SKP Tax Alert
5 March 2015 | Volume 7 Issue 22
Recent update on valuation of goods imported in India under the Customs Law

According to the Customs Law, customs duty is payable on the transaction value of goods i.e. the price actually paid or payable for the goods. Further, as per the Customs Valuation Rules (Valuation Rules), the transaction value also includes any amount paid or payable for costs and services (apart from value of goods), inter alia, such as -
  • commissions and brokerage;
  • engineering, design work, etc. undertaken in countries other than in India and necessary for the production of the imported goods;
  • royalties and licence fees that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued;
  • all other payments as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller.
To evaluate whether the above would be included in the transaction value, it needs to be determined basis the agreement or arrangement between the importer and supplier and whether the expenses are a condition of sale and/or relate to the imported goods. Here, it is worthwhile to note whether these payments constitute condition of sale or post-import or pre-import activities and may be included in the transaction value. This has been a bone of contention between the assessees and the authorities in a number of court rulings.

The recent judgment of the Mumbai CESTAT in the case of Welspun Maxsteel Ltd is the latest example where it was held that payments under separate agreements should be included in the value for the purpose of levy of customs duty which is summarised below:

Welspun Maxsteel Ltd v/s Commissioner of Customs (Import), Mumbai [2015 (1) TMI 406 - CESTAT MUMBAI]

  • Welspun Maxsteel Ltd (Welspun) imported capital goods, equipment, components, etc. for the initial setting up of a manufacturing plant in India.
  • Welspun entered into four agreements on the same date with two unrelated foreign suppliers/collaborators pertaining to (a) Supply of Equipment Agreement (b) Basic Engineering Services Agreement (c) Process Licence Agreement and (d) Supervisory Services Agreement. Payments were to be made under each of the respective agreements.
  • The Deputy Commissioner of Customs passed an order that the amounts payable under agreements (b), (c) and (d) are includible in the assessable value for levy of customs duty which was upheld by the Commissioner of Customs (Appeals).
  • Welspun therefore appealed before CESTAT.
  • The Tribunal held that the engineering services and process know how were incorporated in the imported plant and equipment and all the four agreements were entered into simultaneously.
  • Taking into account all the facts, the Tribunal held that the agreements are inter-dependent and the services provided under these agreements are necessary and essential for the installation, operation, maintenance and use of the equipment by the assessee. Thus, these four agreements constitute a package and the consideration paid under these different agreements form an integral part of the Supply of Equipment Agreement.
  • The Tribunal heavily relied on the Supreme Court judgment in the case of Essar Gujarat Ltd [1996 (88) ELT 609 (SC)] where it was held that process licence fees and cost of technical services for transfer of technology paid to a third party could be included in the price of the plant along with part of the costs for engineering and consultancy fees.
SKP's Comments
The recent CESTAT judgement has thrown light on the tax risks involved in a split contract structure of Engineering Procurement and Construction (EPC) contracts and highlighted some complexities. It is important to note that the Tribunal has meticulously distinguished the earlier Supreme Court cases relied on by the assessees i.e. JK Corporation Ltd [2007 (208) ELT 485 (SC)], Toyota Kirloskar Motor Pvt Ltd [2007 (213) ELT 4 (SC)] and Indo-Gulf Corporation Ltd [2005 (182) ELT 77] and therefore, a fine line exists between what could be considered as a condition of sale and whether it needs to be included in the transaction value of imports.
Analysing what constitutes a pre-import and post-import activity has become important in the light of the present case and businesses must be careful while framing clauses of the agreement to achieve a degree of certainty in taxes. Even in the case of Essar Gujarat supra on which the CESTAT has relied on heavily, it was held that technical services, theoretical and practical training were not included in the import value.
Therefore, it is critical to evaluate the terms of the contracts, inter-linked clauses and other surrounding facts to assess the implication of customs duty and other indirect taxes while structuring an EPC contract. Such an exercise would involve careful analysis of judicial precedents and well laid down principles of an independent contract structure to avoid tax risks.
Further, in addition to customs duty, the other costs and services mentioned above may also attract service tax in India and the two being independent legislations, the possibility of double taxation cannot be ruled out. This results in the increase of tax costs for businesses. It would be interesting to see what stance the authorities take following this judgment and considering the emerging changes with the upcoming goods and services tax.

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