In re Sick India Pvt. Ltd (CAAR Mumbai)
Regarding seeking certainty on consistency with the principles of customs valuation under process called Transfer Price System and steering Concept (TPuS)
To summarise, a factual matrix submitted by applicant states that they propose to follow Transfer Pricing System and Steering Concept (TPuS) method also known as Resale Price method/Resale Minus method only from 1st May 2023 onwards for related party imports for determination of transaction value under section 14 of the Customs Act, 1962. The CBIC Circular referred above has mandated that in case of related parties’ transactions the jurisdictional Commissioners will decide whether the relationship has influenced the transaction value on the basis of the circumstances surrounding the sale of the imported goods. On examination of various elements of price used in demonstration of TPuS method presented by the applicant, discussed in para 2.23 earlier and other submissions made, I find that there will be no direct sales to any unrelated buyer in India, the elements of price covered under Rule 10(1)(c), Rule 1 0(1)(d) and Rule 10 (1)(e) of the CVR, 2007 are not present in the applicant’s imports ruling out application of Rule 10, the transaction value arrived at by using TPuS method is adequate to ensure recovery of all costs plus profit which is representative of the firm’s overall profit realized over a representative period of time (e.g. on an annual/financial year basis) in sales of goods of the same class or kind to demonstrate that the price had not been influenced by the relationship, due to unique brand value and customisation of the goods the scrutiny of transaction value by applying the Rule 4, Rule 5 and Rule 6 is also not required in the present case, and the process adopted under ‘deductive value’ method prescribed under Rule 7 is exactly same as TPuS method. Under Rule 7 as well as under TPuS method the benchmark price adopted for backward calculations is a price charged to unrelated buyer on aggregate basis for each product which is in line with Interpretative Note which interprets such price as ‘the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place’. Deductions worked out under TPuS method from benchmark price are similar to those prescribed in Interpretative note to Rule 7 of the CVR, 2007.
Applicant has mentioned that at the end of the financial period, the value of CAR will be reviewed and finalized. Applicant has proposed to effect an adjustment that is required to be made to such declared price (transaction value) — upward or downward — after the end of financial period/financial year and discharge the remaining Customs duty and other liabilities as per the law accordingly, if any. It goes without saying that, since all elements of transaction value cannot be definitively determined at the time of imports, the assessment to take place on provisional basis until adjustments are made based on actual accounting data and further acceptance by the concerned Customs authorities.
On the basis of foregoing discussion, I rule that the applicant’s proposed valuation method, Transfer Pricing System and Steering Concept (TPuS) method also known as Resale Price method/Resale Minus method, for determination of transaction value under Section 14 of the Customs Act 1962 for goods proposed to be imported from the related party suppliers, after compliance with the procedure prescribed in the CBEC (now CBIC) Circular No. 5/2016-Customs from F. No. 465/12/2010-Cus V dated 09/02/2016 on the issue of “Procedure for investigation of related party import cases and other cases by the Special Valuation Branch”, is consistent with Rule 3 as well as Rule 7 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. This ruling will apply prospectively only to the TPuS method proposed to be adopted by the applicant for transaction value determination w.e f. 1st May 2023.
FULL TEXT OF THE ORDER OF CUSTOMS AUTHORITY OF ADVANCE RULING, MUMBAI
M/s. Sick India Private Limited (hereinafter referred to as the applicant) located at 215, Western Edge II, Western Express Highway, Borivali (East), Mumbai, 400066, has filed an application for seeking advance ruling under section 28 H (2) (c) of the Customs Act, 1962 with respect to their proposed future transactions with their related parties.
2. The applicant made the following submissions:
2.1. They are engaged in import, marketing and selling of sensors, lasers, and parts in India, manufactured by the Overseas Company. The goods imported by the them are classified under Chapter 84, 85, 90 of the first schedule to the Customs Tariff Act, 1975.
2.2. Currently, they are importing goods into India as per an agreed transfer price with overseas company. The methodology adopted for arriving at the customs value, was approved vide Order No. SVB/CUS/182/HKS/2012 dated February 14, 2013 issued by SVB New Delhi.
The order stated that the existing price is not influenced by the relationship between them and the Overseas Company and thus, the transaction value is acceptable for the purpose of customs valuation.
2.3. In 2016, they filed a declaration in the form prescribed vide CBIC circular no. 04/2016 for renewal of aforesaid SVB order. It was intimated by the authorities that the process of renewal of said SVB order is dispensed with, along with the direction issued to Deputy Commissioner of Customs, New Customs House, New Delhi, for finalization of provisional assessments as per the provisions of the said SVB order.
2.4. In 2017, the Directorate Revenue of Intelligence, Mumbai Zonal Unit conducted investigations into the applicant’s imports, alleging undervaluation of imported goods. In 2020, the matter was adjudicated by the Commissioner of Customs (Import), ACC, Mumbai, and it was held that the imported goods were sold to unrelated buyers in India at a higher price and therefore, the customs value adopted by the applicant for related party transactions was rejected. Differential duty along with interest and penalty were demanded from the applicant. Being aggrieved by the adjudication order, the applicant filed an appeal and the matter is pending before the CESTAT Mumbai.
2.5. The Overseas Company i.e. Sick AG, Germany, is undertaking to standardize and harmonize its transfer pricing across the globe within the ambit of its existing application of the Resale minus method / Resale Price Method. This system of arriving at the transfer price is referred to as Transfer Pricing System and Steering Concept (hereinafter referred to as TPuS, and also known as Resale Price method or Resale Minus method) within the Overseas Company and it will be applied to all entities of the Overseas Company across the globe. The applicant’s submission in this regard is as follows:
2.5.1 The Applicant wishes to change the process for arriving at the valuation of its future imports. Currently, the price is based on a gross price list (based on sale proceeds of the Oversees Company) minus discount (depending on the sale territory). The said discounted price (under existing methodology) is also tested by conducting a detailed transfer pricing study. The study incorporates benchmarking of EBIT of oversees Company with the comparable entities.
2.5.2 Under TPuS, the customs value will be based on summation of manufacturing cost and CAR (Commercial Adjustment Rate). CAR will be calculated basis a reverse calculation wherein all costs incurred by the Applicant, along with an EBIT target, will be deducted from sales value charged to unrelated buyers in India. Thereafter, CAR will be arrived at as a residual value.
2.5.3 The existing customs valuation employed by the applicant is based on a list price minus discount, whereas TPuS (also known as Resale Minus Method) is based on computation of CAR at an entity level and its application at transaction level.
2.5.4 Thus, there will be a change in the determination of the customs value for the proposed imports at a transactional/individual level.
2.6 Hence they wish to adopt a new process for arriving at the transaction value for imports from related parties in line with TPuS where transaction value shall be determined on the basis of manufacturing costs of Overseas Company and an amount based on a Commercial Adjustment. Rate percentage (‘CAR%’).
2.7. CAR value will be determined by deducting all costs and a target operating margin (‘EBIT’) of the applicant, from sales value to unrelated buyers in India at an aggregate level. The CAR shall be computed in percentage terms, as a proportion of the manufacturing costs. For instance, CAR, as a proportion to manufacturing costs is X%, then the X% CAR shall be applied for each good to be imported into India by the applicant from overseas companies.
2.8. The CAR will be determined for all the subsidiaries of the Overseas Company in different countries to determine the EBIT of similar comparable companies. The value of CAR will be fixed for a defined period (e.g., a financial year).
2.9. The value of CAR will be determined before the import of products in India based on the estimated sale value and target EBIT. The Customs duty liability will be discharged on the entire value including manufacturing costs and CAR value at the time of actual import.
2.10. At the end of the financial period, the value of CAR will be reviewed. The applicant expects that there should be no significant deviation between the estimated CAR value and the CAR value emerging from the year-end review.
2.11. In view of above, the applicant, in order to obtain certainty on treatment of declared value under the Indian Customs Act, 1962 and related rules, seeks a ruling on whether the value arrived by using the new process is acceptable as Customs Value on which Customs Duty is required to be paid in terms of Section 14 of the Customs Act, 1962 read with the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (hereinafter referred to as CVR, 2007).
2.12. The Overseas Company has 99.99% shareholding in the applicant, the applicant and the Overseas Company are related parties in terms of Rule 2(2)(v) of the CVR, 2007. Therefore, in order to determine the Customs value in case of the applicant, Section 14 read with Rule 3(3)(a) or Rule 3(3)(b) should be referred to.
2.13. Interpretative Note to Rule 3(3) of the CVR, 2007 provides that where the customs authorities have doubt about acceptability of the declared value of imported goods, they may examine the circumstances surrounding the sale.
2.14. The Interpretative Notes provide three ways by which it can be determined whether in a transaction between two related parties, the price was not influenced by their relationship:
a) the related parties act in a manner consistent with the normal pricing practice of the industry;
b) the seller acts as he does in setting his prices to unrelated buyers;
c) the price is shown to cover all the seller’s costs, plus profit which is representative of firm’s overall profit realized over a representative period of time (e.g., on annual basis) in sale of goods of the same class or kind.
In view of the above, where the transaction value is adequate to recover all the costs and profit representative of firm’s overall profit, it can be said that the price had not been influenced by the relationship between the parties.
2.16. The Oversees Company will recover all its costs and a profit percentage from the applicant under TPuS. The transaction value under TPuS will be determined on the basis of manufacturing cost and CAR. Further, the CAR will include administrative and other expenses of the Oversees Company and its profit.
2.17. Therefore, the proposed transaction value is based on recovery of all costs and profit from the applicant.
2.18 The relevance of deployment of applicant’s profit (instead of the profit of oversees Company) draws support from the WCO guide to Customs Valuation and Transfer Pricing.
2.19. In case the transaction value as detailed above is not acceptable as Customs value, then the said value should be determined sequentially on the basis of Rule 4 to 8 of CVR, 2007.
2.20. Most of the goods imported by the applicant are customized as per the customer’s need and enjoy a brand value associated with the applicant. They cannot be compared to any unbranded product / other brand’s product imported into India. Further, post adoption of TPuS, the overseas Company will export such products to only the applicant and no other importer in India. Hence it will not be feasible to apply Rule 4 to imports by the applicant.
2.21. The goods imported by the applicant enjoy a distinct brand value and therefore, cannot be compared with any other products. Hence, it is not feasible to apply Rule 5 to the imports of the applicant.
2.22. Rule 6 states that if the value of imported goods cannot be determined under the provisions of Rules 3, 4 and 5, the value shall be determined under the provisions of Rule 7 or, when the value cannot be determined even under Rule 7, then recourse under Rule 8 should be taken.
2.23. Rule 7 provides for arriving at the value on the basis of deductive method. The value of CAR under TPuS is arrived on the basis of backward calculation.
The proposed methodology under TPuS is as below:
