Related-Party Import Valuation and Duty Drawback
Meridian Engineering Pvt Ltd, Pune, imports a used CNC grinding machine from a related supplier in Germany for €300,000 CIF Indian port. The invoice separately shows a licence fee of €30,000 for software embedded in the machine, which is necessary for its operation, and a selling commission of €10,000 paid to an agent in Germany. Meridian also paid ₹8 lakh in India for foundation work and erection of the machine. The supplier's price to unrelated buyers in Germany for comparable machines is €340,000. The transaction value declared is €300,000. The Assistant Commissioner rejects the declared value because the parties are related and proposes to add the licence fee and commission. Meridian argues that the licence fee is for software, a separate goods supply, and the commission is a buying commission. It also exports garments made partly from imported fabric and wants to claim duty drawback at the All Industry Rate while also claiming IGST refund on exports. Advise.
1. Can the declared transaction value be rejected? How should the customs value be determined, and what is the treatment of the licence fee, commission and erection charges?
Read the worked answer
Related-party transaction value: Rule 3 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 permits transaction value even between related persons if the relationship did not influence the price. Rule 3(3) provides a safety test: the value should be close to the value of identical or similar goods, deductive value or computed value. The supplier's price to unrelated buyers is €340,000, while Meridian declares €300,000, about 12% lower. That is a significant gap and can raise a reasonable doubt. The Assistant Commissioner can reject the declared value after giving a hearing and recording reasons.
Sequential determination: After rejection, value is determined under rule 4 (identical goods), rule 5 (similar goods), rule 6 (deductive value), rule 7 (computed value) and rule 8 (fallback). The supplier's price to unrelated buyers for comparable machines is strong evidence under rule 5. The department should use that value with adjustments for commercial level, quantity, condition and freight.
Additions:
- Licence fee for embedded software: If the software is embedded in the machine and is necessary for its operation, the fee is related to the imported goods and is a condition of sale. It is includible under rule 10(1)(c). The argument that it is a separate supply is weak where the machine cannot function without it.
- Selling commission: Rule 10(1)(a) includes commissions and brokerage, except buying commission. A selling commission paid to the seller's agent is includible. If the agent acted exclusively for Meridian as buyer, it would be a buying commission and excludible; the facts indicate a selling commission.
- Foundation and erection in India: These are post-importation costs incurred after the goods reached the Indian port. If separately identified and not part of the condition of sale, they are not includible in the customs value. Rule 10 covers costs up to the place of importation.
The final value should not double count the same element. If rule 5 value of €340,000 already reflects the machine with software, adding the licence fee again may be challenged.
2. Advise on the duty drawback claim for the garment exports and whether it can coexist with IGST refund.
Read the worked answer
Drawback route: Meridian exports garments made partly from imported fabric. Drawback under section 75 is available for imported inputs used in export goods. It can claim the All Industry Rate (AIR) under rule 3 of the Customs and Central Excise Duties Drawback Rules, 2017, or, if the AIR is inadequate or not notified, apply for a brand rate under rule 6 or 7 with cost and usage data. A provisional brand rate can be sought where final data is awaited.
AIR versus brand rate: AIR is simpler and is based on the average incidence of customs duty on inputs. If the imported fabric attracts a high duty and the AIR is low, a brand rate may give a better refund, but it requires detailed documentation and audit. The company should compare the two before choosing.
Coexistence with IGST refund: Drawback of customs duty and refund of IGST are distinct. An exporter can claim both, but cannot obtain a double benefit for the same tax element. The drawback rules fix AIR after excluding IGST, and IGST refund is separately claimed under section 16 of the IGST Act and rule 96. Maintain a reconciliation showing the imported fabric, duty paid, AIR claimed and IGST refund claimed. Do not include the IGST element in the drawback claim.
Compliance: File the claim with the shipping bill, export invoice, bill of entry, input-output ratio and bank realisation certificate. Ensure the claim is within the prescribed time and that the exported garments are not prohibited or restricted goods.
3. If Meridian instead re-exports the imported CNC machine after using it for two years, what drawback treatment applies?
Read the worked answer
Section 74, not section 75: Re-export of imported goods attracts drawback under section 74, not section 75. Section 75 applies to imported inputs used in the manufacture of export goods. The CNC machine was imported and used, then re-exported as the same goods. Section 74 allows drawback of customs duty paid on import, subject to identification of the goods and the prescribed percentage based on the period between import and re-export.
Rate structure: The rate is 98% of the duty paid if re-exported within six months, 96% if between six and twelve months, 94% if between twelve and eighteen months and 92% after eighteen months. The exact rate should be verified against the current notification. The machine must be capable of being identified as the imported goods; serial numbers, marks and records are essential.
Conditions: The re-export must be under the prescribed procedure, with a shipping bill and bill of entry reference. Drawback is not available if the goods were used in a manner that makes identification impossible or if any prohibition applies. Meridian should also check whether any exemption or concessional duty was availed at import; if so, the drawback is limited to the duty actually paid.