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AEO Scheme - Para 3.2 ('Legal Compliance') - The Bone of Contention


JULY 11, 2018

By Raghav Khurana

THE scheme for Authorized Economic Operator ('AEO') was revamped in 2016 vide Circular No. 33/2016-Cus., dated 22.07.2016 ('AEO Circular'). Vide the AEO Circular, the Central Board of Indirect Tax and Customs ('CBIC') (formerly CBEC) had merged the erstwhile Accredited Client Programme (ACP) and AEO scheme into a three-tier AEO Programme. The objective of the AEO Programme (refer para 1.1.4 of the AEO Circular) is to provide the business with an internationally recognized quality mark which will indicate their secure role in the international supply chain and that their Customs procedures are efficient and complaint.

The AEO Scheme envisages a high degree of compliance, strong internal control system and willingness to comply with the laws on part of an applicant. The AEO scheme requires an applicant to fulfill the various criteria in respect of security, general compliance, financial solvency, etc. as listed down under Section (Para) 3 of the AEO Circular.

Section 3 of the AEO Circular lays down the eligibility conditions and criteria for grant of AEO Certificate for an applicant. Amongst the numerous compliances such as transport records/ financial solvency/ safety and security/ procedural security, etc. Para 3.2 of the AEO Circular importantly prescribes certain level of legal compliance on part of the applicant as the qualifying criteria. The meaning and the scope of the said legal compliance requirement has become a bone of contention between the Department and numerous Applicants.

At present, various applicants have, despite successful compliance with the stringent requirements and conditions under the AEO Circular, been issued with rejection letter in terms of Para 3.2 of the AEO Circular. In this light, it is important to delve into the true purport of the said Para in order to test the compliance level of a particular applicant and to determine whether the case of an Applicant is hit by bar created in the said para.

True Purport of Para 3.2 of the AEO Circular

On a bare perusal of Para 3.2.1 of the AEO Circular, it can be said that Para 3.2.1 of the AEO Circular is limited only to cases where: -

(a) A Show Cause Notice has been issued to the Applicant; and

(b) The Show Cause Notice must have been issued in the last three Financial Years; and

(c) The subject matter of the dispute in the SCN against the Applicant must involve either of the following elements: -

(i) Fraud

(ii) Forgery

(iii) Outright Smuggling

(iv) Clandestine removal of excisable goods

(v) Service Tax collected from customers but not deposited to the government.

From the above, it follows that Para 3.2.1 will act as a bar only in cases wherein a SCN has been issued alleging any of the aforesaid 5 elements. It follows that Para 3.2.1 does not intend to exclude an applicant from the programme merely because a SCN has been issued against him under the provisions of the Customs Act, Central Excise Act or the Finance Act (Service Tax).

Thus, the intent is to exclude only those cases wherein a SCN has been issued and the said cases are on a higher pedestal in the table of offences. Therefore, in each case, the allegation against the applicant under a SCN issued to him is to be looked into and the AEO Circular intends to cover situations wherein a grave offence is alleged against the Applicant and not all cases where a SCN is issued under Section 28 (1) or Section 28 (4) of the Customs Act, Section 11A of the Central Excise Act or Section 73 of the Finance Act. If the intention of the Department was to include any cases/ SCN falling under the aforesaid sections, it would have indicated the same under Para 3.2.1 of the AEO Circular.

Further, Para 3.2.2 of the AEO Circular provides that there should be no case, wherein prosecution has been launched or is being contemplated against the Applicant or its senior management. As is clear on a reading of Para 3.2.2, only in cases where prosecution is contemplated against the Applicant, the benefit of the AEO scheme will be denied.

Further, on a perusal of Para 3.2.3 of the AEO Circular is limited only to cases where: -

a) A SCN has been issued under the Customs Act,1962

b) The SCN must have been issued in the last three Financial Years

c) Where the ratio of disputed duty demanded, or drawback demanded or sought to be denied in the SCN's (issued to the Applicant) to the total duty paid and drawback claimed during the said period (last three Financial years) is more than 10%, a review would be taken on the nature of the cases.

d) After a review on the nature of the cases, a decision would be taken on issue or continuance of AEO status by AEO Programme Manager.

Para 3.2.3 necessitates a review of the nature of the cases. Although there is no pre-defined scope of the review to be undertaken under the Para 3.2.3, given the beneficial nature of the scheme, it would mean only in extremely grave circumstances, as listed down under Para 3.2.1 of the Circular or likewise, would there be a rejection of the application for T2 Certificate. The circumstances to be looked into would mean cases which have severe revenue implications, suppression of facts from department or even cases involving detriment to the security.

Therefore, it can be said that under Para 3.2, merely the issuance of a SCN in the last 3 Financial years will not disqualify an applicant from availing the benefits of the Scheme.

Way Forward

However, various applicants are facing issues in overcoming the bar of para 3.2 of the AEO Circular. It is seen that while on one hand, the Department is encouraging the Applicants to apply for the AEO scheme, numerous Applicants have faced rejection on account of Para 3.2 of the Scheme. Further, no Circular or Clarification or Instruction has been issued by the Board to elucidate the true purport of Para 3.2 of the AEO Circular.

In the said background, given the nature of the Scheme and the constant push from the Department to enroll more applicants into the AEO programme, it would be beneficial if a suitable clarification is received from the Department's end. I is a settled principle of law that beneficial provisions having their purpose as encouragement or promotion of certain activities should be liberally interpreted as noted in Commissioner of Customs (Prev.), Mumbai Versus M. Ambalal & Co. - 2010-TIOL-111-SC-CUS. However, for the purposes of the AEO Scheme, it can also be stated that provided the numerous and kind of benefits which include relaxation in checks and examinations of consignment under the AEO Scheme, the Department will adopt a higher degree of caution in issuing an AEO Certificate or allowing continuance as an AEO operator under the AEO Scheme.

Therefore, as long as the uncertainty and ambiguity remain around the legal compliance requirements under Para 3.2 of the AEO Circular, it will preclude various applicants from applying for an AEO Certificate under the AEO Programme.

(The author is Senior Associate, Lakshmikumaran and Sridharan Attorneys, New Delhi and the views expressed are strictly personal.)

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)



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