TaxTMI 
TaxTMI 
2024 (9) TMI 1907
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....rking and information technology products and associated services worldwide. 1.1 The Applicant is operating the Service Support Operations ("SSO") as an independent business unit with its own business activity, segregated from the Applicant's Sales Channel through which products are sold to customers. The SSO is exclusively responsible for managing the hardware replacement for end-users who have initially purchased a finished product through the Applicant's Sales Channel via its sales partners and distributors and who have acquired, along with the purchase of the hardware, a Service Contract with Arista that includes the replacement, free of charge, of defective hardware as needed. 1.2 When the end-users face a hardware failure, Arista's SSO program offers rapid replacement of the hardware. An end-user who has purchased the Service Contract and is eligible for the SSO coverage will not pay anything upon receipt of the replacement hardware unit (i.e., Service Spare Part), regardless of the quantity and type of products replaced during the service period. The replacement of the defective hardware with a Service Spare Part is free of charge and at no cost to the end-....
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....ve part back to the in-country warehouse. Returned defective Service Spare Parts and unused Service Spare Parts held in the in-country warehouse will be consolidated and periodically shipped back to origin. 1.6 Thus, the key features of Arista's Service Support Operations are summarized below: i. Ownership of the goods is at no time transferred to Arista's authorized Logistics Service Providers and/or their locally appointed service providers. Arista retains ownership of all Service Spare Parts imported into India. Service Spare Parts that are shipped to India to comprise the on-hand inventory in-country are not dedicated to end-users and can be delivered to any end-user in India when required. ii. There is no buy/sell transaction in the shipment of the Service Spare Part from Arista's centralized warehouse to the local warehouse in India managed by the LSP. There is no commercial sale of Service Spare Parts when the goods are transported between warehouses on the Global Service Support network. iii. The Service Spare Parts are shipped to the LSP in India totally free of charge. iv. The Service Spare Parts shipped to India have no ....
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....f various service spare parts by the Applicant. 1.6 Therefore, the Applicant, being desirous to know the correct valuation of the service spare products, is filing the present application seeking an advance ruling as to the valuation of the various service spare parts. 1.7 The questions on which an application for an advance ruling can be made have been provided under Section 28H of the Customs Act. As per Section 28H(2) of the Customs Act, an Applicant may make an application for advance ruling in respect of questions relating to: "(a) .... (c) the principles to be adopted for the purposes of determination of value of the goods under the provisions of this Act." 1.8 Therefore, it flows that in the present case, the Applicant satisfies all the three-essential criterion for filing the application for advance ruling, namely: (a) The Applicant is exporting the goods to the India; (b) The Application is in respect of goods prior to their exportation; and (c) The application for advance ruling is in relation to clauses (c) of Section 28H(2) of the Customs Act, 1962. Non-Applicability of Bar under Section 28I 1.9 Sec....
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....Agreement and guidelines, and the Customs Valuation Rules to ensure that the service spare parts are valued equitably, transparently and in accordance with applicable laws and regulations. 3.2 Section 14 of the Customs Act states that the value for the purposes of calculating customs duty payable shall be the transaction value i.e., price actually paid or payable for the goods exported to India. Rule 3 of Customs Valuation Rules states that the transaction value of the imported goods shall be "the price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of rule 10 of these rules." 3.3 The term, transaction value has been defined under Section 14 of the Customs Act. The relevant extract of the same is given below: 'Section 14. Valuation of goods. - (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation,....
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....but shall not include imported goods where engineering, development work, art work, design work, plan or sketch undertaken in India were completed directly or indirectly by the buyer on these imported goods free of charge or at a reduced cost for use in connection with the production and sale for export of these imported goods;" 3.6 The Applicant submits that the Service Spare Parts exported by the applicant cannot be valued by application of Rule 4, as the service spare parts exported by the applicant are not identical or the same in all aspects, including reputation, quality and physical characteristics, as goods sold in the Indian market whether at the same or at different commercial levels. The applicant submits that there is no commercial transaction that occurs upon importation of the Service Spare Parts, as the Service Spare Parts are at all times owned by Arista. Further, there is no commercial transaction that occurs upon delivery of Arista's Service Spare Parts as they are free of charge replacement service parts. 3.7 The Applicant submits that as per Arista's internal policies, the Service Spare Parts shall not be sold for export to the country of importati....
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....Spare Parts are not supported by a manufacturer's warranty, therefore they cannot be commercially interchangeable with other products which are supported with a manufacturer's warranty that are sold in the country, as customers will not accept Service Spare Parts to be commercially interchangeable with new products, due to the lack of a manufacturer's warranty. 3.11 Further, the Service Spare Parts stored in centralized storage facilities and are subsequently shipped to India market continuously undergo purge processes. These processes further compromise any part's integrity and prohibit such part from being sold or from being found similar to the parts being sold. Therefore, the service spare parts cannot be held to be commercially interchangeable with a product supported by manufacturer's warranty. Hence, Rule 5 is also inapplicable. 3.12 When the transaction value of goods cannot be determined by Rule 4 or Rule 5, Rule 6 of the Customs Valuation Rules directs that the value of goods shall be determined by Rule 7 by application of deductive value or Rule 8 by application of computer value. Deductive Value (Rule 7) 3.13 Rule 7(1) of the Customs Valu....
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....alue (Rule 9) 3.17 Since the value of the Service Spare Parts cannot be determined using any of the foregoing rules, resort must be made to Rule 9 of the Customs Valuation Rules. Under Rule 9, the value of the goods must be determined using reasonable means consistent with the principles and general provisions of these rules and based on data available, following the hierarchical application of the preceding valuation methods. Therefore, the Applicant is of the view that the value must be determined as per the Fallback method by using the existing data to reach a reasonable valuation of the Service Spare Parts. 3.18 To determine the value of the Service Spare Parts based on the Residual Method consistent with a reasonable interpretation of the Computed Value method, Arista follows an annual process whereby it collects all applicable and available financial information relating to the three elements required for a reasonable means calculation of a Residual Computed Value, i.e., Production and fabrication costs, General expenses, and Profit. 3.19 In determining its annual Residual Computed Value for the entire Service Spare Parts inventory, the Applicant follows a process th....
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.... to local country warehouses managed by 3rd parties. There are no direct shipments of Service Spare Parts for replacement to end-users internationally. It is the local partner who clears the goods through Customs and delivers them to a local warehouse for storage until the Service Part is needed by an end-user under Service contracts. Therefore, the expenses associated with the Service Parts operations is calculated by adding the following expenses: * Depot, Warehouse and Storage costs * International logistics costs billed by transportation providers, including handling costs, service fees (such as special handling, clearance and export fees, etc.) * Management and consultative fees * Component materials, service fees and management fees * Arista's internal Service parts operations overhead and expenses, including: ○ Costs for management salaries and benefits ○ Service-related overhead ○ Material and inventory costs * Arista's cost of insurance for the transportation and storage of the goods c. Operating Profit Margin: As described in the Interpretative Note to Artic....
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....ating Profit / TC Standard Overhead Cost Multiplier Total Operating Profit 3.27 Once each Overhead Cost Multiplier is established, then the next step will be to add together each multiplier to find the Computed Overhead Cost Multiplier (M Computed) as follows: M Computed Overhead Cost Multiplier Total Production and Fabrication Cost + Overhead Cost Multiplier Total Overheads and Expenses + Overhead Cost Multiplier Total Operating Profit Computed Overhead Cost Multiplier (M Computed) STEP 4: CALCULATING THE CUSTOMS VALUE OF A SERVICE PART. 3.28 Based on the above calculations, all the variables to reasonably calculate the Residual Computed Value for a single service part unit are available. These variables can be combined into the following equation in order provide a reasonable computation of a customs value of a service part unit that is compliant, correct, and consistent with the reasonable means based on the flexible interpretation of the Residual Computed Valuation Method. The process for calculating a reasonable Residual Computed Value of a single part unit is finally determined under the following calculation: Variables: TC c....
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....cant sought advance ruling, are not of refurbished nature and the goods are very new. Hence, Comments of this office in respect of revised application submitted by the applicant are as follows: i. The applicant has stated that they are operating Service Support Operations (SSO) and that any end-user in India who purchases a finished product and a service contract through Applicant's sales channel, will be provided replacement of defective hardware free of charge and hence there is no sale between the applicant and the end-user. On the basis of this, the applicant has stated that the value cannot be determined as per Rule 3 of Customs valuation Rules, 2007 (CVR). This appears to be appropriate as there is no transaction value involved in the importation of the goods and hence the same would not fall within the purview of Rule 3 of CVR, 2007. ii. Since, the value cannot be determined based on Rule 3 (1), the value shall be determined by proceeding sequentially through rule 4 to 9 as per Rule 3(4) of CVR. iii. Rule 4 of CVR states that the value of imported goods shall be the transaction value of identical goods sold for export to India and imported at o....
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....tion cost information would not be available with them. Devoid of such information, the value cannot be determined under Rule 8 of CVR. vii. Since the value of service spare parts cannot be determined by any of the foregoing rules, the value has to be determined by Rule 9 of CVR under Residual method, which states that where the value of imported goods cannot be determined under the provisions of any of the preceding rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and on the basis of data available in India. Rule 10 of CVR provides for inclusion of Cost of materials and Services as follows: 1. commissions and brokerage, except buying commissions; 2. the cost of containers which are treated as being one for customs purposes with the goods in question; 3. the cost of packing whether for labour or materials; 4. materials, components, parts and similar items incorporated in the imported goods; 5. tools, dies, molds and similar items used in the production of the Imported goods; 6. materials consumed in the production of the imported goods; ....
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....licant company and explained functioning of the goods in question and sought the attention of the Port Commissionerate in terms of application of appropriate principle of valuation. 4. I have gone through the detailed submission by the applicant, the comments made by the Port Commissionerate and examine the briefs and submissions made. In this regard, the comments on the said application are as follows: 4.1 With respect to para-4 of the request to amend application filed by the applicant dated 21.08.2024 In the matter of Application No. 45/2024, it is observed that, as per the revised information furnished by the applicant at SI. No. 7 of the Form CAAR-1, the nature of the applicant's present activity is the export of New service spares to India, for purposes of free-of-charge replacement of defective parts/goods under its Service Support Operations (SSO). 4.2 Para 3 of Annexure 1 submitted by the applicant wherein it is mentioned that the Service Support Operations (SSO). The SSO is exclusively responsible for managing the hardware replacement for end-users who have initially purchased a finished product through the Applicant's Sales Channel via its sales partners....
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....price at which the imported goods or identical or similar imported goods are sold in the greatest aggregate quantity to persons who are not related to the sellers in India. However, as discussed above, identical and similar items are not available. Thus, the value of the goods cannot be determined under Rule 7 of CVR. vi. Rule 8 of CVR states that the value of imported goods shall be based on a computed value, which shall consist of the sum of :- a. the cost or value of materials and fabrication or other processing employed in producing the imported goods; b. an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to India; c. the cost or value of all other expenses under sub-rule (2) of rule 10. The applicant has submitted that their financial systems only hold production cost information for parts produced in the current financial year; that the service spare parts' inventory consists of various parts that have been manufactured several years ago, for which the original product....
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....ted overhead iii. Material and inventory costs f. Cost of insurance for storage and transportation viii. Operating profit margin. The calculation method given by the applicant to compute service spare part, which includes all the above detailed costs, appears to be in consonance with the Rule 9 of CVR and consistent with other provisions of the CVR. 5. I also intend to look into the draft calculations shared by the applicant to determine the value of spare parts. (i) The purpose of this document is to provide supplemental information to Application Nos. 43-45/2024 submitted by Arista Networks. The sample calculations on actual basis has been provided to arrive at the customs value for Service Parts exported to India for purposes of free-of-charge replacement of defectives, according to Rule 9 "Residual Value Method" of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 ("Customs Valuation Rules"). (ii) To determine the value of the Service Spare Parts based on the Residual Value Method consistent with a reasonable interpretation of the Computed Value method ("Residual Computed Method"), Arista follows an annu....
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.... + Total Overheads and Expenses 19,544,716 + Total Operating Profit 26,731,152 TCcomputed 49,705,108 C. STEP 3: CALCULATING THE COMPUTED OVERHEAD COST MULTIPLIER (MComputed) (xii) The calculation of Overhead Cost multiplier for each Computed Cost element is given below: (xiii) Overhead Cost Multiplier Total Production and Fabrication Cost (OCMTPF) Total Production and Fabrication Cost (TPFC) USD 3,429,240 / TCStandard USD67,836,740 Overhead Cost Multiplier Total Production and Fabrication Cost 0.05055 (xiv) Overhead Cost Multiplier Total Overheads and Expenses (OCMTOE) Total Overheads and Expenses USD 19,544,716 / TCStandard USD67,836,740 Overhead Cost Multiplier Total Overheads and Expenses 0.28811 (xv) Overhead Cost Multiplier Total Operating Profit (OCMTOP) Total Operating Profit USD 26,731,152 / TCStandard USD 67,836,740 Overhead Cost Multiplier Total Operating Profit 0.39405 (xvi) Thus, the Computed Overhead Cost Multiplier (Mcomputed) as follows: Overhead Cost Multiplier Total Producti....