Customs Cannot Deny FTA Benefits By Unilaterally Discarding Certificate Of Origin: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 2 June held that Customs authorities cannot unilaterally reject a valid Certificate of Origin (CoO) issued by a foreign authority and recompute local value-added content (LVAC) using a methodology not prescribed under law.

Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao held that authorities cannot deny preferential tariff benefits under a free trade agreement by bypassing the Rules of Origin and the verification procedure prescribed therein and set aside a customs duty demand of Rs.5.68 lakh and penalties imposed on a Mumbai-based importer. The Bench held:

“...the Certificates of Origin issued by the Government of Thailand categorically certify that the goods satisfy the origin criteria, including LVAC of 22%. These certificates are issued under the Operational Certification Procedures, which form part of the statutory scheme and are not mere procedural documents.”

The dispute arose from imports of diamond- and ruby-studded gold jewellery from Thailand under Bills of Entry filed in August 2010 and October 2011.

The importer claimed preferential customs duty exemption under the Indo–Thailand Free Trade Agreement on the strength of Certificates of Origin issued by the Government of Thailand certifying that the goods satisfied the minimum 20% local value-addition requirement. Customs assessed and cleared the consignments after accepting the certificates.

Four to five years later, the Special Intelligence and Investigation Branch (SIIB) initiated an investigation and alleged that the declared local value addition of 22% was incorrect. According to the Department, the actual value addition was only about 6.5% based on its own calculations.

The Department issued a show-cause notice proposing denial of the exemption, recovery of differential duty, confiscation of the goods and imposition of penalties. The adjudicating authority confirmed the demand and penalties, and the Commissioner (Appeals) upheld the order.

Allowing the appeal, the Tribunal held that the Department had wrongly substituted the formula prescribed under Rule 6(d) of the Interim Rules of Origin with an artificial computation based largely on labour and handling charges. It observed:

“...the Department, by reducing the concept of value addition solely to labour and handling charges, has effectively substituted the statutory formula with an artificial and truncated computation. Such substitution is impermissible in law. When a statute prescribes a specific formula, it must be applied as it stands and cannot be altered by administrative interpretation.”

The Bench further held that a Certificate of Origin issued by the designated Thai authority is a crucial document under the FTA framework and cannot be discarded without following the verification mechanism prescribed under the Rules of Origin.

Since Customs authorities did not seek verification from Thai authorities through the prescribed inter-governmental process, their unilateral recomputation of value addition was legally unsustainable, the Tribunal held.

The Tribunal also rejected the Department's contention that the importer was responsible for verifying the foreign supplier's cost structure. It observed that an importer cannot reasonably be expected to access or verify the internal manufacturing costs of an overseas supplier and that production of a valid Certificate of Origin discharges the importer's obligation.

On limitation and penalties, the Bench noted that the importer had furnished all relevant documents, including the Certificates of Origin, at the time of import and that Customs had accepted those documents. It stated:

"penalty under Section 114AA requires that a person must knowingly or intentionally make, sign or use a declaration or document which is false or incorrect in any material particular. There is no material on record to suggest that the Appellant had knowingly or intentionally furnished any incorrect information".

Accordingly, the CESTAT set aside the duty demand and quashed the penalties.

For Appellant: Ranjeet Singh, Consultant

For Respondent: Rajini Menon, Authorised Representative