CUSTOMS AUTHORITY FOR ADVANCE RULINGS

NEW CUSTOM HOUSE, BALLARD ESTATE, MUMBAI - 400 001

E-MAIL: cus-advrulings.mum@gov.in

In

Application No. CAAR/CUS/APPL/69/2022-O/o Commr-CAAR-MUMBAI

Ruling

M/s. Sick India Private Limited (hereinafter referred to as the applicant) located at 215, Western Edge II, Western Express Highway, Borivali (East), Mumbai, 400066, has filed an application for seeking advance ruling under section 28 H (2) (c) of the Customs Act, 1962 with respect to their proposed future transactions with their related parties.

2. The applicant made the following submissions:

2.1. They are engaged in import, marketing and selling of sensors, lasers, and parts in India, manufactured by the Overseas Company. The goods imported by the them are classified under Chapter 84, 85, 90 of the first schedule to the Customs Tariff Act, 1975.

2.2. Currently, they are importing goods into India as per an agreed transfer price with overseas company. The methodology adopted for arriving at the customs value, was approved vide order No. SVB/CUS/182/HSK/2012 dated February 14, 2012 issued by SVB new Delhi.

The order stated that the existing price is not influenced by the relationship between them and the Overseas Company and thus, the transaction value is acceptable for the purpose of customs valuation.

2.3. In 2016, they filed a declaration in the form prescribed vide CBIC circular no. 04/2016 for renewal of aforesaid SVB order. It was intimated by the authorities that the process of renewal of said SVB order is dispensed with, along with the direction issued to Deputy Commissioner of Customs, New Customs House, New Delhi, for finalization of provisional assessments as per the provisions of the said SVB order.

2.4. In 2017, the Directorate Revenue of Intelligence, Mumbai Zonal Unit conducted investigations into the applicant's imports, alleging undervaluation of imported goods. In 2020, the matter was adjudicated by the Commissioner of Customs (Import), ACC, Mumbai, and it was held that the imported goods were sold to unrelated buyers in India at a higher price and therefore, the customs value adopted by the applicant for related party transactions was rejected. Differential duty along with interest and penalty were demanded from the applicant. Being aggrieved by the adjudication order, the applicant filed an appeal and the matter is pending before the CESTAT Mumbai.

2.5. The Overseas Company i.e. Sick AG, Germany, is undertaking to standardize and harmonize its transfer pricing across the globe within the ambit of its existing application of the Resale minus method / Resale Price Method. This system of arriving at the transfer price is referred to as Transfer Pricing System and Steering Concept (hereinafter referred to as TPuS, and also known as Resale Price method or Resale Minus method) within the Overseas Company and it will be applied to all entities of the Overseas Company across the globe. The applicant's submission in this regard is as follows:

2.5.1 The Applicant wishes to change the process for arriving at the valuation of its future imports. Currently, the price is based on a gross price list (based on sale proceeds of the Oversees Company) minus discount (depending on the sale territory). The said discounted price (under existing methodology) is also tested by conducting a detailed transfer pricing study. The study incorporates benchmarking of EBIT of oversees Company with the comparable entities.

2.5.2 Under TPuS, the customs value will be based on summation of manufacturing cost and CAR (Commercial Adjustment Rate). CAR will be calculated basis a reverse calculation wherein all costs incurred by the Applicant, along with an EBIT target, will be deducted from sales value charged to unrelated buyers in India. Thereafter, CAR will be arrived at as a residual value.

2.5.3 The existing customs valuation employed by the applicant is based on a list price minus discount, whereas TPuS (also known as Resale Minus Method) is based on computation of CAR at an entity level and its application at transaction level.

2.5.4 Thus, there will be a change in the determination of the customs value for the proposed imports at a transactional/individual level.

2.6. Hence they wish to adopt a new process for arriving at the transaction value for imports from related parties in line with TPuS where transaction value shall be determined on the basis of manufacturing costs of Overseas Company and an amount based on a Commercial Adjustment Rate percentage ('CAR%').

2.7. CAR value will be determined by deducting all costs and a target operating margin ('EBIT') of the applicant, from sales value to unrelated buyers in India at an aggregate level. The CAR shall be computed in percentage terms, as a proportion of the manufacturing costs. For instance, CAR, as a proportion to manufacturing costs is X%, then the X% CAR shall be applied for each good to be imported into India by the applicant from overseas companies.

2.8. The CAR will be determined for all the subsidiaries of the Overseas Company in different countries to determine the EBIT of similar comparable companies. The value of CAR will be fixed for a defined period (e.g., a financial year).

2.9. The value of CAR will be determined before the import of products in India based on the estimated sale value and target EBIT. The Customs duty liability will be discharged on the entire value including manufacturing costs and CAR value at the time of actual import.

2.10. At the end of the financial period, the value of CAR will be reviewed. The applicant expects that there should be no significant deviation between the estimated CAR value and the CAR value emerging from the year-end review.

2.11. In view of above, the applicant, in order to obtain certainty on treatment of declared value under the Indian Customs Act, 1962 and related rules, seeks a ruling on whether the value arrived by using the new process is acceptable as Customs Value on which Customs Duty is required to be paid in terms of Section 14 of the Customs Act, 1962 read with the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (hereinafter referred to as CVR, 2007).

2.12. The Overseas Company has 99.99% shareholding in the applicant, the applicant and the Overseas Company are related parties in terms of Rule 2(2)(v) of the CVR, 2007. Therefore, in order to determine the Customs value in case of the applicant. Section 14 read with Rule 3(3)(a) or Rule 3(3)(b) should be referred to.

2.13. Interpretative Note to Rule 3(3) of the CVR, 2007 provides that where the customs authorities have doubt about acceptability of the declared value of imported goods, they may examine the circumstances surrounding the sale.

2.14. The Interpretative Notes provide three ways by which it can be determined whether in a transaction between two related parties, the price was not influenced by their relationship:-

a) the related parties act in a manner consistent with the normal pricing practice of the industry;

b) the seller acts as he does in setting his prices to unrelated buyers;

c) the price is shown to cover all the seller's costs, plus profit which is representative of firm's overall profit realized over a representative period of time (e.g., on annual basis) in sale of goods of the same class or kind.

2.15. In view of the above, where the transaction value is adequate to recover all the costs and profit representative of firm's overall profit, it can be said that the price had not been influenced by the relationship between the parties.

2.16. The Oversees Company will recover all its costs and a profit percentage from the applicant under TPuS. The transaction value under TPuS will be determined on the basis of manufacturing cost and CAR. Further, the CAR will include administrative and other expenses of the Oversees Company and its profit.

2.17. Therefore, the proposed transaction value is based on recovery of all costs and profit from the applicant.

2.18 The relevance of deployment of applicant's profit (instead of the profit of oversees Company) draws support from the WCO guide to Customs Valuation and Transfer Pricing.

2.19. In case the transaction value as detailed above is not acceptable as Customs value, then the said value should be determined sequentially on the basis of Rule 4 to 8 of CVR, 2007.

2.20. Most of the goods imported by the applicant are customized as per the customer's need and enjoy a brand value associated with the applicant. They cannot be compared to any unbranded product / other brand's product imported into India. Further, post adoption of TPuS, the overseas Company will export such products to only the applicant and no other importer in India. Hence it will not be feasible to apply Rule 4 to imports by the applicant.

2.21. The goods imported by the applicant enjoy a distinct brand value and therefore, cannot be compared with any other products. Hence, it is not feasible to apply Rule 5 to the imports of the applicant.

2.22. Rule 6 states that if the value of imported goods cannot be determined under the provisions of Rules 3, 4 and 5, the value shall be determined under the provisions of Rule 7 or, when the value cannot be determined even under Rule 7, then recourse under Rule 8 should be taken.

2.23. Rule 7 provides for arriving at the value on the basis of deductive method. The value of CAR under TPuS is arrived on the basis of backward calculation.

The proposed methodology under TPuS is as below:

Transaction value (i.e Manufacturing cost + CAR) = 50 +30= 80

2.24. The above determination for arriving at transaction value (under TPuS) conforms to the requirements of Rule 7 of the CVR, 2007. Application of Rule 7 implies that the applicant has deducted all the costs along with the profit earned in the country of importation from the sales to unrelated buyers in India in order to arrive at the customs value. The said profit is expected to be similar to the profit earned on the same class of products, derived on the basis of Transfer pricing benchmark study.

2.25. Therefore, on the basis of the above arguments, even if valuation under Rule 7 of CVR, 2007 was resorted to, the value arrived at would be the same as the transaction value calculated under TPuS. The convergence of the results from the two approaches, further strengthens the position that the price under TPuS is not influenced by the relationship between the applicant and the Overseas Company. Further, once the customs value has been substantiated under Rule 7, Customs value need not be determined under Rule 8. In any case, since the value is being determined under Rule 3(3)(a) of the CVR, 2007, therefore, there is no requirement to evaluate the determination under any subsequent rules. Reliance is placed on the judgement of the Hon'ble Madras bench of CESTAT in the case of CC Vs. Hewlett Packard Limited for the same.

2.26. Rule 10 stipulates addition of certain goods/services to the transaction value in order to arrive at the customs value. The applicant is not making any such payments (in the form of royalty, license fee etc.) which are required to be added in order to arrive at the customs value. Therefore, the proposed value under TPuS should be acceptable.

2.27. The new process for arriving at valuation of imports for transactions between the applicant and its related entities, i.e. the Overseas Company and its entities, is consistent with the principles prescribed under Section 14 of the Customs Act, 1962 and the CVR, 2007. Hence the transaction value arrived at, by application of the said methodology, is acceptable as Customs value under Indian Customs Act, 1962 and the CVR, 2007, which may be considered for SVB Investigations. Applicant's CAAR-1 application seeks a ruling on whether the principles to be adopted for valuation of goods under a process called Transfer Price System and Steering Concept ('TPuS') (for determination of price at which the goods will be imported by Sick India Private Limited ('the Applicant') from Sick AG, Germany and other related entities ('Overseas Company'), are consistent with Section 14 of the Customs Act, 1962 ('the Customs Act') read with the Customs Valuation (Determination of Values of Imported Goods) Rules, 2007 ['the CVR, 2007'].

Based on these submissions the applicant requested to issue the ruling.

3. A personal hearing was held on 17.11.2022. The applicant was represented by Shri. Manasvi Srivastava (Partner, KPMG Assurance and Consulting Services LLP), Shri Ravi Jain, Associate (Director, KPMG Assurance and Consulting Services LLP) and Ms. Lipi Gupta, Manager (KPMG Assurance and Consulting Services LLP). No authorized representative of the jurisdictional Commissioner attended the hearing. The authorized representatives of the applicant explained their case as outlined in their application CAAR-1. They agreed to submit SVB orders, transfer pricing orders, DRI SCN and adjudication order of Commissioner (ACC) in case of the applicant. In order to arrive at import assessment in future they requested to issue a ruling accepting valuation method proposed by them (TPuS). They also agreed to submit the data / additional data whenever required. They stated that the past litigation was related to valuation methodology that is entirely different from TPuS method and hence their application has been correctly submitted with respect to Sr. No. 11 and 12 of CAAR-1 form.

4.1 I have gone through the application and the submissions made by the applicant. No comments were received from the Jurisdictional Commissioner. Applicant's issue falls within the ambit of section 28H (2) (c) of the Customs Act, 1962. The applicant, in order to obtain certainty on the method of arriving at transaction value under the Indian Customs Act, 1962 and related rules, is seeking a ruling on whether the principles to be adopted for valuation of goods under a process called Transfer Price System and Steering Concept ('TPuS') (for determination of price at which the goods will be imported by Sick India Private Limited ('the Applicant') from Sick AG, Germany and other related entities ('Overseas Company'), are consistent with Section 14 of the Customs Act, 1962 ('the Customs Act') read with the Customs Valuation (Determination of Values of Imported Goods) Rules, 2007 ['the CVR, 2007']. TPuS method draws support from WCO's Guide on Customs Valuation & Transfer Pricing (June 2015) and is also known as Resale Price Method or Resale Minus Method.

4.2 The legal framework related to issue raised by the applicant is governed by section 14 of the Customs Act 1962, CVR 2007 and circulars issued by the CBIC from time to time pertaining to examination of related parties' transactions by special valuation branch. It is important to note that the methodology proposed to be adopted by the applicant for arriving at transaction value for the purpose of levy of Customs duty w.e.f. 1st May 2023 is different from the methodology adopted till today. The applicant has submitted that the most of the goods imported by the applicant are customized as per the customer's need and enjoy a brand value associated with the applicant. They cannot be compared to any unbranded product / other brand's product imported into India. Further, post adoption of new method of valuation w.e.f. 1st May 2023, the overseas company will export such products to only the applicant and no other importer in India. Due to this submission of the applicant I find that the discussion of past activities involving SVB compliance as well as DRI investigation is not appropriate here. I also agree with the contention that the application has been correctly submitted with by the applicant with respect to Sr. No. 11 and 12 of CAAR-1 form.

4.3 Section 14 of the Customs Act, 1962 governs the valuation of goods for the purposes of the Customs Tariff Act, 1975 or any other law for the time being in force. It stipulates that the value of imported 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 where the buyers and sellers 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. Section 14 further provides proviso to sub section (1) as follows;

"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 liecence 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 rides made in this behalf "

Next proviso to sub section (1) further states as follows:-

" 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 respected of goods when the buyer and the sellers are not related or the price is not the sole consideration for the sale or any other case;... "

4.4 Applicant has submitted that their Overseas Company has 99.99% of their shareholding, and therefore the Overseas Company and the applicant are related parties in terms of Rule 2(2)(v) of the CVR, 2007.

4.5 Before proceeding further let us examine the applicant's submissions. Applicant are currently importing goods into India based on list price minus discount method. They have submitted that the Overseas Company, related party supplying the goods, is undertaking an exercise to standardize and harmonize its transfer pricing across the globe by adopting TPuS (also known as Resale Minus Method) based on computation of CAR at entity level and its application at transaction level (for each import) in place of existing customs valuation employed by them based on list price minus discount method. This system of arriving at the transfer price is referred to as TPuS within the Overseas Company and it will be applied to all entities of the Overseas Company across the globe. Under the TPuS, the transaction value shall be determined on the basis of manufacturing costs of Overseas Company and an amount based on the CAR- Commercial Adjustment Rate percentage ('CAR%'). The CAR value will be determined after deducting all costs and a target operating margin ('EBIT') of the applicant from sales price charged to unrelated buyers in India at an aggregate level. The CAR shall be computed in percentage terms as a proportion of the manufacturing costs. The CAR% will be determined before the import of goods in India on the basis of the estimated sale price charged to unrelated buyer and target EBIT of the importer (an applicant). The Customs duty liability will be discharged on the value representing the sum of manufacturing costs and CAR value at the time of actual import. The CAR will include administrative and other expenses of the overseas company and its profit. The Oversees Company will recover all its costs and a profit from the applicant under TPuS. At the end of the financial period, the value of CAR will be reviewed. The applicant expects that there should be no significant deviation between the estimated CAR value and the CAR value emerging from the year-end review. Applicant has submitted that the proposed transaction value is based on recovery of all costs and profit from the applicant and should be considered as transaction value in terms of Rule 3 of the CVR, 2007.

TPuS method has demonstrated that the price charges to unrelated buyer includes sum of (1) manufacturing cost plus CAR (which includes administrative and other expenses & profit) of the exporter and (2) selling & other expenses, interest payments, direct taxes payments and a profit of the importer. This also shows that the proposed transaction value for the purpose of section 14 of the Customs Act, 1962 is sum total of manufacturing cost, administrative expenses & other expenses and a profit of the manufacturer-exporter.

4.6.1 Applicant's case is of related party/parties transactions. For the transactions between the related parties sub-rule (3)(a) of Rule 3 of the CVR, 2007 prescribes as follows;-

"Rule 3(3)(a) Where the buyer and the seller are related, the transaction value shall be accepted provided that the examination of circumstances of the sale of imported goods indicate that the relationship did not influence the price. "

Schedule to CVR, 2007, Interpretative Notes to Rule 3(3) state as follows:

"1. Rule 3(3)(a) and rule 3(3)(b) provide different means of establishing the acceptability of a transaction value.

2. Rule 3(3)(a) provides that where the buyer and the seller are related, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted as the value of imported goods provided that the relationship did not influence the price. It is not intended that there should be an examination of the circumstances in all cases where the buyer and the seller are related. Such examination will only be required where there are doubts about the acceptability of the price. Where the proper officer of customs has no doubts about the acceptability of the price, it should be accepted without requesting further information from the importer. For example, the proper officer of customs may have previously examined the relationship, or he may already have detailed information concerning the buyer and the seller, and may already be satisfied from such examination or information that the relationship did not influence the price.

3. Where the proper officer of customs is unable to accept the transaction value without further inquiry, he should give the importer an opportunity to supply such further detailed information as may be necessary to enable him to examine the circumstances surrounding the sale. In this context, the proper officer of customs should be prepared to examine relevant aspects of the transaction, including the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at, in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and seller, although related under the provisions of rule 2(2), buy from and sell to each other as if they were not related, this would demonstrate that the price had not been influenced by the relationship. As an example of this, if the price had been settled in a manner consistent with the normal pricing practices of the industry in question or with the way the seller settles prices for sales to buyers who are not related to him, this would demonstrate that the price had not been influenced by the relationship. As a further example, where it is shown that the price is adequate to ensure recovery of all costs plus a pro fit which is representative of the firm's overall profit realized over a representative period of time (e.g. on an annual basis) in sales of goods of the same class or kind, this would demonstrate that the price had not been influenced. "

Applicant has claimed that the price arrived on this basis complies with the provisions of rule 3(3)(a). The said rule provides that where the buyer and the seller are related, the transaction value shall be accepted provided that the examination of circumstances of the sale of imported goods indicate that the relationship did not influence the price.

It is further observed in the Schedule to CVR,2007- Interpretative Notes to Rule 3(3)(a) that where the buyer and the seller are related, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted as the value of imported goods provided that the relationship did not influence the price. Provisions clearly state that it is not intended that there should be an examination of the circumstances in all cases where the buyer and the seller are related. Such examination will only be required where there are doubts about the acceptability of the price. Further it is provided that where it is shown that the price is adequate to ensure recovery of all costs plus a profit which is representative of the firm's overall profit realized over a representative period of time (e.g. on an annual basis) in sales of goods of the same class or kind, this would demonstrate that the price had not been influenced. I find that the TPuS method also known as Resale Price Method or Resale Minus Method shows that the price determined as transaction value under section 14 is adequate to ensure recovery of all costs and a profit of exporting firm to infer that the relationship has not influenced the price.

4.6.2 Applicant has submitted that the TPuS is a deductive method similar to one prescribed by way of Rule 7 of the CVR,2007. But before turning to the Rule 7 I find it legally appropriate to discuss applicability of Rule 4 & Rule 5 in sequential manner. Rule 4 is based on transaction value of identical goods and is stated as below:-

"4. Transaction value of identical goods. -

(1)(a) Subject to the provisions of rule 3, 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;

Provided that such transaction value shall not be the value of the goods provisionally assessed under section 18 of the Customs Act, 1962.

(b) In applying this rule, the transaction value of identical goods in a sale at the same commercial level and in substantially the same quantity as the goods being valued shall be used to determine the value of imported goods.

(c) Where no sale referred to in clause (b) of sub-rule (1), is found, the transaction value of identical goods sold at a different commercial level or in different quantities or both, adjusted to take account of the difference attributable to commercial level or to the quantity or both, shall be used, provided that such adjustments shall be made on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustments, whether such adjustment leads to an increase or decrease in the value.

(2) Where the costs and charges referred to in sub-rule (2) of rule 10 of these rides are included in the transaction value of identical goods, an adjustment shall be made, if there are significant differences in such costs and charges between the goods being valued and the identical goods in question arising from differences in distances and means of transport.

(3) In applying this rule, if more than one transaction value of identical goods is found, the lowest such value shall be used to determine the value of imported goods."

I agree with the applicant's contention that most of the goods imported by the applicant are customized as per the customer's need and enjoy a brand value associated with the applicant. They cannot be compared to any unbranded product and other brand's product imported into India. Further, post adoption of TPuS, the overseas Company will export such products to only the applicant and no other importer in India. Hence it will not be feasible to apply Rule 4 to imports by the applicant as no identical goods' imports will be available for comparison.

4.6.3 Rule 5 is based on transaction value of similar goods and is stated as below:-

"5. Transaction value of similar goods.-

(1) Subject to the provisions of rule 3, 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:

Provided that such transaction value shall not be the value of the goods provisionally assessed under section 18 of the Customs Act, 1962.

(2) The provisions of clauses (b) and (c) of sub-rule (1), sub-rule (2) and sub-rule (3), of rule 4 shall, mutatis mutandis, also apply in respect of similar goods.

Here also I agree with applicant's contention that the goods imported by the applicant enjoy a distinct brand value and therefore, cannot be compared with any other products by treating them similar goods. Hence, it is not feasible to apply Rule 5 to the imports of the applicant. Rule 6 prescribes application of Rule 7 if the value cannot be determined on the basis of Rule 4 & Rule 5. Now I take up examination of applicability of Rule 7 in the present case.

4.6.4 Applicant states that the TPuS is a deductive method similar to one prescribed by way of Rule 7 of the CVR,2007. I agree with this submission of the applicant. It is further stated that the value arrived at by applying TPuS method and Rule 7: Deductive value method are same. Relevant provisions of the Rule 7 are as follows;-

"Rule 7. Deductive value. - (1) Subject to the provisions of ride 3, 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, subject to the following deductions : -

(i) either the commission usually paid or agreed to be paid or the additions usually made for profits and general expenses in connection with sales in India of imported goods of the same class or kind;

(ii) the usual costs of transport and insurance and associated costs incurred within India;

(iii) the customs duties and other taxes payable in India by reason of importation or sale of the goods. "

Further the Interpretative Note to rule 7 states as follows;-

"1. The term ''unit/price at which goods are sold in the greatest aggregate quantity" means the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place..."

I notice one difference in TPuS method and Rule 7: Deductive value method. While Rule 7: Deductive value method is a part of Customs Valuation (Determination of price/value of imported goods) Rules, 2007, the TPuS method is not formally recognised under the CVR,2007. However, since both these methods are based on deductive computations from same benchmark price and of similar price elements I hold that the TPuS method is consistent with Rule 7: Deductive value method in accounting terms. I also accept an argument that once transaction value arrived at by application of Transfer Pricing System and Steering Concept (TPuS) method is substantiated by application of Rule 7 of CVR, 2007 then there is no need to examine subsequent rule viz. Rule 8, in CVR, 2007 for understanding whether that rule is consistent with the proposed valuation methodology of the applicant or not.

4.6.5 On the background of foregoing discussion, it is observed that the applicant has made out a case based on accounting method stating that the transaction value to be declared at the time of import, prospectively w.e.f. 1st May 2023, will include in it a manufacturing cost of the overseas related party exporter-supplier and an amount equal to commercial adjustment rate percentage (CAR%). The benchmark price adopted in TPuS method is the price to be charged at aggregate level to the unrelated buyer in India. By carrying out backward calculations what is deducted from this price is the sum total of selling, general and administrative (SG&A) expenses and a targeted, not actual, earnings of the importer before deducting interest charges (cost of finance) and taxes (direct taxes) and profit (of the importer) - in accounting terms an EBIT. To arrive at arm's length price, to be declared as a transaction value at the time of import, the applicant has made out a case based on accounting calculations that the only accounting elements deducted from the price charged to the unrelated buyers in India are the importers selling, general and administrative expenses on accounts of trading of goods imported from a related party, interest expenses, as a cost of financing the trading operations, of the applicant, direct taxes paid/payable by the applicant and the profit of the applicant. What remains after that is a manufacturing cost, all other expenses, and profit of the related party exporter. Applicant is proposing to effect an adjustment that is required to be made to such declared price - upward or downward - after the end of financial period/ financial year and discharge the remaining Customs duty and other liabilities accordingly, if any.

4.7 The applicant is seeking a ruling on whether the value arrived by using the above method is consistent with the provisions of Section 14 of the Customs Act, 1962 read with the CVR, 2007. In this context, I find that the CBIC has issued a Circular no. 5/2016 dated 9.02.2016 on the issue of "Procedure for investigation of related party import cases and other cases by the Special Valuation Branches". On examination of the contents of the application as well as arguments put forth during the course of hearing I find that the CBIC Circular No. 5/2016-Customs dated 9th February, 2016 is relevant for all related party transactions Moreover, CBIC circular 5/2016 dated 09.02.2016, as stated in para 2 therein, has taken cognisance of WCO's Guide to Customs Valuation and Transfer Pricing (June 2015) which recognises TPuS method, however there is no separate dispensation provided in the CBIC circular to this method in related party transaction cases. This CBIC circular remains applicable on equal footing to the importer following TPuS method as per WCO guide as well as to any other related party importer. Further the said circular in para 3.4 states as follows "it has been decided to introduce a questionnaire to be filled by the importer (attached as Annexure A to the circular), which would enable the jurisdictional Commissioner to take a decision on whether a case needs to be referred to SVB for investigations". I invite applicant's attention to Annexure-A to the said circular. The questionnaire given in the Annexure-A is required to be filled by the importer at the time of filing the bill of entry.

4.8 Para 4 of the Circular deals with cases, which may be considered for SVB Investigations, is reproduced as follows:-

"4.0 While filing a bill of entry, every importer makes a declaration about whether the seller of imported goods is a related party or not, as defined under Rule 2(2) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 (CVR, 2007). In other words, where any importer makes a declaration that the transaction is between 'related persons', as defined under Rule 2 (2) of CVR 2007, it would be necessary to examine whether or not the circumstances surrounding the sale of the imported goods indicate that the relationship has influenced the price. Accordingly, such transactions will require to be examined as to whether SVB inquiries are necessary.

4.1 Apart from investigation of transactions involving related parties, cases involving possible additions to declared transaction value also need to be examined to determine whether SVB investigations are necessary. Accordingly, transactions where any payments are sought to be made which are in the nature of instances given below, shall be examined with respect to the need for SVB investigations:-

(a) 'royalty and licence fee' under Rule 10 (l)(c) of CVR, 2007 or

(b) where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller [i.e. Rule (10) (l)(d)] of CVR, 2007 or

(c) where any other payments are made or are contemplated to be made in future by buyer to seller as a condition of sale of imported goods etc., [i.e. Rule 10(l)(e)] of CVR, 2007

4.2 However, no reference to SVB would be necessary where any additions are sought to be made under Clauses (a) and (b) of Rule 10(1), as it is expected that such matters would be decided routinely by Appraising Groups. "

It is observed that the Rule 10 of CVR, 2007 stipulates addition of price elements on account of certain goods and /or services to the transaction value in order to arrive at the correct transaction value. CBIC Circular provides that the transactions where any payments are sought to be made which are in the nature of instances given at (a) (Rule 10(1)(c)), (b) (Rule 10(1)(d)) and (c) (Rule 10 (1)(e)) above, shall be examined with respect to the need for SVB investigations. The applicant has stated that they are not making any such payments (in the form of royalty, license fee etc.) which are required to be added in order to arrive at the transaction value. I find, in the instant case, that the application of Rule 10 is not warranted due to absence of financial flows on account of any such cost elements. TPuS method clearly shows that the proposed transaction value is sum total of manufacturing cost (direct cost & indirect cost) and administrative expenses, other expenses and profit represented by CAR indicating absence of any financial flows which can fall under the scope of Rule 10(1)(c), Rule 10(1)(d) and Rule 10 (1)(e).

4.9 To summarise, a factual matrix submitted by applicant states that they propose to follow Transfer Pricing System and Steering Concept (TPuS) method also known as Resale Price method/Resale Minus method only from 1st May 2023 onwards for related party imports for determination of transaction value under section 14 of the Customs Act, 1962. The CBIC Circular referred above has mandated that in case of related parties' transactions the jurisdictional Commissioners will decide whether the relationship has influenced the transaction value on the basis of the circumstances surrounding the sale of the imported goods. On examination of various elements of price used in demonstration of TPuS method presented by the applicant, discussed in para 2.23 earlier and other submissions made, I find that there will be no direct sales to any unrelated buyer in India, the elements of price covered under Rule 10(l)(c), Rulel0(l)(d) and Rule 10 (l)(e) of the CVR, 2007 are not present in the applicant's imports ruling out application of Rule 10, the transaction value arrived at by using TPuS method is adequate to ensure recovery of all costs plus profit which is representative of the firm's overall profit realized over a representative period of time (e.g. on an annual/financial year basis) in sales of goods of the same class or kind to demonstrate that the price had not been influenced by the relationship, due to unique brand value and customisation of the goods the scrutiny of transaction value by applying the Rule 4, Rule 5 and Rule 6 is also not required in the present case, and the process adopted under 'deductive value' method prescribed under Rule 7 is exactly same as TPuS method. Under Rule 7 as well as under TPuS method the benchmark price adopted for backward calculations is a price charged to unrelated buyer on aggregate basis for each product which is in line with Interpretative Note which interprets such price as 'the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place'. Deductions worked out under TPuS method from benchmark price are similar to those prescribed in Interpretative note to Rule 7 of the CVR, 2007.

Applicant has mentioned that at the end of the financial period, the value of CAR will be reviewed and finalized. Applicant has proposed to effect an adjustment that is required to be made to such declared price (transaction value) -upward or downward - after the end of financial period/financial year and discharge the remaining Customs duty and other liabilities as per the law accordingly, if any, It goes without saying that, since all elements of transaction value cannot be definitively determined at the time of imports, the assessment has to take place on provisional basis until adjustments are made based on actual accounting data and further acceptance by the concerned Customs authorities.

5. On the basis of foregoing discussion, I rule that the applicant's proposed valuation method, Transfer Pricing System and Steering Concept (TPuS) method also known as Resale Price method/Resale Minus method, for determination of transaction value under Section 14 of the Customs Act 1962 for goods proposed to be imported from the related party suppliers, after compliance with the procedure prescribed in the CBEC (now CBIC) Circular No. 5/2016-Customs from F. No. 465/12/2010-Cus V dated 09/02/2016 on the issue of "Procedure for investigation of related party import cases and other cases by the Special Valuation Branch", is consistent with Rule 3 as well as Rule 7 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. This ruling will apply prospectively only to the TPuS method proposed to be adopted by the applicant for transaction value determination w.e f. 1st May 2023.

(Narendra V. Kulkarni)

Customs Authority for Advance Rulings,

Mumbai