TaxTMI 
TaxTMI 
2014 (5) TMI 753
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....Sun Microsystems India Pvt. Ltd. (SI for short/appellant) imported spares from M/s. Sun Microsystems Pte. Ltd. (SunSGP) on payment of customs duty on 'US list price less discount'. The Order-in-Original No.1/2013 dt. 29/03/2013 ('order') has confirmed the demand of customs duty on the US list price without allowing any discount. The US list price has been adopted as assessable value in the order on the ground that various inter-company service agreements entered into by the appellants with SunSGP and M/s. Sun Microsystems Inc. (SunUS) has resulted in undervaluation of spares imported by the appellants. 2. The gist of challenge to Order-in-Original is as follows:- Duty demand confirmed Rs.146.01 crores (Bangalore) Rs.9.13 crores (Chennai) Redemption fine Rs.35 crores Penalty u/s 114A Rs.155.13 crores. Amount appropriated Rs.5.65 crores Bank guarantee enforced against redemption fine : Rs.10.40 crores. Further finalization of Bills of Entry provisionally assessed for the subsequent periods not covered by the order have been ordered to be finalized adopting the value as per the US List price. 3. The Order-in-Original arises fr....
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.... Agreement', wherein the former is appointed as a service provider for which it is reimbursed, on a cost + arm's length mark-up basis. 8. SI has entered into following agreements with Sun SGP: Logistics Services Agreement As per this agreement, Sun SGP (Asia Logistic Centre - ALC) is required to provide replacement of spare parts ordered by SI at the unit price paid by them. Based on this agreement SI has paid Logistic charges (does not include freight for import of spares) to Sun SGP, and these payments are over and above the spares import invoice value raised by Sun, SGP. Marketing and Warranty Support Services Agreement- As per this agreement, SI provides marketing, Pre-Sale support, Warranty and other services for Sun, SGP business in India. Based on this agreement, SI is required to bill the charges at cost plus 10% basis on Sun, SGP and collect the same. Escalated Technical Support Agreement- As per this agreement, Sun, SGP is required to provide technical and other services to SI. Based on this agreement, SI has made payments of amounts billed (called AEC charges) by Sun, SGP. All Sun group companies including Sun, US (holding company), Sun, SGP and SI a....
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....ranty/AMC obligations on free of cost basis. > These spares were of substantial value and were refurbished and supplied subsequently as spares to various Sun Group units. > SI had no option but to export these spares as a contractual obligation. > In the normal course, SI ought to have been reimbursed towards the value of these exported spares. This did not happen and the money value thereof accrued to Sun Singapore/ US. > The above finding is supported by incriminating documentary evidence, such as e-mails and statements given by employees of SI and DHL. > SI began exporting these spares on commercial basis after DRI investigation started. > Appellants have stated that above consideration was recovered by SI from Sun Singapore. Evidence obtained from the Banks is to the contrary. > During the period up to March 2008, the total value of such spares exported by SI amounted to Rs. 302 Crores and the duty liability thereon would be Rs. 78.61 Crores. (b) Payment of Asia Logistics Centre (ALC) Charges > In terms of Logistics Services Agreement, SI paid Sun Singapore ALC charges amounting to Rs.63.76 Cr. up to 2007-08. > These charges were paid out of ....
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....nted to Rs. 102.83 Cr. Duty involved thereon was Rs. 26.74 crores. (d) Payments on account of Spares Re-balancing > Sun Singapore has billed SI an amount of Rs. 9.69 Crores for spares rebalancing. It has been explained by SI that Bill was on account of scrapping of exported defective spares, which could not be repaired and hence, to correct the overcharge, the bill was raised by Sun Singapore. > Respondent has not accepted this argument on the ground that the amount related to imported spares and there could be a rebalancing charge only if there was remittance against export of spares. > Duty involved on this score was Rs.2.52 Crores. (e) Payment of AEC charges > In terms of the Escalated Technical Support Agreement dated 1/7/2003, SI has been paying AE Charges to Sun Singapore. For the period up to March, 31 2008, this amounted to Rs. 18.99 Crores. > No proper explanation was provided by SI as to what were the services being provided to them by Sun Singapore and the basis for arriving at the amount. > Duty involved on this score is Rs.4.94 Crores. 12. The sum and substance of the case made out as per the findings in the order are as follows:- (a) The ....
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.... the fact that there is relationship between the entities and this was the reason why the matter had been placed before SVB. However, it was submitted that in this case transaction value could not have been rejected because the relationship has not influenced the price. 16. The learned counsel relied heavily upon the study undertaken by Price Waterhouse Coopers LLP (PWC) with regard to adherence to the statutory provisions relating to transfer pricing of materials between the entities. It was submitted that the basis for fulfillment of statutory obligations as regards transfer pricing is that the transaction should be at arms length between the entities. It was submitted that the PWC report clearly states that the pricing policy of the SunUS for sale of spares to other entities all over the world is at arm' length. 17. The learned counsel made the following submissions on the basis of three reports prepared by PWC which are reproduced below:- Report Finding Report I - Analysed 63 invoices issued by SunUS to SunSGP, Sun Korea, Sun China, Sun Hong Kong and Sun Taiwan (page 440-451 of Vol. B) .. Discounts are offered by SunUS to SunSGP as well as to Sun entities; .....
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....rements and vary depending upon geography, market conditions etc. However, we take note of the fact that the transfer pricing report does not take note of the fact and does not also consider the relationship between various services provided by the entity in India to SunUS/SunSGP and payments that are to be received and the billing process for the same. The case of the Revenue is not merely based on the sale price from SunUS to SunSGP and from SunSGP to SI but is based on an analysis of various transactions such as provision of service, the fact that spare parts are received only by SI and only for providing AMC and warranty services. No sale of spares by SI has been found by the investigators. Further even AMC services are performed by channel partners and only spares are supplied by SI and that too SunSGP supplies such spares against specific request and on the basis of specific requirement. Therefore the PWC report which relies on only one type of sale from SunUS to SunSGP without considering all other factors and without considering the statutory provisions may not be exactly relevant and appropriate as submitted by the learned special consultant. 20. Report-II of PWC analys....
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....o be copied or distributed or otherwise made available or referred to, in whole or in part, to any other party without out prior written consent. We do not accept any liability or responsibility to any third party to whom our report is shown or into whose hands it may come.' 24. By the time this report was prepared, the offence case had already been registered and show-cause notice had already been issued by DRI with regard to Bangalore imports on 27/02/2009. Therefore these observations have lot of significance. 25. The report takes care to ensure that the report relates to only transfer pricing mechanism and does not certify anything beyond the schedule and letter has been issued to the Director Operations which have been extracted above to ensure that PWC cannot be held responsible if anything wrong is found. 26. It was also submitted that one of the major requirements while examining transactions between related entities is to see whether the sale from one party to another results in loss and for this purpose the learned counsel for the appellant produced some invoices issued by spare parts suppliers to SunUS and those examples showed to us that even after extending mo....
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....n Sun entities is available to examine the price. Nevertheless, the learned counsel for the appellant made a submission that there are instances of such sale where spares have been sold with equipments and in those cases also discounts have been extended from US list price varying from 1% to 20% even though it was submitted by the special counsel that this claim is only by comparing list price for spares arrived at by denial of discounts price charged in the supply of equipment supplied and not exactly based on list price since Sun US has not declared the list price and discount extended either for the equipment or for spares supplied along with equipment. Yet the submissions made by the learned special consultant with regard to supplies made to unrelated buyers by SUNSGP revealed some interesting information. Out of several transactions given in the form of a table, some instances where there were sales of spares at more than the list price were selected and it was found that in these cases the excess billing over and above the list price varied from 1% to 128%. As could be seen from the list submitted by the learned special consultant, majority of the items listed were supplied t....
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....SCSI W/SPUD & PLT - 540417801 195.5 575 1% Juniper Networks India Pvt. Ltd. 3432097 PPCB Parts of Computer RFB 512 MB Memory EOLTB370 4281 01 115.05 295 13% 29. On the one hand, we find that the basis for different prices for different markets and different US entities for giving discounts is not disclosed. The US list price is a figure arrived at based on the discount rates made available by the appellants to the department and not exactly based on any declared US list price. The invoices for supply of spares to Sun entities are generated by SOLEIL systems. The verification of SOLEIL generated invoices and invoices generated for supply of equipments clearly shows that the pricing pattern for supply of spares to Sun entities and others with equipment are quite different. Further, it is also not possible to arrive at the price based on the sale price in India, since there were no sale of spares by the Sun entity in India and supplies are made only to fulfill warranty obligations and AMC obligations. 30. Another aspect that has been a bone of contention between the departm....
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....rranty terms as well as the agreements between the Sun entities, such parts have to be sent back when the order is placed for new parts. d. To support this submission, learned special consultant relied upon sample copies of shipping bills up to 2005 wherein in the declaration, it was specifically mentioned no foreign exchange involved. M/s. DHL Express (I) Pvt. Ltd., the courier service provider stated that during the period from 1998 to December 2006, such declarations were made as per the intimation furnished by SI and therefore, such a declaration was made. This was confirmed by statement of Shri Anil Kumar, Clearing Supervisor. e. Revenue also relied upon the email dated 15.7.2006 from Shri Anand Kumar, Global Service Finance Services Manger to Shri Radhakrishnan, Finance Controller, Sun SGP wherein he mentioned that DRI have sought details of import information and undervaluation issues may be raised. f. In the month of June 2006, export documentation was changed from NFEI declaration to exports made as commercial shipments and the value declared was list price less discount applicable for importer of new spares. According to the learned special consultant, this clear....
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....that the AMC revenue of Rs.477 crores includes the cost of value of spares along with profit margin and therefore only a portion of Rs.477 crores could be considered as value of spares used for AMC. Certain figures were given to support the contention that the Revenues claims regarding defective spares cannot be accepted. 33. It is the Revenues contention that appellants should have been paid for refurbishable spares under the circumstances as discussed above and since they have not been paid for the same, this has to be treated as one of the considerations for charging lower price at the time of supply of spares by Sun US/SGP. 34. We find that there is sufficient evidence to show that during the period of dispute, refurbishable spares were not paid for by Sun US/SGP and apparently appellants have made efforts subsequently to make suitable adjustments. We have already taken note of the fact that even to PWC for conducting study of transfer pricing issue, appellants have not disclosed these facts and even the fact that defective parts were paid for and such payment was equal to the cost of new parts supplied by Sun US/SGP was also not brought to the notice of PWC. Therefore ....
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.... parts were not paid for is assumed to be incorrect, the price charged by Sun US /SGP to SI becomes tainted price and not a price at arms length. 36. It is also strange that even for supplies to fulfill warranty obligations, appellant has been charged for the supply of parts. The price at which goods are supplied initially invariably includes the warranty period also and therefore when equipments are supplied, if parts are to be replaced during the warranty period, they are supplied free to the provider of warranty service. SI which provides warranty service does not get this benefit and according to the calculation made in the OIO, warranty service accounted for about 40% of the total supplies. SI has been charging to Sun US /SGP amortization charges in respect of parts used for warranty, even though according to their own submissions, they get back the entire amount when a part is replaced and refurbishable part is sent back to US. Charging amortization charges would look rational if the old parts are sent back without payment and new parts are not paid for. This would be towards the cost of storing the parts and warranty servicing. 37. Another issue that has to be taken in....
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....,234 Rs.15,89,72,381 6. Asia Escalated Charges Rs.18,99,47,899 Rs.17,69,49,109 Rs.4,60,06,768 7. Spares re-balancing Rs.9,69,36,067 Rs.9,69,36,067 Rs.2,52,03,377 Total Rs.574,54,23,342 Rs.474,53,85,959 Rs.123,38,00,349 40. Out of the above, the export of refurbishable spares and the cost of the same has been a subject of serious dispute between the two parties. There have been claims and counter claims which were examined and we find that appellants have not been able to show that there was indeed payment for refurbishable spares on a regular basis. 41. The second issue for proving flow-back is underbilled amount of spares used for warranty. While billing warranty charges on SunSGP, SI has to bill the full value of spares declared in the import invoice used for warranty purpose with 10% mark up. SI had paid for spares imported for warranty also. However SI did not bill the full value of spares used for warranty thereby underbilling of warranty charges has resulted. Shri Ravi Vishwanath in his statement dt. 06/01/2....
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....ng regime (cost +10% markup and list price less a 680% discount for spares) is intended to provide Sun India with an appropriate "arm's-length" level of profit on their overall operations, given their functions and risks in operating as a commission agent 44. The above mail is an evidence that the cost plus 10% billing for the services provided by SI to SunUS and SunSGP has a bearing on the supply of spares by SunSGP and SunUS to SI at list price less discount (68% or 70%). Hence, under billing in respect of services provided by SI to SunSGP and SunUS was to compensate the underbilling of spares systematically. 45. SunSGP supplies spares to SI under logistics services agreement dt. 01/07/1998 with a condition of only for replacement and at the unit price paid by SunSGP. SI imports new spares, used them for replacement and re-exported defective spares received. Asia Logistic Centre (ALC) charges amounted to Rs.63.76 crores during the period from 1998-99 to 2007-08. This was paid out of AMC income upon using the spares. The special consultant relied upon E-mail dt. 24/09/2007 between Shri Ravi Vishwanath and Mr. John McGovern (part of SunUS Customs team) to submit that ALC ....
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....by point to the allegations in the show-cause notice. As regards underbilled professional charges, the appellants stated in any event the amounts have already been charged by SI on 26/05/2009 and paid for by SunUS. It has to be noted that this is much after the issue of show-cause notice and conducting of investigation. Therefore this allegation has to be held as proved. Other than stating that this had nothing to do with the import of spares, there is no other explanation. There is no explanation how this conclusion has been reached by them. 47. Thus underbilled marketing and R&D costs according to the appellant were subsequently billed and paid for. This, in our opinion, would prove the Departments case. After the investigation was started and statements were recorded if the amounts are charged and received without any basis as to why they were not billed earlier and collected, that cannot be taken into account at this stage. 48. As regards Asia Escalated Charges (AEC ) which according to the worksheet would come to Rs.19 crores, the appellants submitted that these charges are paid by the appellant to SunSGP towards provision of technical and other services. These charge....
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....ave already discussed. The only guidance available is the US list price worked out by working backwards using price paid for and discount rates claimed. For the reasons already discussed, the fact that SunUS makes profit is not relevant. To determine the transaction value, the question as to whether one of the entities makes a profit is not relevant but what is relevant is whether the relationship and other transactions between the two entities has affected the price. Our discussion above would show that it is so. Once the price becomes tainted or cannot be considered as transaction value as discussed by us above, the options left are to take the transaction value and add the flow-back. However, even the flow-back amount worked out by the Revenue has been disputed by the appellants and as already observed, it cannot be said with certainty that these reflected the correct position. For example, if we take export of defective spares, the question of amortization charges and whether there was underbilling in warranty would arise. Moreover, the export of defective spares value may include the value of spares used for warranty also. In such a case, figures given in sl.no.1 and 2 of the ....
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....e facts of this case. 53.2. In the case of Siemens Ltd. Vs. CC, New Delhi [2000(126) ELT 1134 (Tri.)], the Special Investigation Branch of the Customs itself had found that the invoice price was not affected by the holding company-subsidiary company relationship. That is not the case here. Therefore, this decision also cannot be applied. 53.3. In Stahl India Pvt. Ltd. Vs. CC, Chennai [2005(184) ELT 408 (Tri. Chennai)], there was evidence of contemporaneous supply of identical/similar goods at same price to other overseas subsidiary of supplier on record. It was also found that there was import in large quantities by the subsidiary when compared to unrelated consumers and it was also found that subsidiary was incurring expenses connected with marketing activities thereby justifying the transaction value. This decision cannot be applied to the facts of this case. 53.4. Two clarifications issued by US Customs have also been enclosed but we find that those clarifications are not relevant since facts are not comparable. 53.5. In the case of Gem plus India Pvt. Ltd. Vs. CC, Chennai [2005(185) ELT 269 (Tri. Bang.)], the prices of items were mutually agreed between the supplier....
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....find that all the officers have contributed in their own way towards undervaluation. There was discussion, exchange of e-mails and further statements which go to show that the officers were aware that there was an effort to undervalue the goods. However one fact which emerges is that there is no evidence to show that they individually benefitted by way of extra remuneration or extra benefits because of this contribution. Under such circumstances, when penalty has been imposed on the appellant-company under Section 114A and goods have been confiscated and revalued for the purpose of levy of duty, some relief in quantum of penalty is warranted. Accordingly, the penalties on individuals would be as under: a. Shri Bhaskar Pramanik -- Rs.10 lakhs (Rupees ten lakhs only) b. Shri Ravi Vishwanath -- Rs.8 lakhs (Rupees eight lakhs only) c. Shri V. Radhakrishnan -- Rs.6 lakhs (Rupees six lakhs only) d. Shri Anand Kumar -- Rs.4 lakhs (Rupees four lakhs only) e. Shri Reji Kumar -- Rs.2 lakhs (Rupees two lakhs only) 57. Lastly, we have to consider whether penalty is imposable on M/s. DHL Express India Ltd., Bangalore under Section 112(a) of Customs Act, 1962. The learned couns....