Tax impact of International trade

[Guest]

Hello Sir, Company A Ltd of India purchased Moulds from China & sent to Job worker of Japan for manufacturing finished goods using such moulds. The Mould never come to India. Finally finished goods are imported from Japan to India. Please explain the taxability and accounting treatment of moulds purchase.

[KASTURI SETHI]

Sh.Lakshmi Narayan Padhy Ji,

"Mould never come to India" . It is O.K. but Customs duty has to be paid on the apportioned cost of moulds depending upon usage of the same in the manufacture of final product to be imported by A..

Apportioned cost of moulds has to be included in the production of imported goods. Moulds are not consumed immediately in manufacturing the finished goods but are used over a period of time. Cost of moulds should be apportioned over the usage i.e. quantity produced and such apportioned cost must be added to transaction value for arriving at correct taxable (Customs value) for payment of Customs duty on finished goods to be imported by A.

Pl. peruse Rule 10(1)(b) (ii) of Customs Valuation (Determination of Value of of Imported Goods) Rules, 2007 along with Interpretative Notes specified in the Schedule in Rule 13ibid.

[KASTURI SETHI]

In continuation of my reply dated 28.5.23, relevant extracts of Rule 10 and Rule 13 are appended below :

Rule 10.Cost and services. -

(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, -

(b) The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:-

(ii) tools, dies, moulds and similar items used in the production of the Imported goods;

(iii) materials consumed in the production of the imported goods;

13.Interpretative notes. — The interpretative notes specified in the Schedule to these rules shall apply for the interpretation of these rules.

Note to rule 10

In rule 10(l)(a)(i), the term "buying commissions" means fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued.

Rule 10(l)(b)(ii)

1. There are two factors involved in the apportionment of the elements specified in rule 10(l)(b)(ii) to the imported goods - the value of the element itself and the way in which that value is to be apportioned to the imported goods. The apportionment of these elements should be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles.

2. Concerning the value of the element, if the importer acquires the element from a seller not related to him at a given cost, the value of the element is that cost. If the element was produced by the importer or by a person related to him, its value would be the cost of producing it. If the element had been previously used by the importer, regardless of whether it had been acquired or produced by such importer, the original cost of acquisition or production would have to be adjusted downward to reflect its use in order to arrive at the value of the element.

3. Once a value has been determined for the element it is necessary to apportion that value to the imported goods. Various possibilities exist. For example, the value might be apportioned to the first shipment if the importer wishes to pay duty on the entire value at one time. As another example, the importer may request that the value be apportioned over the number of units produced up to the time of the first shipment. As a further example, he may request that the value be apportioned over the entire anticipated production where contracts or firm commitments exist for that production. The method of apportionment used will depend upon the documentation provided by the importer.

4. As an illustration of the above, an importer provides the producer with a mould to be used in the production of the imported goods and contracts with him to buy 10000 units. By the time of arrival of the first shipment of 1000 units, the producer has already produced 4,000 units. The importer may request the proper officer of customs to apportion the value of the mould over 1,000 units, 4,000 units or 10,000 units.

To choose any of the above valuation method for ascertaining the apportioning of cost of moulds is choice of 'A' .

AI Summary

Apportioned cost of moulds must be included in transaction value, affecting customs duty on imported finished goods. The apportioned cost of moulds supplied for use in production abroad must be added to the transaction value of imported finished goods under Rule 10(1)(b)(ii). The moulds' value equals acquisition cost from an unrelated seller or production cost (adjusted for prior use if applicable), and must be apportioned reasonably over units produced-options include charging to the first shipment, units produced to date, or anticipated production-subject to documentation; accounting treatment requires capitalisation and systematic allocation so customs duty is calculated on the adjusted transaction value.