1. India has entered into several bilateral and multilateral treaties (referred to as Free Trade Agreements (FTA)) to promote cross-border trade. Examples include treaties with Singapore, Chile, Malaysia, Korea, Japan, SAARC members, etc. Article XX, containing general exceptions, under the General Agreement on Tariffs and Trade(GATT) permits granting preferential tax rates on the importation of specified goods under such treaties. Although the FTA’s are negotiated by the Government in the capacity of an executive, the preferential treatment to be granted under such FTA’s have to be provided for in the Indian laws for giving it a legal force. In the context of Customs Law, Sec. 5 of the Customs Tariff Act, 1975 contains the provisions relating to the levy of duty at a lower rate under a trade agreement. The salient features of the said provisions are that (a) the duty at the lower rate will be applied only if the goods are produced or manufactured in the country or territory provided in the FTA and that (b) the Central Government is obliged to formulate the rules for determining if any article is the produce or manufacture of such foreign country or territory and for requiring the owner to make a claim at the time of importation, supported by such evidence as may be prescribed. Also, the Central Government is considered as the sole and final arbiter of any disputes arising under any such agreements.

Free Trade Agreements

2. In accordance with Sec. 5 of the Customs Tariff Act, 1975, the preferential lower rate of duty under FTA is effectuated by way of issuance of the exemption notification. As an example Notification No. 69/2011-Customs dt. 29.07.2011 has been issued to grant exemption from duties exceeding the prescribed rates on the specified goods under the Comprehensive Economic Partnership Agreement (‘CEPA’) between the Republic of India and Japan.

3. Similarly, FTA’s also provide for the elaborate “rules of origin” (after much negotiations between the contracting countries) to determine whether any particular goods would be entitled to the benefit or not. Said rules also contain the minimum value addition criteria to be fulfilled in the country of origin in the case of non-originating goods (e.g. 35% in case of India-Japan CEPA).

4. Said “rules of origin” are then replicated by way of issuance of notification under the Customs Tariff Act, 975. As an example the “rules of origin” under the India-Japan CEPA have been notified vide Notification No. 55/2011-Cus (NT) as CustomsTariff (Determination of Origin of Goods under the Comprehensive Economic Partnership Agreement between the Republic of India and Japan) Rules, 2011. Said rules also go beyond the FTA as they also incorporate India’s operational certification procedure which has to be complied with to claim the benefits.

Certificate of Origin (‘COO’)

5. As discussed earlier, FTA’s provide (and which are replicated in the issued notification) for the detailed “rules of origin” which are to be met in the context of imported goods from the treaty partner to avail the preferential lower rate of duty. Within the said “rules of origin” there are also stipulations regarding the submission of the certificate of origin from the country of export. Said certificate forms condition precedent for claiming the preferential rate (see Collector of Customs v. Sanjay Chandiram 1995 (77) ELT 241 (SC)). As an example, Annexure 3 of India-Japan CEPA provides for the detailed rules for such certificates. Said rules also encapsulate the issues such as third party invoicing, issuing authority, format, validity period, etc. regarding the COO. It also covers aspects relating to the verification of such COO at the behest of the country of import. It also contains aspects relating to the suspension of benefits during the period of verification. It may also be noted that the eventual competence to determine the country of origin and the acceptance of COO vests with the customs officers of the country of import as they are the authority to assess the claims for preferential lower rate. It may also be noted that apart from the requirements of COO stemming from the given FTA read with the concerned notification, CBIC has also supplemented by way of detailed instructions certain additional procedures to be applied by the customs officer for the verification (e.g. Instruction No. 31/2016-Cus dt. 12.09.2016).

Undue claims under FTA

6. As the applicable duty under FTA is lower than the general rate, there is always an incentive to make undue claims of benefit in cases where the imported goods in question are otherwise not eligible. Many instances have occurred in the past wherein such undue claims have been made and the same therefore poses a threat to the domestic industry. Therefore a need was felt to have stringent checks to prevent the misuse. Accordingly Chapter VAA containing Sec. 28DA came to be inserted in the Customs Act, 1962 by virtue of Finance Act, 2020. Said provision requires an importer claiming the benefit to maintain “sufficient information” as regards the manner in which country of origin criteria, including the regional value content and product-specific criteria, specified in the rules of origin in the trade agreement, are satisfied. Said provision also requires the importer to “exercise reasonable care” as to the accuracy and truthfulness of the information furnished. Also, mere submission of the certificate of origin will not absolve the importer of the responsibility to exercise reasonable care. Provisions also provides for the temporary suspension of benefits in certain situations (where the claim is doubted). Said provision also provides that the importer claiming the benefits is required to furnish such information in such manner as may be provided by rules.

Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020

7. In accordance with Sec. 28DA (supra), Government vide Notification No. 81/2020 – Customs (N.T.) dt. 21.08.2020 have notified Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020. Said rules has come into effect from 21.09.2020. Salient feature of the said rules are as follows:

(i) Importer availing the benefit shall at the time of filing bill of entry by claiming the preferential rate shall (a) make a declaration that the goods qualify as originating goods for a preferential rate of duty under the FTA, (b) indicate respective tariff notification against each item on which preferential rate of duty is claimed, (c) produce certificate of origin and (d) enter details of certificate of origin in the bill of entry.

(ii) Importer availing the benefit should also 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.

(iii) Importer availing the benefit is required to keep all supporting documents related to Form I for at least five years from the date of filing of bill of entry and submit the same to the proper officer on request.

(iv) Importer availing the benefit should exercise reasonable care to ensure the accuracy and truthfulness of the aforesaid information and documents.

8. Rules further provide for the manner of verification by seeking the requisite information from the importer and consequences on the misuse of the benefits apart from the consequences flowing from the provisions of the Act. CBIC Circular No. 38/2020-Cus, dated 21stAugust, 2020 has also been issued to supplement the existing operational certification procedures prescribed under different trade agreements.

Way forward

9. Given the above developments, all the importers availing the benefits under FTA are expected to assess the risks associated including cost escalation as well as the disruption in the supply chain on account of alleged misuse of benefits. Also, importers are required to capture the basic minimum information as required by Form I. Lastly, importers are suggested to give proper disclosure and submissions to demonstrate reasonable care in situations wherein there can be a lack of clarity in certain aspects. This will protect the benefits availed.

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One Comment

  1. gucharan singh says:

    if i sell my agriculture land and want to send the proceeds to my son a australian citizen for his maintenance will i be paying TCS.I FILE my income tax return and TDS is deducted and am paying income tax

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March 2021