The Hindu Business Line : Rough edges in the new export valuation norms

The Export Valuation Rules stipulate that the value of export goods shall be the transaction value, but if the buyer and seller are related then the exporter must prove that the relationship did not influence the price.

Joseph Dominic

The next time you export a consignment to your brother’s company abroad, the goods are likely to be stopped by the customs officer who will ask you to justify the price declared because the seller and the buyer are related. The same fate awaits multinational companies which get goods manufactured by their subsidiary companies in India.

The Export Valuation Rules notified by the Government on September 13, 2007, stipulate that the value of export goods shall be the transaction value, but if the buyer and seller are related then the exporter must prove that the relationship did not influence the price.

Transaction value

In the rules there are only three valuation methods for fixing value of exports. The first is the transaction value method. Under this method, the value of export goods shall be the transaction value as defined in Section 14 of the Customs Act. In short, where the transaction is between unrelated parties, the invoice price on ‘free on board’ basis shall be the value for customs purposes.

However the customs officer has been empowered to reject the export price on the ground of relationship between the exporter in India and the buyer abroad. The situations where the two parties to an export transaction are deemed to be related are given in sub-rule (2) of Rule 2.

Anyone familiar with export trade knows that Indians settled abroad are big buyers of all kinds of Indian produce — be it garments, food articles, spices, and even engineering goods.

Also, many of these Indian buyers abroad utilise the services of their family members in India to source these goods. Now, the exporters from India will have to prove that the relationship did not influence the price.

In fact the types of relationships mentioned in the rules are plenty in this era of outsourcing and off-shoring, where a company abroad may get certain goods manufactured by their subsidiary in India. Any transaction between two members of a group of companies or between companies having common stock holding or common directors will clearly be a ‘related-party transaction’ and it will be the responsibility of the exporter to prove that the relationship did not influence the price.

Assuming that the exporter either failed to discharge his responsibility or the material produced by him did not convince the officer, the next step would be that the officer rejects the declared value and proceeds to re-fix the value on the basis of the subsequent methods.

By comparison

The next method to fix the value is determination of export value by comparison. Under this rule the officer can determine the export value based on the transaction value of goods of like kind and quality exported at or about the same time to other buyers in the same destination country and, in the absence of such buyers in the same country, on the basis of the prices of buyers in another country. Of course, the officer has to make adjustments for the differences of the dates of exportation, commercial levels, and quantity levels and for differences in composition, quality, design, etc.

The underlying assumption in the rule that any export consignment can be compared to another is a very questionable one. Even comparable things like T-shirts, for instance, may fetch vastly different prices. Some buyers are willing to pay a higher price because the exporter in India had to invest heavily for complying with the environmental or labour standards of the destination country.

If Ford India exports engines to Ford South Africa, the export value may get rejected because of relationship and the officer may have to fix the price on the basis of some other engines exported (assuming that they are being exported) to the same country or to some other country.

The assumption that export values that similar goods fetch can be compared betrays the utter lack of understanding of the dynamics of export prices.

Computed value

If the comparison method is found inapplicable, the officer can resort to the next method called the computed value method. Here the officer can determine the value on the basis of the cost of production, manufacture or processing of the goods, including the charges for the design or brand and also an amount towards profit. After arriving at the cost of production, the officer has to add the charges for the design or brand.

Valuation of a brand is admittedly a complex task and the only option for the officer would be to engage an outside specialist for it. The charges have to be fixed not only for the brand but also for the design. The rule appears to use the terms as if they are synonymous which they are not.

Residual approach

The final valuation method under the rules is the residual method. It permits determination of the value using reasonable means consistent with the principles and general provisions of these rules. It has been made clear that this rule is subject to the provisions of rule 3, that is, the transaction value method.

Further, the rule insists that the residuary method of valuation shall be consistent with the principles and general provisions of all the rules.

Thus the principle of comparison and of computation can also be used under this method. However, the obstacles to using those methods mentioned above still remain and jumbling all the methods into a hotchpotch is unlikely to yield any better results than the use of the methods separately.

There is also one more proviso that the local market price may not be the only basis for determining the value of the export goods under this rule. This indirectly gives the green signal to use the local market price to determine the export price. This again betrays a lack of appreciation of the pricing policies of the companies, which are intricate and complex. The market’s ability to pay is a major consideration.

Besides, companies adjust their designs and components differently for different markets even if the model name and number are the same. At times certain models are sold only in certain markets. Same models are sold in different markets under different brands. Therefore, local prices may not a reliable guide to arrive at the export value.

Finally Rule 8 empowers the officer to reject the declared value if he has the reason to doubt the truth and accuracy of the declared value and to call for further information or documents justifying the declared value. Of course this process is subject to the observance of the principles of natural justice.

Variation in prices

It has been explained in the rules that the reasons for raising doubts by the officer may include ‘significant’ variation between the declared price of the goods under export and that of other goods of like kind and quality in comparable quantity and comparable commercial transaction.

Significantly higher declared value when compared to their local market value and mis-declaration of other parameters such as description, quality and quantity will also be reasons to raise doubts about the truth and accuracy of the declared value.

The rules yield no clue as to what constitutes a significant variation in price or what will be taken as comparable kind and quality in other goods.

This brings us to some of the fundamental issues raised by the promulgation of these rules. What is the ultimate purpose of these rules? Apparently the Government wants to stem the large number of false claims for export incentives by deliberately declaring higher prices than they actually fetch. Instead of subjecting every exporter to the tortuous rigours of these rules, it would be better to review the plethora of export promotion schemes and reduce their number and make them more transparent.

The rules have been drafted on the assumption that exporters are inflating the declared value to claim higher incentives. They overlook the possibility of the value being under declared to keep a part of the proceeds abroad or depress the profit of the Indian subsidiary. In such cases, if the declared values are enhanced, there is no stipulation in these rules that the exporter must repatriate the revised amount. There is also no provision to give the exporter incentives on the revised value.

Administration problems

The administration of these rules is going to present enormous problems to the officers who, in turn, will make the life of the exporters more difficult. The number of documents and the amount of information that the officers may call for from the exporters, especially the related parties, can be mind-boggling.

With that, delay in decision-making is only to be expected and a number of exports may remain provisionally cleared for number of years as in the cases of imports by related parties. One is also struck by the enormous discretion given to the officers in these rules.

In the comparison method the officer is expected to compare the declared value with the value of goods of like ‘kind and quality’. Further he can make several adjustments that appear to him reasonable in matters such as quality, design and composition.

In the computed-value method the officer has been given the discretion to fix the value of the brand and design. Even in the illustrative list of reasons to doubt the declared value, the officer will decide what is the significant variation between the value of the goods under examination and comparable goods. Even assuming that the discretion will be used fairly, the officer will need enormous amount of data and information to come to any conclusion on a matter like the valuation of a brand.

Considering the implications of these rules, the roadblocks they create for the exporters and increased cost of compliance, the exporters are going to face some hard times.

(The author is a former Chief Commissioner of Customs.)

More Stories on : Taxation | Exports & Imports

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

Stories in this Section
Elusive FTA

By indirections find out directions

Rough edges in the new export valuation norms

Understatement in real-estate deals

Rekindle the spirit of khadi

Co-opt vendors into business process

China’s FDI policy — Changing gears for national interests

On how ambiguity robs the SEZ-sop of its sizzle

Sugar facts