India: Customs Duty And Tax Planning In India: Advance Authority Ruling

Last Updated: 8 September 2008
Article by Ashok Sagar

Tax has fundamental implication on the viability and planning of most projects. A conclusive determination of tax liability is therefore highly desirable. With this in view, the Indian Government has created a quasi-judicial body called the 'Authority for Advance Ruling' (Authority). Under this statutory scheme, (created under the Indian Customs Act, 1962) any foreign investor can get a fix on his customs duty in respect of imports or exports. A Ruling by the Authority is binding on both the customs authorities, as well as the applicant. The Authority comprises of a three member panel, headed by a former Judge of the Supreme Court of India.

This article sets forth the contours of the Advance Ruling mechanism in India.

Issues on which Advance Ruling may be sought

Advance ruling may be sought in respect of five issues, namely:-

(i) Classification of goods under the Customs Tariff Act, 1975;

Each type of goods being imported may carry a different rate of duty depending on its classification under the Customs Tariff Act. Therefore, a correct classification of the goods is important for determining the rate of duty applicable.

(ii) The applicability of notifications issued under section 25 (1) of the Customs Act;

The rate of duty applicable on goods is specified under the Customs Tariff Act. However, the Central Government has the power to exempt goods either wholly or partially from customs duty. This is by way of Notifications issued by the Central Government under Section 25 of the Customs Act.

(iii) The principles that are to be adopted for purposes of determination of the value of the goods;

Valuation is an important aspect as the quantum of duty may depend upon the same (where duties are on ad valorem basis). The normal basis for valuation is the "transaction value" and price is the sole consideration for the sale. For purposes of determination of the value of goods the Central government has framed the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. These provide, inter alia, the circumstances in which the transaction value is accepted. The Rules further provide for the methodology for determining the value of goods in case the transaction value is not available or circumstances exist in which the transaction value may not be accepted. Similarly Rules have also been framed for the determination of value of goods meant for exports.

(iv) The applicability of notifications issued in respect of duties under the Customs Act, the Customs Tariff Act and any duty chargeable under any other law for the time being in force in the same manner as duty of customs is leviable under the Customs Act;

In addition to customs duty certain additional duties of customs such as special duties of customs may also be imposed on goods being imported into India. The Central Government also has the power to grant exemptions in such cases either from the whole of such duties or a part of such duties, absolutely or subject to conditions. Further, anti-dumping duty may be imposed on import of certain goods. It would be open to an applicant to make an application to determine if such anti dumping duty would be imposable on goods imported by it.

(v) The determination of origin of the goods in terms of Rules notified under the Customs Tariff Act, 1975;

India has entered into various trade agreements. Under these, reduced rates of customs duties are leviable on goods originating from such countries. These Rules provide the manner in which the origin of goods is to be determined.

Persons that may apply for Advance Ruling

Only the following categories of persons may apply for an advance ruling:-

(i) a non-resident setting up a joint venture in India in collaboration either with another non-resident or a resident;

(ii) a resident of India setting up a joint-venture in collaboration with a non-resident;

(iii) a wholly-owned subsidiary incorporated in India of which the holding company is a foreign company;

(iv) a resident falling within any such class or category of persons as the Central government may by notification specify. At present the Central Government has issued one Notification which covers a person proposing to import any goods from the Republic of Singapore under the Comprehensive Economic Cooperation Agreement between India and Singapore. The advance ruling may be sought in respect of the determination of the origin of the goods.

The terms "non-resident", "Indian company" and "foreign company" have not been defined under the Customs Act and it is provided that they carry the same meanings as are given to them under the Indian Income Tax Act, 1961.

Stage at which an application may be made

An applicant seeking an advance ruling may make an application to the Authority only in relation to an "activity" proposed to be undertaken by it. "Activity" has been defined to mean "import or export". The Authority does not allow an application if the activity of import or export is already underway.

Procedure followed by the Authority

On the filing of an application, a copy thereof is forwarded to the concerned Commissioner of Customs for his comments.

There are two stages of determination.

First Stage

In the first instance the Authority has to determine whether the application is maintainable.

An application for advance ruling is liable to be rejected outright in the following circumstances (proviso to section 28-I [2] of the Customs Act):-

Where the issue/question raised in the application is

(i) already pending in the applicants case before any officer of Customs, the Customs Excise and Service Tax Appellate Tribunal or any court;

(ii) the same in a matter already decided by the Customs Excise and Service Tax Appellate Tribunal or any court.

However, it is mandatory for the Authority to give the applicant an opportunity of being heard before rejecting the same and in case an application is being rejected, the Authority has to give reasons for such rejection.

Second Stage

In this stage the Authority determines the questions on merits. The Applicant must request for a hearing if it so wishes. It is stipulated that the Authority should pronounce its Ruling in writing within 90 days of the receipt of the application. An applicant has the right to withdraw its application within 30 days from the date of filing of the same (section 28H [4] of the Customs Act). If, however, the applicant desires to withdraw its application any later point of time, it may do so only with the permission of the Authority.

Binding Nature of an Advance Ruling Order

The advance Ruling made by the Authority is binding on the applicant as also on the Customs departments and all authorities subordinate to him. It is binding in respect of the questions that have been raised in the application (section 28J [1] of the Customs Act), unless there is a change in law or in the facts on the basis of which the advance ruling had been pronounced (section 28J [2] of the Customs Act).

The Authority has the power to declare an advance ruling made by it to be void ab initio if it finds that such Ruling has been obtained by the applicant by fraud or misrepresentation (section 28K [1] of the Customs Act).

Summing up

Advance Rulings allow traders and investors to make business decisions in a stable and predictable environment. Typical disputes with regard to tariff headings, valuation and original are avoided. Advance rulings thus do away with time-consuming complaints and appeals to the various appellate forum. Advance Ruling is thus a very useful tool in aid of investments in a foreign venture.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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