NOVEMBER 28, 2024

By Dr Sanjay Kalra, LLM., Ph.D.(GST Law), Advocate, KPS Legal

Introduction: GOVERNMENT of India has various trade agreements, namely 'Preferential Trade Agreements' (PTA), 'Comprehensive Economic Cooperation Agreements' (CECA), 'Comprehensive Economic Partnership Agreement' (CEPA), 'South Asian Free Trade Area Agreement' (SAFTA) and 'Free Trade Agreements' (FTA), with about 54 individual countries / 18 groups of countries. For providing duty exemption under these trade agreements, the Government of India has issued several notifications, under Section 5 of Customs Tariff Act, 1975, for Determination of Origin of Goods under the relevant Trade Agreement. Each Trade Agreement contains a set of Rules of Origin, which prescribe the criteria that must be fulfilled for goods to attain 'Originating Status' in the exporting country. Such criteria are generally based on factors such as domestic value addition and substantial transformation in the course of manufacturing / processing. They also lay down form of Certificate of Origin (COO), manner of issuing it and process of origin verification

Eligibility for claiming Duty Exemption: The Importer, claiming the duty exemption i.e. the preferential rate of duty, needs to comply with the procedure prescribed under CAROTAR Rules, 2020 [Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020)] read with Section 28DA of the Customs Act, 1962. While making claim of such preferential rate of duty in terms of any trade agreement, Importer shall make a declaration that the subject goods qualify as originating goods for preferential rate of duty under such agreement. He shall possess sufficient information as regards the manner in which country of origin, including the regional value content and product specific criteria, specified in the Rules of Origin in the trade agreement, are satisfied. Before filing the claim along with the mandatory submission of Certificate of Origin (COO), Importer shall exercise due diligence as to the accuracy and truthfulness of the information furnished to the Proper Officer of Customs. Here it is clarified that the "Certificate of Origin" means a certificate issued in accordance with a trade agreement certifying that the goods fulfil the country of origin criteria and other requirements specified in the said agreement.

Obligation on the Importer: While claiming the benefit of preferential rate of duty, the Importer shall furnish the information and documents as specified under Rule 3 and Rule 4 of CAROTAR Rules, 2000. Importer shall furnish such information, as indicated in Form of CAROTAR Rules, to demonstrate the manner in which Country of Origin criteria, as specified in the Rules of Origin, are satisfied. Importer shall mention relevant Tariff Notification, produce Certificate of Origin for each item giving details thereof e.g. originating criteria. Importer shall declare whether accumulation/cumulation is applied; whether the Certificate of Origin is issued by a third country (back-to-back); and whether goods have been transported directly from country of origin. He shall maintain all supporting documents related to Form I for at least five years from Import and shall exercise reasonable care to ensure the accuracy and truthfulness of the aforesaid information and documents. If the proper officer of customs has reason to believe that origin criteria prescribed in the respective Rules of Origin have not been met, he may seek such information and supporting documents from the importer as specified under Rule 4 of CAROTAR Rules, 2000. If the Importer fails to furnish the said information or documents, the proper officer shall proceed for Verification under Rule 6 ibid.

Disallowing duty exemption without Verification: The proper officer may refuse to allow preferential rate of duty even without Verification in the following circumstances, as specified under Sub-section (10) of Section 28DA of the Customs Act, 1962, namely:-

(i) the tariff item is not eligible for preferential tariff treatment;

(ii) complete description of goods is not contained in the certificate of origin;

(iii) any alteration in the certificate of origin is not authenticated by the Issuing Authority;

(iv) the certificate of origin is produced after the period of its expiry,

Further, the Commissioner of Customs may, in terms of Rule 5(5) of CAROTAR Rules, 2000, disallow the claim of preferential rate of duty without further verification where:

(a) the importer relinquishes the claim; or

(b) the information and documents furnished by the importer and available on record provide sufficient evidence to prove that goods do not meet the origin criteria prescribed in the respective Rules of Origin.

Verification of Certificate of Origin: CBIC Board, vide its Circular No. 38/2020-Cus., dated 21st August, 2020 has clarified that mandatory verification shall be conducted only for the reasons specified under CAROTAR, 2000 and Rules of Origin notified for a trade agreement in terms of sub-section (1) of section 5 of the Customs Tariff Act, 1975. Accordingly the proper officer may request for verification of certificate of origin from Verification Authority only in circumstances, as specified under Rule 6 of CAROTAR Rules, 2000, where:

(a) there is a doubt regarding genuineness or authenticity of the certificate of origin for reasons such as mismatch of signatures or seal;

(b) there is reason to believe that the country of origin criterion has not been met or the claim of preferential rate of duty made by importer is invalid; or

(c) verification is being undertaken on random basis, as a measure of due diligence to verify whether the goods meet the origin criteria as claimed

Denial of Duty Exemption: If the Verification Authority fails to provide the requested documents and information in the prescribed manner or the information and documents prove that goods do not meet the origin criteria prescribed in the respective Rules of Origin, the proper officer may deny, under Rule 6(7) ibid, the claim of preferential rate of duty without further verification.

Provisional release of goods: On request of the Importer under Rule 6(4)(c) of CAROTAR Rules, 2000, the proper officer may provisionally assess and clear the goods, provided that the Importer furnishes a security amount equal to the differential duty i.e. the difference between the duty provisionally assessed under section 18 of the Act and the preferential duty claimed.

Penal provision: Rule 8(2) of CAROTAR, 2000 provides that where an importer has suppressed the facts, made wilful mis-statement or colluded with the seller or any other person, with the intention to avail undue benefit of a trade agreement, his claim of preferential rate of duty shall be disallowed and he shall be liable to penal action under the Act or any other law for the time being in force.

Verification of FOB Value: Recently, while redressing the trade grievances, the CBIC Board, vide its instructions issued vide F. NO. 20000/6/2015-OSD(ICD) dated 8.6.2024 has clarified that though as per extant provisions of CAROTAR, 2020, the importer may be requested for supporting information but he is under no compulsion to submit commercially sensitive information such as the export invoice in case of third - party invoicing. The 'Bill to Ship to Business' model ensures commercial confidentiality in global value chains. CAROTAR, 2020 does not require an importer to seek details, which may be business confidential. Preferential rate of duty may be denied only in the circumstances specified under CAROTAR, 2000 read with Section 28DA of the Customs Act, 1962. Accordingly, Public Notice no. 55/2024 dated 24.6.2024 issued by Nhava Sheva Customs further clarified that only in case of Third-Country Invoicing, the Certificate of Origin shall indicate FOB only if the format of COO, prescribed under the relevant Trade Agreement, provides for such column. Further, the amount of freight and insurance needs to be disclosed in Third-Country Invoice or separate disclosure thereof. The rationale behind verifying the FOB by the proper officer is to check any possible under-valuation by the Merchant Supplier or influence of the special relationship between the Manufacturer and the Merchant Supplier over value of the imported goods.

However, once again for redressing the trade grievances, the CBIC Board, vide its further instructions  23/2024-Customs dated 21st October, 2024, has clarified that the purpose of Certificate of Origin is to serve as a proof that the goods qualify as originating within the terms of relevant Trade Agreement, irrespective of whether third-party invoicing is involved or not. While, the seller's invoice, including a third-party invoice where applicable, is the document relevant for customs valuation. Also, CAROTAR Rules, 2020 does not require an issuing authority or a seller to use a specific or same currency for declaring value in COO and invoice respectively. Thus, CBIC clarified that the claim for preferential duty cannot be denied by merely pointing out that the value addition is artificially inflated by wrongfully adding certain ineligible elements (e.g. freight, insurance etc.) unless it is demonstrated that the value addition, calculated as per formula prescribed in the trade agreement, does not meet the threshold percentage point when such elements (freight, insurance etc) are removed. 

Judicial interpretation:

(i) CESTAT, Ahmedabad in case of "KIRAN KOTAK AND COMPANY Vs COMMISSIONER OF CUSTOMS" [2024-TIOL-460-CESTAT-AHM] held that once the claimant Importer has provided the requisite information and there is no doubt on the authenticity of the country of origin certificate issued, it is the burden on the department to get the verification of the authenticity of Certificate of origin. Without verification, the certificate of origins cannot be discarded and on that basis benefit cannot be denied.

(ii) Hon'ble Tripura High Court, in the case of Shri Goutam Roy v. Union of India, [2021-TIOL-1031-HC-TRIPURA-CUS], observed that since Importer has submitted the requisite information and documents, the Revenue may proceed for verification of the COO certificate and seek other information under Rule 5(5)(b) of CAROTAR 2000. Revenue shall release the imported goods on obtaining an indemnity bond to deposit the differential duty by the Importer.

Conclusion: While making claim of preferential rate of duty in terms of any trade agreement, Importer shall, under Section 28DA ibid, ensure that the subject imported goods qualify, as originating goods, for the said duty exemption. In terms of Rule 3 and Rule 4 of the CAROTAR Rules, 2000, Importer shall furnish such information and documents as indicated in Form thereof, to demonstrate the manner in which Country of Origin criteria are satisfied, failing which, the proper officer may proceed for Verification only in the circumstances specified under Rule 6 ibid. No claim of preferential duty may be rejected except for the reasons specified Section 28DA(10) of the Customs Act, 1962 read with Rule 5(5) and Rule 6(7) of CAROTAR Rules, 2000. Preferential Rate of duty cannot be denied merely on basis of amount of FOB / Freight, Insurance etc or the type of Currency mentioned in third-party invoicing without rejecting the authenticity / eligibility of  COO.  On request of the Importer, the subject goods may be released provisionally pending verification, on furnishing a security amount of differential duty. Importer shall not be compelled to furnish the information or documents not specified under the Rules. Importers are, therefore, advised to refer to the respective Rules of Origin also.

[The views expressed are strictly personal.]