Special Customs Mechanism for Valuation in India

Introduction

In India, the import and export of goods have undergone significant changes and with the advent of cross border trade, the customs authority in India have also taken measures to draft policies and guidelines relating to import and export of goods.

Under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, the customs authority in India defines method for assessing the value of goods for the purpose of levying duties and taxes.

The customs authority of India are members of the World Customs Organization (WCO) that follows the Harmonized System (HS), nomenclature that is developed and maintained by the WCO, and governed by an international convention. The HS defines codes for every product and goods that are imported and exported worldwide.  

Thus, in order to import into India, every product needs to be classified as per a particular code usually called as the HSN Code. This Code plays a crucial part for customs processing because they not only determine the tariff or duty rate, but also the end use of the product.

VALUATION OF CUSTOMS DUTY

The classification of goods for import and export purposes has always been a challenge for businesses, due to the very nature of the classification process and different interpretations by customs and businesses. Classification of product requires in-depth understanding of the description and use as well as knowledge of the classification system process.

Under Section 14 of the Customs Act, 1962, customs duty is imposed on the value of imported goods.

However, in such a case, if an Indian buyer and foreign supplier are related, say as holding and subsidiary, the goods may be imported at a discounted price that could be lower than the normal market price. Accordingly, the customs duty imposed will be lower, leading to a potential loss in revenue for the Government. In order to restrict the advantage taken by the Indian buyer, the customs authority has formulated a special mechanism called as the Special Valuation Branch (SVB) that investigates the valuation of goods during imports between related persons/ parties.

The said examination by the Customs authorities is required to verify whether the goods supplied by the supplier from outside India (usually in cases of a parent company) to its related importer (usually in cases of its subsidiary) have been invoiced at ”arm’s length price” or they have been “undervalued” for the purpose of reducing Customs Duty liability.

Indian subsidiaries importing goods from their foreign entities are required to declare whether the supplier and the buyer in India have any affiliations as related parties. Rule 2(2) of the Customs Valuation Rules provides criteria for establishing a “related” relationship for customs valuation purposes. Once it is established that the transaction is with a related party the importer shall be required to register the goods imported with the SVB. The SVB investigation shall be conducted at the time of arrival of the first consignment at the time of introducing the product into India from a foreign country during the import of goods by the importer from the related party.

For the purpose of registering the product with the SVB, the importer shall furnish a mandatory declaration along with the bill of entry and a questionnaire in Annexure A. In case of additional information as required by the SVB officer, the importer may provide their responses in Annexure B within a period of 60 days with all the relevant information and documents. In case, if the importer fails to furnish proper response within the stipulated period, an additional duty called as the “Extra Duty Deposit” shall be collected on subsequent import of goods. The authorized officer shall examine the circumstances surrounding the sale and the invoice value of the goods. Upon completion of provisional assessment, the authorized officer shall transfer the case to the SVB jurisdictional officer who shall be bound to complete the investigation within 2 months from receipt of the information.

The SVB officer shall issue an Investigation Report which shall include all relevant facts, submissions made by the importer, investigative findings, grounds for acceptance or rejection of transaction value, and the extent of influence on declared transaction value.

There are certain situations where registration of the product with the SVB is not mandatory. This is the case of the Import of goods such as samples and prototypes from related sellers, or imports of goods that are from related suppliers where duty chargeable is fully exempt or nil without any condition, or where the transaction of the value of imported goods is less than Rs. 1,00(approximately Euro 1.114). However the cumulative transactions for the said financial year must not exceed Rs. 25,00(approximately Euro 27,862).

The SVB order can be renewed when there is a change in circumstances or terms and conditions involving the import from related parties. In case there is a change in facts or any other terms and conditions, intimation to the customs department in order to renew the order passed by the SVB is a mandatory condition.

Conclusion:

Registering of the product with the SVB plays a crucial role in customs procedures by ensuring the proper valuation of imported goods.

It is essential that the foreign supplier and the Indian buyers, more specifically the parent and the subsidiary, under the procedure and the obligation associated with the SVB registration so as to ensure compliance and avoid unnecessary potential penalties. This shall assist in creating transparency, fair trade practices, and strengthen the position of its Indian subsidiary in the global marketplace.

Bosky Tanmay Gokani Bosky Tanmay Gokani

Bosky Tanmay Gokani

Legal Advisor
Bosky Gokani, a qualified Indian lawyer, is currently based in Shanghai.
Veronica Gianola Veronica Gianola

Veronica Gianola

Senior Associate
Veronica Gianola, an accomplished Italian lawyer, is a member of the Milan Bar Association.

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