Special Value Branch and its purpose
A special relationship between an Indian importer and a foreign supplier may impact the price of the import resulting in reduced customs duty imposed on such transaction. The Special Valuation Branch has been constituted to monitor the transactions surrounding goods imported by the Indian buyer from a related foreign supplier.
In other words, SVB is a separate wing of the Indian Customs Authorities to investigate the valuation of goods during imports between related parties. It is required to examine whether the goods imported from related parties are invoiced at “arm’s length price” or they have been “undervalued” to reduce customs duty liability.
Who is a related party?
The transactions between an Indian importer and the related foreign supplier are investigated and/or examined by the Special Value Branch (SVB) under Customs Act, 1962, when the parties are related as per Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
As per Rule 2(2) of the said Customs Valuation Rules following persons shall be deemed to be ‘related’ for customs valuation:
(i) Officers/ Directors/ Partners in each other’s businesses
(ii) Employer-employee relationship
(iii) Any person who directly/ indirectly owns, controls, or holds five percent of voting stock or shares or both of them
(iv) Both are directly/ indirectly controlled by a third person/ they control each other
(v) They control a third person directly/ indirectly
(vi) They are members of the same family
(vii) Sole agent or sole distributor
Special Value Branch investigation is initiated immediately at the time of first import of goods by the importer from its related party. As per the Customs Valuation (Determination of Value of Imported Goods), Rules, 2007 (Rules), every importer is required to furnish information to the customs authorities in a bill of entry based on which the customs duty is assessed. It is advisable to prepare the required documents well in advance. This will help in avoiding delay in clearance of goods which helps in preventing levy of delayed clearance charges. However, in the following cases SVB inquiries are not mandated:
• Import of goods as samples and prototypes from related sellers;
• Imports of goods from related sellers where duty chargeable is fully exempt or nil without any condition.
• Any transaction of the value of imported goods is less than INR 100,000 i.e, 1250 Euro approximately, but cumulatively these transactions must not exceed INR 2.5 Million i.e, 30,000 Euros approximately in any financial year.
It is important to note that Rule 3(3)(a) provides for assessing the applicable customs duty in the case of related parties. The transaction value shall be the value of the imported goods only if the circumstances of the sale indicate that the special relationship between the importer and exporter did not affect the transaction value. The importer is required to give documentary pieces of evidence to this effect and if he is unable to do so, the concerned authorities refer the case to the Special Value Branch for investigation.
At the time of import of the first consignment of goods in India by an importer from its related suppliers, the importer is required to file various specified documents along with the questionnaire in “Annexure-A”. The authorities at the port can demand investigation concerning the valuation of imported goods where the case is consequently referred to the Special Value Branch, and the imported goods can be cleared based on the provisional assessment.
The SVB department registers the matter and issues a second questionnaire, i.e, “Annexure B”, to the importer under a separate file reference number. The response is required to be filed by the importer within sixty days of its issue by the SVB.
In case the importer fails to furnish the response to Annexure B within the prescribed time of sixty days, an additional Extra Duty Deposit (computed up to five per cent of the declared assessable value of goods) is collected on subsequent import of goods cleared on a provisional basis for three months.
The importer must file detailed written submissions with respect to transactions to justify that the relationship between the importer and therefore the supplier has not influenced the transaction value of goods.
Based on the details submitted and additional documents requested from time to time, the SVB authorities issue an Investigation Report (IR), after obtaining the approval from the Principal Commissioner/Commissioner of Customs.
It was seen that due to delay in finalization of SVB investigations by the Departmental officials, there was continued uncertainty due to provisional assessments. There was also an increase in transaction costs due to extra deposits, and the burdensome procedure of renewal of SVB orders. To combat the same, the CBEC has issued two Circulars namely-
(i) Circular No. 4/2016- Customs ‘Procedure for renewal of SVB Orders and ongoing SVB inquiries under Circular No. 11/2001-Cus dated February 2001-reg.;
(ii) Circular No. 05/2016-Customs dated 09.02.2016: The investigation procedure of related party import cases and other cases by the Special Valuation Branches-reg.
With the introduction of this circular, the requirement to renew Special Value Branch orders stands repealed, and the need to mandatorily renew SVB orders has been discontinued. However, if there is any change in terms and conditions at a later stage which might have an influence on the prices at which the goods are imported from the related party, including the product description, product pricing, etc., the importer has to mandatorily inform the same to the port authorities via specific application which might be referred to the SVB department.
The detailed instructions regarding the procedures to be observed by the Customs Houses for referring cases to SVBs and the timelines to be followed for finalizing such cases were issued vide:
• Circular No. 01/98-Customs dated January 01, 1998
• Circular No. 11/2001- Customs dated February 23, 2001
The Investigation Report (IR) issued by the Special Value Branch is valid at all ports in India:
In a practical scenario, in case of goods are imported at multiple ports before finalization of the SVB matter, the importer will be required to file Annexure A at all such ports along with a continuity bond and assess the bills of entries provisionally by referring to the ongoing SVB investigation at the selected custom house. After the finalization of the Special Value Branch proceedings, the investigation report issued by any SVB is valid at all ports across India.
The documentation prepared for Transfer Pricing provisions under the Income Tax Act can be used for the investigation under the Special Value Branch Order:
The documentation created for Income Tax transfer pricing purposes (Transfer Pricing report along with Form 3CEB) can be used in explaining the facts to the Customs authorities. However, they cannot be the sole basis for the customs authorities to accept the transfer pricing of imported goods.
Under the original provisions in the Customs Act, 1962 read with Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, a special value branch order was required to be renewed every three years. However, with the introduction of Circular No. 05/2016-Customs dated 09.02.2016, the need to renew SVB orders every three years is dispensed with. The importer must renew the SVB order only 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 department and the special value branch order renewal are mandatory.
Inspection of Special Value Branch Order where the importer is paying royalty to its foreign parent company
The ultimate purpose of going through the SVB process is that the Government wants to ensure that the prices at which the goods are imported are at arm’s length price. Where any importer is going through the process of SVB and the same importer is also paying a certain amount of Royalty to its parent company or any group company outside India, the department takes a view that the Royalty paid outside India is nothing but part of the price consideration to be paid to the foreign company on account of the goods imported into India and therefore the Royalty paid should form part of the Assessable Value at the time of import of goods into India.
Any importer paying Royalty outside India and going through the process of SVB should be mandatorily be needed to substantiate as to why the Royalty paid outside India should not form part of the price consideration of the goods imported into India. If the importer fails to do so, then there is a high possibility that there would be the applicability of a certain percentage of loading which might be applied at the time of passing the final SVB order.
In case of any query on the Special Valuation Branch, please contact the ASC Group. Professionals assist companies with end-to-end advisory.
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