The Regulatory implications of India’s membership of the Wassenaar Arrangement

 

 

 

 

India has joined the Wassenaar Arrangement (WA) on 8 December 2017 becoming the Arrangement’s 42nd Participating State. The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, commonly known as the Wassenaar Arrangement, is a multilateral export control regime (MECR). The Wassenaar Arrangement was established to contribute to regional and international security and stability by promoting transparency and greater responsibility in transfers of conventional arms and dual-use goods and technologies. Participating states seek, through their national policies, to ensure that transfers of these items do not contribute to the development or enhancement of military capabilities which undermine these goals, and are not diverted to support such capabilities. It was established on 12 July 1996, in Wassenaar (the Netherlands).

India is also on the verge of joining The Australia group. The Australia Group is an informal arrangement which aims to allow exporting or trans-shipping countries to minimise the risk of assisting chemical and biological weapon (CBW) proliferation. The Group meets annually to discuss ways of increasing the effectiveness of participating countries’ national export licensing measures to prevent would-be proliferators from obtaining materials for CBW programs. Participants in the Australia Group do not undertake any legally binding obligations: the effectiveness of their cooperation depends solely on a shared commitment to CBW non-proliferation goals and the strength of their respective national measures. Key considerations in the formulation of participants’ export licensing measures are: they should be effective in impeding the production of chemical and biological weapons; they should be practical, and reasonably easy to implement, and they should not impede the normal trade of materials and equipment used for legitimate purposes. All states participating in the Australia Group are parties to the Chemical Weapons Convention (CWC) and the Biological Weapons Convention (BWC).

 

Joining of these regimes, besides having conventional strategic implications, have significant industrial/commercial spinoff as well. For instance, as a consequence of joining these multilateral institutions, in the near future, trade between the U.S. and India is likely to be simplified. After the US Commerce Department notifies India’s membership in these organizations in the Federal Register, the changes will likely reduce the exports for which a specific authorization will be required, and will increase the availability of certain license exceptions under the EAR, including Additional Permissive Re-exports (“APR”). However, to reap such benefits, India’s end of the bargain also has to be maintained.

 

The main policy instrument of the government to put into effect the obligations mandatory or otherwise as a consequence of entering the Australia Group or the Wassenaar agreement is the SCOMET list. Special Chemicals, Organism, Materials, Equipment and Technologies (SCOMET)” items are dual-use items having potential for both civilian and Weapons of Mass Destruction (WMD) applications. Export of such items is either restricted, requiring an authorisation for their export, or is prohibited. The export policy relating to SCOMET items is given in Paragraph 2.73 of Hand Book of Procedures of FTP 2015-20 and the list of such items is given in Appendix 3 to Schedule 2 of ITC (HS) Classification of Export and Import Items. There are eight broad categories of such items viz.,

  1. Nuclear materials, nuclear-related other materials, equipment and technology
  2. Toxic chemical agents and other chemicals
  3. Micro-organisms, Toxins
  4. Materials, Materials Processing Equipment, and related Technologies
  5. Nuclear-related other equipment and technology, not controlled under Category o
  6. Aerospace systems, equipment, including production and test equipment, and related technology
  7. Reserved
  8. Electronics, computers, and information technology including information security

 

All applications for export of SCOMET items as well as applications for onsite verification are considered on merits by an Inter-Ministerial Working Group (IMWG) in the DGFT under the Chairmanship of Additional Director General of Foreign Trade as per guidelines and criteria laid down in Para 2.74 of the Hand Book of Procedures. Members include, inter-alia, MEA, Cabinet Secretariat, DRDO, ISRO, DAE and Department of Chemicals & Petro-Chemicals. No export permission is required for supply of SCOMET items from DTA to SEZ. However, export permission is required if the SCOMET items are to be physically exported outside the country from SEZ. The SCOMET list which up to now was harmonised with the lists of Nuclear Suppliers Group (NSG) and Missile Technology Control Regime (MTCR) leading to India joining the MTCR in June 2016, has been further amended to fulfil the obligations of the Wassenaar agreement and the Australia group protocol, vide notification no: 29/2015-2020 dt:21/09/2017 further amending notification No.5/2015-20 dated:24/04/2017 and notification No.13/2015-20 dated:28/06/2017 .

 

Further, the following public notice has also been issued; Public Notice No. 2 7/2015-20 dated: 21/09/2017 which essentially amends Paragraph 2.72 (b) of the Handbook of Procedures of the Foreign Trade Policy (FTP) 2015-20.

The revised Paragraph 2.72 (b) of the HBP of FTP 2015-20 reads as under:-

(b) If the exporter has been notified in writing by DGFT or he knows or has reason to believe that an item not covered in the SCOMET list has a potential risk of use in or diversion to weapons of mass destruction (WMD) or in missile system or military use (including by terrorists and non-state actors), he shall apply for a SCOMET license. The export of such an item may be denied or permitted as per the procedure provided for SCOMET items in Paragraph 2.73.Note: “Military use” shall mean incorporation into items listed in SCOMET Categories 5D or 6 or for the use, development, or production of military items listed in these categories.

 

Implementing such complex provisions is hugely challenging for the Customs authority, which is the operational arm to implement the SCOMET guidelines, as primarily the customs resources are geared towards import monitoring. It is very difficult to correlate SCOMET items with HSN, this coupled with the fact of use of front companies, circumvention through third countries, exporting items just below the threshold requirements makes the task of implementation hugely challenging. The answer lies in enhanced capabilities required at the institutional level acquired through Inter Agency process of sharing information about potential export control violation, engaging with major multilateral export control regimes to understand emerging trends in proliferation issues. Effective implementation would also require significant outreach efforts.

 

 

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Scheme of Deferred payment of Customs Duty Introduced by India

 

Government of India through Circular No. 52/2016-Cus(F.No.450/81/2016-Cus IV) dated the 15th November, 2016 has drawn attention to Customs Notification No. 134/2016-Custorns (N.T) & 135/2016-Custorns (N.T.) dated 2nd November, 2016 permitting Importers certified under Authorized Economic Operator Programme as AEO (Tier-Two) and AEO (Tier-Three) to make deferred payment of duty of Customs. Explaining therein that :

Every importer certified as AEO-T2/AEO-T3 shall obtain ICEGATE Login which is essential to avail benefits envisaged in the AEO Programme. Further, in order to avail the facility of deferred payment, every AEO-T2/AEO-T3 is advised to nominate a nodal person borne on their establishment who would be responsible for authenticating all the customs related transactions on behalf of the AEO. Since the option of deferred payment has been extended only to AEO (Tier-Two) and AEO (Tier-Three), it is important for the AEO to exercise due caution in nominating the AEO nodal person to prevent misuse of facility of deferred payment. The contact details of AEO nodal person shall also be provided in ICEGATE login to ensure that the information reaches in time at their registered mail for authentication.

As per rule 4 of the Deferred Payment of Import Duty Rules, an eligible importer who intends to avail the benefit of deferred payment shall intimate to the Principal Commissioner of Customs or the Commissioner of Customs, as the case may be, having jurisdiction over the port of clearance, his intention to avail the said benefit. An intimation addressed to the AEO Programme Manager with a copy to the Principal Commissioner(s) of Customs or the Commissioner(s) of Customs, as the case may be, having jurisdiction over the port(s) of clearance shall be considered as an intimation by an eligible importer of his intention to avail the said benefit.

The eligible importer who intends to make deferred payment shall indicate the same using flag “D” in the Payment Method column of Bill of Entry filed. In order to ensure that the facility of deferred payment is availed only by the eligible importer, option has been provided in ICEGATE Login for AEO Nodal person to acknowledge such intent and authenticate using One Time Password (OTP) sent to his registered e-mail address. The Nodal person would be able to authenticate multiple Bills of Entry at once. Only on such authentication by the eligible AEO importer, customs clearance would be provided for the consignment under deferred payment of duty Rules. The due dates for deferred payment of import duty by eligible importers are specified in rule 6 of the said Rules. The eligible importer also has an option to select the challans belonging to the deferred period and pay at anytime, even before the due date at their convenience.

 

RELATED PARTY ASSESSMENT PROCEDURE UNDER INDIAN CUSTOMS LAW

RELATED PARTY TRANSACTIONS ARE MONITORED AND FINALIZED BY SPECIAL VALUATION BRANCH (SVB) FORMATIONS OF THE INDIAN CUSTOMS ADMINISTRATION BELOW IS A COMPREHENSIVE NOTE ON THE FUNCTIONING OF SVB: 

 

 

1.Background

                      Special Valuation Branch is an institution which specializes in the investigation and assessment of transactions involving special relationship between the importer and the related foreign supplier or those involving special circumstances surrounding the sale of imported goods having bearing on the valuation of imported goods.  In other words, when the parties are related as per rule 2(2) of Customs Valuation ( Determination of Value of Imported Goods ) Rules, 2007 (valuation rules), then the valuation of the goods as imported from such related foreign supplier is investigated / examined by SVB. CENTRAL BOARD OF EXCISE AND CUSTOMS (CBEC) ALSO REFERRED TO AS BOARD   has superseded its Circular Nos. 1/98-Customs dated 01.01.98 & 11/2001-Customs dated 23.02.2001 and issued detailed and comprehensive revised instructions for SVB proceedings in the following two circulars-:

  • Circular No. 04/2016-Customs dated 09.02.2016 providing for the procedure for renewal of SVB orders and pending SVB inquiries under Circular No. 11/2001-Customs dated 23.02.2001. Thus this circular is relevant only for such cases which are pending for renewal and pending SVB inquiries under Circular No. 11/2001-Customs.
  • Circular No. 05/2016-Customs dated 09.02.2016 providing procedure for SVB investigations of related party transactions and some other issues. This Circular laid down comprehensive procedure for SVB proceedings.

The salient features of above mentioned two latest CBEC circulars are given below:

  1. Cases which may be considered for SVB investigations

At the time of filing bill of entry, all importers are required to file a declaration before the customs as to whether the seller of imported goods is a ‘related person’ in terms of rule 2(2) of CVR, 2007. If the importer declares that the transaction is with a ‘related person’ as defined under rule 2(2) of CVR, 2007, then it becomes necessary to examine whether or not the circumstances surrounding the sale of imported goods indicate that the relationship has influenced the price of imported goods and whether the SVB inquiries are needed or not.

Apart from related party transactions, certain transactions involving possible addition to declared transaction value are also to be considered/ examined to determine whether SVB investigations are required or not. Thus payments sought to be made which are in natures of instances below, are to be examined to find out the need for SVB inquiries-

  • ‘royalty and licence fees’ under rule 10(1)(c) of CVR, 2007 or
  • Where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller—rule 10(1)(d) of CVR, 2007. Or
  • Where any payments are made or contemplated to be made in future by buyer to seller as a condition of sale of imported goods etc—- rule 10(1)(e) of CVR, 2007.

However no reference to SVB is required if the addition to value are sought to be made under rule 10(1)(a) and 10(1)(b) of CVR, 2007.

  1. Procedure for considering reference to SVB

In cases where an importer  is related with foreign supplier in terms of rule 2(2) of CVR, 2007 and/or involving additions to value on account of royalty, licence fees etc, the importer  shall provide information as given in questionnaire as per Annexure A attached to CBEC Circular No. 05/16-Customs dated 09.02.2016 and the information as required under rule 3(3)(b) of CVR,2007 at the time of filing of bill of entry.

Since scrutiny of transaction between related persons or involving addition to value due to royalty etc. can lead to delay in clearance of consignment, the importers falling in these categories, should, as far as possible, file a prior bill of entry under the second proviso to sub-section (3) of section 46 of the Customs Act, 1962 preferable 15 days prior to import along with information as per above said Annexure A and as required under rule 3(3)(b) of CVR, 2007. Such advance filing of bill of entry is desirable to provide sufficient time to Customs for taking a decision on whether the transaction needs to be referred to SVB or not and therefore ensuring timely clearance of the import goods. This advance filing of bill of entry is required only in first instance of import and once a decision is taken regarding referring the matter to SVB or not, there would be no need for such advance bill of entry in each subsequent import.

Upon filing of bill of entry and receipt of information in Annexure A, the proper officer shall carefully examine the circumstances surrounding the sale and shall proceed to determine whether, prima facie, there is requirement of SVB investigation. The proper officer shall complete the examination within three days of filing of bill of entry and submit the matter before the Commissioner. The proper officer shall evaluate the matter on the following parameters as specified in Circular No. 5/16-Customs dated 09.02.2016:

  1. Has the importer declared the price of goods imported as a “transfer price”?
  2. What is the basis on which the price has been settled between buyer and seller?
  • Has the price been settled in a manner consistent with the way the seller settles prices for sale to buyer who are not related to seller?
  1. Does the nature of relationship between the buyer and seller appear to influence the price?
  2. Is the information provided by the importer in terms of rule 3(3)(b) able to demonstrate that the transaction is at arm’s length?
  3. Are there are any payments such as royalty, licence fees etc. actually made or to be made, as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation cast by the seller? Are such payments included in the price actually paid or payable?
  • Whether any parts of proceeds of subsequent re-sale, disposal or use of the imported goods accrues, directly or indirectly, to the seller?
  • What is the nature of other payments, if any, made or to be made by the buyer as a condition of sale of imported goods?
  1. Has the importer entered into an Advance Pricing Agreement with the Income Tax Authorities or obtained an Advance Ruling?
  2. Will the price paid or payable by the importer be settled with the seller at the end of the defined period by means of a debit note / credit note?

While examining the information provided by the importer in terms of rule 3(3)(b), the proper officer shall also refer to the Interpretative Note given in CVR, 2007 which reads as under:

“ A number of factors must be taken into consideration in determining whether one value “closely approximates” to another value. These factors include the nature of imported goods, the nature of industry itself, the season in which the goods are imported and whether the difference in value is commercially significant. Since these factors may vary from case to case, it would be impossible to apply a uniform standard such as fixed percentage, in each case. For example, a small difference in value in a case involving one type of goods could be unacceptable while a large difference in a case involving another type of goods might be acceptable in determining whether the transaction value closely approximates to the “test” values set forth in rule 3(3)(b).”

After examining the matter on above said guidelines, the proper officer shall submit his report to the Commissioner for a decision on whether the case is fit for being referred to the SVB investigations.

The Commissioner shall after due consideration of the preliminary findings, take a considered view whether:

  • The matter be referred to SVB for further investigations and the goods be provisionally assessed to duty in terms of section 18 of the Customs Act, 1962, or
  • The transaction does not merit investigations by SVB and the assessment be finalized on the basis of enquiries to be conducted by the proper officer in terms of rules 4 to 9 of the CVR, 2007 or
  • The transaction be assessed in terms of rule 3 of CVR, 2007.
  1. Procedure for reference to SVB

If the Commissioner directs for SVB investigations, the proper officer shall promptly clear the goods by carrying out provisional assessment in terms of section 18 of the Customs Act, 1962 and ensure that no delays occur in release of goods.

Side by side, the proper officer shall requisition further information from the importer as per Annexure B to Circular No. 05/2016-Customs dated 09.02.2016. The importer should be advised to furnish the documents and duly indexed reply to the questionnaire to the jurisdictional SVB within 60 days.

After carrying out provisional assessment procedure and issue of questionnaire to the importer, the proper officer shall transfer all related records/documents to the jurisdictional SVB within 3 working days of release of goods.

In cases where the import takes place through Customs Houses of Mumbai / Delhi / Chennai / Kolkata / Bangalore, the importer will be free to select the SVB of the Customs House of the import or the Customs House most proximate to the corporate office, as convenient to him. In the earlier Circular No. 11/2001-Customs dated 23.02.2001, jurisdiction of SVBs were based upon only on the principle of the location of corporate office .

  1. Procedure in Special Valuation Branch

After receiving all records from the referring Customs formation, SVB will forthwith assign a case number and update the Central Registry Database (CRD) maintained by DGOV and also inform RMD about the details of importer, his IEC code and details of seller for inserting suitable instructions for assessing officers of all Customs House to ensure provisional assessments at all ports of import during the pendency of SVB investigations.

The documents received from the importer with reference to Annexure B shall be duly acknowledged by SVB. An intimation regarding the same shall be forwarded to RMD and the referring Appraising Group regarding submission of the documents in time so that provisional assessments without security can continue till finalization of investigations.

SVB will go through the documents and information received from the importer in Annexure B and will commence inquiries. The concerned Deputy/Asstt. Commissioner may call for additional information or documents if required. The importer shall be given full opportunity to submit all evidences in support of his declared value.

SVB shall, as far as possible, complete the investigations and issue its findings within two months of receipt of information in Annexure B.

If the investigations could not be completed within two months , then SVB shall seek the approval of jurisdictional Commissioner for extending the period of investigation as deemed necessary.

However if the investigations are not completed within 4 months of receipt of information in Annexure B, then the matter shall be placed before the Chief Commissioner for extension of period as deemed fit.

SVB will complete the investigations quantifying the extent of influence on transaction value due to the relationship or payments towards royalty or licence fees or other payments actually made or to be made as a condition of sale of imported goods. SVB will submit its findings to the Principal Commissioner/Commissioner.

Upon approval by the Principal Commissioner/Commissioner, an Investigation Report (IR) shall be prepared broadly consisting of following details/documents:

  • Relevant facts
  • Submissions of the importer
  • The findings
  • The ground for acceptance or rejection of declared value
  • Extent of influence on declared transaction value
  • All relied up[on documents.

Investigation Report with all relevant documents shall be communicated to the referring Customs station and all other such stations where the goods were cleared on provisional basis as well as to DGOV.

In cases where investigative findings conclude that the declared value confirms to rule 3 of CVR, 2007, SVB shall convey through a communication to the importer regarding the acceptance of declared value.

  1. Finalization of assessments

Upon receipt of Investigation Report from SVB, all provisional assessments will immediately be finalized and there would be no need to issue a speaking order for finalizing provisional assessment cases where declared price is found confirming to rule 3 of CVR, 2007.

In cases where investigative findings are that the declared value has been influenced by the circumstances surrounding the sale, a show cause notice is required to be issued by the proper officer to the importer within 15 days of receipt of investigations report under intimation to SVB.

Where the imports have been made from multiple locations, the jurisdictional Commissioner of SVB, after issue of show cause notices in all such locations, shall make a proposal to the Commissioner (Customs), CBEC recommending appointment of a common adjudicating authority by Board for passing orders for finalization of provisional assessments.

The adjudicating authority will follow the principles of natural justice and pass the orders quantifying the extent of influence on declared price. A copy of the order shall be endorsed to RMD and DGOV for updating the Central Registry Database. Normal appellate channels as given in the appellate provisions under Chapter XV of the Customs Act, 1962 would apply for filing appeals against the orders of adjudicating authority.

Earlier system of adjudication wherein the proper officer of SVB passes appealable order followed by the assessing officer passing another corresponding order finalizing provisional assessments has been replaced. Board has decided that SVB shall not issue an appealable order. Instead, SVB shall convey its findings by way of Investigation Report to the concerned Customs formation. This would do away with multiple streams of appeals for the trade.

  1. Procedure for cases where reference to SVB is not required

                                  In cases where after examination of the transaction, the Commissioner decides that that there is no need for referring the matter to SVB, the concerned Customs formation shall issue a reference number to the importer and RMD to indicate that the transaction has been examined from the point of view of need of SVB inquiries and it has been decided not to refer the same to SVB.

  1. Transactions not to be subjected to SVB proceedings

                                 In order to ensure that only cases with significant revenue implications are taken up for SVB investigations, Board has decided that the following cases shall not be taken up for inquiries by SVBs:

  1. Import of samples and prototypes from related sellers.
  2. Imports from related sellers where duty chargeable (including Additional Duty of Customs etc.) is unconditionally fully exempted or nil.
  • Any transaction where value of imported goods is less than Rs. 1 lakh but cumulatively these transactions do not exceed Rs. 25 lakh in any financial year.
  1. Extra Duty Deposit (EDD)

Board has reviewed the practice of levying “Extra Duty Deposit” (EDD) SVB cases. Earlier importers were required to deposit 1% of declared value as EDD for a period of four months during which he was required to submit information and documents to SVB and if he failed to submit required details, EDD can be increased to 5% till such time he complies. Upon complying with submission of required details, EDD is discontinued and clearance was done on PD bonds till completion of investigations. Board has also taken note of representations from many importers on delays in dispensing with EDD, even though importers provided required information and still the case was not decided within 4 months. In view of position explained above and in order to cut transactional costs and to bring uniformity across Customs Houses, Board in its latest circular no. 5/16 dated 09.02.2016, has decided that no security in the form of EDD shall be obtained from the importer although the assessment in cases referred to SVB, has to be provisional. However in cases where importer fails to provide information and documents required for SVB inquiries within 60 days of requisition of the same, security deposit at the rate of 5% of the declared assessable value shall be imposed by the Commissioner for a period not exceeding the next three months. Simultaneously, the importer shall be granted a further period of 60 days for submission of required details/documents. If the importer fails to provide documents even within the extended period, then the Commissioner Incharge of SVB may take help of other provisions of the Customs Act  in order to obtain documents/information from the importer for conducting investigations. But in no case, the period of security deposit of three months can be extended. Board has also decided that the importer is free to choose  the manner of furnishing security for the purposes of provisional assessment i.e. either cash deposit or bank guarantee. The form of the bond to be initially submitted by the importer is given in Annexure D to the circular and the form of bond with security is given as Annexure E to the said circular.

  1. Changes in circumstances surrounding the sale

In any case where the circumstances of sale or terms and conditions of the agreement between buyer and seller change, or any other payments of the kind referred under rule 10(1)(c), (d) & (e) of the CVR, 2007 becomes payable, importer shall be required to declare the same at the place of import in the prescribed format in Annexure C to Circular No. 05/2016-Customs dated 09.02.2016. All such cases shall be examined by the proper officer and the jurisdictional Commissioner shall refer the matter to the jurisdictional SVB wherever required.

  1. Discontinuation of renewal of SVB orders

                                       In view of the position explained in the above para 10, the requirement of renewal of SVB orders every three years has been done away with immediate effect i.e. from 09.02.2016.

  1. Instructions regarding disposal of pending cases

Board’s Circular No. 04/2016-Customs dated 09.02.2016 provides for the procedure of disposal of pending SVB cases initiated in terms of two superseded circulars nos. 1/98-Cus. Dated 1.1.98 & 11/2001-Cus. Dated 23.02.2001 and those involving renewal of SVB orders. The procedure is outlined below:

Pending SVB renewal cases –  To facilitate quick disposal of cases pending with SVBs for renewal, a system of submission one time declaration in prescribed formats (Annexure 1 & 2 of circular 4/16) has been provided. Importers, in such cases were required to submit this one time declaration to jurisdictional SVB by 31.05.2016. In cases where the importer filed declaration in Annexure 1 indicating no change in the circumstances surrounding the sale, the process of renewal would be treated as dispensed with.  SVB is to inform the concerned Customs station to discontinue EDD and finalize provisional assessments. This communication from SVB to Customs station was required to be sent by 30.06.2016. In cases where a change in circumstances surrounding the sale had been stated in Annexure 2, the SVB inquiries are to be initiated in terms of the procedure laid down in Circular 5/16. If EDD is obtained in such cases, that are to be reviewed and sequence of para 3.2 of circular no. 5/16 is to be followed.

Pending SVB investigations –  All pending SVB investigations (other than renewal cases) where EDD is deposited are to be reviewed as per para 3.2 of circular No. 5/16. In cases where importer provided information and documents to SVB, EDD is discontinued. This exercise was required to be completed by 31.05.16. In cases where EDD enhanced to 5% due to non-submission of information/documents necessary for SVB inquires , the Commissioner is to take recourse to other provisions of the Customs Act for obtaining the necessary documents.

  1. Jurisdiction of DGOV and monitoring of SVB investigations

CBEC circular No. 29/2012 dated 07.12.2012 wherein functional control over SVBs was vested with DGOV, has been withdrawn with effect from 09.02.2016 and functions of all Special Valuation Branches have been put under the supervisory control of the jurisdictional Chief Commissioner/Principal Commissioner/ Commissioner. DGOV shall continue to support SVBs by issuing advisories on legal issues and guidance notes and shall facilitate co-ordination amongst the SVBs. Once the case is registered by SVB, detailed information of the case along with IEC code of the importer is required to be entered in the Central Registry Database (CRD) maintained by DGOV. DGOV shall monitor the progress of the investigation and report to the Board cases involving inordinate delays.