#TaxmannPPT | Session 1 | Customs Post Clearance Audits

EMERGING CUSTOMS CONTROVERSIES AND DISPUTE MITIGATION STRATEGIES

SESSION – I

November 04, 2022

RECENT SPIKE IN INVESTIGATIONS

INVESTIGATIONS: DRI AND CUSTOMS AUTHORITIES

- Continuing wave of investigation caused by sudden fall in revenue in COVID time

- Investigations and Audits to an unprecedented scale

RECENT SPIKE

IN INVESTIGATIONS

- While Customs post clearance Audits are devised as Transaction based, Premise based and Theme based; DRI investigations are intelligence based and are considered robust

- Presently investigations and Audits are revolving around issues of classification and valuation

- It is high time that Importers/Exporters re-align their classification and re-assess valuation positions to either circumvent any possible allegations or to strongly defend the same

CLASSIFICATION – LIVE ISSUES

PARTS VS. PARTS OF GENERAL USE

Imports of general spares are under severe scrutiny based on classification dispute.

Imports are being alleged to be covered by tariff headings meant for ‘parts of machine’ in which these are used instead of ‘parts of general use’

These tariff headings attract higher duty rate.

Industry under scanner: Automobile, Railway locomotives, Renewable energy

MULTIPLE INSTRUCTIONS/CLARIFICATIONS

Implementation of SC decision in Westinghouse Saxby –Circular dt. 05.01.22

Review Petition in the aforesaid matter followed by another Circular Dt. 03.10.22

LIVE ISSUES

CLASSIFICATION QUA EDIBLE PREPARATION

Miscellaneous Edible Preparation covered under Tariff heading 2106 attracts higher duty rate

Revenue is seen challenging classification of nutraceuticals, health supplements under Chapter 30 and bring it under heading 2106

Industry under scanner: Nutraceutical, Food and Beverage

MULTIPLE INSTRUCTIONS/CLARIFICATIONS

Instruction issued by CBIC/DGFT to classify imports with specific heading rather than residual sub-heading of ‘other’

Investigations are initiated to verify its compliance

CLASSIFICATION: KEY CONCERNS

Classification to suit overseas importer or exporter is unwarranted for Indian Tariff purpose

Only valid reference is Customs tariff, WTO’s HSN and Indian Jurisprudence.

It is only logical to ensure uniformity of classification for GST and Customs purpose as they emanate from same source

It becomes imperative that classification is re aligned and periodical checks are maintained to ensure its sanctity

IMPORT BENEFITS

These are associated with HSN specific Export Obligations. A disputed classification leads to disputes qua appropriate fulfilment of Export Obligations

Penal Consequneces are as heavy as five times the duty saved

EXPORT INCENTIVES

These are linked with HSN. any application for such incentives is also being scrutinised for correctness of the ‘classification of export product

If disputed otherwise, past incentives already availed would be jeopardised too

ALLIED LAWS

Applicability of Bureau of Indian standards framework, FSSAI Regulation, SCOMET are more often than not are driven by tariff code

Incorrect tariff classification may potentially invite litigation of non-tax/allies laws

INDIAN TARIFF: CUSTOMS, GST, EXCISE.

INTERNAL CONTROL

For determination of classification Must take into account Tariff Entry, Chapter/Section Notes, Rules of Interpretation, Judicial Precedence

Due regard to functional utility, design, shape, predominant use

EXPERT OPINION

Any position of complex issue ought to be well documented

Wherever necessary expert opinion may be docketed

UNIFORMITY

Classification is a mechanism for standardisation. It thus makes uniformity of paramount importance

TRAINING

Counsel/Sr. Counsel may be counselled for interpretation

Industry expert/Academicians may be considered for technical specifications

Respective teams for different business units, branches, subsidiaries, Vendors, etc. may be sensitised and brought on same page for maintaining uniformity

Classification being a complex and sensitive area the working team must remain aware of relevant developments on regular basis Refresher courses, trainings are effective tools

CLASSIFICATION FRAMEWORK

HSN: BACKGROUND



BACKGROUND

Harmonised System of Nomenclature (‘HSN’) is system of codification of goods introduced in 1988 by the World Customs Organization (‘WCO’).



Primary aim: (i) Uniformity in identification of goods across the globe (ii) to aid in seamless international trade.



HSN comprises: A series of 4-digit headings to identify groupings of related products. These headings are further sub-divided into 5- and 6-digit subheadings for detailed bifurcation inter se



Signatories of WCO are dutybound to adopt the HSN in their domestic tariff structure, with nominal variation.

 India being a signatory has adopted HSN in its Customs Tariff (which is also borrowed by GST laws) as well Excise Tariff.

IMPORTANCE



Primary purpose is systematic classification of goods but it also helps gather data and address various trade issues problems



Creates handle in negotiating Free Trade Agreements, Preferential Trade Agreements, Economic Partnership Agreements, etc.



Used worldwide, with 200+ countries participating

EXPLANATORY NOTES

FORMS INTEGRAL PART OF THE TARIFF

 constitutes official interpretation of the Harmonized System at the International level. It is indispensable and mutually complement to the System.

 Provides commentary on scope of each heading, giving a list of the main products included and excluded

 Provides technical descriptions of the goods concerned (their appearance, properties, method of production and uses) and practical guidance for their identification.

 Where appropriate, Explanatory Notes also clarify the scope of particular subheadings.

HSN AND EXPLANATORY NOTES: RELEVANCE

 Although, since it is the source of Indian Tarif, it possesses very high persuasive value while determining scope of Indian tariff .

 HSN and Explanatory Notes are not integral part of the Statutory Provision per se for interpretation of Indian Tariff system INDIAN TARIFF [CUSTOMS, EXCISE AND GST]

HSN along with the Explanatory Notes to provide a safe guide for interpretation of an entry:

Collector of Central Excise v. Wood Craft Products Ltd. [(1995) 1995 taxmann.com 361/(77) E.L.T. 23]; and

Commissioner v. Hindalco Industries Ltd. [2011 (271) E.L.T. A70 (S.C.)]

INDIAN

EXCISE

GENERAL RULES FOR INTERPRETATION OF TARIFF

• Forms integral part of the tariff; and

• Provides thumb rule for classification and addresses miscellaneous circumstances

1 2 3 4 5

prescribes how to classify products at the 4-digit Heading level, based on the wording of the headings and the relative HS Section and Chapter Notes

prescribes how to classify both incomplete and unassembled goods, and mixtures and combinations of goods

provides classification principles for goods which, prima facie, fall under two or more headings. It has three parts which are applied sequentially until a classification is determined

Goods which cannot be classified in accordance with the above Rules shall be classified under the heading appropriate to the goods to which they are most akin

1 2 3

relates to containers and packaging for goods. Few goods are traded without being packed in some way. This leaves the question of how to account for these packing materials and containers

JUDICIAL PRECEDENCE AND DISCIPLINE

International Precedents

Relevance of Indian judicial precedents

Judicial precedence

 A precedent is a principle or a rule that was declared or laid down in a previous legal case. It is binding on tribunals and courts when a similar case with similar facts arises before it.

 India has a unified judicial system with a single constitution. This means that there is only one Judiciary that is responsible for the interpretation of the Constitution. The Apex Court is the ultimate interpreter.

 The same can be used for reference purpose and highly persuasive;

 However, its not binding in India

Judicial Discipline

Supreme

Court

of India Union Of India And Others vs Kamlakshi Finance Corporation ... [1992] 1992 taxmann.com 16 (SC)

 The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not "acceptable" to the department - in itself an objectionable phrase - and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws

APPLICABILITY OF HSN 2022 TO INDIAN TARIFF

Whether the amendment which is effective from 1-1-2022 is applicable only from the perspective of Customs or does it have a larger impact including compliance in GST?

Tariff Notification of goods issued under section 9(1) of the CGST Act, 2017 i.e. Notification No.1/2017 Central Tax (Rate) dated 28-6-2017, wherein the rates of GST has been notified as specified from Schedule I to VI which duly mentions the Chapter / Heading / Sub heading / Tariff item along with the description of goods.

Here, it is important to refer para (iii) and (iv) of the Explanation of the said notification, which clearly states that for the purpose of this notification: (iii) “Tariff item”, “sub-heading” “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975). (iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification.

Hence, it is appropriate to state that the application of the changes in the HS Codes is not restricted to the Customs but have impact even in the GST Law.

It is significant to note that 351 set of amendments in HS Codes are new &/or differs with the earlier HS Codes as it is relatable only to one entry &/or multiple entries. Besides there are few HS Codes which are directly co related.

CLASSIFICATION : SUMMARY

SENSITIVE SUBJECT THAT HAS DIRECT NEXUS WITH TAX LIABILITY

COMPLEXITIES ARE EVER DYNAMIC AND ATTRACTS HIGEST ATTENTION BY REVENUE AUTHO

POWERS

MULTIPLE LAYERS OF STATUTORPY PROVISIONS

- Description of tariff entry Section/Chapter Note

- General Rules for interpretation of tariff

- Judicial Precedence

WCO’s Harmonised System of Nomenclature

- HSN Explanatory Notes

- Functioal utility, design, shape and predominant usage

VALUATION - LIVE ISSUES

SPECIAL VALUATION BRANCH (SVB):

SVB Proceedings on the rise. Average loading of 15% - 20% on the assessable value

Addition of suppliers, non reporting of price escalation, etc. being treated as default

VALUATION: ROYALTY PAYMENT TO OVERSEAS ENTITY

Dual incidence of duty payment as duty being demanded at the hands of Manufacturer as well as Job Worker

Notices issued to more than 200 vendors of key OEM’s

LIVE ISSUES

VALUATION

SPECIAL

VALUATION FRAMEWORK

VALUATION: KEY CONCERNS

TRANSACTION

EXPORT BENEFIT – LIVE ISSUES

SERVICES EXPORTS FROM INDIA SCHEME:

SEIS Scrips claimed by logistics service providers against receipt of convertible foreign exchange. These scrips, being transferable instrument were sold in open market

Eligibility to claim SEIS itself came under intense litigation. Utilization of these scrips was seen as violation of the law

Transferee/Buyer of the Scrip were made party to the dispute despite any involvement in availment of alleged inadmissible Scrip. Penal consequences followed.

DUTY DRAWBACK:

Export of unlocked and activated phones are being denied the benefit of duty drawback

Similar benefits are already in-place in overseas jurisdictions

Indian exporters are loosing the competitive advantage and business

LIVE ISSUES

NON-WITHDRAWAL OF BOND

SCRIP UTILISATION AND CESS:

Use of scrip restricted to BCD, CVD, SAD. Cess Could not be discharged.

The Portal however did not allow to pay the cess separately and debited scrip automatically

Old EPCG/DEPB licenses (as old as mid 90’s) where bond executed by the license holder were not withdrawn post obtaining EODC are being called upon now to prove fulfilment of EO by issuance of SCN

Any minor discrepancy/unavailability of documentation is being treated as violation of the statute and demands are affirmed that follows payment of mandatory pre-deposit to avail appellate remedy

TAKE AWAY

TAKE AWAY

- Customs matter tend to be highly complex and sensitive that can potentially leave impact not only on tax liability but on supply chain, production and so do the revenue

- Adherence to Customs law calls for expert attention. Taxpayers ought to either develop an inhouse team dedicated to Customs matters or seek expert opinion

- It would be worthwhile to regularly review tax position for its reaffirmation with constantly changing statutory horizon

- Continuous updation on internal controls, SOP, trainings, internal Audit ought to be given paramount importance and be followed religiously