Custom, Excise & Service Tax Tribunal
M/S Bentley Systems India Pvt Ltd vs Cc, New Delhi on 22 February, 2011
CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
Court No.IV
C/Appeal No.142/2009-Cus
(Arising out of order in appeal No.CC(A)Cus/18G/454/08 dated 12.12.08 passed by the Commissioner of Central Excise (Appeals), New Delhi)
Date of Hearing: 22.2.2011
For Approval and signature:
Honble Mr. Ashok Jindal, Member Judicial
Honble Mr.Mathew John, Technical Member
_________________________________________________
1. Whether Press Reporters may be allowed to see
The order for publication as per Rule 27 of the
CESTAT(Procedure) Rules, 1982?
2. Whether it would be released under Rule 27 of
the CESTAT (Procedure) rules, 1982 for
publication in any authoritative report or not?
3. Whether their lordships wish to see the fair
copy of the order?
4. Whether order is to be circulated to the
Department Authorities?
___________________________________________________
M/s Bentley Systems India Pvt Ltd Appellant
Vs
CC, New Delhi Respondent
Appeared for the Appellant: Shri Prasad Paranjape, Advocate
Appeared for the Respondent: Shri Fateh Singh, DR
Coram: Honble Mr. Ashok Jinda, Member Judicial
Honble Mr. Mathew John, Member Technical
ORDER
Per Mathew John:
The issue involved in this appeal is the valuation of computer software imported by M/s Bentley System India Pvt Ltd, the Appellant, from M/s Bentley Incorporated USA which holds 99.5% of the share capital of the Appellant company. The importer is related to the foreign supplier in terms of Rule 2(2) of Customs Valuation (Determination of Imported Goods) Rules, 2007 (hereinafter referred to as Customs Valuation Rules). The Appellant declared the relationship as required under the Customs Valuation Rules. As per directions of the department, the Appellant has been paying duty on the basis of transfer price agreed to between the foreign supplier and the Appellant, after making a revenue deposit of 1% of assessable value based on transaction price from 03-05-2006 to 31-01-2007 and by making a revenue deposit of 5% of such assessable value thereafter.
2. The contention of the Appellant before the adjudicating officer and before the first appellate authority has been that the prices to the Appellant company were at arms length and require no further loading though Appellant is related to the foreign supplier.
3. Prior to 31-03-2007, the foreign company was supplying the same goods directly to unrelated importers in India. It was seen that prices to these unrelated buyers were higher than the prices at which goods were sold to Appellant, who was related to the foreign supplier. The contention of the Appellant is that for such sales to unrelated buyers in India a commission of 25% was being paid to the Appellant as per their agency agreement. It is argued that when goods are sold directly to the Appellant at a whole sale level and the Appellant is marketing the goods thereafter, it is only natural that the goods are sold to it at a lower price corresponding to the 25% Commission that the Appellant was getting earlier. So it is argued that for making a comparison between prices at which goods were sold when the Appellant was acting as agents and the price when Appellant is acting as wholesale distributor, the prices for the first type should be discounted by 25% and then comparison made. Appellant gave the following information for making such comparison.
(i) Details of Microstation V8 2004 Edition as sold by Bentley USA to third parties:
Quantity Gross price per unit (US$) Net price after deducting 25% paid to Bentley India (US$) Net price (US$) 10 2925 2194 21937 12 3122 2341 28098 2 3382 2536 5073 9 3725 2794 25144 1 3750 2182 2812 2 4220 3165 6330 2 4795 3596 7192 Total 38 96586 Average 2542
(ii) Details of Microstation V8 2004 Edition as sold by Bentley USA to Bentley India Quantity Price per unit (US$) Total Price (US$) 108 2586 279288 245 2781 681345 Total 353 960633 Average 2721
4. It was also noticed that the suppliers price list for its main product namely Microstation V-8 during the year 2006-07 showed a price of US $ 4795 per piece FOB but for goods imported by the Appellant, the price was declared at US 2781.10 per piece C&F. Further, it was noticed that the appellant was paying money to the supplier i.e. their foreign supplier under Corporate Service Charges (hereinafter referred to as CSC) and such charges are also mentioned in the Transfer Price Agreement. Considering the above aspects, the adjudicating authority passed an assessment order. The operative part of the order is reproduced below:-
The importers and the foreign suppliers are related as per Rule 2(2) of the Valuation Rules.
The prices declared by the importers in the import invoice in respect of goods manufactured by the Foreign suppliers and import made from the foreign suppliers before 10th October, 2007 are rejected being abnormal discounted prices.
The prices declared for imports made from the foreign suppliers, where the goods manufactured by the foreign suppliers, on or after 10th October, 2007 are rejected being abnormal discounted prices.
I order to assess all imports w.e.f. 30.5.06 on the basis of price list taking list price as FOB value to arrive at assessable value i.e. I order loading of such amount on account of freight, insurance, landing charges etc. in the value of the goods which is declared as per price list where imports made before 10th October, 2007 under rule 9 of CVR 988 and where imports made on or after 10th October, 2007 under Rule 10 of CVR, 2007.
Since priced list for the imports prior to 30.5.06 is not supplied/available and date regarding contemporary imports of third unrelated parties are available assessment of the goods will be done on the basis of contemporary imports only. No concession/discount will be allowed as importers and other unrelated Indian buyers are at same commercial level as most of products were imported by both in same/similarly quantity.
All future imports of goods shall be assessed on merits subject to verification of the price list taking list price as FOB price and after disallowing any discount etc. keeping in view provisions of the Valuation Rules 2007.
All pending assessment may be finalized accordingly.
5. Aggrieved by the order, the Appellant filed appeal with the Commissioner of Customs (Appeals) explaining that the suppliers were giving discount from the list price to other un-related buyers also and that the Corporate Service Charges are for services rendered by the parent company in matters like accounting, finance, legal, data processing (IT), Human Resources (HR) and other management functions, corporate marketing and product support services and such CSC is not a payment which is conditional for the import of the said goods and there is no reason for rejecting the transfer price of the goods taking into account CSC being paid. The Commissioner (Appeals) after considering the submissions came to the following conclusions summarized as below:-
8.-----. The Appellant through written submissions have given year-wise CSC payable as follows:-
Financial year CSC payable Sales CSC as percentage of sale 2004-05 1,90,76,440 3,09,09,959 61.71% 2005-06 1,58,23,853 9,06,12,818 17.46% 2006-97 3,47,80,481 18,43,43597 18.86%
9. From the above table, it is not clear whether the CSC payable is based on actual cost of service rendered or otherwise. Since it is the contention of the Appellant that the CSC have not influenced the declared values, the burden is on them to prove the same by furnishing detailed cost analysis of CSC which Appellant have failed to do Thus, the Appellant have not discharged the burden that CSC had not influenced the declare values. Moreover, as stated by the AC in his order, the Appellant have declared before Income-tax authorities that corporate service charges are linked transactions to the purchase of software products. In transfer pricing cases, the charges which the importer is required to pay to the supplier besides declared price has to be analyzed incisively as there is always a risk of assessable value getting transferred to other charges payable. In the subject case, as I have already stated, CSC payable has to be incommensurate with the cost of services rendered and which the Appellant have failed to prove. Since this has not been done and the suppliers and the Appellant are related persons, the declared value cannot be accepted and the same has to be determined under Rule 9/10 of the Customs Valuation Rules, as the case may be, as has been held by the AC for the reasons given in his order.
6. Aggrieved by the above order, the appellant is before the Tribunal. The main submission of the appellant is essentially the same as was before the adjudicating authority and the first appellate authority. Appellant have submitted a tabulation showing that the parent company was giving discount on the listed price even when the foreign company was selling to other importers. Appellant submitted the following information in respect of their main product:-
S.No Name of third party Month Qty Supplied Value in US$ per unit Qty Supplied to Appellant Value in US$ per unit to Appellant 1 ONGC May 2006 2 2341.5 25 2586.8 2 NRSA May 2006 2 2341.5 25 2586.8
7. Appellant argues that from the table above, it can be seen that the prices at which the goods were sold to the Appellant were comparable and higher than with the prices at which the goods were being sold to other independent buyers. Appellant also pointed out that before 1.3.2006 when the above company was supplying directly to the distributors, Appellant was getting commission of 25% of the invoice value and this amount has to be deducted for making a proper comparison when goods are sold to the Appellant. After the above date, the parent company stopped supply to other importers in India and all supplies in India are being made through the Appellant company.
8. Appellant contents that the prices at which software is supplied directly by the foreign company to a consumer, cannot be a basis for determining the value at which the goods are supplied to the Appellant who is a distributor because these two transactions are at different commercial levels. Here it is to be noted that the expression commercial levels used in rule 4 (2) of Customs Valuation Rules is for distinguishing sale price to a distributor, to a whole sale dealer or a retail buyer as different commercial levels and not in terms of the quantity. Quantity involved in each transaction is a separate matter dealt with in the same Rule. The Customs Valuation Rules recognize that values for different commercial levels will be different. Further as distributor, the Appellant is importing higher volumes than what is imported by individual customers. Therefore, price at which the goods are sold to individual customers cannot be the prices at which the goods are sold to the distributor Appellant.
9. The Appellant also submitted that as per the transfer price, the transfer price agreement is for determining the price of products and service. Such prices are determined as per clause 1.01 of the agreement which is reproduced below-
Prices The transfer prices for the purchase of products and services by Bentley local from Bentley shall be determined substantially in accordance with arms length pricing rules based on the relative functions performed and risks borne by the contracting parties as required by the arms length standard. The transfer price calculation may be mended in written by Bentley US from time to time. Bentley US will have transfer price studies performed by qualified professionals from time to time. The method used in a recently completed study similar to that in previous studies, is a profit-based analysis, which in practice, established an operating profit percentage based on studies of other comparable entities financial reports.
10. In addendum to the transfer price agreement, the clause relating to Corporate Service Charges is for the service tariff in respect of accounting, finance, legal, data processing human resources and other management functions, corporate marketing and product support services such as continuous product upgrades and online resources marketed as Bentley Select. These services are provided by the parent company irrespective of the imports made by the company and payments are to be made irrespective of quantum of imports. Appellant quoted the statistics as reproduced in the table in para 4 above to prove that the payment under the head CSC was not relatable to the product.
11. From the table it can be seen that in 2004-05, CSC sales was 61.71% and for other two years, it was only 17.46% and 18.46%. Appellant also pointed out that during the year 2004-05, there was no customs duty payable on import of software and the appellant or the foreign supplier was not gaining anything by showing a higher percentage of amounts as CSC. The CSC were decided purely on the basis of the quantum of service availed by the company from their parent company.
12. He argued that charging customs duty on the basis of list price is totally illegal because the goods are never sold at that price to any distributor whether related or not. Since the transfer price has been worked out by taking into account all the aspects of the costing involved and such prices are also accepted for Income tax purposes, it should also be accepted for assessment of customs duties.
13. The learned DR did not press any argument justifying how list price can be taken as assessable value for sale of goods to a distributor. His argument is that the CSC are linked to the sale of goods and since any payment linked into sales should form part of the value, the same should be taken into account for determining the assessable value.
14. Heard and considered arguments on both sides.
15. There is no merit in the argument that goods imported by a distributor should be assessed on the basis of list price for retail sale especially because evidence regarding discounts given from list price to unrelated buyers like Pixel Soft Tech Pvt Ltd, Durr India Pvt Ltd, ONGC etc. are produced. This matter does not need any elaborate discussion. The order-in-original and order-in-appeal are to be set aside on this count alone.
16. However, it is necessary to examine whether any addition need to be made on account of CSC being paid by the importing company to the supplier abroad. Here the relevant facts are
(i) there is no denial of the fact that the supplier is providing service to the importer company in the matter of accounting, finance, legal, data processing human resources and other management functions, corporate marketing and product support services, such as continuous product upgrades and online resources marketed as Bentley SELECT.
(ii) No case is made out that the payment is disproportionate to any reasonable estimate of cost of such services;
(iii) CSC is not proportionate to the value of sales;
(iv) There is no information regarding any objection taken by Income-tax Department to the cost of services in the Transfer Price Agreement.
17. The Ld. DR argues that CSC is linked to the imported goods. The manner in which it is linked is not explained by the DR nor is it seen in the orders passed by lower authorities. It appears that the argument is that of there is no import of goods, there is no need for the importer company to exist on India and no need for CSC. This is a very stretched interpretation of Rule 4(2) (g) of Customs Valuation Rules. It also appears that revenue is basing their argument on Rule 4 (2) (b) of the said Rules. These provisions read as under:-
The transaction value of imported goods under sub-rule (1) above shall be accepted :
Provided that,-
(a)---
(b) the sale does not involve any abnormal discount or reduction from the ordinary competitive price;
--
(g) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Rule 9 of these Rules;
18. Further, I take note of the Interpretation Notes to Rule 3(3) of Customs Valuation Rules, 2007 which reads as under:-
Rule 3(3) Rule 3(3)(a) and rule 3(3)(b) provide different means of establishing the acceptability of a transaction value.
2. Rule 3(3)(a) provides that where the buyer and the seller are related, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted as the value of imported goods provided that the relationship did not influence the price. It is not intended that there should be an examination of the circumstances in all cases where the buyer and the seller are related. Such examination will only be required where there are doubts about the acceptability of the price. Where the proper officer of customs has no doubts about the acceptability of the price, it should be accepted without requesting further information from the importer. For example, the proper officer of customs may have previously examined the relationship or he may already have detailed information concerning the buyer and the seller and may already be satisfied from such examination or information that the relationship did not influence the price.
3. Where the proper officer of customs is unable to accept the transaction value without further inquiry, he should give the importer an opportunity to supply such further detailed information as may be necessary to enable him to examine the circumstances surrounding the sale. In this context, the proper officer of customs should be prepared to examine relevant aspects of the transaction, including the way in which the buyer and the seller organize their commercial relations and the way in which the price in question was arrived at in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and seller, although related under the provisions of rule 2(2) buy from and sell to each other as if Appellant were not related, this would demonstrate that the price had not been influenced by the relationship. An example of this, if the price had been settled in a manner consistent with the normal pricing practices of the industry in question or with the way the seller settles prices for sales to buyers who are not related to him, this would demonstrate that the price had not been influenced by the relationship. As a further example, where it is shown that the price is adequate to ensure recovery of all costs plus a profit which is representative of the firms overall profit realized over a representative period of time (e.g. on an annual basis) in sales of goods of the same class or kind, this would demonstrate that the price had not been influenced.
4. 3(3)(b) provides an opportunity for the importer to demonstrate that the transaction value closely approximates to a test value previously accepted by the proper officer of customs and is therefore, acceptable under the provisions of rule 3. Where a test under rule 3(3) (b) is met, it is not necessary to examine the question of influence under rule 3(3)(a). If the proper officer of customs has already sufficient information to be satisfied, without further detailed inquiries, that one of the tests provided in rule 3(3)(b) has been met, there is no reason for him to require the importer to demonstrate that the test can be met. In rule 3(3)(b) the term unrelated buyers means buyers who are not related to the seller in any particular case.
19. The transfer prices are normally scrutinized by the Income Tax Department considering the whole gamut of issues relevant and with better focus on the overall accounts of the company unlike the customs department which compares prices for the product billed to other importers. The matter of transfer prices is to be determined by in-depth analysis of the books of accounts and not to be simply rejected on the basis of list price of the commodity for retail sale. No evidence of price for sale at the same commercial level and same quantity level is produced by the department. No case is made out that the Income Tax department found the prices to be vitiated. Once the Transfer Prices Agreement for the products or services is not objected to by the Income-tax Department a case that the value of goods has been transferred to service has to be proved with more meaningful evidence rather than a comparison with list price for sale to retail buyers especially when evidence exists for discounts given even to retail buyers.
20. In the facts and circumstance, we are of the view that orders of the lower authorities are to be set aside. This order shall not be a bar on making out a proper case against the importer on the basis of demonstrable evidence that the price of imported goods has been transferred to imported services.
21. Before closing the matter, we would like to make an observation that the services availed by the importer from their holding company, for which CSC is paid, are likely to be chargeable to service tax under Section 66A of the Finance Act, 1994 and it is open to the Customs authorities to notify the concerned service tax authorities for taking action as permitted under law for recovery of service tax if not already paid.
22. With the above observation, the appeal is allowed by setting aside both the order-in-original and order-in-appeal with consequential relief to the Appellant.
(ASHOK JINDAL) Member (Judicial) (MATHEW JOHN) Member (Technical) MPS* 16