The Finance Bill 2002 proposes significant amendments to the law on customs valuation. The amendments will overturn the Supreme Court judgment in the case of Maruti Udyog Ltd (MUL) and put the companies importing from related parties at the mercy of customs.
According to Section 14(1) of the Customs Act, 1962 (CA 62), the value of imported goods shall be deemed to be the price at which such or like goods are ordinarily sold or offered for sale, for delivery at the time and place of importation, in the course of international trade, where the buyer and seller have no interest in the business of each other and the price is the sole consideration for the sale or offer for sale.
MUL imported completely-, semi-knocked down kits as well as complete vehicles from Suzuki Corporation, Japan. Suzuki had 26 per cent shares in MUL and its nominees were on the board of MUL.
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Moreover, Suzuki gave MUL the know-how for manufacture of vehicles and earned a lumpsum fee and running royalty on sales of Maruti vehicles. MUL was the only buyer of Suzuki's goods. The hybrid trade mark of Maruti-Suzuki was without any fee.
The customs alleged related party transactions, rejected the invoice price as not truly representative of the transaction value and sought to load the transaction value. The Tribunal [1987 (28) ELT 390] observed that while Suzuki did hold 26 per cent equity in MUL and its nominees were on its board, MUL had neither equity in Suzuki nor any nominees in the Suzuki board.
To rule out valuation under Section 14(1)(a), the seller and buyer should have interest in the business of each other. One-sided interest is not enough, said the tribunal and went on to hold that MUL is right in pleading that mutuality of interest did not exist. The SC approved the Tribunal judgment on 26.4.89.
Even after the amendments to the Section 14 of CA 62 in 1988, the courts have followed the Maruti judgment in a number of cases, the notable ones being those of Modi Xerox, Birla Yamaha, Eicher Misubhishi, Mahindra Peugeot, GMMCO Ltd., Atic, Hero Honda.
The amendments to Section 14(1) now proposed, add the words "or one of them has no interest in the business of the other" after the words "the seller and the buyer have no interest in the business of each other".
What this means, in effect, is that even if one party has interest in the business of the other the price shall not be the deemed value for the purpose of valuation. The price shall be the deemed value only if neither of the parties has any interest in the business of the other.
Last year, amendments to Rule 4(2) of Customs Valuation Rules, 1988 introduced the concept of 'fully competitive conditions' and four more conditions to be fulfilled before acceptance of price paid or payable as the transaction value. That has made life difficult enough for importers.
The amendment to Section 14(1) of CA 62 proposed now will take away one of the important points of defence for importers, especially, the companies importing from collaborators or parent companies. They will have to take extra care in drafting collaboration agreements and purchase contracts and satisfy the revenue-oriented Customs officials that relationship has not influenced the price.