JANUARY 21, 2025

By Neeraj  Prasad, IRS (C&IT)

CESTAT in the Appeal No. 51433 of 2022; S. S. Overseas versus The Principal Commissioner of Customs ICD, Tughlakabad, New Delhi held that (Date of Decision: 14.01.2025) - 2025-TIOL-125-CESTAT-DEL, the goods imported by the appellant originated from UAE and not from Pakistan. The contours of the case would be discussed in details in the subsequent paras(s) however, essentially, the entire debate is about the "origins" of the "Dates".

2. In international trade "origins" of goods are determined as per the discipline of "rules of origin". But what exactly this "rules of origin" refers to? It would be useful to revisit the concept, in some details (Ref; WCO Handbook on Rules of Origin).

The Agreement on Rules of Origin (Annex 1A to the Marrakech Agreement establishing the World Trade Organization in 1995) provides the definition for the Harmonized Non-Preferential Rules of Origin and for the Preferential Rules of Origin:

"Non-Preferential Rules of Origin shall be defined as those laws, regulations and administrative determinations of general application applied by any Member to determine the country of origin of goods" (Article 1.1).

"Preferential Rules of Origin shall be defined as those laws, regulations and administrative determinations of general application applied by any Member to determine whether goods qualify for preferential treatment under contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph a of Article 1 of GATT 1994" (Annex II, Paragraph 1).

3. The basic role of rules of origin is the determination of the economic nationality as opposed to the geographical nationality of a given product. This is necessary for the implementation of various trade policy instruments such as imposing import duties, allocating quotas or for the collection of trade statistics. The determination of the country of origin is the last step in the customs clearance procedures, the first steps being the classification of the goods and the determination of the value of the goods.

4. There are two basic criteria to determine the country of origin of goods. These are:

- Wholly obtained criterion, and

- Substantial/sufficient transformation criterion.

Wholly obtained goods:

Wholly obtained goods are: goods naturally occurring; or live animals born and raised in a given country; or plants harvested in a given country; or minerals extracted or taken in a single country. The definition of wholly obtained also covers goods produced from wholly obtained goods alone or scrap and waste derived from manufacturing or processing operations or from consumption.

Substantial/sufficient transformation:

There are three major criteria to express a substantial/sufficient transformation:

a. A criterion of a change in tariff classification:

A goods is considered substantially transformed when the goods are classified in a heading or subheading different from all non- originating materials used.

b. A criterion of value added (ad valorem percentages):

Regardless a change in its classification, goods are considered substantially transformed when the value added to a product increase up to a specified level expressed by ad valorem percentage. The value added criterion can be expressed in two ways, namely a maximum allowance for non-originating materials or a minimum requirement of domestic content.

c. A criterion of manufacturing or processing operations (technical requirement): Regardless a change in its classification, a good/product is considered substantially transformed when the goods/products have undergone specified manufacturing or processing operations.

Minimal operations:

A reverse form of the specific manufacturing operations above can be found in the Agreement on Non-Preferential Rules of Origin as well as in many preferential trade agreements, whereby specifically identified manufacturing operations are insufficient to confer origin (e.g. labeling, packaging or assembly).

De minimis or tolerance rule:

The de minimis or tolerance rule permits a specific share (often between 10% and 15%) of the value or volume of the final product to be non-originating without

the final product losing its originating status. In some agreements, the components to which the rule applies are specifically identified. Alternatively, there may be a negative list of components that may not be included in the allowance or a list of products (e.g. HS Chapters) to which the tolerance rule does not apply.

5. The WTO Agreement on Rules of Origin:

All Members of the WTO including any new Members will apply the harmonized rules of origin as part of the package of membership, when these rules enter into force, they will bring uniformity as to how the origin of a specific product is determined and how the rules are applied.

Objectives and principles of the Agreement on Rules of Origin:

The objectives and principles of the Agreement on Rules of Origin are:

- To develop clear and predictable rules of origin.

- To facilitate the flow of international trade.

- Not to create unnecessary obstacles to trade.

- Not to nullify nor impair the rights of Members under GATT 1994.

- To provide transparency of laws, regulations, and practices regarding rules of origin

- To ensure that rules of origin are prepared and applied in an impartial, transparent, predictable, consistent and neutral manner.

- To make available a consultation mechanism and procedures for the speedy, effective and equitable resolution of disputes arising under the Agreement.

- To harmonize and clarify non-preferential rules of origin.

Scope of Application of Rules of Origin

The non-preferential rules of origin are not related to contractual or autonomous trade regimes leading to the granting of tariff preferences. They are used in the application of:

Most-favored-nation treatment (MFN):

In the WTO, most-favored-nation means that each member country has to treat all its fellow-members equally. If one member country grants a special favor (such as a lower duty rate for an imported product) to another member, that favor also has to be granted to all other WTO members so that they are all equally "most- favored". This kind of non- discrimination is one of the most important principles of the WTO trading system, and is covered in Article 1 of the GATT 1994.

Anti-dumping and countervailing duties:

Article VI of the GATT provides for the right of contracting parties to apply anti- dumping measures, i.e. measures against imports of a product at an export price below its normal value (usually below the price of the product in the domestic market of the exporting country), if such dumped imports cause injury to a domestic industry on the territory of the importing contracting party. In order to offset or prevent dumping, a contracting party may levy on any dumped product an anti- dumping duty not greater in amount than the actual margin of dumping.

The term "countervailing duty" is a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly or indirectly, upon the manufacture, production or export of any merchandise.

Safeguard measures:

Article XIX of the GATT 1994 allows a Member to take a safeguard action to protect a specific domestic industry from an unforeseen increase in imports of any product which is causing, or which is likely to cause, serious injury to the industry. The safeguard measure should be applied only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment.

Origin marking requirements:

Article IX of GATT 1994 stipulates that contracting parties shall co-operate with each other with a view to preventing the use of trade names in such manner as to misrepresent the true origin of a product, to the detriment of such distinctive regional or geographical names of products of the territory of a contracting party as are protected by its legislation.

Discriminatory quantitative restrictions or tariff quotas:

Quantitative restrictions imposed as a result of safeguard measures should normally not reduce the quantities of imports below the annual average for the last three representative years for which statistics are available. In principle, safeguard measures have to be applied irrespectively of the source.

Government procurement:

Procurement of products and services by government agencies for their own purposes represents an important share of the total government expenditure and, thus, has a significant role in domestic economies. It is estimated that government procurement typically represents 10-15% of the gross domestic product (GDP). Any discriminatory government procurement procedures and practices can lead to distortions in international trade.

Trade statistics:

In the field of international trade, there are close links between customs and statistical aspects. It is for this reason that in most countries the primary data used for the preparation of international trade statistics are taken from customs import or export documents, which means that the data are based on the national tariff classification system or the Harmonized System. The harmonized rules of origin which are devised on the premises of the Harmonized System provide further detailed information in complying trade statistics.

Role of WTO and WCO in the Harmonization Work Programme:

The international institutions carrying out the Harmonization Work Programme are the WTO Committee on Rules of Origin (CRO) which reports to the WTO Council for Trade in Goods, and the Technical Committee on Rules of Origin (TCRO) which was established under the auspices of the WCO to undertake the technical work related to the harmonization. Due to the complexity of many issues raised during the work, the intended time schedule in the agreement was extended several times. The negotiations are still on-going but without a formal deadline or time schedule.

Architecture of the Agreement on Rules of Origin:

The architecture and the content of the Agreement on Rules of Origin are as follows:

Definitions

General Rule1 - Harmonized System (is the basis for the product specific rules)

General Rule 2 - Determination of origin

General Rule 3 - Neutral elements

General Rule 4 - Packing and packaging materials and containers

General Rule 5 - Accessories and spare parts and tools

General Rule 6 - Minimal operations and processes

Appendix 1: Wholly Obtained Goods

- Rule 1: Scope of application

- Definitions 1(a) to (i) and 2

Appendix 2: Product Specific Rules of Origin (Rules for determining the country of origin when the origin of the good is not determined under Appendix 1)

- Rule 1: Determination of Origin (Provisions of this Rule applied in sequence, taking into account Rule 2 where applicable)

- Rule 1 (a): The country of origin is the country in which the good is produced exclusively from originating materials;

- Rules 1 (b) and (c): Primary Rules

- Rules 1 (d) to (g): Residual Rules

- Rules 2 (a) to (g): Application of the Rules

- Terminology Guide

- Origin Criteria for HS Chapters 1 – 97 in matrices

General common aspects:

Documentary evidence

Documentary evidence means a specific form/certificate or a declaration identifying a given product, in which the authority, manufacturer or other competent person certifies that the goods to which the certificate or declaration relates, originate in a specific country.

Verification of proofs of origin and Administrative Assistance:

The Chapter 3 of the Specific Annex K of the Revised Kyoto Convention deals with control of documentary evidence of origin. The contracting parties of a preferential trade agreement as well as the parties involved in trade relating to non- preferential rules of origin shall upon request provide administrative assistance for the control of the origin of goods. The principle of reciprocity governs the assistance.

Origin Fraud:

Origin fraud falls within the area of commercial fraud. There is a high risk of fraud within the origin area because of the level of duties and because of the complexity of the rules of origin.

The reasons for fraud in origin are multiple:

- Obtaining illicit access to preferential duty rates via a false indication of the country of origin of the imported goods.

- Evading quantitative restrictions in the importing country.

- Evading import prohibitions on import of goods.

- Avoiding anti-dumping or countervailing duties in the importing country. The goods will in fact penetrate the market of the importing country and gain a commercial advantage.

- Illegally satisfying the documentary requirements laid down in the importing country.

6. It is in light of the above backdrop of the contours of "Rules of Origin", the ruling of CESTAT in Customs Appeal No. 51433 of 2022; S. S. Overseas versus The Principal Commissioner of Customs ICD, Tughlakabad, New Delhi (Date of Decision: 14.01.2025) = 2025-TIOL-125-CESTAT-DEL, should be analysed:

The background of the dispute:

The order dated 10.09.2021 passed by the Principal Commissioner of Customs ICD (Import) TKD, New Delhi held that the item imported by S. S. Overseas would fall under Customs Tariff Item 9806 00 00 instead of CTI 08404 10 30 and confirming the demand under section 28(4) of the Customs Act, 1962 .

The appellant claimed that its representative negotiated with M/s. GVO Global FTZ, UAE for import of dry dates of UAE origin. The appellant filed a Bill of Entry dated 09.08.2019 and submitted commercial invoice, packing list, fumigation certificate issued by Universal Pesticides Trading Co. (LLC), Certificate of Origin dated 16.07.2019 issued by Ajman Chamber of Commerce, UAE, and phytosanitary certificate issued by Plant Protection Organization, UAE. According to the appellant, all these documents declare that the dry dates that were being imported were of UAE Origin.

However, a show cause notice dated 04.12.2020 was issued to the appellant alleging that dry dates imported by the appellant were of Pakistan origin based on the Export Declaration and the container tracking report submifled by the freight forwarder.

The appellant, contended that the genuineness of the certificate of origin issued by the Ajman Chamber of Commerce, UAE which was submitted by the appellant before the Customs was not controverted in the show cause notice. The appellant also contended that the allegation made in the show cause notice that the importer colluded with his supplier and obtained the county of origin certificate on the strength of false documents was incorrect. The appellant also pointed out that no reliance could be placed on the Export Declaration and the container tracking report submitted by the freight forwarder.

The Principal Commissioner did not accept the pleas taken by the appellant and held that the imported goods originated from Pakistan. It is this order dated 10.09.2021 that was assailed in appeal.

The Findings and order of CESTAT:

The issue that arises for consideration in this appeal is as to whether the dry dates imported by the appellant through invoice dated 15.07.2019 and Bill of Entry dated 19.08.2019 originated from UAE or from Pakistan. To support its claim that the goods originated from UAE, the appellant had submitted commercial invoice, packing list, fumigation certificate issued by Universal Pesticides Trading Company, the certificate of origin dated 16.07.2019 issued by Ajman Chamber of Commerce, UAE and the phytosanitary certificate issued by Plant Protection Organization, UAE.

The department, however, placed reliance upon two documents namely the Export Declaration provided by the freight forwarder and the container tracking report also provided by the freight forwarder.

The CESTAT then proceeded to examine Rule 6 of the Customs (Administration of Rules of Origin) Rules 2020 which provides a procedure for verification of the certificate of origin and it is reproduced below:

"Rule 6. Verification request.-

- The proper officer may, during the course of customs clearance or thereafter, request for verification of certificate of origin from Verification Authority where:

- there is a doubt regarding genuineness or authenticity of the certificate of origin ;

- there is reason to believe that the country of origin criterion stated in the certificate of origin has not been met or the claim of preferential rate of duty made by importer is invalid; or

- ……:

Provided that a verification request may be made only where the importer fails to provide the requisite information sought under rule 5 by the prescribed due date or the information provided by importer is found to be insufficient.

……….Provided that where a timeline to finalize verification is prescribed in the respective Rules of Origin, the proper officer shall finalize the verification within such timeline.

- The proper officer may deny claim of preferential rate of duty without further verification where:

- The verification Authority fails to respond to verification request within prescribed timelines;

- The verification Authority does not provide the requested information in the manner as provided in this rule read with the Rules of Origin; or

- The information and documents furnished by the Verification Authority and available on record provide sufficient evidence to prove that goods do not meet the origin criteria prescribed in the respective Rules of Origin."

Eventually concluding that there is nothing on the record to suggest that such verification as contemplated under the 2020 Rules was carried out with the concerned UAE Authorities to verify the genuineness and correctness of the certificate of origin.

In the process CESTAT also examined the decision of the Tribunal in Omega Packwell in which it was held as under: That dry dates were imported and the country of origin was shown as UAE. The documents that were submitted for this purpose were invoice, country of origin certificate, phytosanitary certificate and fumigation certificate. The department, however, believed that the dry dates originated from Pakistan. The Tribunal found that no enquiry was conducted by the department to prove that the country of origin certificate issued by the competent authority of UAE was fake. The Tribunal also found that the other certificates that were submitted by the appellant indicated that the country of origin was UAE. The Tribunal also held that the procedure contemplated under rule 6 of the 2020 Rules for verifying whether the country of origin certificate was genuine had not been resorted to. The Tribunal also held that since the Export Declaration was received from the shipping line and not from the customs authority and the fact that it was an unsigned photostat copy it could not be considered as an evidence to prove the country of origin.

Eventually concluding that: The facts of the present case are similar to the facts of Omega Packwell decided by the Tribunal. In the present case, the Principal Commissioner has not recorded a finding that the country of origin certificate produced by the appellant was forged and all that has been stated is that it was obtained by the appellant in collusion with the exporter by submitting incorrect documents. This finding is based purely on conjectures and surmises. As noticed above, a detailed procedure has been provided in the 2020 Rules for examining the genuineness of the country of origin certificate and if the customs authorities had any doubts, the same could have been cleared only by the UAE Authority that issued the country of origin certificate. Whether it was based on authentic documents or not certainly could not have been examined by the customs authorities as they had no documents before them. The appellant had also submitted fumigation certificate issued by Universal Pesticides Trading Co. (LLC) and the phytosanitary certificate issued by Plant Protection Organization, UAE. These two certificates also showed that the country of origin was UAE. On the other hand, the Principal Commissioner proceeded to place emphasis on an unsigned photostat copy of the Export Declaration submitted by the freight forwarder. This is a document which is submitted by the exporter before the customs authorities. If any reliance was to be placed on this document, it should have been obtained from the UAE customs authorities, but the Principal Commissioner proceeded to place reliance on a photostat copy of the document produced by the shipping line, as against the country of origin certificate issued by the proper UAE authority. This Export Declaration was not even signed or attested by a proper authority. It has, therefore, to be held that the goods imported by the appellant originated from UAE and not from Pakistan.

6. Here it is quite intriguing to note that CESTAT chose to examine the protocol as laid down in the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, Issue Date: 21-September-2020; but this case was not about preferential treatment of goods. This is also to be noted that the case precedes the India-UAE CPEC which only came in effect on 01/05/2022. The finding of CESTAT that no verification protocol was followed is entirely consistent with the provisions WTO regime of Rules of Origin, equally applicable to preferential or non-preferential scenario. However, it is evident from the case facts that the "origin" debate in no manner followed the established and accepted contours of "Rules of Origin" like goods wholly obtained, substantial transformation, minimal operations, to be applied to non - preferential scenario.

Further, since CESTAT chose to focus on the verification protocol laid down in Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, the other crucial clauses of these referred rules also requires a focus:

Rule 3. Preferential tariff claim. -

(1) To claim preferential rate of duty under a trade agreement, the importer or his agent shall, at the time of filing bill of entry,-

(a) make declaration in the bill of entry that the goods qualify as originating goods for preferential rate of duty under that agreement;

(b) ………

(c) produce certificate of origin covering each item on which preferential rate of duty is claimed; and

(d) enter details of certificate of origin in the bill of entry, namely:

(i) ...............;

(ii) ...............;

(iii) originating criteria;

(iv) indicate if accumulation/cumulation is applied;

(v) ...................;

(vi) indicate if goods have been transported directly from country of origin.

Rule 4. Origin related information to be possessed by importer.-

The importer claiming preferential rate of duty shall-

a. possess information, as indicated in Form I, to demonstrate the manner in which country of origin criteria, including the regional value content and product specific criteria, specified in the Rules of Origin, are satisfied, and submit the same to the proper officer on request.

b. keep all supporting documents related to Form I for at least five years from date of filing of bill of entry and submit the same to the proper officer on request.

c. exercise reasonable care to ensure the accuracy and truthfulness of the aforesaid information and documents.

Rule 5. Requisition of information from the importer.-

1. Where, during the course of customs clearance or thereafter, the proper officer has reason to believe that origin criteria prescribed in the respective Rules of Origin have not been met, he may seek information and supporting documents, as may be deemed necessary, from the importer in terms of rule 4 to ascertain correctness of the claim.

2. Where the importer is asked to furnish information or documents, he shall provide the same to the proper officer within ten working days from the date of such information or documents being sought.

3. …………...

4. Where the importer fails to provide requisite information and documents by the prescribed due date or where the information and documents received from the importer are found to be insufficient to conclude that the origin criteria prescribed in the respective Rules of Origin have been met, the proper officer shall forward a verification proposal in terms of rule 6 to the nodal officer nominated for this purpose.

5. Not with standing anything contained in this rule, the Principal Commissioner of Customs or the Commissioner of Customs may, for the reasons to be recorded in writing, disallow the claim of preferential rate of duty without further verification, where:

a. ……….

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.

7. Even though the origin debate should have followed the principles of "rules of origin", it hardly appears to be the case either in this matter or the other case of Omega Packwell cited by CESTAT.

Like CESTAT, could the department have referred to these rules essentially with respect to claiming UAE "origin"? Are these rules helpful in context to "non - preferential scenario", the answer is a probable "yes" despite the context of these rules being entirely different. An intelligent and calibrated adherence to the protocol would have allowed the department to discharge the responsibility of "burden of proof" and adherence to the "due process requirements".

But is this the optimal solution? Certainly not!! Then what's the way out of this conundrum? While India has a series of notified Preferential Rules of Origin, these arrangements / agreements prescribe Rules of Origin which have to be met for imports/ exports to be eligible for tariff preference.

There is reference to Non-Preferential Rules of Origin in para 2.93 of the Handbook of Procedure of the Foreign Trade Policy (2023), but these provisions address the origin concerns of goods exported from India to non - preferential destinations/ circumstances, as against the requirements of preferential rules of origin under FTAs/CEPCs which is separately notified under customs.

8. It is evident that we are still to have a legally binding full-fledged Non- Preferential Rules of Origin regime, without which the basis for declaring the CoO for the entire gamut of Exim trade, remain inadequately addressed, and is a major regulatory vacuum. We are lagging behind in the regulatory catch up on this issue, in comparison to other major trading powers with whom we wish to compete. Countries/trading blocks that have non-preferential rules of origin include: Asean nations, Australia, China, Canada Hong Kong Japan, EU, USA, etc. Essentially all major trading countries/blocs.

While having a legally binding non-preferential rules of Origin regime is certainly need of the hour, care would have to be taken that the framework is not complicated to implement, especially in terms of the substantial transformation criteria, and has a very definitive and empowered administrative mechanism for implementing it. Whatever be the approach adopted for legislating Non-Preferential Rules of Origin, it has to be an ambiguity free, comprehensive legal and administrative framework.

In the interregnum the department could pick the clue as indicated by Hon. CESTAT and adhere to the substantive protocol as laid down in Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020.

Post script; Tony Blair in the book "On Leadership", quotes George Kennan who quipped in context to having a proper road map for executing plans (para phrasing Lewis Carrol in Through the Looking - Glass): "If you don't know where you're going, any road will take you there" (essentially, nowhere ;emphasis mine). A regulatory vacuum is bound to lead us astray, which would be a disservice to the interest of all stake holders, be it government or trade!!

[The views expressed are strictly personal.]