Denial of Exemption and re-classification under ASEAN-India FTA: Legal Imperatives of the Two-Month Rule and COO Verification Protocols

I. Introduction

This article attempts to highlight the importance of procedural safeguards provided in international treaties such as AIFTA and Rules made thereunder. The judgment rendered by the Hon’ble CESTAT Chennai in the case of Hyundai Motors India Ltd. Versus Commissioner of Customs, Chennai II Commissionerate And Commissioner of Customs Chennai II Commissionerate Versus Hyundai Motors India Ltd. - 2025 (6) TMI 608 - CESTAT CHENNAI has examined the issue in detail. Tribunal held that international treaties and FTAs have overriding effect, and COO Certificates issued by competent authorities constitute substantive and conclusive evidence of origin. The Customs Department must follow the procedural safeguards under the Rules of 2009, including retroactive checks and verification, before denying preferential treatment. Since revenue failed to demonstrate compliance with these procedures, denial of exemption was improper. 

II. Background: Recent Enforcement Trends

Recent reports allege that more than 1,000 importers have been issued show-cause notices by customs authorities for allegedly availing undue duty exemptions under the ASEAN-India Free Trade Agreement (AIFTA) between 2019 and 2023.The notices are demanding payment of differential customs duty along with a penalty for imports of copper tubes and pipes that were declared as originating from Vietnam. Authorities have argued that these products do not meet the origin criteria required under AIFTA for duty exemption, despite being cleared at zero percent BCD and 18 percent IGST at the time of import. The enforcement action follows a surge in imports of copper tubes and pipes from Vietnam in recent years. As per the show-cause notices, the customs department has alleged that importers made ‘wrong declarations’ by claiming that the copper used to manufacture these goods was sourced from Indonesia or other ASEAN member states, thereby falsely complying with the 35 percent value addition requirement under AIFTA. Even steel industry players have raised concerns that exporters of stainless steel in several countries are colluding with some Indian importers to misuse the provisions of the ASEAN-India FTA. It has been alleged that the Exporters of stainless steel in several countries are colluding with some Indian importers to misuse the provisions of Indian-ASEAN FTA rules. Certain enforcement action followed the surge in imports of SS Products from ASEAN nations. In an era of increasingly transactional and unpredictable global trade, India has taken certain decisive steps to address the persistent issue of third-country imports being rerouted through countries that have signed FTAs with India. The rampant diversion of goods, particularly from China via the ASEAN-India FTA, has led to amendment of the 2025 amendments in CAROTAR Rules.A key change in this 2025 amendment brought vide NOTIFICATION NO. 14/2025- CUSTOMS (N.T.) New Delhi dated the 18th March, 2025 is the replacement of the term certificate of origin with proof of origin—a move that promises both regulatory relief and enhanced enforcement.

III. Procedural Safeguards under the Rules of 2009 and Judicial Approach to Certificates of Origin

In many cases, Custom authorities have not questioned the validity or the genuineness of the Certificate submitted by Importer at the time of import. The COOs have not been invalidated or quashed or cancelled or denied by issuing authority. Importer allege that the substantial conditions required to be satisfied to avail the benefit of Country of Origin such as presentation of valid COO has been complied with. Rule 13 of the Customs Tariff (Determination of Origin of Goods), 2009 under the India ASEAN FTA deals with issuance of AIFTA Certificate of Origin. Para 7(c) of Annexure III to the said Rule states that in cases where an AIFTA Certificate of Origin is not accepted by the Customs Authority of the importing party, such AIFTA Certificate of Origin shall be returned to the Issuing Authority within a reasonable period but not exceeding two months, duly notifying the grounds for the denial of preferential tariff treatment. No such action has been taken by the Customs department in many cases and hence the benefit cannot be denied.

Courts have consistently held that when an importer produces a COO Certificate which covers the imported goods, it has to be considered as substantive and conclusive evidence of being goods as declared and duty concession as eligible should be allowed, in the normal course, as the concession originates from an international treaty entered between the contracting States of which India is a signatory. In case the concession is felt to be not eligible then the department has to take recourse to the provision of the Rules of 2009 and follow the procedure set out there in. When the Customs Department of the importing Country does not take any action as provided for in Paras 7, 16 and 17 of Annexure III to the Rules of 2009 it cannot then question the concession from payment of duty as eligible as per the COO Certificate. As per Para 7, in case the AIFTA Certificate of Origin is not accepted by the Customs Authority of the importing party it shall be returned to the Issuing Authority within a reasonable period but not exceeding two months, duly notifying the grounds for the denial of preferential tariff treatment. As per para 16 the importing party may request a retroactive check at random and/or when it has reasonable doubt as to the authenticity of the document or as to the accuracy of the information regarding the true origin of the goods in question or of certain parts thereof. In case of reasonable doubt as to the authenticity or accuracy of the document, the Customs Authority of the importing party may suspend provision of preferential tariff treatment while awaiting the result of verification. As per Para 17 if the importing party is not satisfied with the outcome of the retroactive check, it may, under exceptional circumstances, request verification visits to the exporting party. In the many cases Revenue has not demonstrated that they have taken any steps as required by paras 7, 16 and 17 of Annexure III ibid and have thereby wrongfully sought to deny the exemption.

IV. Treaty Obligations and Legislative Framework

It may be pertinent to reproduce relevant extracts from statutory notifications issued in pursuance to international treaties : -

“7.  ISSUANCE OF AIFTA CERTIFICATE OF ORIGIN

(a) (b) (c)  In cases where an AIFTA Certificate of Origin is not accepted by the Customs Authority of the importing party, such AIFTA Certificate of Origin shall be marked accordingly in box 4 and the original AIFTA Certificate of Origin shall be returned to the Issuing Authority within a reasonable period but not to exceed two months. The Issuing Authority shall be duly notified of the grounds for the denial of preferential tariff treatment.

(d)  In cases where an AIFTA Certificate of Origin is not accepted, as stated in paragraph (c), the Issuing Authority shall provide detailed, exhaustive clarification addressing the grounds for the denial of preferential tariff treatment raised by the importing party. The Customs Authority of the importing party shall accept the AIFTA Certificate of Origin and grant the preferential tariff treatment if the clarification is found satisfactory.”

Revenue in many cases is not abiding by the time limits and is undertaking retroactive checks after years. In other cases, SCNs are being issued without retroactive checks in respect of goods covered under valid COOs and without getting them cancelled/invalidated from issuing authorities. Strict time limits have been prescribed in Rules under International treaties and statutory notifications such as Notification No. 189/2009-CUSTOMS (N.T.) dated 31st December, 2009. An official certificate that too covered under the procedure formulated by a Treaty obligation and issued as per the requirements under Rules of 2009 cannot be lightly discarded. A 5 Judge Bench of the Hon’ble Supreme Court in EP. ROYAPPA Versus STATE OF TN. & ANR. - 1973 (11) TMI 80 - Supreme Court  held that the burden of establishing mala fides in very heavy on the person who alleges it. The allegations of mala fides are often more easily made than proved, and the very seriousness of such allegations demands proof of a high order of credibility. In many cases, Revenue places reliance on the judgment of the Hon’ble High Court of Gujarat in Trafigura India Private Limited Versus Union Of India - 2023 (12) TMI 196 - GUJARAT HIGH COURT to support their stand. However as discussed above in many cases, Courts have held that there is no proof in manner known to law that revenue have been able to get COOs cancelled or discarded rather in many cases they have not even taken up COOs for verification in manner laid down in statutory notifications. Even otherwise, binding nature of statutory notifications and instructions was not the issue before Bench. Issue considered in said decision was related to Article 24 of treaty and the binding nature of treaty in absence of domestic legislation.

Section 5(1) of the Customs Tariff Act, 1975, empowers the Central Government to issue a Notification so as to make Rules for determining if any article is a produce or manufacture of such foreign country. This benefit is extended through a Notification issued in accordance with the powers conferred by sub-section 1 of Section 25 of the CA 1962, which provides a preferential rate for payment of BCD for the goods concerned. In accordance with the framework of the Notification, COO Certificate issued by the Competent Authority at the country of export, contains the classification of the goods as per the Harmonized System number of the importing Party. What is importantly and noticeably omitted is Article 24 of AIFTA Operational Certification Procedures. Article 24 provision does not figure in DOGPTA Rules, 2009 enacted by Government of India. Article 24 reads and provides as under,

“Article 24

(a) In case of a dispute concerning origin determination, classification of products or other related matters, the Governmental authorities concerned in the importing and exporting Parties shall consult each other with a view to resolving the dispute, and the result communicated to the other Parties.

(b) Where no mutually satisfactory solution to the dispute is reached through consultations, the Party concerned may invoke the dispute settlement procedures under the ASEAN-India DSM Agreement.”

It must be noted that the international treaties are entered into between Sovereign contracting States for providing “preferential tariff treatment” to goods imported by participating countries, from each other, in accordance with a trade agreement. There is a prima facie presumption that Parliament does not intend to act in breach of international law, including therein a specific treaty obligation. This is because the Directive Principles of State Policy as enshrined in Article 51 of the Indian Constitution enjoin the State to endeavor, inter alia, to foster respect for international law and treaty obligations. This is also seen to be diligently followed in CBIC’s Instruction No. 19/2022- Customs, dated 17/08/2022, wherein Customs officials were instructed to give Free Trade Agreements an overriding treatment over Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR in short) wherever CAROTAR is inconsistent with FTA. Relevant portion is reproduced below.

“3.2 In continuation of the same, field formations are sensitized by drawing attention again to section 28DA [Customs Act, 1962]. It is emphasized that its sub-section (3) empowers the proper officer to ask the importer to furnish further information, consistent with the trade agreement, in case the proper officer has reasons to believe that the country-of-origin criteria have not been met. Similarly, its sub-section (4) enables the proper officer, where the importer fails to provide the requisite information for any reason, to cause further verification consistent with the trade agreement. Moreover, in the Rules [CAROTAR], the rule 8 (3) states - 'In the event of a conflict between a provision of these rules and a provision of the Rules of Origin, the provision of the Rules of Origin shall prevail to the extent of the conflict.'

Thus, it must be noted that while the Customs department can after following the due process change the classification of the imported goods as per the domestic laws, it cannot deny “preferential rate of duty” (which has been defined under CAROTAR to mean rate at which customs duty is charged in accordance with a trade agreement), to the goods covered by a valid COO Certificate issued as per an international treaty obligation, that satisfies the conditions of a notification issued under Section 25 of the CA 1962,unless the classification had been challenged successfully as provided for in the Rules of 2009. Hence the action taken by the revenue in denying concessional rate of duty for the goods by rejecting the Country-of-Origin Certificate in many such cases is untenable. Thus, both Origin related matters as well as classification disputes covered under validly issued COOs should be strictly dealt as per above Board Instructions only.Both treaty as well as statutory notification provides for 2 months time limits in case of non acceptance of COO exemption. Treaty requires mandatory consultation in classification dispute also but said article has not been notified in terms of statutory notification. However, CBIC Instruction No. 19/2022- Customs, dated 17/08/2022 and CAROTAR Rules mandate that in the event of a conflict between a provision of these rules and a provision of the Rules of Origin, the provision of the Rules of Origin shall prevail to the extent of the conflict.

V. Binding Nature of statutory notifications, CBIC Instructions and CBIC Circulars

The issue of binding nature of statutory notifications, Circulars and Instructions is no longer resintegra. Reliance to placed on following decisions of the Apex Court :-

1. RANADEY MICRONUTRIENTS Versus COLLECTOR OF CENTRAL EXCISE - 1996 (9) TMI 124 - Supreme Court
2. COLLECTOR OF CENTRAL EXCISE, BOMBAY Versus KORES (INDIA) LIMITED - 1996 (12) TMI 53 - Supreme Court
3. COLLECTOR OF CENTRAL EXCISE, PATNA Versus USHA MARTIN INDUSTRIES - 1997 (8) TMI 77 - Supreme Court
4. COLLECTOR OF CENTRAL EXCISE, BOMBAY Versus JAYANT DALAL PRIVATE LTD. - 1996 (10) TMI 97 - SC Order
5. Ellerman Lines Limited Versus Commissioner of Income-Tax, West Bengal I - 1971 (10) TMI 7 - Supreme Court
6. KP Varghese Versus Income-Tax Officer, Ernakulam, And Another - 1981 (9) TMI 1 - Supreme Court 
7. PAPER PRODUCTS LTD. Versus COMMISSIONER OF CENTRAL EXCISE - 1999 (8) TMI 70 - Supreme Court
8. COLLECTOR OF C. EX., VADODARA Versus DHIREN CHEMICAL INDUSTRIES - 2001 (12) TMI 3 - Supreme Court 
9. SIMPLEX CASTINGS LTD. Versus COMMR. OF CUS., VISHAKHAPATNAM - 2003 (4) TMI 107 - Supreme Court
10. Union of India And Another Versus Azadi Bachao Andolan And Another - 2003 (10) TMI 5 - Supreme Court
11. DABUR INDIA LTD. Versus COMMISSIONER OF CENTRAL EXCISE, MEERUT - 2003 (8) TMI 50 - Supreme Court
12. COMMISSIONER OF CUSTOMS, CALCUTTA Versus INDIAN OIL CORPORATION LTD. - 2004 (2) TMI 66 - Supreme Court  
13. STATE OF KERALA AND OTHERS Versus KURIAN ABRAHAM PVT. LTD. AND ANOTHER - 2008 (2) TMI 289 - Supreme Court
14. UNION OF INDIA Versus ARVIVA INDUSTRIES (I) LTD. - 2007 (1) TMI 6 - Supreme Court
15. Vijay Krishnaswami @ Krishnaswami Vijayakumar Versus The Deputy Director of Income Tax (Investigation) - 2025 (9) TMI 106 - Supreme Court

VI. Importance of Timelines

It is reiterated that word used in statutory notifications is “SHALL” and same further qualifies it with a time limit of “Reasonable period not exceeding 2 months”. Circulars are binding on revenue officers. However, in the instant cases, issue pertains to the binding nature of Statutory Notification which prescribes a time limit. Next issue is the binding nature of Instructions issued by CBIC. Even otherwise, time limits provided in Section 28 for issuance of SCN, allowing drawback under Section 74, experience for appointment as Member in terms of Section 129, maximum punishments in Section 132 and 135 etc are mandatory. Therefore, business of discarding COO or duty benefit should be carried out strictly as per time limits prescribed in Notifications. Moreover, retroactive checks should be used by revenue officers for challenging origin as well as for challenging classification declared in Certificates.

It is not open to the Revenue to raise a contention that is contrary to a binding notification or binding instruction. It is settled law that it is not even open to the Revenue to advance arguments that are contrary to the terms of Tariff Advice or a Trade Notice issued by the Board thereof.  Such statutory notifications and Board Instructions have not been issued for fancy or as rituals. When it comes to judicial scrutiny, it is difficult to see how the officers notified by Board could argue or work against the terms of statutory notifications and Board Instructions. Delayed actions appear to be a more of an omission on part of revenue officials to timely decide on non acceptance of COOs. Board Instructions and statutory notifications flow as a consequence of international treaties. Revenue officers can not be permitted to fix their own time lines or cover up their inactions to promptly deny acceptance of exemptions.

Treaty obligations are a result of active negotiations by Ministry of Commerce. Relevant Custom Notifications and Instructions have been notified by CBIC. Field formation cannot sit over judgment on the time lines prescribed in treaties, statutory notifications and render their provisions and clauses as redundant or otiose. These Notifications and Instructions have not been challenged by CBIC nor have been withdrawn. The Department is precluded from challenging the correctness of the said statutory notifications or Instructions even on the ground of the same being inconsistent with the statutory provision. The ratio of the judgment of Apex Court further precludes the right of the Department to file an appeal against the correctness of the binding nature of the even Circulars. Therefore, it is clear that so far as the Department is concerned, whatever action it has to take, the same will have to be consistent with the Circular which is in force at the relevant point of time. Case here is not just circular but Statutory Notifications and Board Instructions. Irrespective of fact whether said right is available to the revenue, it does not lie in the mouth of the Revenue to repudiate a statutory Notification or an Instruction issued by the Board on the basis that they have some reasonable belief after a delay of years.

Consistency and discipline are, of far greater importance than the winning or losing of revenue in the court proceedings. The principles laid down by Apex Court are :(a) Although a circular is not binding on a Court or an assessee, it is not open to the Revenue to raise the contention that is contrary to a binding circular by the Board. When a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid nor that it is contrary to the terms of the statute.(b) Despite the decision of this Court, the Department cannot be permitted to take a stand contrary to the instructions issued by the Board.(c) A show cause notice and demand contrary to existing circulars of the Board are ab initio bad.(d) It is not open to the Revenue to advance an argument or file an appeal contrary to the circulars. Such an approach is unsustainable in the eyes of law. If the CBIC Officers are of the view that such Notifications or Instructions are illegal or that they are ultra vires, which it is not, it remains open to the Executive to nullify/withdraw the said Instruction or table amended Notification with clear retrospective clause in Parliament. It is not open to the officers administering the law working under the Board to say that the said notification or instruction is not binding on them. If such a contention was to be accepted, it would lead to chaos and indiscipline in the administration of tax laws.

VII. Conclusion

Any other interpretation will render provisions of this notification otiose. It is difficult to say that notifications and Instructions are not binding in view of number of decisions supra, especially those rendered by 3 and 5 judge Constitution Benches of Apex Court. Infact, the Supreme Court on 28.08.2025 in the case of Vijay Krishnaswami @ Krishnaswami Vijayakumar Versus The Deputy Director of Income Tax (Investigation) - 2025 (9) TMI 106 - Supreme Court has imposed Rs. 2 Lakhs cost on Income Tax Department for 'grossly abusing its position' to continue a prosecution against an assessee alleging willful tax evasion even after deletion of penalty by ITAT. Apex Court after relying on series of its earlier decisions noted that it is imperative for us to understand the binding nature of the departmental circular, Prosecution Manual, 2009, and CBDT’s clarification.On similar lines, statutory notifications and Instructions issued by CBIC have binding effect on revenue officers. Tax statute provides for mechanism for ensuring compliance from person whom department alleges to be non compliant. Time limits have been prescribed for filing returns, issuing notices, finalizing provisional assessment, issuing speaking orders, issuing adjudication orders, quantum of punishment etc. The CBIC instructions and judicial rulings highlight the importance of adhering to timelines and the consequences of failing to do so. Delay in adjudication in another such issue.

Rules regarding the interpretation of taxing statues as enunciated in Chief Commissioner of Central Goods and Service Tax & Ors. Versus M/s Safari Retreats Private Ltd. & Ors. - 2024 (10) TMI 286 - Supreme Court makes importance of plain reading of time limits even clearer. A taxing provision and associated procedural time limits cannot be interpreted on any presumption or assumption.A taxing statute has to be interpreted in the light of what is clearly expressed. The Court or Executive cannot imply anything which is not expressed. Moreover, the Court cannot import provisions in the statute to supply any deficiency or impose any other time limit other than one clearly mentioned in treaty obligations and statutory notifications. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature’s failure to express itself clearly or executive’s failure to notify non acceptance within the time  limits prescribed by statutory notification. It is not a function of the Court in the fiscal arena to compel the Parliament or Executive to go further and do more. Judgment of a nine-judge Bench of the Hon’ble Supreme Court in SUPERINTENDENT & LEGAL REMEMBRANCER, STATE OF WEST BENGAL Versus CORPORATION OF CALCUTTA - 1966 (12) TMI 67 - Supreme Court. In MARTIN BURN LTD Versus CORPN. OF CALCUTTA - 1965 (8) TMI 83 - Supreme Court, the Apex Court, observed as under:–“A result flowing from a statutory provision is never an evil. A Court has no power to ignore that provision to relieve what it considers a distress resulting from its operation. A statute must of course be given effect to whether a Court likes the result or not.”

In the light of clear time lines for non acceptance of COO in AIFTA related statutory notifications, CBIC Instructions giving overriding effect to the Rules of Origin over CAROTAR, law declared by Apex Courts in respect of binding nature of notifications and instructions, the very survival of various Notices will remain in question. Such proceedings involving recovery of duty by discarding COO without adherence to procedure prescribed in statutory notifications may not stand judicial scrutiny. The very proceedings may at the most be termed as nothing but as one without jurisdiction, without the authority of law and perse illegal abinitio in event of glaring Omission on part of revenue to follow statutory notifications and instructions issued by Board. Tax provisions have to be clear, explicit and unambiguous. Cost of unwarranted litigation and the financial burden should be avoided.