Section 28 DA Of Customs Act 1962 & CAROTAR Rules 2020: Is The Remedy Worse Than The Disease?

Conventionally, in order to claim the preferential duty benefit, the importer was required to supply to the customs authority a Certificate of Origin (CoO) issued by a competent body, designated in the FTA ( usually a Chamber of Commerce of the exporting country ) along with the documents required for importation of goods, i.e. invoice and the bill of entry at the time of clearance of goods.

The Advent of S 28 DA and consequential CAROTAR Rules 2020

S 28 DA has been inserted into the Customs Act in the Budget of 2020, which ,in substance, places the full onus on Indian importers to prove that goods imported under the free trade agreement (FTA) adhere to the prescribed origin criteria, by "satisfying " the Customs officers who can now demand evidences much beyond the CoO .The Govt introduced the CAROTAR Rules 2020 w.e.f 21^st Sept 2020 ,vide Notification 81/2020 Cus NT , as the machinery provisions to give teeth to the section. The ostensible objective behind introduction of CAROTAR, 2020 is to curtail the prevalent malpractices in the trade by preventing the " dishonest" importers from misusing the facility of claiming preferential duty benefit under various Trade Agreements by a mere production of the CoO, which may be fake or fraudulently obtained .. However, a perusal of the provisions and the hardships it entails for the importers, apart from the potential threat of over ride of the Treaty provisions can make one wonder, whether the Remedy is worse than the Disease ?

Summary of S 28DA & CAROTAR Provisions

The pith and substance of these provisions , is that the full onus is on Indian importers to prove that goods imported under the free trade agreement (FTA) adhere to the prescribed origin criteria & " satisfy the assessing officers of the same . Under the provisions, the tax authorities have greater powers that permit them to temporarily suspend the preferential treatment pending verification, or even disallow the claim under special circumstances without further verification. Claims can also be rejected for importers of identical goods, where at the time of previous verification, such goods imported by other Indian importers from the same producer and exporter have been found to be non-compliant with the prescribed conditions. Thus, effectively , the benefits of tariff concession, on which a bona fide importer may have based his business case & commercial economics, can be nullified by administrative actions of Revenue officers , if he has "reason to believe " that the COO criteria has not been met, or the information furnished by the importer under the Rules, "is not found satisfactory " ( readers may note, in particular S 28 DA (4) incl its proviso, & S 28DA (8) apart from the other sub sections )

Subsequently, to implement the aforesaid section, The government has notified the Customs (Administration of Rules of Origin under Trade Agreement) Rules, 2020 , effective from 21^st Sept 2020 which stipulate the detailed procedure to be followed for substantiating the benefits under the FTAs and the powers of verification of the authorities.

The rules require an importer to submit certain declarations in the bill of entry filed for goods imported under the FTA and requires it to be in possession of details prescribed in Form I. The details , inter alia include information on the production process, originating criteria, the origin of inputs (used for manufacturing/producing imported goods), the method used for determining the origination criteria for example , accumulation/cumulation, value content, change in tariff classification (CTC) rule, process rule etc. The importer is supposed to exercise reasonable due diligence in the verification of data. The onus of accuracy and truthfulness of the information is now on the importer.

Hardships /Difficulties for Importers

Before debating the standing of the Rules in the light of International Law of Treaties, let us briefly focus on the practical difficulties that will now be faced by the importers, listed below

• The information sought is at a very macro level and the rules lack granularity on the exact nature of the documents/proof that needs to be obtained to "satisfy" authorities on the genuineness of the claim by the Indian importer.
• Most of the information sought could be confidential or a process registered under an intellectual property, and the supplier may be completely unwilling to share it, e.g. production process or cost details or value content workings, etc. There have been past instances where the issuing authorities,( from the exporting member nations), have forbidden the exporters from sharing any details with the Indian importers, as such requests have been considered outside the ambit of the FTA. Confidentiality has also been cited in the past , as a reason for not sharing these details.
• Even if the supplier/exporter were ready to submit the details, the rules do not stipulate the level of verification that needs to be carried out to constitute reasonable due diligence. What constitutes 'reasonable due diligence' can differ from one tax authority/officer to another and this could lead to a subjective and indiscriminate approach to conducting and concluding enquiries by the customs authorities.
• There could also be a situation where additional documents are sought by Customs at a subsequent stage, as the customs law ( S 28DA (9) ) permits notices to be issued for up to five years after the date of claim of the preferential tariff rate ( usually Date of Importation or BOE date ) & at that point of time, the Indian importer may no longer have any ongoing transactions or business relationship with the supplier, making it difficult/impossible for him to belatedly seek additional information at the behest of the Customs authorities .
• The importer may have invested capital and based his business case on the promise of FTA tariff benefits notified. Any belated annulment & denial of the same subsequently, as late as even after 5 years, is contrary to the doctrine of promissory estoppel, and such denial is not justifiable on the plank of "public interest" ( which will definitely be the main defence of the Govt of India against any ground of promissory estoppel ., especially after the SC judgment in UOI vs VVF Ltd 2020-TIOL 83-SC) . Rather, an adverse climate for business and cross-border trade is likely to be fostered due to the CAROTAR, which may prove to be against "public interest" eventually.
• The CAROTAR could trigger a change in the commercial arrangement between the exporters and importers, whereby importers could demand a declaration from the exporter on the authenticity of the (COO), and the documents provided for establishing the origin criteria. Some transactions could lead to the demand (from importer to the exporting supplier) of indemnity to cover cases where the provisions of incorrect documents/details leads to denial of benefits and levy of penalties. Moreover, the above could then become a pre-condition of sale/purchase, as also became a reason for escalating procurement costs, as exporters may build in costs of such additional compliances into their selling price

Issues of International Law

• The preferential tariff agreements are governed by the customary principles of International Law & Treaties. The principles set out in Vienna Convention as agreed on 23^rd May 1969 are recognized as applicable to tax treaties. Rules embodied in Articles 26, 31, 32 and 33 of the Vienna Convention are often referred to in interpretation of tax treaties. Some aspects of those Articles are good faith; pacta sunt servanda, objects and purpose and intent to enter into the treaty. According to the principle of pacta sunt servanda, embodied in Article 26 of the VC, every treaty signed by a country is binding on it and the obligations imposed by treaties must be performed by the country in good faith. Though India is not a signatory to the Vienna Convention, it adopts many of its principles as principles of customary International Law The Supreme Court too has, in Ram Jethmalani v. Union of India (MANU/SC/0711/2011) recognized that the Vienna Convention codifies many principles of customary international law.
• A pertinent principle which needs to be noted in the interpretation of the provisions of an international treaty, is that treaties are negotiated and consummated at a political level between sovereigns, and have several larger considerations as their rationale and objectives. Such treaties should be seen in the context of aiding commercial relations between treaty partners and as being essentially a contract or bargain between two sovereign treaty countries ( Ref UOI vs Azadi Bachao Andolan -MANU/SC/1219/2003)

• All of the above beg the question -- whether by municipal law of a treaty signatory country( here India) the scope and effect of an International treaty (in this case FTA) can be diluted, defeated, or annulled

It is therefore suggested that the sweeping powers given to Customs authorities vide the CAROTAR, should be tempered in way consistent with the FTA signed by two sovereign states, rather than negate/override the objectives of the treaties indirectly, , through administrative actions of Customs authorities (potentially unilateral & arbitrary ) post importation.

Suggestions & Way Forward

All of the above, makes one wonder whether the baby (of a favourable climate of International Trade , that can be fostered by municipal laws consistent with the comity of nations & rules of international Law) ) is being summarily thrown out with the dirty bathwater (of a few fraudulent transactions and fake CoOs) . To avoid or prevent such unfortunate occurrence , a few suggestions are humbly offered below :

• The best and most elegant way to be consistent with the principles of international law and tax treaties signed between sovereigns, is to make the domestic laws consistent with the treaties signed under international law.

• Any contentious issues noted /apprehended by the Government of India, should be resolved by directly amending the concerned FTA itself, by incorporating appropriate safeguards (against possible revenue leakage & misuse of COO), into the FTA itself.
• The CAROTAR be diluted /amended to give effect to the beneficial objectives of the FTA, and prevent subjective interpretations by Customs authorities and consequent hardships for the importers and litigation burden.
• The sanctity of the CoOs be respected as primary evidence of origin . In most countries The COO issued by the member country is generally accepted as a reasonable assurance that the goods are of the origin of the exporting country. Furthermore, the FTAs already prescribe a retroactive check, whereby the importing country government can reach out to the exporting country government and seek information

Views expressed by the author are personal.

(Author is a Mumbai based Advocate)