The government recently constituted a working group to study the issue related to transfer pricing (related-party transactions) under the Customs Valuation Rules.
This article addresses the policy and procedural changes required to ensure that the determination of transaction value, in the circumstances of related-party transactions, at arms length basis, in terms of the Customs law in force, is done expeditiously and fairly.
At the outset, it is submitted that the examination of related-party transactions, as it exists today, does not factor in a number of changes that have occurred in the recent past, such as developments in cross-border supply chains and technological advancements that have made the process of development of products faster and more cost effective, as also the emergence of goods with an inherent service element built in. The suggestion is, therefore, to ensure that the provisions are periodically revised and updated, as a process, so that they stay current.
To quicken the determination of the arms length price and to make it more effective, one change could be to dispense with the current requirement for the filing of the declaration by the importer at the time of import of goods from a related party.
Instead, the assessing officer should refer matters to the Special Valuation Branch only in cases where the valuation adopted by the importer is found to be lower than the benchmark identified by the authorities. The authorities should further inform the importer the prima facie grounds on which matters have been referred to the Special Valuation Branch.
This would ensure that the process is based on an assessment of the underlying risks rather than the present system of reference of all related-party transactions to the Special Valuation Branch. This would also be a more pragmatic approach, considering that a related-party transaction does not necessarily imply undervaluation, in terms of the law on the point.
Another recommendation would be to do away with the 1 per cent loading charge imposed at the time of clearance of goods, on a provisional basis, pending the examination of valuation by the Special Valuation Branch. Instead, an importer may be permitted to submit a bond, supported by a bank guarantee, which can be invoked if the transaction is proved not to be at arms length.
Similarly, there should be no loading of 1 per cent of the value at the time of filing of renewal applications to the Special Valuation Branch, upon the expiry of the three-year validity period, in cases in which the original Special Valuation Branch order had accepted the declared transaction value. Stoppage of loading in cases in which the Special Valuation Branch proceedings take longer than the recommended four months is also recommended. All this would do away with the need to file refund applications at subsequent points of time.
Simplification of the assessment procedure after the issuance of the final order by the Special Valuation Branch, through an automatic finalisation of the Bills of Entries within a prescribed timeframe, is also suggested.
Further, a dispensation may be made of the requirement of filing refund claims where excess payments have been made during the period of Special Valuation Branch examination. Thus, upon the issuance of the Special Valuation Branch order, all provisional assessments should be finalised and refund of excess duty paid should be credited to the bank account of the importer, as in the case of duty drawback.
Guidelines in this regard should be published by the department, on how the importer can demonstrate that the duty burden has not been passed on, in terms of the unjust enrichment procedures. Finally, the order issued by the Special Valuation Branch authorities should continue to remain valid, unless there is any material change in the importation model.
Further, the present requirement is that an extra duty deposit of 5 per cent can be levied when the importer is unable to file the complete response to the Special Valuation Branch questionnaire within the 30-day period. It is suggested that the period be extended to 6090 days, considering the exhaustive nature of the details required to be submitted. The period of submission of various documents should be reduced from three years to one year. From a policy standpoint, the acceptability of the declared price by the authorities in the exporting countries should also be considered a sufficient ground to establish the arms length price.
Also, the extent and kind of information required from an importer having imports in excess of, say Rs 100 crore, differs from that required of an importer having imports of, say Rs 5 crore. Thus, the extent of information sought from the importer should be based on the classification of importer according to the value of imports.
In terms of the process of valuation and the procedures related thereto, the existing provisions need modifications relating to determination of valuation, issuance of tentative valuation order (show cause notice), grant of personal hearing, final orders and other related issues. Further, the importer should be given an option to determine the method of valuation that will be appropriate, considering the specific facts of his transactions. Thirdly, in cases where royalty and technical fees are involved, the possibility of dual taxation exists as service tax may also be levied on the intellectual property services involved. The Customs provisions or the service tax laws should provide for suitable abatements/set off in such cases.
Finally, the rules should specify the manner of determining the value of goods imported under lease arrangements, forward contracts, the value of import of carrier media containing intellectual property and of goods imported for use in turnkey projects, to illustrate specific situations. Guidelines with respect to the above, based on decisions of the World Customs Council Technical Committee and of the courts in various countries who are signatories to the WTO agreement, could be a suitable measure for facilitation of trade in India.
With the substantial increase in foreign direct investment in India, the import of goods for trading, manufacturing and provision of services has increased manifold. The idea of trade facilitation requires that India take measures that have been adopted in other developed countries in this regard.
The writer is leader, indirect tax practice, PricewaterhouseCoopers