Customs Valuation – Significant amendments in SVB procedures

Import of goods are liable to Customs duty and are subject to scrutiny by the by Customs authorities. Further, imports from the ‘related parties’ are specifically scrutinised by the Customs Authorities to ensure that relationship between the parties have not influenced the value of import and the valuation is at arm’s length transaction. Importers engaged in importing the goods from related parties are required to substantiate their transaction value to the special cell of the Customs ie Special Valuation Branch (‘SVB’).

The ‘Special Valuation Branch’ (‘SVB’) is a valuation cell specialized in investigation of transactions involving special relationships between the parties ie importer and exporter. Presently, SVBs are located at five Custom Houses locations namely Chennai, Kolkata, Delhi, Bangalore and Mumbai.

The procedure for investigation by SVB Cell was initially laid down vide Central Board of Excise & Customs (‘CBEC’ or ‘Board’) Circular Nos. 1/98 – Cus. dated 1 January 1998 and 11/2001-Cus., dated 23 February 2001. However, there were several issues and challenges at the operational and administrative level that lead to delays and uncertainty in finalization of the pending proceeding.

Considering the above challenges faced by SVB cell and the Industry at large, the Board has now completely revamped the SVB procedure vide Circular No 5/2016 – Cus. dated 9 February 2016. Further, Circular No 4/2016 – Cus. dated 9 February 2016 deals with the pending SVB matters under the erstwhile procedures.

A brief about the erstwhile procedure:

Where goods are imported from related parties, the importer is required to declare the fact of related party relationship at the time of import. Usually all related party imports are made subject to SVB valuation. Once the case is referred to the SVB authorities, related party imports are provisionally assessed by Customs authorities (at the port of import). Importer is also required to pay an Extra Duty Deposit (‘EDD’) at 1% of the assessable value of goods and also execute a bond.

SVB examines the influence of relationship (between related parties) on the value of the imported goods in respect of transactions between related parties. SVB authorities also issue a notice along with questionnaire. Importer is required to fill up the questionnaire submit it along with the list of documents and information as mentioned in the notice issued.

In case the importer does not file a reply to the questionnaire issued by the SVB authorities within 30 days of the receipt of the questionnaire, the EDD is increased from 1% to 5% till the date of receipt of the reply to the questionnaire. The goods are allowed to be cleared on a provisional basis from the customs port on payment of the EDD.

On completion of the SVB proceedings, an order is issued based on which the assessment is finalized. The SVB order is valid for a period of 3 years. After the expiry of period of 3 years, the importer is required to apply for renewal of the same.

The Need for change:

The erstwhile provisions were based upon the Customs valuation rules of 1988, whereas the valuation rules were superseded by the Customs valuation rules of 2007. Further, there was no structured procedure for valuation by SVB. Due to this, the industry faced various issues such as delays in finalization of SVB investigations, uncertainty due to provisional assessments, increased transaction costs due to EDD etc.

Also the pendency of cases with the SVB was increasing. With a view to streamline the procedures and speed up the disposal of cases referred to SVB, the entire process has been revamped. Brief about the new procedure is given under.

Key features of the Circular 4/2016 – Provisions for pending case as on 9 February 2016

The pending cases can be broadly classified into the following two categories:

Case which are pending renewal
Other cases: These would typically be cases which are pending SVB investigation
Cases pending renewal

Importers shall submit a declaration in prescribed formats (Annexure 1 & 2) to the jurisdictional SVB by 31 May 2016.
Annexure 1 – One time declaration that there is no change in circumstances of sale; terms and conditions of agreement; no new related supplier; no change in royalty/licence arrangements or no post import price adjustments
Annexure 2 – One time declaration where any of the above change exists
In case of application in Annexure 1, the process of renewal will be treated as dispensed with and the pending provisional assessments will be finalized without making any reference to the importer.
In case of application in Annexure 2, the SVB enquiries will be initiated as per the procedure laid out in Circular 5 /2016.
Cases pending SVB Investigation

If the importer has submitted all the required information and documents then EDD will be discontinued.
In cases where the EDD has been enhanced to 5%, the commissioner will take necessary recourse for obtaining the necessary documents and then dispense with the EDD.
Key features of the Circular 5/2016 – New procedure for SVB process

The procedure can be broadly divided in to the following stages:

Stage 1: Selection of cases for valuation by SVB

Stage 2: Referring of cases to the SVB

Stage 3: Investigation by SVB

Stage 4: Finalisation of assessments

Stage 1: Selection of cases for valuation by SVB

Every importer is required to file details as per the questionnaire provided in Annexure A to Circular 5 – 2016 at the time of filling of bill of entry.
The customs officer on receipt of above information is required to assess the case on prima facie basis.
A time limit of three days has been prescribed wherein customs officer has to determine whether:
To clear the goods based on provisional assessment and refer the matter to SVB for investigation
Whether the assessment is to be finalized by conducting enquiries by customs officer
Whether the assessment is to be finalized under Rule 3
Few parameters have been specified, based on which the customs officer has to evaluate a particular case and determine the need of reference to SVB. These parameters typically relate to the circumstance surrounding the sale such as the basis of arriving at transaction price, the nature of relationship between the importer and seller, the nature of consideration, advance pricing agreements under the Income Tax Act etc.
The following cases are specifically excluded from being subjected to SVB valuations
Import of samples and prototypes from related sellers
Import of goods from related sellers that enjoy unconditional custom duty exemption (exemption for BCD, CVD as well as SAD)
Imports from related sellers which have low value ie each individual transaction has value less than ₹ 1 Lacs, and cumulatively all transactions in a financial year are for value less than 25 lacs.
There is a provision for subjecting cases, other than imports from related party, to SVB valuation. Few instances have been specified in the circular which consist of transactions wherein the valuation is subject to adjustment under Rules 10(1)(c) – 10(1)(e) of the customs valuation rules of 2007. These typically include cases where payment is in terms of Royalty, license fees, sharing of sale proceeds of subsequent re-sale etc.
It is further clarified, that SVB valuation is not necessary in case of adjustment on account of Rule 10(1)(a) & Rule 10(1)(b) of the customs valuation rules of 2007.
Stage 2: Referring of cases to the SVB

The goods will be promptly cleared by carrying out provisional assessment.
The EDD of 1% will not be required hence forth. However, if the importer does not furnish the required information within 60 days, then EDD at 5% of the declared assessable value will be imposed.
Further, the EDD will be for a maximum period of 3 months, without any exceptions. Option has been provided to discharge the EDD by way of cash deposit or a bank guarantee.
The importer will be required to furnish additional information as per the questionnaire provided in Annexure B.
A time limit of three days has been prescribed for transfer of case along with all information and documents to the SVB authorities.
Stage 3: Investigation by SVB

Upon receipt of information and documents from the customs officer, the SVB will commence its enquiries. During the process, it can call for additional information and documents if required.
On completion of investigation, the SVB will quantify the extent of influence of related party relationship on the transaction value and submit its findings to the Principal commissioner / Commissioner. Under the erstwhile procedure, the importer was required to obtain separate orders from SVB and from the customs officer.
Upon approval, an Investigation Report (‘IR’) will be submitted to the referring customs station and to any other customs station where the goods were cleared on provisional basis. The report will broadly consist of the following:
Relevant facts, submissions made by the importer
The findings
The grounds for acceptance or rejection of declared value
Extent of influence on the declared transaction value.
A time limit of two months has been prescribed for completing the investigations and issuing a report thereon. However the time limit of 2 months can be extended subject to following approvals and time lines:
For maximum two months with the approval of Jurisdictional Commissioner
For any period with the approval of Chief Commissioner.
Stage 4: Finalisation of assessments

If the declared value confirms to Rule 3 of Customs valuation rules, then all the provisional assessments will be immediately finalized.
If the declared value is influenced by the related party relationship, then the customs officer will issue a show cause notice to the importer within 15 days.
If provisional assessment was carried out at multiple customs locations, then a common adjudicating authority will be appointed for the purpose of finalizing all the provisional assessments.
The adjudicating authority will pass an order quantifying the extent of influence on the declared value and the assessment will be finalized.
The erstwhile provision regarding validity of the SVB order for a period of 3 years and subsequent renewal of the same has been done away with. Now, the SVB order shall be valid till there is a change in the facts relating to the import transactions with related party. (In case of any change, the importer is required to intimate the customs authorities. Format for the said application is prescribed in Annexure C of the circular)
The said changes are expected to bring a smooth compliance mechanism and also relieve the importers from unnecessary trouble in meeting the requirements of the SVB.

However, still there are few areas wherein clarity has not been provided in the above circulars. It is expected that Board should issue the necessary guidelines in due course.

Disclaimer: The views expressed above are author’s personal views and have no legal binding.