Valuation of Goods imported from related foreign party

Case: M/s BENTLEY SYSTEM INDIA PVT.LTD VS CC, NEW DELHI

Citation: 2012-TIOL-95-CESTAT-DEL.

Issue:- Import of Goods from foreign supplier holding 99.5% of share capital in Importer-company – how valuation of goods imported is to be done?

Brief Facts:- Appellant-importer have imported computer software from M/s Bentley Incorporated USA which holds 99.5% of the share capital of appellant-company.

Appellant is related to foreign supplier in terms of Rule 2(2) of Customs Valuation (Determination of Imported Goods) Rules, 2007. Appellant declared their relationship as required under the Customs Valuation Rules. As per directions of the department, Appellant has been paying duty on the basis of transfer price agreed to between foreign supplier and Appellant, after making a revenue deposit of 1% of assessable value based on transaction price from 03-05-2006 to 31-01-2007 and by making a revenue deposit of 5% of such assessable value thereafter.

Prior to 31-03-2007, the foreign company was supplying the same goods directly to unrelated importers in India. It was seen that prices to these unrelated buyers were higher than the prices at which goods were sold to Appellant, who was related to the foreign supplier.

Before Lower Authorities, stand of the appellant was that the prices to them were at arm’s length and require no further loading though Appellant is related to foreign supplier. Appellant contended that for such sales to unrelated buyers in India a commission of 25% was being paid to the Appellant as per their agency agreement. It is argued that when goods are sold directly to the Appellant at a whole sale level and the Appellant is marketing the goods thereafter, it is only natural that the goods are sold to it at a lower price corresponding to the 25% Commission that the Appellant was getting earlier. So for making a comparison between prices at which goods were sold when the Appellant was acting as agents and the price when Appellant is acting as wholesale distributor, the prices for the first type should be discounted by 25% and then comparison made. Appellant give information for making such comparison.

It was also noticed that the supplier's price list for its main product namely 'Microstation V-8' during the year 2006-07 showed a price of USD 4795 per piece FOB but for goods imported by Appellant, the price was declared at USD 2781.10 per piece C&F. Further, it was noticed that appellant was paying money to the supplier i.e. their foreign supplier under "Corporate Service Charges" (CSC) and such charges are also mentioned in the Transfer Price Agreement.

Considering the above aspects, the adjudicating authority passed the assessment order wherein it was held that appellant and the foreign suppliers were related as per Rule 2(2) of the Valuation Rules. The prices declared by appellant in import invoice in respect of goods manufactured by the Foreign suppliers and import made from foreign suppliers before 10th October, 2007 were rejected as being abnormal discounted prices.

The assessment of all import w.e.f 30.05.06 was ordered to be done on the basis of price list taking list price as FOB value to arrive at assessable value i.e. I order loading of such amount on account of freight, insurance, Landing charges etc. in the value of the good which is declared as per price list where import made before 10th October, 2007 under Rule 9 of CVR 988 and where import made on or after 10th October, 2007 under Rule 10 of CVR, 2007.

Since priced list for the imports prior to 30.05.06 is not supplied/available and the data regarding contemporary imports of the third unrelated parties are available, assessment of the good will be done on the basis of contemporary import only. No Concession/discount will be allowed as importer and other unrelated Indian buyers are at same commercial level as most of products were imported by both in same/similarly quantity.

All future import of good shall be assessed on merit subject to verification of the price list taking List price as FOB price and after disallowing any discount etc. keeping in view provisions of the Valuation Rules 2007.

Aggrieved by the order, Appellant filed appeal with the Commissioner (Appeals) explaining that the suppliers were giving discount from the list price to other un-related buyers also and that the "Corporate Service Charges" are for services rendered by the parent company in matters like accounting, finance, legal, data processing (IT), Human Resources (HR) and other management functions, corporate marketing and product support services and such CSC is not a payment which is conditional for the import of the said goods and there is no reason for rejecting the transfer price of the goods taking into account CSC being paid.

The Commissioner (Appeal) concluded that CSC payable has to be incommensurate with the cost of service rendered and which the appellant have failed to prove. Since this has not been done and the supplier and appellant are related person, the declared value cannot be accepted and same has to be determined under Rule 9/10 of the Customs Valuation Rules, as the case may be, as has been held by the Adjudicating Authority for the reason given in his order.

Aggrieved, appellant is before the Tribunal.

Appellant’s Contention:- Appellant have submitted a tabulation showing that the parent company was giving discount on the listed price even when the foreign company was selling to other importers.

Appellant submitted that from the table above, it can be seen that the prices at which the goods were sold to them were comparable and higher than with the prices at which the goods were being sold to other independent buyers. Appellant also pointed out that before 1.3.2006 when the above company was supplying directly to distributors, appellant was getting commission of 25% of the invoice value and this amount has to be deducted for making a proper comparison when goods are sold to the Appellant. After the above date, the parent company stopped supply to other importers in India and all supplies in India were being made through the Appellant.

Appellant contented that the prices at which software is supplied directly by the foreign company to a consumer, cannot be a basis for determining value at which the goods are supplied to the appellant who is a distributor because these two transactions are at different commercial levels. Here it is to be noted that the expression "commercial levels", used in rule 4 (2) of Customs Valuation Rules is for distinguishing sale price to a distributor, to a whole sale dealer or a retail buyer as different commercial levels and not in terms of the quantity. Quantity involved in each transaction is a separate matter dealt with in the same Rule. The Customs Valuation Rules recognize that values for different commercial levels will be 'different. Further as distributor, the Appellant is importing higher volumes than what is imported by individual customers. Therefore, price at which the goods are sold to individual customers cannot be the prices at which the goods are sold to the distributor Appellant.

Appellant also submitted that as per the transfer price, the transfer agreement is for determining the price of products and service. Such prices are determined as per clause 1.01 of the agreement which was reproduced.

In addendum to the transfer price agreement, the clause relating to 'Corporate Service Charges' is for the service tariff in respect of accounting, finance, legal, data processing human resources and other management functions, corporate marketing and product support services such as continuous product upgrades and online resources marketed as 'Bentley Select'. These services are provided by the parent company irrespective of the imports made by the company and payments are to be made irrespective of quantum of imports. He argued that charging customs duty on the basis of list price is totally illegal because the goods are never sold at that price to any distributor whether related or not. Since the transfer price has been worked out by taking into account all the aspects of the costing involved and such price are also accepted for Income Tax purpose, it should also be accepted for assessment of custom duties.

Respondent’s Contention:- Revenue did not press any argument justifying how list price can be taken as assessable value for sale of goods to a distributor. Their argument is that the CSC are linked to the sale of goods and since any payment linked into sales should form part of the value, the same should be taken into account for determining the assessable value.

Reasoning of Judgment:- The Tribunal held that there is no merit in argument that goods imported by a distributor should be assessed on the basis of list price for retail sale especially because evidence regarding discounts given from list price to unrelated buyers like Pixel Soft Tech Pvt Ltd, Durr India Pvt Ltd, ONGC etc. are produced. It was held that this matter does not need any elaborate discussion. The order-in-original and order-in-appeal are to be set aside on this count alone. However, the Tribunal found it necessary to examine whether any addition need to be made on account of CSC being paid by the importing company to the supplier abroad.

The Tribunal noted that as contended by Revenue that CSC is linked to imported goods but it is not shown as to in which manner it is linked nor it is shown in impugned orders. It appeared to the Tribunal that the argument is that of there is no import of goods, there is no need for the importer company to exist on India and no need for CSC. This is a very stretched interpretation of Rule 4(2) (g) of Customs Valuation Rules. It also appeared that Revenue is basing their argument on Rule 4 (2) (b) of the said Rules.

The Tribunal examined the provisions of Rule 4 (2) (b) as well as the Interpretation Notes to Rule 3(3) of Customs Valuation Rules, 2007.

The Tribunal observed that transfer prices are normally scrutilized by the Income Tax Department considering the whole gamut of issues relevant and with better focus on the overall accounts of the company unlike the customs department which compares prices for the product billed to other importers. The matter of transfer prices is to be determined by in-depth analysis of the books of accounts and not to be simply rejected on the basis of list price of the commodity for retail sale. No evidence of price for sale at the same commercial level and same quantity level is produced by the department. No case is made out that the Income Tax department found the prices to be vitiated. Once the Transfer Prices Agreement for the products or services is not objected to by the Income-tax Department a case that the value of goods has been transferred to service has to be proved with more meaningful evidence rather than a comparison with list price for sale to retail buyers especially when evidence exists for discounts given even to retail buyers.

In the facts and circumstance, the Tribunal is of the view that orders of the lower authorities are to be set aside. This order shall not be a bar on making out a proper case against the importer on the basis of demonstrable evidence that the price of imported goods has been transferred to imported services.

Before closing the matter, the Tribunal made an observation that the services availed by the importer from their holding company, for which CSC is paid, are likely to be chargeable to service tax under Section 66A of the Finance Act, 1994 and it is open to the Customs authorities to notify the concerned service tax authorities for taking action as permitted under law for recovery of service tax if not already paid. Impugned ordered set aside.

Decision:- Appeal allowed with consequential relief.

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PJ/Case Laws/2011-12/1558

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