OCTOBER 12, 2020

By S Murugappan, Advocate

THE Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 [CAROTAR, 2020] were notified, ostensibly, to prevent origin frauds and to ensure that claims for preferential treatment are made correctly. It is a fact that such trade agreements are misused to make fraudulent claims by unscrupulous importers. But to prevent such misuse, these agreements have self-contained mechanisms for conducting verification through cooperation among the participating sovereign countries.

As such, how far a participating country can 'unilaterally' impose additional conditions on importers holding origin certificates to avail such benefits, without infringing upon its obligations under international treaties, will be a moot question.

The Rules notified have come into force from 21 st of September 2020. These impose onerous conditions on the importers while providing sweeping powers to the Customs officials to reject the origin certificates.

What an importer is required to do:

1. He should declare that the goods qualify for such benefits.

2. He should enter the details of origin certificates in the bill of entry. For this purpose, the bill of entry format has been modified.

3. If called upon, he should provide information in Form-I which should cover the following details.

a. The production/manufacturing process of the goods imported by him

b. The basis as to how the origin criteria have been applied by the supplier/manufacturer - such as - fully obtained, regional value content, change in tariff code, change in tariff code at subheading level, change in chapter etc.

c. When the product is not wholly obtained in the originating country, then the list of components and other ingredients used in the production of these goods along with their origin details.

d. Whether the producer himself manufactured the inputs/components used by him or he obtained them from local suppliers or imported them from third countries; if the supplier has procured them locally then whether he has collected evidence regarding their origin.

e. If origin criteria is based on 'value content' then the percentage of local value content; the components of such value content should include value of the materials, production cost and the profit margin of the supplier/manufacturer.

f. If non-originating materials are used in the production of the goods imported then, the HS codes of such materials.

g. Whether values of indirect/neutral materials, packing materials have been taken into account to determine the origin criteria.

h. If inputs from participating countries of a particular agreement are used in the production of the goods imported then, to what extent and in what manner these have been taken into account to decide the applicability of the concept of 'accumulation'.

i. If 'De minimis' concept (presence of insignificant ingredients) is applied, then details of those ingredients along with their percentage.

4. He should ensure the correctness of the information and supporting documents produced. Any mis-statement will lead to penal consequences. (Here it is to be noted that the information provided by the importer is based on the data made available to him by the supplier and an importer does not have time and energy to verify and investigate the correctness of such data made available to him).

5. He should keep all the supporting documents for five years.

Thus, every importer claiming preferential rate of import duties under trade agreements is required to have a detailed knowledge of the processes and value additions achieved by the supplier of the goods in the exporting country. To put it differently, the very same information with which the checks are to be carried out in the exporting country by the officials of that country for issuing the origin certificate, the Indian importers are required to obtain from the suppliers. This amounts to a second verification of the goods' origin.

Now the central question is whether the suppliers of the goods will be prepared to provide such detailed information relating to their manufacturing processes as well as value additions including profit margins achieved by them. Many of these processes will be 'industrial secrets' and all suppliers may not be willing to share with their buyers such detailed technical or financial information relating to the products manufactured by them. No seller will disclose his profit margin details to the buyer. This will place the importers in a quandary.

What the Customs officer can do:

While the difficulties faced by the importers is one part of the story, the other part relates to the sweeping powers given to the officers to reject the claims and the certificates.

a. As per Rule 3(2)(a), the officers, without verification, can reject a certificate if it is incomplete. What factors will make a certificate 'incomplete' is left vague in the Rules.

b. As per Rule 3(2)(d), a certificate can be rejected without further verification if the officer decides that it is issued for an item not eligible for preferential treatment. Most of the agreements refer to products by HS code only and not by description and HS codes followed by the manufacturers in different countries may not always match the codes adopted by Indian customs. Thus, this provision is prone to ring in disputes.

c. As per Rule 5(1), if the officer has reason to believe that the origin criteria prescribed are not met then he can ask for Form-I and supporting documents.

d. The importer should make them available within 10 days. If it is not provided within the stipulated time or if it is decided that information provided is insufficient, the officer can initiate verification process with the originating country.

e. As per Rule 5(5), Principal Commissioner can reject the certificate without verification if he decides that sufficient evidence available on 'record' proves that goods do not meet the origin criteria. What is the information available on 'record' is not made clear and whether it will be shared with the importer and subjected to test under the laws of evidence is not known.

f. As per Rule 6(4), when information is called for or verification is taken up, the preferential treatment can be suspended or extended only when sufficient security equal to the duty difference is provided.

g. As per Rule 6(7)(b), the certificate can be rejected if the verification authority abroad does not provide requested information as per these Rules.

h. As per Rule 6(7)(c), even after receipt of verification report from the originating country, the officer can reject the certificate if information available on 'record' provides sufficient evidence that the goods do not meet the origin criteria.

What is happening now:

These Rules are in force for more than two weeks now. Already numerous importers across the country have reported delays and bottlenecks in clearance of goods. Rule 5(1) provides for asking for further information and Form-I ONLY when the officer has 'reason to believe' that the origin criteria as stipulated in the Rules have not been met. But it is reported that, as a matter of routine, queries are raised in the EDI system for every claim, requiring the importers to upload Form-I and supporting documents. The power to call for additional information is to be exercised only on the basis of 'reasons to believe'.

In the case of Tata Chemicals Ltd vs. Commissioner of Customs (Preventive) Jamnagar - 2015-TIOL-120-SC-CUS the Supreme Court observed:

"Statutes often use expressions such as 'deems it necessary', 'reason to believe' etc. Suffice it to say that these expressions have been held not to mean the subjective satisfaction of the officer concerned. Such power given to the concerned officer is not an arbitrary power and has to be exercised in accordance with the restraints imposed by law".

Asking for Form-I and supporting documents in each and every case without justification results in arbitrary exercise of discretionary powers, throwing the procedure for smooth clearance of import consignments into chaos, ultimately resulting in delays in clearance, escalation in transaction costs and upsetting of marketing arrangements and production schedules. CBIC's recent Circular 42/2020-Cus dated 29th September 2020 stipulates giving of 100 percent security for differential duty by importers, including authorised economic operators, for provisional assessments, in case documentation is called for in terms of Rule 5(1).

Obviously, these Rules are intended to check rules of origin frauds. When compared to the overall claims for preferential treatments deliberate misuse is, at best, limited to a small percentage of importers. With a vast Customs intelligence machinery having wide powers, it should be possible to investigate dubious importers misusing such facilities and isolate them for severe penalties instead of subjecting every importer to go through this process. It is like, when there are 5% fraudulent cases, subjecting the remaining 95% imports also to strict, but avoidable, scrutiny.

Primacy of International Agreements:

Interestingly, Rule 8(3) states that in case of a conflict between these Rules and the relevant rules of origin under specific trade agreements, then the relevant rules of origin will prevail to the extent of such conflicts. While this provision attempts to uphold the primacy of the trade agreements and the rules of origin agreed to between sovereign countries, at the same time it exposes the ambivalence shown in the framing of these Rules with such conflicting provisions. For example, Rule 3(2)(c) provides for outright rejection of a certificate without verification if it is produced after its validity period has expired. On the contrary, as per the rules for determination of origin of goods under the agreement on South Asian Free Trade Area (SAFTA), a certificate of origin submitted after its expiration of the validity period is still to be accepted when failure to observe the time limit results from 'force majeure' or other valid causes beyond the control of the exporter. Such cases will be more, especially, during this period of Covid-19 pandemic.

What lies ahead:

The frauds relating to the misuse of preferential trade agreements have to be tackled in a balanced manner so as not to affect the smooth flow of trade in terms of such agreements. While putting the onus on importers is one way of ensuring compliance, it may not be always the best way by calling upon every importer to produce a wealth of information, impossible to obtain in the normal course of international trade, justifying the origin certificate he has been given from another country. It questions, as a matter of routine, the correctness of the powers exercised by another sovereign country; it creates bottlenecks in customs clearance and increases the transaction costs. The wide discretionary powers given to officials to reject certificates at different stages and to call for information and documents as well as to withhold the preferential rate pending investigation will add to the importers' woes.

Providing for a strong customs intelligence network and imposing stringent penalties for frauds in this regard have proved effective in other countries. As a matter of fact, the World Customs Organisation has published a 'Guide to counter origin irregularities' that is available to all Customs administrations. This guide contains specific case studies of origin frauds.

Many countries and unions across the world are moving forward towards systems where self-certifications with regard to origin are accepted. The preferential arrangements European Union has with its trading partners provide for the concept of 'Approved Exporters' where the declaration by such Approved Exporter in the invoice itself is taken as sufficient. There is another category of 'Registered Exporters' where such exporters can provide a self-certification instead of going to their government authorities for certification. The economic partnership agreements between European Union and Canada provide for such 'Registered Exporters'. Such trade facilitation measures result in less documentation and fast customs clearance.

As of now, the present Rules do not appear to contribute to ease of doing business. One has to wait and watch whether these Rules achieve their avowed purpose of keeping the fraudsters at bay or end up in creating hardships to genuine importers.

[The views expressed are strictly personal.]