Verification First, SCN Later: Re Centring FTA Origin Checks

Abstract

Indian Customs authorities are increasingly issuing show cause notices ('SCNs') directly to the importers, disputing preferential duty claims under Free/Preferential Trade Agreements ('FTAs'), even when Certificates of Origin ('COOs') have been issued by the designated authority of the exporting country. Recent High Court interventions reaffirm a simple proposition: once a COO exists, the importing administration must first invoke the verification architecture embedded in the FTA (and mirrored in Section 28DA of the Customs Act, 1962 and CAROTAR, 2020) before proceeding against the importer. This article surveys the treaty text, the domestic legal framework, and the emerging case law, and argues for rigorous adherence to the verification‑first sequence. 

The Treaty Architecture: Operational Certification Procedures (OCPs) under FTA

The operational certification procedure ('OCP') refers to the set of rules and processes that govern how certificates of origin are issued, verified, and accepted under a preferential trade agreement. Considering the ongoing disputes primarily centred on AIFTA (ASEAN-India Free Trade Agreement), the authors will specifically address the operational certification procedure under AIFTA. 

Under the AIFTA, it provides for a two‑stage verification protocol in Operational Certification Procedures.¹ Such verification procedure is different from the dispute settlement procedure² given under the FTA, and recently contested.³ When the importing country harbours 'reasonable doubt' about the authenticity of a COO or the accuracy of origin particulars, it may request a retroactive check from the Issuing Authority of the exporting Party⁴, followed, if not satisfied, by verification visits⁵. Determinations are to be notified to the Issuing Authority and the producer/exporter, if goods are found non‑originating. Thereafter, the exporter receives an opportunity to respond before a final determination issues. The OCPs also require the importing Party to return a COO it refuses to accept, stating grounds.⁶ The OCP makes it aptly clear a step-wise manner in which the procedure must be followed. 

In practice, this means that a customs officer's disagreement with an importer's claim cannot, without more, translate into denial of benefits. The customs officer ought to follow the due procedure notified by the rules of origin and undertake verification through the counterpart Issuing Authority.

Domestic Transposition: Section 28DA and CAROTAR, 2020

Parliament codified the 'verification‑first' logic in Section 28DA of the Customs Act, 1962⁷ and the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 ('CAROTAR'). As per Section 28DA(3) and (4) of Customs Act, the proper officer (customs department), upon doubts, at the time of clearance or thereafter,⁸  has powers to seek information from the importer consistent with the FTA.⁹ The importer must furnish whatever information it possesses.

In case the information sought from the importer is not sufficient, it is obligatory on the officer to cause further verification consistent with the FTA¹⁰ and may only temporarily suspend preferential treatment pending verification.¹¹ Rule 6 of CAROTAR then gives the operational roadmap, i.e., (1) requests to the Issuing Authority, (2) possibilities of additional information/verification visits, and (3) timelines for replies. Attempting to leapfrog this procedure by issuing a notice premised on unverified origin verification is ultra vires the statutory provisions.

Why the sequence of verification matters
 

1. Rule‑of‑law within reciprocity. The COO is not an importer's private certificate. It is a sovereign‑to‑sovereign instrument. Disputing it is therefore a state‑to‑state procedural exercise, routed through Issuing/competent authorities as the treaty stipulates. Unilateral disallowance of FTA benefit undermines the mutual trust on specified agencies under the FTAs. 
    
2. Due process for facts not in the importer's control. The exporter's cost statements, production records, and originating computations typically sit outside the importer's domain, and are confidential information of trade. Thus, the authors believe that shifting the evidentiary burden prematurely onto the importer by issuing an SCN is incorrect.
3. Administrative discipline. Section 28DA/CAROTAR channels suspicion into a controlled administrative process (information request →nodal FTA cell → issuing authority). Skipping these steps not only prejudices the importer, it also weakens the Department's case.
    

Court findings: Verification is a jurisdictional pre‑condition

High Courts, across benches, have insisted that authorities must follow the treaty and statutory verification device before initiating coercive action:
 

• Delhi High Court in Bullion & Jewellers Association  v. UOI¹² held that doubts about origin must be addressed via the prescribed verification under the Rules of Origin. In fact, in Ausil Corporation Pvt. Ltd.  v. UOI¹³, surveying the CAROTAR framework, emphasized that COOs issued by a competent foreign authority cannot be lightly ignored. It was held that a verification exercise must be initiated on well‑substantiated grounds, not conjecture. 
   
• Andhra Pradesh High Court in Mahadev Metaliks Pvt. Ltd.  v. UOI¹⁴ foregrounded the sanctity of inter‑State commitments, and procedures agreed upon between States. In Noble Import Pvt. Ltd.  v. UOI¹⁵, the same Court held that even if an importer fails to supply information, the authority's recourse is to conduct a retroactive check. Accordingly, the orders passed without such retro‑check were held to be without jurisdiction. 
   
• Tax Tribunals  have echoed the approach in MJ Gold Pvt. Ltd.¹⁶ and Dhar Cement¹⁷.

Conclusion

Despite this settled architecture, recent SCNs are increasingly being issued without resorting to OCP verification as mandated under FTAs. This not only burdens importers with avoidable litigation but also weakens the Department's position. 

The jurisprudence is steadily converging on a clear principle. Verification under an FTA is not optional but a jurisdictional prerequisite, and once a duly issued COO exists, mere disagreement by a customs officer cannot justify denial of preferential duty. Authorities must first seek clarifications from the importer, and then necessarily invoke treaty‑mandated verification mechanisms alongside Section 28DA and CAROTAR before issuing any SCN.

Given the rising misuse of COOs and the consequent spike in disputes, importers must take proactive compliance measures. From the Department's perspective, a dedicated regulatory framework, similar to Pre‑Notice Consultation Regulations¹⁸, is needed to standardize FTA verification procedures. In its absence, COOs are being rejected contrary to law. It is crucial to recognize that FTA verification is independent of inquiries or investigations under Section 108. Even during such proceedings, officers remain bound to follow the specific verification process under the FTA, Section 28DA, and CAROTAR.

Question remains, if verification during assessment or inquiry favours the assessee, is the Department subsequently barred from reopening verification? Secondly, what should be the outer timeline for Customs to initiate verification, given that a delayed process may leave the issuing authority without the records needed for compliance? The authors leave this for readers to consider.

Footnotes

1 Annexure-III, Operational Certification Procedure, Notification No. 189/2009-Cus (NT) dated 31 December 2009 

2 Article 24 of AIFTA (Main Text)

3 Trafigura India Pvt Ltd. v. UOI [(2023) 13 CENTAX 9 (Guj)]

4 Article 16, Verification, Annexure-III, Operational Certification Procedure, Id.

5 Article 17(a), Verification, Annexure-III, Operational Certification Procedure, Id. 

6 Article 17(b), Verification, Annexure-III, Operational Certification Procedure, Id.

7 Introduced vide Finance Act, 2020

8 Rule 5(1), CAROTAR

9 Rule 5, CAROTAR

10 Section 28DA(4)(i), Customs Act, 1962

11 Section 28DA(4)(ii), Customs Act, 1962

12 2016 (335) ELT 639 (Del.)

13 2024 (9) TMI 716- DHC

14 2016 (331) ELT 424 (A.P.)

15 2017 (349) ELT 44 (A.P.)

16 MJ Gold Pvt Ltd. v. PC (Import), New Delhi [2022 (10) TMI 292 - CESTAT NEW DELHI]

17Dhar Cement Ltd. v. CC Ex [2016 (335) E.L.T. 292 (T)]

18 Pre-Notice Consultation Regulations, 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.