ISLAMABAD: The Federal Board of Revenue (FBR) has reportedly increased assessable customs value of MG vehicles by 14.5 percent from $ 11,632 per unit to $ 13,314 per unit by using ‘Fall Back Method’ as provided under section 25(9) of the Customs Act, 1969.

Official documents available with Business Recorder reveal that pursuant to the directives of FBR conveyed through Model Customs Collectorate of Appraisement & Facilitation (East), Karachi’s letter of February 17, 2021 an audit of the importer M/s JW SEZ (Private) Limited, Lahore was initiated regarding phenomenon of underinvoicing in import of MG HS vehicles imported by M/s JW SEZ (Private) Limited and supplied by M/s SAIC Motor International Co., Ltd., China in the backdrop of alleged invoicing scam.

The major aspect to be audited is under-invoicing, purportedly made directly by the importer M/s JW SEZ (Private) Limited or indirectly in association with the supplier. In order to ascertain the factual position/actual transactional value, following documents/information were required from the supplier, ie, M/s SAIC Motor International Co, Ltd. China: (i) per unit sale price of the vehicle made by the supplier to the Pakistan importer; (ii) reason of variation in selling price of vehicle MG HS invoiced at $ 14,000/- per unit vide BL No. OOLU4107855160 of April 17, 2020 and subsequent vehicle MG HS invoiced at $ 11,632/- per unit vide BL No. COAU7226707400 of October 16, 2020; (iii) country-wise unit price of vehicle MG HS/MG ZS/MG ZS EV sold to countries like UAE, KSA, Australia, Bahrain, Egypt, India etc; (iv) any special discount offered to the Pakistani importer; and (v) copy of verified/authenticated contract agreement (Technical Transfer/Assistance) between M/s JW SEZ (Private) Limited and Chinese supplier M/s SAIC Motor International Co, China to ascertain actual transactional value/royalty licencing fee/franchise fee, etc, involved if any.

However, M/s JW SEZ (Private) Limited requested this Directorate to provide time due to voluminous record but their response is still awaited despite issuance of three notices under section 26-A of the Customs Act, 1969 and ample opportunities of time.

Similarly, import documents including commercial invoices, Bills of Lading relevant to eight Goods Declaration (GD), manufacturer suggested retail price specification sheet relating to "MG HS/MG ZS & MG ZS EV vehicles" under H.S. Code 8703.2260, supplied by Ms SAIC Motor International Co. China and presented to Pakistan Customs by M/s JW SEZ (Private) Ltd., were also forwarded to the FBR on February 19, 2021 for approaching Pakistan High Commission and Customs Administration China to get their genuineness of import documents verified on the basis of export documents available with Customs Administration China and also to collect all relevant documents/information from the supplier. It was further requested that a copy of China export invoice may also be obtained from the administration. Accordingly, Board, in its office memorandum of March 4, 2021 approached Ministry of Commerce to do the needful.

During the audit process, Directorate Post Clearance South also wrote a letter to Engineering Development Board, Islamabad on March 16, 2021 and requisitioned following data/information: (i) copy of approved business plan in respect of Green Field status granted under Automotive Development Policy (2016-2021), duly approved by BoI and assessed by EDB, Islamabad in favour of M/s JW SEZ (Private) Limited or any other company owned by the Directors of M/s JW SEZ (Private Limited: (ii) copy of verified/authenticated contract agreement (Technical Transfer/Assistance between M/s JW SEZ (Private Limited and Chinese supplier M/s. SAIC Motor International Co. to ascertain actual transactional value royalty/licencing fee franchise fee, etc, involved if any; (iii) copy of contract of joint venture signed between Chinese state-owned company, M/s SAIC Motor Corporation, China and Pakistani importer M/s JW SEZ (Private) Limited, Lahore or any other company owned by the Directors of M/s JW SEZ (Private) Limited, Lahore; and (iv) any other information pertaining to the said imports of vehicles.

In response to the letter, Engineering Development Board has provided required information on March 30, 2021.

FBR argues that in order to ascertain correctness of the declaration made by the importer at import stage, Directorate of Post Clearance Audit, relevant Collectorates (Appraisement & Facilitation East, West & PMBQ) be requested to provide the FOB value of the vehicles under audit, and certified from the actual Chinese manufacturer, M/s SAIC Motor Corporation Limited, Shanghai, China or their authorised local agents as envisaged under CGO 14/2005.

However, on the basis of audit process, initial findings in respect of unit price of imported MG HS/MG ZS/MG ZS EV as found available on website were also conveyed indicating minimum unit price to the tune of $ 22,000 inclusive of VAT MG Motors, UAE.

Furthermore, Directorate of Post Clearance Audit directly approached M/s SAIC Motor Corporation Limited, Shanghai, China and M/s SAIC Motor Corporation Limited, Shanghai.

In the meanwhile, M/s JW SEZ (Pvt) Limited filed Constitutional Petition No. D-1556 of 2021 in Sindh High Court at Karachi and made Directorate of Post Clearance Audit as respondent, praying that its notice issued on February 19, 2021 for initiation of audit proceedings be set aside; besides not to take any coercive action against the petitioner in pursuance of audit proceedings initiated vide impugned notice of February 19, 2021, including but not limited to blocking of NTN/User ID etc. till the pendency of instant petition.

In the constitutional petition of M/s JW SEZ Sindh High Court did not stop the audit process initiated against the petitioner.

The sources said, analysis of documents presented to Pakistan Customs at the time of imports by M/s JW SEZ (Pvt) Limited revealed that M/s JW SEZ (Pvt) Limited imported a consignment KAPE-HC-130493 on May 18, 2020. Subsequently, the importer filed seven GDs - from 7 November 2020 to 8 February 2021 - and imported 687 vehicles.

The sources maintained that prior to the filing of import declaration of 686 vehicles, the company had already entered into the agreement with SAIC Motor International Co., Ltd., on September 09, 2020 and the same fact was suppressed from the Customs authorities while importing vehicles.

The Directorate of Post Clearance Audit maintained that the importer admitted in the High Court that the consignments under question were imported under a Tripartite/Joint Venture Agreement wherein importing company is holding 49% shares while the manufacturer is holding 51% shares which clearly reflects transactions to be "related party transactions", taking them out of the ambit of Section 25(1) of the Customs Act, 1969.

The same fact was also confirmed in para 15.11 of Joint Venture Agreement SMIL-JW-001 between SAIC Motor International Co., Ltd. and JW SEZ (Private), Limited by EDB in its letter of March 30, 2021.

The sources said section 79 of the Customs Act, 1969 requires the importer to file Home Consumption Goods Declaration duly supported with commercial invoice/packing list, etc, however, during audit process, it surfaced out that no commercial invoice packing list was found accompanied by the vehicles inside the container.

The EDB, in its letter of March 1, 2021 conveyed that CBUs imports in question were not imported under the ADP 2016-21 at concessional custom duty for test marketing purposes etc., meaning thereby that the imported vehicles under question are commercial in nature.

M/s JW SEZ (Pvt) Limited has been awarded Greenfield status whereas investment agreement that includes approved business plan has yet to be signed. On signing of the Investment Agreement the importing company will be entitled to import 100 vehicles of each variant in CBU at 50% of the prevailing duty/taxes for test marketing and concessional rate of custom duty at 10% on non-localized parts and 25% percent on localized parts for a period of five years for cars and LCVs.

"Prima facie, the importer is suppressing C&F value of imported vehicles in CBU condition attracting duties/taxes (@ 146% cumulative approx. at import stage by way of under-invoicing/under-valuation to enter into the market," Directorate of Post Clearance Audit said, adding that consequently, the assessment of imported vehicles in CBU condition at current suppressed values will have a direct negative impact on collection of duties/taxes at the stage when they import the same vehicles in CKD condition at the concessional/reduced rate of duty/taxes @ 46% cumulative approx. on the basis of Greenfield status under the ADP 2016-21.

The importer imported 747 vehicles vide nine number of Goods Declarations filed during the period November, 2020 to February, 2021. Earlier, the importer, Ms JW SEZ (Pvt) Limited, imported first consignment of MG vehicles (KAPW-HC-130493 on May 18, 2020 declaring motor vehicle model MG HS at unit price $ 14,000, model MG ZS at unit price $ 9,000 and MG ZS EV at unit price $22,000. However, subsequently, the importer M/s JW SEZ (Pvt.) Limited, imported eight Goods Declaration declaring motor vehicle model MG HS at unit price $ 11,632 and model MG ZS at unit price $ 9,245 and the same were assessed on declared values by the clearance Collectorates.

The Directorate of Post Clearance Audit states that the declared customs/transaction value by the importer M/s JW SEZ (Pvt) Limited cannot be accepted as actual transaction value in terms of Section 25 (1) (d) of Customs Act, 1969, as the buyer M/s JW SEZ (Pvt) Limited and seller M/s SAIC International Co, are related parties, hence, their declared unit prices are found influenced, while the importer M/s JW SEZ (Pvt) Limited also failed to substantiate the declared values under the provisions of Section 25 of Customs Act, 1969.

In this regard, Directorate of Post Clearance Audit further observed that identical/similar goods value method provided in Sub-Sections (5) & (6) of Section 25 has been examined for applicability to determine Customs value of subject vehicles, and the data provided references the same importer, and it is found that the same cannot be solely relied upon due to the absence of absolute demonstrable evidence of qualities, and quantities of commercial level to unrelated buyers. Information available was, hence, found inappropriate.

In line with the statutory sequential order of Section 25, the office resorted to prevailing market prices using Deductive Value Method under Sub-Section (7) of the Section 25 of the Customs Act, 1969, however, it was found that the determination of Customs value could not be made the basis solely upon this method either.

Furthermore, valuation method provided vide Section 25 (8) of Customs Act 1969, could not be relied upon as well as the conversion cost from constituent materials and allied expenses, at country of export were not available.

A report submitted to National Assembly Standing Committee on Finance also notes that finally, import data under section 25 (5) & (6), prevailing market prices of the vehicles, information and international prices from the official websites (table below) of MG Middle East/Gulf, MG Nepal, MG UK and MG Australia have been examined thoroughly. All the information so gathered was analyzed for determination of Customs Value of the vehicles. Consequently, the Fall Back Method as provided under section 25(9) of the Customs Act, 1969 was considered the most appropriate method to arrive at assessable customs values of imported MG vehicles.

According to the Directorate, the company had to pay Rs 3.283 billion as total duties and taxes against 747 vehicles but it paid Rs 2.024 billion which implies total duty and taxes recoverable are Rs 1.240 billion.

Informed sources told this scribe that the company is now paying difference of about $ 2000 from declared value of $ 11,632 and provisional value of $ 13,314 per unit under section 81 of the Customs Act.

Copyright Business Recorder, 2021