The Hindu Business Line : Missing G that the taxman spotted

CISCO Systems, Inc. is `the worldwide leader in networking for the Internet,' informs www.cisco.com. It was founded in 1984 `by a small group of computer scientists from Stanford University'. Over the two decades, it has grown to more than 34,000 employees worldwide.

"Cisco remains committed to creating networks that are smarter, thanks to built-in intelligent network services; faster, in their ability to perform at ever-increasing speeds; and more durable, with a generational approach to an evolutionary infrastructure," the site educates. "At Cisco, our vision is to change the way people work, live, play and learn," declares the company.

Only, the magic didn't seem to work with the taxman, who seemed to win the day when the Delhi High Court decided the case of Cisco Systems India Pvt Ltd on December 8.

"The petitioner company is a subsidiary of Cisco Systems Management BV (Netherlands), which in turn, is a subsidiary of Cisco Inc, USA," reads the text of the judgment, narrating the facts.

"The latter of the two companies has entered into agreements with the petitioner for supply of equipment broadly classified into the following four different categories: a) import of equipment for use in the STP (Software Technology Park) unit; b) import of equipment for internal use; c) import of demonstration equipment on loan/returnable basis; and d) import of spare parts for supply to the customers of Cisco Inc. to support replacements of failed parts of original equipment supplied by Cisco Inc."

Enter GPL

So far, so good. Trouble starts with the price. The Indian company of Cisco said that the prices of imported goods are determined on the basis of a reference price list of Cisco Inc called the Global Price List or GPL; and that Cisco Inc universally adopted this for exports made to different countries.

However, goods exported by Cisco Inc were normally made at a discount, which varied from equipment to equipment, said the company. Thus, for capital goods imported for STP units, pricing was at 40 per cent of GPL, and from June 2004, at 46 per cent. For equipment imported for internal use, the value was at 46 per cent of GPL; and for spare parts (the subject matter of the writ petition on hand), pricing was at 35 per cent of the price mentioned in GPL.

"Keeping in view the special relationship between the selling and the buying companies, however, the issue regarding the correct valuation of the imported spare parts was referred to the Special Valuation Branch (SVB) of Delhi Customs," notes the judgment. Even as the matter was pending before the SVB, the value of goods imported in terms of a particular bill of entry was enhanced by the Bangalore Customs authorities by 70 per cent.

The Department made a provisional assessment of duty, and Cisco challenged the same before the Commissioner of Customs (Appeals), and thereafter before CESTAT (that is, the Customs, Excise and Service Tax Appellate Tribunal). Cisco argued that the Tribunal had set aside the order passed by the authorities below and directed refund of the extra duty of Rs 18.15 crore on imports made from January 2002 to December 2003.

In the meantime, the Delhi SVB assessed the value of the imported goods at 58 per cent of GPL of Cisco Inc, after taking into consideration the value of similar goods supplied to unrelated parties. Aggrieved again, Cisco preferred an appeal before the Commissioner of Customs (Appeals) and applied for waiver of the pre-deposit of duty. "The Commissioner has partly allowed the said application and directed a pre-deposit of Rs 5 crore only as against a demand of Rs 9.22 crore raised by the Department," notes the judgment. "The present writ petition assails the correctness of the said order."

`Absurdity of sorts'

Resuming the case, what was the Commissioner's finding? He noticed that the goods were sold to unrelated buyers at various percentages of GPL ranging between 10 and 90. "Some of the invoices which the petitioner had placed on record before the Commissioner even showed that goods had been sold at 0 per cent of GPL to Wipro Ltd," which the Commissioner considered to be "an absurdity of sorts."

From the data furnished to him, the Commissioner found that 70 per cent of the invoices issued to unrelated buyers were at a price ranging from 52 to 69 per cent of GPL. About 30 per cent of such invoices were at a price higher than 69 per cent or less than 52 per cent of GPL.

"The Commissioner has, on that basis, prima facie, drawn the conclusion that GPL has no sanctity whatsoever and that the petitioner's invoicing pattern was wholly arbitrary," reads the text of the High Court's verdict. "The logic underlying the invoicing system had not, it appears, been disclosed to the Commissioner by the petitioner as indeed the same was not disclosed even to this Court."

If that sounds shocking from the side of a global major, "what is significant is that the Commissioner found that the petitioner-company had invoiced goods at 35 per cent of GPL in cases where Customs duty was leviable, while in cases where Customs duty was not leviable such imports have been made at 46 per cent of GPL."

The Commissioner observed, "The same goods manufactured by the same supplier have been sold at widely varying prices to different buyers." As for the two rates, 35 and 46 per cent, though Cisco admitted to have invoiced thus, "no convincing arguments for this blatant difference in the values declared to the Customs have been placed on record," noted the Commissioner.

No error of jurisdiction or of law

Justices T. S. Thakur and B. N. Chaturvedi of the Delhi High Court heard the case and said that there was `neither any error of jurisdiction nor any error of law' in the Commissioner's order.

"The power to waive pre-deposit to avoid hardship to the party against whom the demand is raised is discretionary. So long as the discretion is not exercised in an arbitrary and whimsical fashion, a writ court would not interfere with the order of waiver of pre-deposit or refusal thereof," said the court.

The party against whom a claim for duty has been made must pre-deposit the duty amount unless the appellate authority considers it proper to waive such pre-deposit either in whole or in part to avoid hardship to it, explained the court. "What is to be seen is whether there is any hardship if pre-deposit is not waived for hearing of the appeal on merits. The answer to that question would largely depend upon the facts and circumstances of each case."

The court cited the apex court's observations in the Dunlop India case that since the law presumes public authorities to function properly and bona fide with due regard to the public interest, "a court must be circumspect in granting interim orders of far reaching dimensions or orders causing administrative, burdensome inconvenience or orders preventing collection of public revenue for no better reason than that the parties have come to the court alleging prejudice, inconvenience or harm and that a prima facie case has been shown."

Interestingly, the apex court had shared the common man's puzzlement when saying, "We often wonder why in the case of indirect taxation where the burden has already been passed on to the consumer, any interim relief should at all be given to the manufacturer, dealer and the like."

Neither any illegality nor any perversity

The Delhi High Court made a few insightful observations. Such as, that absurdity can arise "out of a mechanical application of the `transaction value' of similar goods sold to unrelated buyers". And that "a wooden or mechanical application of the provisions of Rules 4(3) and 5(1) and (3) of the Customs Valuation Rules was indeed bound to lead to anomalous results and had, therefore, to be avoided."

The court stated that the entire object underlying the exercise undertaken by the authorities below was to determine the true transaction value of the imported goods keeping in view the fact that the seller and the buyers were related parties and taking into consideration the transaction value of identical goods or of similar goods in sales to unrelated buyers in India.

"There is neither any illegality nor any perversity in that line of reasoning to call for interference by this court," notes the verdict.

A Cisco fiasco of sorts, where the weak spot was the missing G that the taxman could easily zero in on.

Tailpiece

"I heard that a hefty tax relief is available on a first-come-first-served basis!"

"Don't believe rumours, especially about relief!"

Detaxification@TheHindu.co.in

D. Murali

More Stories on : Taxation | Detaxfication

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Sugar's sorry state

The great bubble of world economics

Missing G that the taxman spotted

Milching of zilch has gone a bit too far

Can there be understatement of income from property?

Discretion is key to levying penalty

Handloom industry — weaving out the myths

The dignity of the House