Customs valuation of imported goods for trading activity

In re Foxconn Technology (India) Pvt. Ltd. (CAAR Mumbai)

1. The applicant M/s. Foxconn Technology (India) Private Limited (hereinafter referred to as FTIPL / applicant) is engaged in the business of manufacturing and trading electronic products, particularly communication network products and components, computers and computer parts, devices and systems for use in various industrial and domestic sectors. The applicant company is a subsidiary of Ingrasys (Singapore) PTE Ltd (hereafter referred to as “Ingrasys Singapore”) which holds 99% of the share capital of the applicant company. The applicant imports various electronic products, components, etc., from Ingrasys Singapore and engages in the manufacture and sale of network cabinets and server cabinets. The applicant is also engaged in a trading activity whereby they import goods like server racks from Ingrasys Singapore and then sell the same in the domestic market. This application for Advance Ruling dated 19.11.2022 is pertaining to the Customs valuation of imported goods for trading activity.

3.1 Applicant’s submissions are reiterated as follows:

M/s Amazon Data Services Private Limited (hereafter referred to as ADSPL), a third party buyer, has contracted with M/s Ingrasys Singapore (foreign parent company of the applicant) for the purchase of server racks and the terms of the contract are agreed to between them and this agreement is for the global operations of ADSPL. In pursuance of the same, the applicant imports the goods based on purchase order (PO) raised by ADSPL on them and in turn the applicant raises a similar PO on Ingrasys Singapore for import of the required products. The said goods are classifiable under Chapter heading 8471 of the Customs Tariff and the Basic Customs duty is exempted for the same, but IGST @ 18 % is payable. The freight for import of the goods is paid directly to the carrier / freight service provider by ADSPL in terms of the master agreement between ADSPL and Ingrasys Singapore. The applicant does not engage in trading of goods in this model with any other domestic purchaser.

3.2 The applicant does not undertake any value addition on the goods. It earns a margin of 3% while trading imported goods. The assessable value for payment of customs duties has been determined by the applicant as the sum of price at which the goods are sold by Ingrasys Singapore to the applicant plus freight. It may be noted that such freight is directly met by ADSPL.

3.3 The transaction of import by the applicant from Ingrasys Singapore, i.e., foreign parent company was investigated by the Special Valuation Branch (SVB), as the parties are related to each other and as per the order dated 31-1-2019, the price was found to be at arm’s length or uninfluenced by the relationship between the seller/exporter (Ingrasys Singapore) and importer/buyer (FTIPL/applicant). The method for valuation of imported goods as adopted by FTIPL/applicant was found to be correct by SVB after examining the documents and computation. Accordingly, the applicant was paying customs duties, including IGST on the basic import price and freight component. Subsequently, the imported goods were sold by FITPL to ADSPL by adding 3 % profit margin.

3.4 Pursuant to investigation / inquiry by the Directorate of Revenue Intelligence (DRI) in 2021, the applicant started adopting a method different from the one adopted earlier and as approved by SVB to determine the value of imported goods for payment of customs duty purposes. The contentions of the DRI, on the basis of the investigation, is that the assessable  value should be the sum of basic value, transportation cost and the margin of 3% earned by the applicant upon sale of the imported goods to ADSPL. In other words, DRI alleged that the applicant is only a commission agent and the margin earned by them upon sale of the imported goods is nothing but their commission, which also needs to be included in the assessable value for customs purposes. In this connection, DRI has issued summons to the executives of the applicant company and also recorded statements from them. The applicant has chosen to pay the differential customs duties along with interest and penalty in terms of Section 28(2) of the Customs Act and paid differential customs duty of Rs. 6,68,83,559, interest of Rs.7,143,766  and the matter was closed in terms of Section 28(2) ibid. Hence the issue is no more pending.  The applicant wishes to submit that they are of the view that the addition of 3 % trading margin  earned by them in the assessable value of imported goods is not in accordance with the  provisions of the Customs law and it also leads to the accumulation of Input Tax Credit of IGST paid on imports.

3.5 The applicant by way of example, explains the method of determination of Assessable value being followed by them.

3.6 It may be observed from the above that as a result of inclusion of profit margin in the Assessable value for payment of Customs Duty purposes, the IGST payable on imports is more than the IGST payable on the price at which the goods are sold by applicant to ADSPL, leading to accumulation of ITC. Under such circumstances, the applicant is of the bonafide belief that the value adopted for payment of customs duty by the applicant is not in accordance with the valuation provision of Customs Act, 1962 and Customs Valuation Rules. Therefore, the present application is being filed to ascertain

(i) Whether the applicant can be considered as Trader or Commission Agent?

(ii) Whether the trading margin of 3 % earned by the applicant upon import of the subject goods is required to be added in the assessable for customs purposes?

3.7 Applicable provisions and rules under customs act for valuation:

• 14 of Customs Act, 1962 (Customs Act)
• Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CV Rules)

The extract of the above provisions is reproduced 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

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf.

Provided further that the rules made in this behalf may provide for,-

(i) the circumstances in which the buyer and the seller shall be deemed to be related;

(ii) the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case;

(iii) the manner of acceptance or rejection of value declared by the importer or exporter, as the case may be, where the proper officer has reason to doubt the truth or accuracy of such value, and determination of value for the purposes of this section:

(iv) the additional obligations of the importer in respect of any class of imported goods and the checks to be exercised, including the circumstances and manner of exercising thereof as the Board may specify, where, the Board has reason to believe that the value of such goods may not be declared truthfully or accurately, having regard to the trend of declared value of such goods or any other relevant criteria.

Provided also that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under section 46, or a shipping bill of export, as the case may he, is presented under section 50.

Customs Valuation (Determination of Value of Imported Goods) Rules, 2007:

Rule 10. Cost and services. ____  (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, — (a) the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely: – (i) commissions and brokerage, except buying commissions; (ii) the cost of containers which are treated as being one for customs purposes with the goods in question; (iii) the cost of packing whether for labour or materials; (b) The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely :- (i) materials, components, parts and similar items incorporated in the imported goods; (ii) tools, dies, moulds and similar items used in the production of the imported goods; (iii) materials consumed in the production of the imported goods; (iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods; (c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; (d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller; (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. Explanation. — Where the royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.

Note to rule 10 In rule 10(1)(a)(i), the term “buying commissions” means fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued. Rule 10(1)(b)(ii) I. There are two factors involved in the apportionment of the elements specified in rule 10(1)(b)(ii) to the imported goods – the value of the element itself and the way in which that value is to be apportioned to the imported goods. The apportionment of these elements should be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. 2. Concerning the value of the element, if the importer acquires the element from a seller not related to him at a given cost, the value of the element is that cost. If the element was produced by the importer or by a person related to him, its value would be the cost of producing it. If the element had been previously used by the importer, regardless of whether it had been acquired or produced by such importer, the original cost of acquisition or production would have to be adjusted downward to reflect its use in order to arrive at the value of the element. 3. Once a value has been determined for the element it is necessary to apportion that value to the imported goods. Various possibilities exist. For example, the value might be apportioned to the first shipment if the importer wishes to pay duty on the entire value at one time. As another example, the importer may request that the value be apportioned over the number of units produced up to the time of the first shipment. As a further example, he may request that the value be apportioned over the entire anticipated production where contracts or firm commitments exist for that production. The method of apportionment used will depend upon the documentation provided by the importer. 4. As an illustration of the above, an importer provides the producer with a mould to be used in the production of the imported goods and contracts with him to buy 10,000 units. By the time of arrival of the first shipment of 1,000 units, the producer has already produced 4,000 units. The importer may request the proper officer of customs to apportion the value of the mould over 1,000 units, 4,000 units or 10,000 units. Rule 10(1)(b)(iv) 1. Additions for the elements specified in rule 10(1)(b)(iv) should be based on objective and quantifiable data. In order to mininiise the burden for both the importer and proper officer of customs in determining the values to be added, data readily available in the buyers commercial record system should be used in so far as possible. 2. For those elements supplied by the buyer which were purchased or leased by the buyer, the addition would be the cost of the purchase or the lease. No addition shall be made for those elements available in the public domain, other than the cost of obtaining copies of them. 3. The case with which it may be possible to calculate the values to be added will depend on a particular firm’s structure and management practice, as well as its accounting methods. 4. For example, it is possible that a firm which imports a variety of products from several countries maintains the records of its design centre outside the country of importation in such a way as to show accurately the costs attributable to a given product. In such cases, a direct adjustment may appropriately be made under the provisions of rule 10. 5. In another case, a firm may carry the cost of the design centre outside the country of importation as a general overhead expense without allocation to specific products. In this instance, an appropriate adjustment could be made under the provisions of rule 10 with respect to the imported goods by apportioning total design centre costs over total production benefiting from the design centre and adding such apportioned cost on a unit basis to imports. 6. Variations in the above circumstances will, of course, require different factors to be considered in determining the proper method of allocation. 7. In cases where the production of the element in question involves a number of countries and over a period of time, the adjustment should be limited to the value actually added to that element outside the country of importation. Rule 10(1)(c) I. The royalties and licence fees referred to in rule 10(I)(c) may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value. 2. Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods.

3.8 As per Section 14 ( I) of the Customs Act, 1962, the value of the imported goods and export goods shall be the transaction value of such goods, that is, 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. In short, transaction value is the basis for payment of customs duties on imported goods and the price actually paid or payable for the goods sold is the transaction value.

3.9 The proviso to the above said Section states that the transaction value of imported goods shall include, in addition to the price actually paid or payable for the goods, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules. Therefore, transaction value is subject to adjustments by way of inclusion of certain expenses which have not been included.

3.10 As per Rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (in short “CV Rules”) the value of imported goods shall be the transaction value adjusted in accordance with provisions of Rule 10 but subject to Rule 12 which states that if the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any imported goods, he may seek documents or information and the importer has to demonstrate the accuracy of declared value.

3.11 Rule 10 (1) (a) of CV Rules mandates inclusion of the following items to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods:

i. commissions and brokerage, except buying commissions;

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

iii. the cost of packing whether for labour or materials.

For the purpose of this Application of Advance Ruling, the first clause (i) above is relevant. That is, any commission or brokerage, except buying commission is to be added for determining the value for the purpose of paying customs duty.

In addition to the above, Rule 10 (1) (e) mandates that, for determining the transaction value, all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. This provision seeks to include any payment that the buyer is required to make as a condition of sale of the imported goods. This further covers the situation of payment to third party by the importer-buyer so as to satisfy the obligation of the foreign seller vis-a-vis such third party.

Rule 10(4) provides that no addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule.

Based on the above provisions, it is clear that Sec. 14 of the Customs Act provides a clear mandate to accept transaction value where buyer and seller are not related and price is the sole consideration. If the parties are related, the Customs Act mandates determination of assessable value to ensure that relationship has not been influenced leading to under-valuation  of the imported goods and consequently resulting in short payment of duty.

3.12 Inclusions to transaction value can be carried out only as per Rule 10 of CV Rules. The applicant is importing the goods and selling the same to their sole buyer ADSPL. The applicant is not acting as any commission agent. In such circumstances, it is to be examined whether such inclusion has legal sanction as per the relevant statutory provisions. In the transaction undertaken by the applicant, Rule 10 (1) (a) (i) of the CV Rules provides for the inclusion of commission to the extent they are incurred by the buyer but not included in the price and Rule 10 (1) (e) provides for inclusion of all other payments which are a condition of sale. Therefore, an inclusion to the TV must meet the criteria of these Rules. It can be inferred that only such items which would go to add to cost of the goods or expenses which are incurred by the buyer (importer) can be added.

3.13 In this case, the profit margin of 3 % earned by the Applicant upon sale of the imported goods is an income earned by the applicant while selling the goods to ADSPL. It is the profit earned by the applicant post importation on sale of the goods in India. This amount does not satisfy the term “commission” incurred by the buyer as per Rule 10 (1) (a) (i) of the CV Rules. Under Rule 10 any payment or expense incurred by the buyer/importer requires examination for inclusion in TV. The profit margin in this case is not “incurred” but “earned” by the applicant and it is not an item of expense or outgo but income for the applicant. It is also not a commission which is to be understood as a fee paid for services to an agent and in the context of trade in goods it may be for arranging for or facilitating such transaction. The applicant herein is not acting as an agent to source buyers or goods for either Ingrasys Singapore or ADSPL. It is just an independent business entity importing goods and selling the same. Margin earned by the applicant is not the commission as envisaged in Rule 10(1)(a)(i). The said Rule excludes buying commission but calls for inclusion of selling commission incurred by the buyer. The profit margin earned in this case is neither buying commission nor selling commission paid by the applicant to any other person and the said rule is not applicable.

3.14 The applicant is neither acting for or on behalf of either Ingrasys Singapore or ADSPL  and nor Ingrasys Singapore is sourcing any buyer for the applicant but the transaction is purely  on principal-to-principal basis. The scenario envisaged in the said Rule is not present in the transaction of import by the applicant. The margin represents the profit earned by FTIPL the importer/buyer and is not something that is “incurred by the buyer”. In fact, whether the applicant earns a margin or incurs a loss is not of consequence as far as customs valuation is concerned. The fact that price is at arm’s length or untainted by relationship as established by TP study or as demonstrated to SVB is relevant to conclude that the AV as computed by the applicant is not a tainted one and is acceptable for customs purposes. It is seen from the computation chart submitted to SVB that the applicant is earning a reasonable margin after including various expenses towards selling and administrative expenses and is dealing at arm’s length with Ingrasys Singapore. In view of the above, Rule 10(1)(a)(i) of CV Rules is not applicable to the present transaction.

3.15 The other relevant sub-rule in Rule 10 which needs to be examined is sub rule (1) clause (e). After providing for various inclusions pertaining to tools & dies, royalty, designs, under this rule inclusion is to be made of any payment if it is a condition of sale of goods or is to satisfy the obligation of the seller. In the case of margin earned by the applicant, it is not a payment which is a condition of sale. The margin is a sum earned by the applicant and does not merit inclusion in TV in terms of Rule 10(1)(e).

3.16 The applicant wishes to submit that the trading margin earned by them is not includible in the assessable value of imported goods under any provisions of the Customs Valuation Rules. It is relevant to note that deductive value method seeks to exclude commission or profits in relation to sale of imported goods in India and computed value method seeks to include profits in the country of the producer that is, before goods reach India. There is no statutory mandate to include profits made by importer after importation. It is clear that profits of the importer are not exigible to Customs duty. An analysis of the additions under Rule 10 also shows that what is sought to be included is only such amount which would flow to foreign seller without being part of invoice price or landed cost and is relatable to sale of goods.

Analysis of the provisions vis-à-vis the transaction under this application

3.17 Absence of legal basis for inclusion of margin in Transaction Value: For determination of value of the goods imported i.e. for arriving at the assessable value (AV) which is the transaction value (TV) as adjusted, Section 14 of the Customs Act is very relevant. As per the said Section, besides the price actually paid or payable for the imported goods, certain amounts paid for services like engineering, design work, brokerage, insurance, costs of transportation to the place of importation, licence fees, loading/unloading charges etc., are required to be included in transaction value.

3.18 The method followed by the applicant as declared to SVB is as per the mandate of Section 14 of the Customs Act read with the Valuation Rules. The price of goods is agreed  between two unrelated parties — Ingrasys Singapore and ADSPL. The applicant imports the goods from Ingrasys Singapore and sells it to ADSPL. The price at which it imports the goods allows it to earn a margin of 3% on further sale to ADSPL. The arrangement is in line with the transfer pricing provisions under Income Tax Act, 1961. Such price has been accepted by SVB also. Further, in the SVI3 Order dated 31.01.2019, the customs authorities have analyzed the provision of Rule 10 of CVR 2007 and came to the conclusion that no addition or adjustment under Rule 10(1) of the CV Rules is required to be made to arrive at the transaction of the imported goods.

4. Therefore, it is prayed that Hon’ble Authority may be pleased to issue a ruling to the
effect that:

(i) The applicant is only a Trader for the purpose of import ofthe goods from its related party and not a commission agent.

(ii) The trading margin earned by the applicant upon sale of the imported goods in India is not required to be included in the assessable value for customs purposes.

5.1 I have gone through the records of the case and submissions made by the applicant. A personal hearing in this matter was conducted on 6/1/2023. Advocate G. Natarajan represented the case of the applicant and explained the contents of application. In addition to their regular trading & manufacturing activities the applicant is also engaged in an import and trading of goods like server racks from M/s Ingrasys Singapore, a related party, and then sell the same in the domestic market. Instant Advance Ruling is limited to the Customs valuation of imported goods involved in only this trading activity. Applicant has raised two issues in the application as follows:

(1) The applicant is only a Trader for the purpose of import of the goods from its related party and not a commission agent, and

(2) The trading margin earned by the applicant upon sale of the imported goods in India is not required to be included in the assessable value for customs purposes.

5.2 Present application primarily involves the issue of import valuation. Framework governing import valuation is spelt out by way of Section 14 of the Customs Act, 1962 read with Customs Valuation (Determination of value of imported goods) Rules, 2007 (CVR, 2007), interpretative notes to the CVR, 2007 and the Special Valuation Branch related CBIC circular of February 2016. However, in view of incomplete data in the applicant’s submissions the applicant’s representative was requested, during the course of hearing, to submit the reply to following questions.

1. Why there is no direct import transaction between ADSPL India and Ingrasys when the price of goods is agreed between two unrelated parties — Ingrasys Singapore and ADSPL? Price agreement copy is essential to understand the exact role of Foxconn Technology India Limited. In this case how the transaction between the Ingrasys and Foxconn can be treated as a transaction on principal to principal basis when the price was Finalized between Ingrasys Singapore and ADSPL?

2. Any agreement between ADSPL and Foxconn Technology (India) Limited on the issue of payment of import freight by ADSPL though it is required to be paid by the importer Foxconn Technology (India) Ltd.? Agreement in support of freight payment between ADSPL and Foxconn is essential to understand the valuation issue.

3. What are the constituent elements of 3% earning by Foxconn? Is earning equal to the commission? Is earning equal to the profit of the importer? Profit and loss statement of importer was required to be produced.

Here kind attention is invited to the provisions of the Section 28L of the Customs Act, 1962.

Powers of Authority — (1) The Authority shall, for the purpose of exercising its powers regarding discovery and inspection, enforcing the attendance of any person and examining him on oath, issuing commissions and compelling production of books of account and other records, have all the powers of a civil court under the Code of Civil Procedure, 1908 (5 of 1908).

5.3 At the outset I find that the applicant company M/s. Foxconn Technology (India) Private Limited (hereinafter referred to as FTIPL / applicant) is engaged in the business of manufacturing and trading electronic products, particularly communication network products and components, computers and computer parts, devices and systems for use in various industrial and domestic sectors. Applicant is a subsidiary of Ingrasys (Singapore) PTE Ltd (hereafter referred to as “Ingrasys Singapore”) which holds 99% of the share capital of the applicant company. The applicant imports various electronic products, components, etc., from Ingrasys Singapore and engages in the manufacture and sale of network cabinets and server cabinets. The applicant is also engaged in a trading activity whereby they import goods like server racks from Ingrasys Singapore and then sell the same in the domestic market. This Application for Advance Ruling is pertaining to the Customs valuation of imported goods meant for trading activity.

5.4 A third party, Amazon Data Services Private Limited (hereafter referred to as ADSPL), has contracted with Ingrasys Singapore (foreign parent company of the applicant) for the purchase of server racks and the terms of the contract are agreed to between them and this agreement is for the global operations of ADSPL. In pursuance of the same, the applicant imports the goods based on purchase order (PO) raised by ADSPL on them and in turn the applicant raises a similar PO on Ingrasys Singapore for import of the required products. The said goods are classifiable under Chapter heading 8471 of the Customs Tariff and the Basic Customs duty is exempted for the same, but IGST at the rate of 18 % is payable. The freight for import of the goods is paid directly to the carrier / freight service provider by ADSPL in terms of the master agreement between ADSPL and Ingrasys Singapore. The applicant does not engage in trading of goods in this model with any other domestic purchaser.

5.5 The applicant does not undertake any value addition on the goods. It earns a margin of 3% while trading imported goods. The assessable value for payment of customs duties has been determined by the applicant as the sum of price at which the goods are sold by Ingrasys Singapore to the applicant plus freight. It is noted that such freight is directly paid by ADSPL, a third party.

5.6 It is on record that the transaction of import by the applicant from Ingrasys Singapore, i.e., foreign parent company was investigated by the Special Valuation Branch (SVB), as the parties are related to each other and as per the order dated 31-1-2019, the price was found to be at arm’s length or uninfluenced by the relationship between the seller/exporter (Ingrasys Singapore) and importer/buyer (FTIPL/applicant). The method for valuation of imported goods as adopted by FTIPL/applicant was found to be correct by SVB after examining the documents and computation. Accordingly, the applicant was paying Customs duties, including IGST on the basic import price and freight component. Subsequently, the imported goods were sold by importer FITPL to a third party, ADSPL, by adding 3 % profit margin.

5.7 I have observed that, pursuant to investigation / inquiry by the Directorate of Revenue Intelligence (DRI) in 2021, the applicant started adopting a different approach to valuation from the one adopted earlier. Earlier approach was approved by SVB to determine the value of imported goods for payment of customs duty purposes. The contentions of the DRI on the basis of the investigation is that, the assessable value of imported goods should be the sum of basic value, transportation cost and the margin of 3% earned by the applicant upon sale of the imported goods to ADSPL. In other words, DRI alleged that the applicant is only a commission agent and the margin earned by them upon sale of the imported goods is nothing but their commission, which also needs to be included in the assessable value for customs purposes. In this connection, DRI had issued summons to the executives of the applicant company and also recorded statements from them. The applicant has chosen to pay the differential customs duties along with interest and penalty in terms of Section 28(2) of the Customs Act and paid differential customs duty of Rs. 6,68,83,559/-, interest of Rs. 71,43,766/- and the matter was closed in terms of Section 28(2) ibid. Applicant claims that the issue of valuation is no more pending. However, I find that, the grounds for acceptance of liability based on the DRI’ s charge of acting as a commission agent is not explained by the applicant in their application. The applicant has further submitted that they are of the view that the addition of 3 % trading margin earned by them in the assessable value of imported goods is not in accordance with the provisions of the Customs law and it also leads to the accumulation of Input Tax Credit of IGST paid on imports. Hence I find that there are three issues raised by the applicant viz. method of import transaction value determination, role of applicant as a trader or a commission agent and the accumulation of IGST Credit.

5.8 As discussed in earlier para the assessable value for payment of customs duties has been determined by the applicant as the sum of price at which the goods are sold by Ingrasys Singapore to the applicant and freight charges. It is noted that freight is directly met by ADSPL, a third party. In the value chain the price offered to the third party subsequent to import should have been higher than the assessable value declared but for direct freight payment by the third party to the supplier- exporter even if there is no value addition on account of manufacturing or processing. But, the present case is peculiar and I observe value deletion instead of value addition subsequent to import. I observe from the accounting demonstration in para 3.5 that the applicant has accumulated IGST- ITC (Input Tax Credit) in their books of account due to higher import price and lesser first post-import resale price. This paradoxical situation is created by the applicant themselves due to the way the transactions are structured. Element of freight cost is included in import transaction value and the same element of cost is deducted from the price offered on post-importation resale due to direct freight payment by the third party. This situation has not arisen due to any legal infirmities in the law. In the value chain of import and first resale after import there should have been a value addition if at all the elements of import cost represented by CIF were borne by the applicant importer. Not doing so has resulted in ITC accumulation. In short, the genesis of accumulation of IGST credit (ITC Credit) lies in higher transaction value declared for import and lower transaction price offered to the third party in a first resale after import. I do not see any role of the department or a legal framework under the Customs Act, 1962 in it. As stated earlier this accumulation is entirely attributable to the way the transaction is organized among the three transacting entities. Hence accumulation of IGST credit (ITC) is not a correct legal ground for seeking an advance ruling.

5.9 Now I turn to the issue raised by the applicant on its status as a trader or as a commission agent in this whole transaction. In order to examine the nature of transaction in further details questions, already mentioned in para 21, were raised before the applicant’s representative on 6.1.2023. Answers to these questions are required in order to examine the applicant’s claim to principal to principal basis transaction as well as an exact role of the applicant in the whole transaction. Applicant has emphasized that the transaction between the exporter Ingrasys Singapore and applicant M/s. Foxconn Technology (India) Private Limited is on principal to principal basis. In that case a question remains as to why the price agreement was contracted between exporter Ingrasys and a third party, ADSPL, who is a sole purchaser of goods covered under present application. This indicates that the applicant importer had no role in price determination on import as well as on first resale. Moreover, the applicant has to answer as to why the burden of freight, a significant portion of a transaction cost, was borne by the third party. Applicant-importer is dealing with imported goods in multiple ways — as a trader only and also as a manufacturer-reseller. But in the instant case of goods i.e. server racks, these two factors – direct price agreement with a third party and freight payment by a third party — raise the doubt on the principal-to-principal basis transaction argument. In this context the stand taken by the DRI that the applicant-importer is merely a commission agent appears legally correct, notwithstanding the issue whether such commission is includable to arrive at transaction value under section 14 of the Customs Act, 1062 or not. Moreover, if the stand taken by the DRI was not acceptable to the applicant then why they paid the liability worked out by the DRI is not clear. Neither the applicant has given any reason for this. Finally, I turn to the applicant’s approach to the transaction value determination under the section 14 of the Customs Act, 1962.

5.10 As discussed in para 5.9 earlier two factors – direct price agreement by exporter Ingrasys Singapore with a third party and freight payment by a third party instead by the applicant importer — are contrary to the applicant’s claim of having principal-to-principal basis transaction. Even if the applicant is assumed to be a commission agent in the instant case the valuation method of the applicant is required to be examined under the legal framework for valuation i.e. Customs Valuation (Determination of value of imported goods) Rules, 2007 read with section 14 of the Customs Act, 1962.

5.11 I observe that the fundamental issue relates to addition or otherwise of 3% amount earned by the applicant to the declared import transaction value. Applicant has stated that the inclusions to transaction value can be carried out only as per Rule 10 of CV Rules, 2007. The applicant is importing the impugned goods and selling the same to their sole buyer ADSPL. The applicant has stated that they are not acting as any commission agent. In such circumstances, it is to be examined whether such inclusion has legal sanction as per the relevant statutory provisions. Rule 10 (1) (a) of CVR, 2007 mandates inclusion of the following items to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods:

i. commissions and brokerage, except buying commissions;

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

iii. the cost of packing whether for labour or materials.

As rightly pointed out by the applicant I agree that, for the purpose of present application of Advance Ruling, the first clause (i) above is relevant. That is, any commission or brokerage, except buying commission is to be added for determining the value for the purpose of paying customs duty. In the transaction undertaken by the applicant, Rule 10 (1) (a) (i) of the CVR, 2007 provides for the inclusion of commission to the extent they are incurred by the buyer but not included in the price. This means the inclusion of commission, if any, is conditional to the extent that it should be incurred by the importer-buyer of the imported goods. Further, Rule 10 (1) (e) provides for inclusion of all other payments which are a condition of sale. Therefore, an inclusion to the transaction value must meet the conditions laid down in these Rules. Here I agree with the contention of the applicant that it can be inferred that only such items which would go to add to cost of the goods or expenses which are incurred by the buyer (importer) can be added.

5.12 Applicant in the instant case has stated that the profit margin of 3 % earned by the applicant upon sale of the imported goods is an income earned by the applicant while selling the goods to ADSPL. It is the profit earned by the applicant post importation on sale of the goods in India. This amount does not satisfy the term “commission” incurred by the buyer as per Rule 10 (1) (a) (i) of the CV Rules, 2007. Under Rule 10 any payment or expense incurred by the buyer/importer requires examination for inclusion in transaction value. The profit margin in this case is not “incurred” but “earned” by the applicant and it is not an item of expense or outgo but income for the applicant. It is also not a commission which is to be understood as a fee paid for services to an agent and in the context of trade in goods it may be for arranging for or facilitating such transaction. The applicant herein is not acting as an agent to source buyers or goods for either M/s Ingrasys Singapore or ADSPL. Applicant has further stated that it is just an independent business entity importing goods and selling the same. Margin earned by the applicant is not the commission as envisaged in Rule 10(1)(a)(i). Applicant has further stated that the said Rule excludes buying commission but calls for inclusion of selling commission incurred by the buyer. The profit margin earned in this case is neither buying commission nor selling commission paid by the applicant to any other person and the said rule is not applicable.

 5.13 It is on record that the applicant company is a subsidiary of Ingrasys (Singapore) PTE Ltd. which holds 99% of the share capital of the applicant company. They are related parties in terms of Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. In such a situation the import transactions will be subjected to the rigor of procedure laid down under the CBIC circular no. 5/2016-Customs dated 9.2.2016 related to the procedure to be followed in related party import cases and other cases by the Special Valuation Branch. I find that here the questions remain as to

(1) why the price agreement is entered into between the exporter supplier M/s Ingrasys, Singapore & a third party buyer M/s ADSPL leaving aside the importer-applicant (claimed to be principal to the transaction), who claims to be an independent business entity. The copy of price agreement is necessary to examine the role of the applicant in the transaction,

(2) why the principal (importer) in this transaction has not borne the burden of the freight that would have resolved the issue of accumulation of ITC,

(3) whether 3% amount earned by the applicant is a “profit margin” or “a business revenue’ of the applicant. It is important to note that the business profit and business income are not same and interchangeable terms,

(4) why there is no statement/submission on the grounds for payment of Customs duty and interest subsequent to DRI investigation when the applicant is of firm belief that the 3% margin earned by them is not a commission and hence not includible in transaction value of imported goods under section 14 of the Customs Act, 1962. Investigation closure report of the DRI, if any, is also not submitted by the applicant,

(5) why the data sought from the applicant including the profit and loss account of the applicant, referred in para 5.1 earlier, was not submitted by the applicant. This data was essential to understand exact role of the applicant in the transaction,

(6) Rule 10 (1) (e) provides for inclusion of all other payments which are a condition of sale. In the absence of sufficient data this factor also cannot be conclusively verified.

On the background of foregoing discussion, I find that the applicant has not submitted requisite information sought by the advance ruling authority. This is a clear case of data insufficiency.

6. On the ground of data insufficiency I refrain from issuing a ruling in this case.