Special Valuation Branch: The new road ahead

By Karthik Sundaram and Rajat Chhabra, Economic Laws Practice
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Under customs laws, the Special Valuation Branch (SVB) specializes in investigation and assessment of transactions involving special relationships between buyer and seller and certain special features surrounding the sale of imported goods having influence on the value of import goods. A circular issued in 2001 previously governed the procedure to be observed by customs houses for cases referred to the SVB.

Karthik Sundaram
Karthik Sundaram

The procedure led to delays in finalizing SVB investigations, prolonged uncertainty owing to provisional assessments, increased transaction costs due to extra duty deposits (EDDs), and cumbersome renewal of SVB orders, and was based on the Customs Valuation Rules, 1988, which have since been replaced by the Customs Valuation Rules, 2007. Two recent circulars (4/2016-Cus and 5/2016-Cus) have rationalized the procedure of investigation by the SVB.

For the first time guidelines have been laid down on how and when “circumstances surrounding the sale” ought to be examined and evaluated by an officer at the customs station for submitting the findings to the commissioner for a decision on whether to refer the matter to the SVB.

The SVB is mandated to complete an investigation and issue its investigation report to the commissioner within stipulated time lines. The SVB does not have statutory powers to issue an order to the importer. After receiving the SVB report, the commissioner, having followed the principles of natural justice, will pass an order specifying the extent of influence on the declared transaction value.

Effective 9 February 2016, SVB orders will no longer need to be renewed every three years. Renewal will be needed only in cases of change in terms and conditions of sale, royalty or other commercial aspects of the import of goods between the seller and the importer.

In order to reduce transaction costs and to bring uniformity across customs houses, furnishing an EDD pending the finalization of the SVB-related proceedings will no longer be required. Nonetheless, where the importer fails to provide documents/information within 60 days of requisition, EDD at 5% of the declared assessable value may be imposed for a period not exceeding three months.

India’s customs and transfer pricing departments are increasingly synchronizing their efforts to ensure that the same assessee does not adopt contradictory positions on customs valuation and transfer pricing. For instance, incurring brand-related advertising, marketing and promotion (AMP) expenses has been recognized as an “international transaction” which is subject to transfer pricing for which the compensation can be in the form of an AMP contribution, reimbursement, or by way of price adjustment. Where the compensation is to be by way of price adjustment on imported goods, the customs authorities are increasingly scrutinizing transactions to ensure that appropriate customs duty has been paid on the imported goods and, for this purpose, increasingly scrutinizing transfer pricing-related filings made by the same assessee.

Increased information sharing between customs and transfer pricing authorities is also evident from the new requirements for valuation to be followed by the SVB, which make reference to the World Customs Organization’s guide on customs valuation and transfer pricing, and provide that:

  • While determining whether the relationship has influenced the price, the “proper officer of customs” will check whether the importer has declared the price of the imported goods as transfer price.
  • The proper officer of customs will examine whether the importer has obtained an advance ruling or entered into an advance pricing agreement (APA) with the income tax authorities. A copy of any such APA will have to be submitted to the SVB.
  • A copy of any transfer pricing report filed with the Income Tax Department or any such report prepared for any customs or tax purposes is to be submitted to the SVB.
Rajat Chhabra
Rajat Chhabra

The central government on 2 February 2016 also announced the setting up of a Tax Policy Research Unit to facilitate a more consistent, coherent and inter-disciplinary approach to direct and indirect tax policy, which is the domain of two separate authorities in India –the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC). Further, the CBDT and the CBEC have formalized their sharing of customs and income tax data in a memorandum of understanding.

Though no legislation mandates harmonization of the values adopted for the purposes of customs and transfer pricing, the government has been taking steps to bring the two streams closer in terms of tax policy. Increased interaction between the departments makes it imperative for companies operating in India to plan and document their transfer prices comprehensively, based on the valuation principles contained in both the customs and the transfer pricing regulations, and also to deal with the two authorities in a harmonious and seamless manner.

Karthik Sundaram is an associate partner and Rajat Chhabra is a senior associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.

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