise shall be completed by 31 May In cases where EDD has been enhanced to 5%, on account of non-provision of necessary information or documents for SVB inquiries, the Commissioner shall immediately take recourse to appropriate provisions under the Customs Act for obtaining the necessary documents for investigations and shall subsequently dispense with the EDD. Comments The new procedure prescribed by CBEC will not only provide much needed relief to the importers in case of transactions involving special relationships and circumstances but will also facilitate ease of doing business through radical shift in the approach and functioning of SVB. The success in bringing down the time taken in disposal of cases and making the process less burdensome, will however depend on its efficient implementation by the revenue department. On the other hand timely adherence to the simplified compliance requirements will help importers overcome their grievances.

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