Preferential origin rules and Certificate of Origin verification limited customs' power to recompute value addition and impose penalties.

A preferential origin scheme required Local Value-Added Content to be computed under the prescribed FOB/CIF formula, and customs could not replace that statutory method with labour and handling charges. A Certificate of Origin issued by the designated foreign authority remained the foundational document unless the prescribed verification procedure was invoked, and the importer's duty was limited to producing that certificate. In the absence of wilful suppression, misstatement, or intent to evade duty, the extended limitation period and penalties were not attracted, and consequential duty demand could not stand.

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Issues: (i) Whether the Department could reject the Certificate of Origin and recompute Local Value-Added Content contrary to the Interim Rules of Origin, and whether the importer bore the burden of verification; (ii) Whether the duty demand, extended period of limitation, and penalties were sustainable.

Issue (i): Whether the Department could reject the Certificate of Origin and recompute Local Value-Added Content contrary to the Interim Rules of Origin, and whether the importer bore the burden of verification

Analysis: Rule 6(d) prescribes the method for computing Local Value-Added Content by reference to FOB value and CIF value of non-originating materials. The Department's approach of treating labour and handling charges as the measure of value addition amounted to an impermissible substitution of the statutory formula. The Certificates of Origin issued by the designated Thai authority formed the foundational document under the origin scheme, and the prescribed verification under Rule 15 was not invoked. The importer was only required to produce the certificate and could not be expected to verify the foreign supplier's internal cost structure.

Conclusion: The rejection of the Certificate of Origin and unilateral recomputation of Local Value-Added Content were unlawful, and the issue was answered in favour of the assessee.

Issue (ii): Whether the duty demand, extended period of limitation, and penalties were sustainable

Analysis: Once the denial of exemption failed, the consequential demand also failed. The extended period could not be invoked without wilful suppression, wilful misstatement, or intent to evade duty. The records showed disclosure of the Certificates of Origin at the time of import, their acceptance by Customs, and no material suggesting forgery, manipulation, or collusion. Penalties under Sections 114A and 114AA required the relevant mens rea, which was absent on the facts found.

Conclusion: The duty demand, extended period, and penalties were not sustainable, and the issue was answered in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal succeeded with consequential relief.

Ratio Decidendi: Where a preferential origin scheme prescribes a specific formula and verification mechanism, customs authorities cannot discard the Certificate of Origin or substitute their own methodology without following the prescribed procedure; absence of wilful suppression or intent to evade duty defeats invocation of the extended period and penalties.

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