Advance Ruling on Valuation of Arista’s Service Spare Parts

In re Arista Networks Limited (CAAR Delhi)

In the case of In re Arista Networks Limited, the Customs Authority for Advance Rulings (CAAR) Delhi addressed the issue of customs valuation for service parts imported by Arista under its Service Support Operations (SSO). The applicant clarified that the imported parts were new, not refurbished, exempting them from Foreign Trade Policy (FTP) restrictions. Since there was no transaction value due to the free replacement policy, CAAR ruled that the customs value could not be determined under Rule 3 of the Customs Valuation Rules, 2007 (CVR). The authority then proceeded through rules 4 to 9, ultimately determining the value under Rule 9 using the Residual Method. This method incorporates the cost of production, general expenses, and profit margins to calculate the value of service parts. CAAR reviewed the applicant’s detailed submissions, including financial data and standard costs, concluding that the Residual Computed Value method was appropriate for determining customs duties on these shipments.

FULL TEXT OF THE ORDER OF CUSTOMS AUTHORITY OF ADVANCE RULING, DELHI

M/s. Arista Networks Limited, having office at 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, (hereinafter referred to as “the Applicant/ Arista”) is a private limited company registered in Ireland under Companies Registration Office. The evidence of shareholding pattern is filed along with this application as “Share Holding Pattern” of the Applicant as Annexure-Ill. Memorandum of Association is attached as Annexure-IV and the Articles of Association has been filed with this application as Annexure-V. The Applicant is engaged in manufacturing and supplying various networking and information technology products and associated services worldwide.

1.1 The Applicant is operating the Service Support Operations (“SSO”) as an independent business unit with its own business activity, segregated from the Applicant’s Sales Channel through which products are sold to customers The SSO is exclusively responsible for managing the hardware replacement for end-users who have initially purchased a finished product through the Applicant’s Sales Channel via its sales partners and distributors and who have acquired, along with the purchase of the hardware, a Service Contract with Arista that includes the replacement, free of charge, of defective hardware. as needed.

1.2 When the end-users face a hardware failure Arista’s SSO program offers rapid replacement of the hardware. An end-use’ who has purchased the Service Contract and is eligible for the SSO coverage will not pay anything upon  receipt of the replacement hardware unit (i.e., Service Spare Part), regardless of the quantity and type of products replaced during the service period. The replacement of the defective hardware with a Service Spare Part is free of charge and at no cost to the end-user. There is no sale between Arista and the end-user who receives the Service Spare Part as a replacement of hardware under the SSO contract.

1.3 Once an end-user covered under the SSO submits a hardware failure notification, Arista
is obligated to replace the hardware rapidly through the SSO flow. The Service Spare Part replacement process exchanges a functional replacement Service Spare Part for the broken module or the entire product if the fault so requires. Arista provides hardware replacement for Field Replaceable Units (“FRU”) for each model it sells for a period as contracted under the SSO agreement with the end-user which may extend up to seven years as well in some cases. To facilitate swift hardware replacement operation, it is necessary to hold stock locally in India to ensure prompt onsite service delivery through the hardware replacement process. The Hardware Replacement Process is described in detail below.

Hardware Replacement Process

1.4 Arista’s Service Support Operations in a specific country or region are managed by non-related third-party logistics service providers (“LSP”) who are contracted by Arista to support the SSO coverage in that country or region. In India, Arista’s authorized LSP is Flash Global Logistics Inc., which in turn appointed Reconnect Supply Chain Solutions Limited in India to perform in-country import, export, warehouse management and local distribution activities. To support in-country activities, the Service Spare Parts required for the fulfilment of Arista’s service support obligations in India are shipped from Arista’s centralized warehouse managed by an authorized Logistics Service Provider in Singapore. Service Spare Parts are held in storage in India until such time as they are needed to support service events in India. Based on demand planning, the Service Spare Parts are imported into India by the authorized LSP or their appointed local service provider and stored in the local warehouse, available for when a failure notification from a customer in India is received, and an immediate replacement unit is required.

1.5 Once a failure notification is received, Arista ships a replacement Service Spare Part from the in-country warehouse to the end-user in accordance with the service support level. Upon receipt of the replacement Service Spare Part, the end-user is required to return the defective part back to the in-country warehouse. Returned defective Service Spare Parts and unused Service Spare Parts held in the in-country warehouse will be consolidated and periodically shipped back to origin.

1.6 Thus, the key features of Arista’s Service Support Operations are summarized below:

i. Ownership of the goods is at no time transferred to Arista’s authorized Logistics Service Providers and/or their locally appointed service providers. Arista retains ownership of all Service Spare Parts imported into India. Service Spare Parts that are shipped to India to comprise the on-hand inventory in-country are not dedicated to end-users and can be delivered to any end-user in India when required.

ii. There is no buy/sell transaction in the shipment of the Service Spare Part from Arista’s centralized warehouse to the local warehouse in India managed by the LSP. There is no commercial sale of Service Spare Parts when the goods are transported between warehouses on the Global Service Support network.

iii. The Service-Spare Parts are shipped to the LSP-in India -totally-free of charge.

iv. The Service Spare Parts shipped to India have no commercial value. Likewise, there is no local sale or commercial transaction that occurs on delivery of the Service Spare Parts to end-users after importation, or when defective items are returned to the service depot.

v. The LSP acts solely as the importer on record to enable the fulfilment of the Service Spare Parts inventory in India to meet the obligations with end-users who purchased the service contract that includes. the free of charge warranty exchange of defective hardware.

APPLICANT’S ELIGIBLITY FOR ADVANCE RULING

1.7 In order to file an application before the Customs Authority for Advance Ruling, the Applicant must satisfy the conditions prescribed under the Customs Act, 1962 (hereinafter referred to as ‘Customs Act’).

1.1 Provisions relating to Advance Ruling are prescribed under Chapter VB of the Customs Act. Clause (c) of Section 28E of the Customs Act defines an “Applicant” as:

“In this chapter, unless the context otherwise requires,

(c) “applicant” means-

(ii) exporting any goods to India; or;”

1.2 The Applicant herein has been exporting service spare parts to the authorized LSP and/or their locally appointed service providers. Copy of sample Shipping Bills filed by Arista Singapore is enclosed herewith as Annexure-VI.

1.3 Clause (b) of Section 28E of the Customs Act defines ‘advance ruling’ as:-

“(b) “advance ruling” means a written decision on any of the questions referred to in section 28H raised by the applicant in his application in respect of any goods prior to its importation or exportation;”

1.4 The above definition of ‘advance ruling’ allows the Applicant to seek a ruling on a question of law or fact from the Authority in respect of any goods prior to its exportation. In the instant case, the Applicant is filing the present application seeking a ruling on the valuation to be adopted for export of spare service parts to India.

1.5 For the purpose of clearing the goods from the port of import, and determining the liability to duty, it is essential for it to identify the correct value which must be declared in respect of the various service spare parts. As the Applicant will be exporting service spare, the objective of the present application is to decide the appropriate valuation to be adopted for the export of various service spare parts by the Applicant.

1.6 Therefore, the Applicant, being desirous to know the correct valuation of the service spare products, is filing the present application seeking an advance ruling as to the valuation of the various service spare parts.

1.7 The questions on which an application for an advance ruling can be made have been provided under Section 28H of the Customs Act. As per Section 28H(2) of the Customs Act, an Applicant may make an application for advance ruling in respect of questions relating to:

“(a)….

(c) the principles to be adopted for the purposes of determination of value of the goods under the provisions of this Act.”

1.8 Therefore, it flows that in the present case, the Applicant satisfies all the three-essential criterion for filing the application for advance ruling, namely:

(a) The Applicant is exporting the goods to the India;

(b) The Application is in respect of goods prior to their exportation; and

(c) The application for advance ruling is in relation to clauses (c) of Section 28H(2) of the Customs Act, 1962.

Non-Applicability of Bar under Section 281

1.9 Section 281 of the Customs Act, 1962 is set out below:

“SECTION 28-1. Procedure on receipt of application. — (1) On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the [Principal Commissioner of Customs or Commissioner of Customs] and, if necessary, call upon him to fumish the relevant records :

Provided that where any records have been called for by the Authority in any case, such records shall, as soon as possible, be returned to the [Principal Commissioner of Customs or Commissioner of Customs].

(2) The Authority may, after examining the application and the records called for, by order, either allow or reject the application.-;-.

Provided that the Authority shall not allow the application [ *  *  *] where the question raised in the application is –

(a) already pending in the applicant’s case before any officer of customs, the Appellate Tribunal or any Court;

(b) the same as in a matter already decided by the Appellate Tribunal or any Court:

Provided further that no application shall be rejected under this sub-section unless an opportunity has been given to the applicant of being heard :

Provided also that where the application is rejected, reasons for such rejection shall be given in the order”

1.10 For the export of service spare parts, the Applicant is not involved in any dispute/case regarding the same. Thus, the bar under Section 281(2)(a) of the Act above will not apply. Further, in the present case, to the appellant’s knowledge the same matter has not already been decided by the Appellate Tribunal or any other court. Therefore, the bar under Section 28I(2)(b) would not apply as well in the present case.

APPLICANT’S UNDERSTANDING

2.1 In light of the aforementioned, the Applicant seeks to enter the following question for Advance Ruling and its interpretation of the question will be as under:

(a) Question 1: Whether the determination of value of the Service Spare Parts by application of Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (“Customs Valuation Rules”) is appropriate?

1. VALUATION OF SERVICE SPARE PARTS IN TERMS OF RULE 9 OF THE CUSTOMS VALUATION RULES:

3.1 The valuation of Service Spare Parts must be determined in accordance with) the World Trade Organization (V1/1^–0) Valuation Agreement and guidelines, and the Customs Valuation Rules to ensure that the service spare parts are valued equitably, transparently and in accordance with applicable laws and regulations.

3.2 Section 14 of the Customs Act states that the value for the purposes of calculating customs duty payable shall be the transaction value i.e., price actually paid or payable for the goods exported to India. Rule 3 of Customs Valuation Rules states that the transaction value of the imported goods shall be “the price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of rule 10 of these rules.”

3.3 The term, transaction value has been defined under Section 14 of the Customs Act. The relevant extract of the same is given below:

“Section 14. Valuation of goods. –

(1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf. “

3.4 Thus, from a reading of the above terms, the transaction value is to be determined on the basis of the price that is paid or payable when the goods are sold for export to India. However, the transaction value cannot be determined for Arista’s Service Spare Parts on this basis, as there is no price paid or payable for the Service Spare Part when exported to India. In the present case, there is no commercial transaction involved in relation to the importation or upon the subsequent delivery of the Service Spare Parts to the end-user in India. Thus, the transaction value cannot be determined as per Rule 3(1) of the Customs Valuation Rules.

3.5 In these circumstances, it is pertinent to refer Rule3(4) of the Customs Valuation Rules. As per Rule 3(4) if the value cannot be determined under the provisions of Sub-rule 3(1), the value shall be determined by proceeding. sequentially through rule 4 to 9 of the Customs Valuation Rules. Therefore, Arista would in the following paragraphs substantiate by sequential application that the value of the service spare parts is most appropriately determined by Rule 9.

Transaction value of identical goods — Rule 4

3.4 Where the transaction value of goods cannot be determined by Rule 3, Rule 4 of the
Customs Valuation Rules provides that the transaction value of such goods shall be the value of identical goods sold for export to India and imported at or about the same time. To test the applicability of Rule 4, it is pertinent to refer to Rule 2(d) which defines the term “identical goods”. The same is extracted below:

“Rule 2(d) “identical goods” means imported goods- (i) which are same in all respects, including physical characteristics, quality and reputation as the goods being valued except for minor differences in appearance that do not affect the value of the goods; (ii) produced in the country in which the goods being valued were produced; and (iii) produced by the same person who produced the goods, or where no such goods are available, goods produced by a different person, but shall not include imported goods where engineering, development work, art work, design work, plan or sketch undertaken in India were completed directly or indirectly by the buyer on these imported goods free of charge or at a reduced cost for use in connection with the production and sale for export of these imported goods;”

3.5  The Applicant submits that the Service Spare Parts exported by the applicant cannot be valued by application of Rule 4, as the service spare parts exported by the applicant are not identical or the same in all aspects, including reputation, quality and physical characteristics, as goods sold in the Indian market whether at the same or at different commercial levels. The applicant submits that there is no commercial transaction that occurs upon importation of the Service Spare Parts, as the Service Spare Parts are at all times owned by Arista. Further, there is no commercial transaction that occurs upon delivery of Arista’s Service Spare Parts as they are free of charge replacement service parts.

3.6 The Applicant submits that as per Arista’s internal policies, the Service Spare Parts shall not be sold for export to the country of importation and thus, no transaction value of identical goods exists to be compared with, neither at the same time nor at any time as the goods being valued. Further, the Applicant submits that the Service Spare Parts are not supported by a manufacturer’s warranty and hence, do not have the same reputation as goods sold into the market.

3.7 Further, the Service Spare Parts which are exported by the Applicant are only components of the larger system which is sold by Arista in the market. Thus, these Service Spare Parts do not have the same physical characteristics as the goods sold by Arista otherwise through its sales channels in the market. Thus, even on this count, these are not comparable with any other goods sold. Therefore, since no identical goods are available for comparison of transaction value, the value of service spare parts exported by the Applicant cannot be determined in accordance with Rule 4. Hence, it is pertinent to resort to the other rules.

Transaction Value of Similar Goods (Rule 5)

3.8 When transaction value cannot be determined on basis of identical goods, the Customs Valuation Rules provides determination of value based on the value of similar goods. In this regard, it is pertinent to refer to Rule 2(f) which defines similar goods, the extract of which is given below:

“2(t) “similar goods” means imported goods –

(i) which although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable with the goods being valued having regard to the quality, reputation and the existence of trade mark;

(ii) produced in the country in which the goods being valued were produced;

(iii) produced by the same person who produced the goods being valued, or where no such goods are available, goods produced by a different person, but shall not include imported goods where engineering. development work. art work, design work, plan or sketch undertaken in India were completed directly or indirectly by the buyer on these imported goods free of charge or at a reduced cost for use in connection with the production and sale for export of these imported goods;”

3.9 However, it is the Applicant’s submission that the transaction value cannot be determined by application of Rule 5 since the Service Spare Parts are not supported by a manufacturer’s warranty, therefore they cannot be commercially interchangeable with other products which are supported with a manufacturer’s warranty that are sold in the country, as customers will not accept Service Spare Parts to be commercially interchangeable with new products_; due to the lack of a manufacturer’s warranty.

3.10 Further, the Service Spare Parts stored in centralized storage facilities and are subsequently shipped to India market continuously undergo purge processes. These processes further compromise any part’s integrity and prohibit such part from being sold or from being found similar to the parts being sold. Therefore, the service spare parts cannot be held to be commercially interchangeable with a product supported by manufacturer’s warranty. Hence, Rule 5 is also inapplicable.

3.11 When the transaction value of goods cannot be determined by Rule 4 or Rule 5, Rule 6 of the Customs Valuation Rules directs that the value of goods shall be determined by Rule 7 by application of deductive value or Rule 8 by application of computer value.

Deductive Value (Rule 7)

3.12 Rule 7(1) of the Customs Valuation Rules provides for the determination of the transaction value of goods on the basis of Deductive Method. As per Rule 7, if the goods being valued or identical goods or similar goods are sold in India, the value of the imported goods shall be determined by the unit price at which the imported goods or identical or similar imported goods are sold in the greatest aggregate quantity to persons who are not related to the sellers in India and subject to other conditions prescribed under the rule.

3.13 However, the Applicant submits that in the present case, as explained above, there is no sale of the exported service spare parts in India. Therefore, the Deductive Method is not applicable to Arista’s Service Spare Parts. As a result. the requirement of the greatest aggregate quantity sold, which one would need to be able to deduct from, is not available and cannot be used as the basis for establishing the deductive value for Service Spare Part in India. Therefore, it can be concluded that the Deductive Method is also not applicable to Arista’s Service Spare Parts.

Computed Value (Rule 8)

3.14 As per Rule 8 of the Customs Valuation Rules, the value of the goods can be computed by considering the sum of the cost of production of the goods, the profit or general expenses of similar goods and other expenses as mentioned in Rule 10(2). However, it is the Applicant’s submission, that the transaction value of the Service Spare Parts cannot be determined by the Computed Value method since the Applicant’s financial systems only hold production cost information for parts produced in the current financial year.

3.15 However, the Service Spare Parts’ inventory consists various parts that have been manufactured several years ago, for which the original production cost information would not be available with the Applicant. Further, it is not possible for the Applicant to know, prior to dispatch or export, the age or production year of the specific service part which was selected by the third-party service provider from the centralized warehouse facility. Thus, it is impracticable for the Applicant to identify or know, which cost base to apply to a single unit (i.e., Service Spare Part) prior to dispatch. Therefore, the Computed Value method can also not be used to determine the value of the Applicant’s Service Spare Parts.

Residual Value (Rule 9)

3.16 Since the value of the Service Spar-_/parts cannot  be determined using any of the foregoing rules, resort must be made to Rule 9 of  the Customs Valuation Rules. Under Rule 9. the value of the goods must be determined using  reasonable means consistent with the principles and general provisions of these rules and based on data available, following the hierarchical application of the preceding valuation methods. Therefore, the Applicant is of the view that the value must be determined as per the Fallback method by using the existing data to reach a reasonable valuation of the Service Spare Parts.

3.17 To determine the value of the Service Spare Parts based on the Residual Method consistent with a reasonable interpretation of the Computed Value method, Arista follows an annual process whereby it collects all applicable and available financial information relating to the three elements required for a reasonable means calculation of a Residual Computed Value, i.e., Production and fabrication costs, General expenses, and Profit,

3.18 In determining its annual Residual Computed Value for the entire Service Spare Parts inventory, the Applicant follows a process through which all the required elements for determining a Residual Computed Value are considered for calculating a reasonable value of all service parts. The steps to determining the value are given below:

a. Step 1: Calculating the Total Standard Cost value (1^–Cstanderd)

b. Step 2: Calculating the Total Aggregate Computed Cost (TCcomputed)

c. Step 3: Calculating the Computed Overhead Cost Multiplier (Mc_omputed)

d. Step 4: Calculating the Customs Value of a Service Part (SP . Value,

3.19 By following the above process, the Applicant is of the view that it can most accurately calculate a Residual Computed Value of a single Service Spare Part based on reasonable means available. The various costs to be calculated for arriving at the Value of the Service Spare Part are explained below:

STEP 1: CALCULATING THE TOTAL STANDARD COSTS VALUE (TCStandard

3.20 The Total Standard Costs value  (TC standard ) of Service Spare Parts inventory can be calculated by taking the actual cost value of new “Production” parts (i.e., parts purchased directly from the manufacturing organization or OEM’s).

STEP 2: CALCULATING THE TOTAL AGGREGATE COMPUTED COST (TCcomputed)

3.21 The Total Aggregate Computed Cost (TCcomputed) of the service inventory contains the following elements:

a. Production Cost and Fabrication Costs: This relates to manufacturing assists that support the manufacturing operations and are not included in the new production standard costs. The total production and fabrication cost of Service Spare Parts includes the below costs that are needed for production and fabrication of the service parts:

i. Costs related to manufacturing assists that supports the manufacturing operations, which are not included in the new production standard costs.

ii. These manufacturing assists have been added to the new product standard cost to accurately reflect a fully burdened acquisition value for the new production supply.

iii. Assists are only added to the value of new production acquisition on a one-time basis as part of the true cost of acquisition.

b. General Expenses: These expenses include those relating to the management and operations of the entire global service support organization. Arista ships Service Spare Parts inventory internationally from its global depots to local country warehouses managed by 3′ parties. There are no direct shipments of Service Spare Parts for replacement to end-users internationally. It is the local partner who clears the goods through Customs and delivers them to a local warehouse for storage until the Service Part is needed by an end-user under Service contracts. Therefore, the expenses associated with the Service Parts operations is calculated by adding the following expenses:

• Depot, Warehouse and Storage costs
• International logistics costs billed by transportation providers, including handling costs, service fees (such as special handling, clearance and export fees, etc.)
• Management and consultative fees
• Component materials services and management fees
• Arista’s internal Service parts operations overhead and expenses, including:
  • Costs for management salaries and benefits
  • Service-related overhead
  • Material and inventory costs
• Arista’s cost of insurance for the transportation and storage of the goods

c. Operating Profit Margin: As described in the Interpretative Note to Article 6 of the WTO Valuation Agreement, an amount for profit should be included in the computed value calculation to arrive at the appropriate customs value based on information supplied by or on behalf of the producer. Arista utilizes its annual operating profit margin in its computed value calculations. The calculation focuses on the profit that relates to the hardware replacement service support operations. Arista’s service support organization does not maintain separate profit and loss accounting; thus, Arista has chosen to apply the normal hardware net income profitability as a reasonable estimate of profit.

3.22 Thus, the Tota  Aggregated Computed Cost (TCcomputed) is a sum of the above expenses.

3.23 Thus, the Total Service Parts Inventory Value is:

STEP 3: CALCULATING THE COMPUTED OVERHEAD COST MULTIPLIER (MComputed)

3.24 The Applicant submits that all the cost elements for a particular Service Spare Part are not available at the time of dispatch. Therefore, the available information is used to reasonably arrive at a means considered reasonable in computing the Residual Computed value of a particular part. Therefore, it is necessary to determine the Computed Overhead Cost Multiplier (MComputed), to translate the cost contained within the TCcomputed in such a way that it can accurately correlate with the TCstandard value, to ultimately ensure correct computation of the Residual Computed value calculation for a single Service Part.

3.25 In order to arrive at MComputed, it is important to first determine the Overhead Cost multiplier for each Computed Cost element. The calculation of Overhead Cost multiplier for each Computed Cost element is tabulated below.

I. Overhead Cost Multiplier Total Production and Fabrication Cost (OCMTPF)

II. Overhead Cost Multiplier Total Overheads and Expenses (OCMTOE)

III. Overhead Cost Multiplier Total Operating Profit (OCMTOP)

3.26 Once each Overhead Cost Multiplier is established, then the next step will be to add together each multiplier to find the Computed Overhead Cost Multiplier (MComputed) as follows:

MComputed

STEP 4: CALCULATING THE CUSTOMS VALUE OF A SERVICE PART.

3.27 Based on the above calculations, all the variables to reasonably calculate the Residual Computed Value for a single service part unit are available. These variables can be combined into the following equation in order provide a reasonable computation of a customs value of a service part unit that is compliant, correct, and consistent with the reasonable means based on the flexible interpretation of the Residual Computed Valuation Method. The process for calculating a reasonable Residual Computed Value of a single part unit is finally determined under the following calculation:

3.28 Thus, the value of the service spare part can be determined in the following manner:

3.29 The applicant utilizes the above calculation to compute the Service Spare Part value of each individual service part unit within Arista’s entire-service parts inventory, and thereby ensuring that each service part’s value is correct and in accordance with Rule 9 of the Customs Valuation Rules, based on the Residual Method and consistent with the reasonable means application of the Residual Computed Method The Application is therefore of the bona fide view that the appropriate value of the exported goods can be determined most suitably by application of Rule 9 of the Customs Valuation Rules.

ISSUES REQUIRING ADVANCE RULING AND APPLICANT’S UNDERSTANDING

3.30 In light of the aforementioned submissions, the Applicant seeks to enter the following question for Advance Ruling and its interpretation of the question will be as under:

Question 1: Whether the determination of value of the Service Spare Parts by application of Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (“Customs Valuation Rules”) is appropriate?

Applicant’s Understanding: The most appropriate method to determine the value of the Service Spare Parts exported by the Applicant is by application of Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (“Customs Valuation Rules”) is appropriate.

2. The Comments of the Port Commissionerate Principal Commissioner of Customs (Airport), Chennai-I Commissionerate, Chennai in respect of revised application submitted by the applicant are as follows:

2.1 In the application, the applicant has indicated that they are involved in the manufacturing and supply of various networking and information technology products. According to the Foreign Trade Policy (FTP), the import of old and used/refurbished capital goods is permitted. Additionally, the policy supports the import of spares and components, including both old and refurbished parts, required for capital goods. However, it is unclear whether networking and information technology products fall under the category of capital goods. Moreover, the FTP prohibits the import of old and used IT products.

2.2 In light of the above, the applicant may be requested to provide catalogues, images of the products, and a detailed technical write-up to facilitate further review and comments on the matter.

2.3 Under the circumstances, it is requested that the hearing in this case may be postponed by a month.

3. Personal Hearing: The matter was taken up for hearing on 08.10.2024 vide hybrid mode, where Authorized Representative (AR) of the applicant attended the hearing through virtual mode. The AR of the applicant emphasized that the applicant had earlier filed Bill of Entries through the Courier Terminal under the Chennai-I Commissionerate. Further, he reiterated the earlier position taken during the last two hearings on 21.08.2024 and 23.09.2024.

4. I have gone through the detailed submission by the applicant, the comments made by the Port Commissionerate and examine the briefs and submissions made. In this regard, the comments on the said application are as follows:

4.1 The applicant has already submitted the amended application, whereby, it was made absolutely clear that the products are new and not old/refurbished in anyway. Thus, the prohibition in view of the Foreign Trade Policy (FTP) does not apply under the current case.

4.2 The Port Commissionerate is free to seek any documents including catalogues, images of the products, and a detailed technical write-up during time of import.

4.3 As requested by the Port Commissionerate the hearing hearing in this case cannot be postponed by any any such duration, as already Sufficient time has lapsed in the current case and CAAR is mandated to issue Rulings within a span of 90 days from the receipt of complete application. Hence, no further delay could be entertained.

4.4 Further, it is also provided that the Port Commissionerate has assessed Bill of Entries of the applicant, copy of relevant pages of the Bill of Entry No. CBEX-IV_MAA_ 2024-2025_ 2808_ 1 0067 dated 28/08/2024 are enclosed below:

4.5 With respect to para-4 of the request to amend application filed by the applicant dated 21.08.2024, in the matter of Application No. 45/2024, it is observed that, as per the revised information furnished by the applicant at SI. No. 7 of the Form CAAR-1, the nature of the applicant’s present activity is the export of New service spares to India, for purposes of free-of-charge replacement of defective parts/goods under its Service Support Operations (SSO).

4.6 Para 3 of Annexure 1 submitted by the applicant wherein it is mentioned that the Service Support Operations (SSO). The SSO is exclusively responsible for managing the hardware replacement for end-users who have initially purchased a finished product through the Applicant’s Sales Channel via its sales partners and distributors and who have acquired, along with the purchase of the hardware, a Service Contract with Arista that includes the replacement, free of charge, of defective hardware as needed.

i. The applicant has stated that they are operating Service Support Operations (SSO) and that any end-user in India who purchases a finished product and a service contract through Applicant’s sales channel, will be provided replacement of defective hardware free of charge and hence there is no sale between the applicant and the end-user. On the basis of this, the applicant has stated that the value cannot be determined as per Rule 3 of Customs valuation Rules, 2007 (CVR). This appears to be appropriate as there is no transaction value involved in the importation of the goods and hence the same would not fall within the purview of Rule 3 of CVR, 2007.

ii. Since, the value cannot be determined based on Rule 3 (1), the value shall be determined by proceeding sequentially through rule 4 to 9 as per Rule 3(4) of CVR.

iii. Rule 4 of CVR states that the value of imported goods shall be the transaction value of identical goods sold for export to India and imported at or about the same time as the goods being valued. However, goods identical in all aspects viz., quantity, commercial value are not available as the applicant does not undertake sale of spare parts in India and thus the value cannot be determined under Rule 4 of CVR.

vi. Further, Rule 5 of CVR states that the value of imported goods shall be the transaction value of similar goods sold for export to India and imported at or about the same time as the goods being valued. The value of similar items cannot be adopted for the reasons that the price/cost of Service support provided by other similar firms may vary in comparison to Arista and hence cannot be applied in the present case. Hence, the value of the goods under import cannot be determined under Rule 5 of the CVR.

v. Rule 7 of the CVR provides for the determination of the transaction value of the goods on the basis of Deductive method. Rule 7(1) of CVR states that if the goods being valued or identical or similar imported goods are sold in India, in the condition as imported at or about the time at which the declaration for determination of value is presented, the value of imported goods shall be based on the unit price at which the imported goods or identical or similar imported goods are sold in the greatest aggregate quantity to persons who are not related to the sellers in India. However, as discussed above, identical and similar items are not available. Thus, the value of the goods cannot be determined under Rule7 of CVR.

vi. Rule 8 of CVR states that the value of imported goods shall be based on a computed value, which shall consist of the sum of:-

a. the cost or value of materials and fabrication or other processing employed in producing the imported goods;

b. an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to India;

c. the cost or value of all other expenses under sub-rule (2) of rule 10.

The applicant has submitted that their financial systems only hold production cost information for parts produced in the current financial year; that the service spare parts’ inventory consists of various parts that have been manufactured several years ago, for which the original production cost information would not be available with them. Devoid of such information, the value cannot be determined under Rule 8 of CVR.

vii. Since the value of service spare parts cannot be determined by any of the foregoing rules, the value has to be determined by Rule 9 of CVR under Residual method, which states that where the value of imported goods cannot be determined under the provisions of any of the preceding rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and on the basis of data available in India.

Rule 10 of CVR provides for inclusion of Cost of materials and Services as follows:

1. Commissions and brokerage, except buying commissions;

2. The cost of containers which are treated as being one for customs purposes with the goods in question;

3. The cost of packing whether for labour or materials;

4. Materials, components, parts and similar items incorporated in the imported goods;

5. Tools, dies, molds and similar items used in the production of the Imported goods;

6. Materials consumed in the production of the imported goods;

7. Engineering, development, artwork, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;

8. Royalties and license fees related to the imported goods

9. The cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to the place of importation;

10. The cost of insurance to the place of importation:

The applicant vide paragraphs 3.18 to 3.31 has clearly elucidated the method of

valuation which includes the following-

I. Standard costs of parts purchased directly from the OEM manufacturer

II. Production cost and fabrication costs for service spare parts

III. General expenses relating to management and operations of the entire global service support:

a. Depot, warehouse and storage costs

b. International logistics — transportation costs

c. Management and consultative fees

d. Component materials, services fees and management fees

e. Operations overhead and expenses

i. Costs for management salaries and benefits

ii. Service-related overhead

iii. Material and inventory costs

f. Cost of insurance for storage and transportation

viii. Operating profit margin. The calculation method given by the applicant to compute service spare part, which includes all the above detailed costs, appears to be in consonance with the Rule 9 of CVR and consistent with other provisions of the CVR.

5. I also intend to look into the draft calculations shared by the applicant to determine the value of spare parts.

(i) The purpose of this document is to provide supplemental information to Application Nos. 43-45/2024 submitted by Arista Networks. The sample calculations on actual basis has been provided to arrive at the customs value for Service Parts exported to India for purposes of free-of-charge replacement of defectives, according to Rule 9 “Residual Value Method” of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (“Customs Valuation Rules”).

(ii) To determine the value of the Service Spare Parts based on the Residual Value Method consistent with a reasonable interpretation of the Computed Value method (“Residual Computed Method”), Arista follows an annual process whereby it collects all applicable and available financial information from the Financial Statements of Arista Networks for a reasonable means calculation of a Residual Computed Value:

a. Production and fabrication costs;

b. General expenses; And

c. Profit

(iii) For the calculation of the Residual Computed Value applied for shipments throughout the Year 2024, the figures on 31 December 2023 were:

Data Elements	Total New products (USD)	Reference
Standard Cost Value (excl Assist)	67,836,740	TCStandard
Production & Fabrication (PF)	3,429,240	PF
Overheads & Expenses (OE)	19,544,716	OE
Profit (P)	26,731,152	P

(iv) The steps to determine the value of the service spare parts exported into India are given below:

Step 1: Calculating the Total Standard Cost value (TCstandard)

Step 2: Calculating the Total Aggregate Computed Cost (TCcomputed)

Step 3: Calculating the Computed Overhead Cost Multiplier (Mcomputed)

Step 4: Calculating the Customs Value of Service (SPvalue)

A. STEP 1: CALCULATING THE TOTAL STANDARD COST VALUE (TCstandard)

(v) This is calculated by taking the actual cost value of new “Production” parts (i.e., parts purchased directly from the manufacturing organization or OEM’s). The actual cost value of new “Production” parts is the new stock acquired from a previous financial year, taken on 31 December 2023 at the value of USD 67,836,740/-

(vi) Therefore, the final Total Standard Costs value (TCstandard) is USD 67,836.740/-

B. STEP 2: CALCULATING THE TOTAL AGGREGATE COMPUTED COST (TCcomputed)

(vii) TCcomputed = Production & fabrication costs + General Expenses + Operating Profit

(viii) The Total Production and Fabrication costs of the Service Parts inventory on 31 December 2023 was USD 3,429,240/-

(ix) The general expense of overheads and expenses allocated to the management and operation of the entire global service support organization as on 31 December 2023 was USD 19,544,716/-

(x) Total profit applicable to Arista total Service Parts inventory was USD 26,731,152

(xi) Therefore, the Total Aggregate Computed Cost (TCcomputed) can be calculated in the manner given below:

C. STEP 3: CALCULATING THE COMPUTED OVERHEAD COST MULTIPLIER (MComputed)

(xii) The calculation of Overhead Cost multiplier for each Computed Cost element is given below:

(xiii) Overhead Cost Multiplier Total Production and Fabrication Cost (OCMTPF)

(xiv) Overhead Cost Multiplier Total Overheads and Expenses (OCMTOE)

(xv) Overhead Cost Multiplier Total Operating Profit (OCMTOP)

(xvi) Thus, the Computed Overhead Cost Multiplier (MComputed) as follow:

D. STEP 4: CALCULATING THE CUSTOMS VALUE OF A SERVICE PART (SPvaiue)

(xvii) The process for calculating a reasonable Residual Computed Value of a single Service Part unit is finally determined under the following calculation:

(xviii) It is pertinent to note here that the Service Part Standard Cost (SPcost) against each of the part is available in the Financial Statements of Arista in the previous financial year and are considered for the purposes of determining the final value of the part.

(xix) The example below demonstrates how the Residual Computed Value can be applied practically in determining the value of a single :Replacement Service Part using the variables and calculation mentioned above.

Example 1

Part Number: DCS-7500-SUP2

Product Description: Supervisor-2 module for 7500 Series (spare)

The aforesaid model calculation for advanced valuation ruling for Arista’s valuation methodology i.e. Residual Computed Value for shipments of Service Parts to India under Arista’s Service Support Organization, in accordance with Rule 9 “Residual Value Method” of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (“Customs Valuation Rules”).

6. In conclusion, In light of the aforementioned submissions, the following question for Advance Ruling and its interpretation of the question will be as under:

Question: Whether the determination of value of the Service Spare Parts by application of Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (“Customs Valuation Rules”) is appropriate?

Ruling: The most appropriate method to determine the value of the Service Spare Parts exported by the Applicant is by application of Rule 9 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (“Customs Valuation Rules”) is appropriate.

7. I, rule accordingly.