AUGUST 21, 2018

By Devinder Bagia & Raghav Khurana

IN the previous article titled 'AEO Scheme - Para 3.2 ('Legal Compliance') - The Bone of Contention', the difficulties being faced by various applicants seeking to obtain AEO registration in terms of Para 3.2 of the Circular No. 33/2016-Cus., dated 22.07.2016 ('AEO Circular ') were highlighted.

The article had concluded with the following suggestion: -

"Therefore, as long as the uncertainty and ambiguity remains 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."

In a welcome move to encourage various applicants to apply and enroll themselves under the AEO scheme, the Directorate of International Customs under the Central Board of Indirect Taxes & Customs ('Board' or 'CBIC') has recently issued Circular No. 26/2018- Cus., dated 10.08.2018 ('AEO 2018 Circular'). The AEO 2018 Circular seeks to simplify and rationalize processing the AEO-T1 Applications.The Board has taken note of suggestions from various field formations that the compliance requirements for AEO T1 entities was not commensurate with the benefits allowed to AEO T1 entities under the AEO Circular. Accordingly, vide the AEO 2018 Circular, the Board has decided to do away with the voluminous requirements of submitting Annexure A, C, D, E1, E2, E3 & E4 envisaged under the AEO Circular for AEO T1 applicant. The same have been replaced with the requirement of submitting documents and information as set forth in Annexure-1 and Annexure-2 provided under the AEO 2018 Circular. At the same time, the pre-requisites for obtaining AEO T1 certificate have also been reduced.

Anneuxre-1 lists down the General Compliance requirements to be provided by an applicant. In terms of the said Annexure, general information pertaining to the Applicant's business is required to be submitted.It is worthwhile to note S. No. 11 of Annexure-1 which requires the Applicant to provide a process map illustrating the flow of goods. The process Map shall describe the activities and the role of the applicant and its business partners who are involved in the supply chain in any manner.The process map shall be supported with appropriate illustrative documents to be provided such as purchase order and sales order, shipping documents, etc. which shall help in ascertaining the complete trail and the flow of the goods in a supply chain.

Annexure- 2 provide for legal and financial solvency compliance and managing the commercial records. S. No.1 and 2 of the Annexure-2 (pertaining to legal compliance requirements) are now a complete contrast to the erstwhile stringent requirements for AEO T1 under Para 3.2 of the AEO Circular. Under the AEO 2018 Circular, there are no outright disqualifying provisions such as Para 3.2.1, 3.2.2 or Para 3.2.3 of the AEO Circular. Trade was facing a number of issues in satisfying the requirements of said paras as SCNs issued involving interpretational issues but where department authorities had alleged fraud, suppression etc. was keeping them away from the benefits of the AEO scheme. We have also seen many applications being rejected on such grounds and the applicants making representations to the AEO manager to bring home the point that they are not hit by any of the said paras of the AEO Circular. From the changes brought in the AEO 2018 Circular, it can be said that the intention of the board is to encourage applicants to apply notwithstanding the number and the amount involved in the Show Cause Notices issued to them.

Further, vide the AEO 2018 Circular, it has been specified that the process of accreditation of AEO-T1 shall be decentralized to the on Zonal level. The Zonal AEO Programme Manager shall accept or reject the AEO T1 application. Also, the AEO 2018 Circular provides that the applications shall be processed online which the board is in the process of operationalizing. Thus, it can be said that the intention of the Board is now to decentralize and digitize the whole process. This will ensure transparency and faster disposal.

Trade security and facilitation is one of the key determinants for the economic development of a country. Customs, being the border police that controls and administers the international movement of goods, is in a unique position to provide increased security to the global supply chain and to contribute to socio-economic development through revenue collection and trade facilitation. With a view to secure the international supply chain, the World Customs Organization had in June 2005 adopted the SAFE Framework of Standards to secure and facilitate global trade (Refer para 1.1.1 of the AEO Circular ).

In light of various international developments, as well as in view of the focus of the Government of India on "Ease of Doing Business", it was deemed imperative to develop a comprehensive unified trade facilitation programme by incorporating the existing ACP scheme and ongoing AEO programme into a revised AEO programme providing additional facilities to businesses who have demonstrated strong internal control system and willingness to comply with the laws administered by the Central Board of Indirect Taxes and Customs (Refer para 1.1.4 of the AEO Circular ).

Thus, the objective of the AEO Scheme is to facilitate trade and not regulate the same. Though used interchangeably, the words 'facilitate' and 'regulate' have a marked difference. The word 'facilitate' essentially means to 'make (an action or process) easier' whereas the word 'regulate' means 'to control something, especially by making it work in a particular way'. Therefore, while the former is enabling in nature, the latter is restrictive in nature.

The Hon'ble Bench of the High Court of Gujarat at Ahmedabad in case of Titanic Restaurant Through Dharmendrabhai Dashrathbhai Patel v. Dy. Police Commissioner and Ors., (2012) 1 GLH 146, dealt with the meaning and scope of the word 'regulate'. The Hon'ble Division Bench observed that the power to regulate includes the power to restrain and indicate restriction in some respects. Further, the word necessarily denotes some degrees of restraint usually done in connection with the thing to be regulated. Thus, the power to regulate may include the power to license or to refuse a license etc.

Vide the issuance of the AEO 2018 Circular, it can be said that the Board is encouraging the applicants to apply and form part of the AEO Programme. Although, the benefits accorded to an AEO T-1 are not at par with AEO T-2 or AEO T-3, it can be said that the AEO 2018 Circular is a welcome step for the industry. In essence, it is an 'invitation' from the Board to apply for the scheme and avail the benefits available thereof.

Given the welcome move of the Board to simplify and rationalize the application procedure for AEO T1, it would be interesting to see if trade welcomes this move with equal enthusiasm in obtaining AEO T1 certification.

(Devinder Bagia is Joint Partner and Raghav Khurana is Senior Associate, Lakshmikumaran and Sridharan Attorneys. The views expressed are strictly personal.)