The transaction among the related parties have always been a cause of concern for the government agencies when it comes to the entities located in different countries. Various government agencies properly examine the transaction value adopted by the companies.
As per the importers under Rule 10(1)(c) or Rule 10(1)(d) or Rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, the custom department points out the complicated cases of addition and removal with respect to the transaction value.
Requirement of Special Valuation Branch as special unit:
Special Valuation Branch was declared as a functional institution for the cases which involves transactions among connected parties according to the Circular No. 1/98 dated 01.01.1998 issued by the custom department. Here's an outline of main concepts related to foreign branch taxation and special value branch rules:
1. Foreign Branch Taxation:
Basic Taxation of Foreign Branches:i. Income Reporting: A foreign branch typically reports its income directly in the parent company's tax filings.
ii. Double Taxation: Double Taxation is the main factor with foreign branch taxation.
iii. Tax Treaties and Foreign Branches: International tax treaties between the involved countries affect the tax treatment of foreign branches.
2. Tax Treatment of Branch Profits:
Branch Profits Tax (BPT): There are some jurisdictions, where a BPT or Branch Profits Tax may be executed on the foreign branch’s profits, when they are expelled to the parent company. The BPT is specifically created for foreign branches just like subsidiaries, by tazing the profits of the branch when they are distributed effectively to the parent.
A. Attribution of Profits:
i. Economic Substance: The branches which is connected with special activities like financial services, IP, i.e., intellectual property, or sales operations, which may face strict analysis regarding the credit of profits.
ii. Transfer Pricing: Talking about the analytical aspect of profit attribution is to ensure that intercompany transactions between the parent company and its branch are executed at arm’s length, i.e., they must introduce the same terms & conditions
iii. A critical aspect of profit attribution is ensuring that intercompany transactions between the parent company and its branch are conducted at arm’s length, i.e., they must reflect the same terms and conditions just like the entities were separate.
B. Special Value Rules and Anti-Avoidance Measures:
i. Controlled Foreign Corporation (CFC) Rules: There are various countries that use CFC rules to protect the entities from altering profits to low-taxed branches or subsidiaries or foreign.
ii. Substance Over Form Doctrine: The jurisdictions of tax authorities with special vale branch rules may focus on the operating elements of foreign branch instead of its formal legal structure.
iii. Tax authorities in the areas with special rules for branch operations may more focus on the actual activities of the foreign branch instead of its official legal setup.
iv. Hybrid Mismatch Rules: Some regions use hybrid mismatch rules to deal with the combination of foreign branches and hybrid instruments or structures.
Who needs to register with SVB?
1. Importers must register with the SVB if they are affiliated with their suppliers as outlined in: A. Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007
B. Rule 2(1) of the Customs Valuation (Determination of Value of Export Goods) Rules, 2007
C. Section 14(1) of the Customs Act, 1962
2. Rule 2 of the Customs Valuation (Determination of Value of Imported Goods), Rules, 2007 covers people who shall be deemed to be "related" only if –A. Officers or directors of each other’s businesses are involved.
B. They are legally recognized business partners.
C. One is the employer and the other is employee.
D. One part owns, controls, or just holds 5% or more of the voting stock or shares of both entrepreneurs, directly or indirectly.
E. One party directly or indirectly controls the other.
F. They are directly or indirectly controlled by a third party.
G. They jointly control a third party.
H. They are members of the same family
Types of Special Value Branches:
1. Branches Engaged in Intellectual Property (IP) Activities: If a foreign branch is involved is significant intellectual property activities ( such as research, development, or marketing), it may be subject to special rules that require closer examination of how profits are allocated and how value is assigned to the branch’s IP-related activities.
2. Branches in Low-Tax Jurisdictions: Branches in Low-Tax Jurisdictions: Foreign branches in low-tax or no-tax areas may attract attention from tax authorities, particularly if there is a risk that profits are being artificially shifted to these locations to benefit from lower tax rates.
3. Financial Services Branches: In the case of financial services branches, special value rules may apply to ensure that profits are not shifted to foreign branches solely for tax purposes.
SVB registration process
1. Filing of declaration and supporting documents
A. Importers must file a declaration in Annexure-A at the time of submitting the bill of entry to Customs Authorities. This declaration should be accompanied by the necessary supporting documents.
B. This step occurs before the goods are cleared from the Customs Port.
2. Examination by the authorized customs officer
A. The authorized office examines the circumstances surrounding the sale and the invoice value of the goods.
B. If deemed necessary, the Proper Officer may refer the case to the SVB for further investigation.
3. Information request in Annexure-B
A. If the case is referred to the SVB, the office of the customs may request further information from the importer using Annexure-B.
B. The importer must provide all requested information and documents to the jurisdictional SVB within 60 days.
C. Failure to respond to Annexure-B within the prescribed time may result in the collection of an additional Extra Duty Deposit, computed up to five percent of the declared assessable value of goods, on subsequent imports cleared on a provisional basis for three months.
D. Documents to be filed by importer to SVB:
i. Full name, Adress, Annexure-A, Bill of Entry, Bill o gladding, Packing list, Letter of Credit
ii. Annual Report and Balance sheet of proceeding 3 years.
iii. Copy of transfer pricing report filed with income tax if any
iv. Copy of advance pricing agreement if any.
v. Details of goods imported previously.
vi. Whether goods are imported are CKD/SKD, list of items imported.
vii. Pricing Pattern.
viii. Terms and conditions of sale.
ix. Relationship particulars
4. A provisional assessment will be made.
5. A case number will be assigned
6. An investigation will be conducted
A. Proceedings
B. Submission of Findings
C. Investigation Report
7. The assessment will be finalized
A. Upon receipt of the IR from the SVB, where investigative findings are that the declared value is found conforming to Rule 3 of the CVR, 2007, the customs stations where provisional assessments have been undertaken shall immediately proceed to finalize the same. There would be no need to issue a speaking order for finalizing the provisional assessments in such cases.
B. However, when investigative findings are that the declared value has been influenced by the circumstances surrounding the sale, a show cause notice to the importer issued by the proper officer within 15 days of the receipt of the IR, under intimation to the concerned SVB
C. After following the principles of natural justice, the adjudicating authority pass an order which quantifies the extent of influence on disclosed transaction value. The appellate provisions under Section XV of the Customs Act would apply for filing appeals against the order passed by the adjudicating authority.
Other Considerations
1. What triggers an investigation by India’s special value branch?
Every importer engaged in importing goods is obligated to declare whether the supplier and buyer in India have any affiliations as related parties. In the affirmative, it becomes pivotal to ascertain whether this relationship has influenced the transaction’s price. In such instances, SVB investigations become essential, and the transaction must undergo meticulous review and inquiry.
2. What are the documents required for SVB registration?
To complete the SVB registration process, importers may be asked to provide various documents, including:
A. Copy of relevant Bills of Entry
B. Importers must provide a sample of invoices of imports during the last three years.
C. If the importer is a company, then the annual reports of previous three years
D. Importers should provide the current price list of products from the foreign supplier (Collaboration agreement, Joint Venture agreement)
E. Statements of the CIF (Cost, Insurance, and Freight) value for the last three years, duly certified by a Chartered Accountant:
i. Landed cost of imports and CIF value from related foreign suppliers
ii. CIF value and landed cost of imports from other suppliers
iii. Importers must provide Ex-factory value of the goods
iv. Royalty, net and gross, paid or payable
v. If applicable, importers must give a statement of equity capital held in a foreign company for the last three years.
vi. Statement of shareholding along with the information of common directors in an Indian company.
vii. Importers must give sample invoices and bill of entries related to imports of identical or same goods by any other person.
viii. Importers must provide payment details, including remittances with deferred payments (if any)
ix. Importers must provide details related to the payment made to or in place of or under the orders of the supplier.
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