Happy New Year! It is hard to believe it is 2018 already . . . .
We wanted to bring to your attention a recent report out of India involving a customs valuation investigation that could have meaningful consequences for other multinationals who do business there.
The article published in The Indian Express earlier this week details a customs investigation by the Directorate of Revenue Intelligence (“DRI”) (as you may know, DRI is a group within the Central Board of Excise and Customs responsible for investigating and pursuing violations of India’s Customs Act) into the intercompany pricing of a multinational enterprise. DRI alleged that the Indian subsidiary of this multinational undervalued goods purchased/imported from related parties over a 6-year period and, as a result, failed to pay approximately $96 million (Rs. 612.72 crore) in customs duties.
There are several interesting/important take-away’s from this article.
The first is the substantive customs valuation issue involved, as it may be a common one among multinationals. From the article, it appears that the intercompany distribution agreement required the Indian distributor to spend a certain amount in the Indian market advertising and promoting the product (which is not unusual). DRI took the position that that the amounts the distributor spent on advertising and promotion in the local market were for the benefit of the seller and, therefore, were part of the “price actually paid or payable” (i.e., part of the customs value) for the imported goods. What is interesting is DRI’s characterization of normal distributor expenses as being for the benefit of the seller, rather than being for the benefit of the distributor (i.e., the amount the distributor spends advertising promoting the product helps justify the margin the distributor earns on resale of that product). This characterization has a major impact on how the expenses are treated for customs purposes.
The second take-away is to remember that DRI is quite aggressive, particularly when it comes to multinationals, and even more particularly when it comes to intercompany customs valuation issues. We are currently assisting several clients with customs-related disputes with DRI and can attest to this personally.
While the article does not say whether DRI’s conclusions are being further challenged in court (one would expect/hope so), all multinationals that do business in India should take this as a warning and review their intercompany agreements/practices to identify any additional customs risk. If you would like any assistance doing so, please let us know.
We hope this is helpful.