FTA Benefit Eligibility for FOC Imports

[Sudhir M]

Can FTA benefits be availed when importing goods as Free of Cost (FOC), while paying customs duty on the commercial value? The concern is that we need to satisfy the Regional Value Content (RVC) requirement under FTA, which is based on the FOB value of the goods. However, in this case, the actual value is nil, whereas for customs duty payment purposes, we will use a commercial value.

[Shilpi Jain]

FTA with which country are you referring to? i.e. import is from which country?

[Sudhir M]

India Korea FTA

[YAGAY and SUN]

Yes, FTA benefits under the CEPA (Comprehensive Economic Partnership Agreement) between India and South Korea can still be availed when importing goods as Free of Cost (FOC), provided certain conditions are met, especially with respect to the Regional Value Content (RVC) requirement and how customs duties are calculated on the commercial value.

Here’s how it works in the context of the India-Korea CEPA:

1. FTA Benefits and Free of Cost (FOC) Goods:

• Under the CEPA between India and South Korea, tariff reductions or exemptions are provided for goods that meet the rules of origin specified in the agreement.

• Even if goods are imported as FOC (without actual payment by the importer), the key is whether they meet the rules of origin and whether the correct Regional Value Content (RVC) requirement is satisfied.

• Customs Duty on Commercial Value: In cases where goods are received as FOC, but customs duty is paid based on the commercial value (the value at which the goods are sold or would be sold), the RVC calculation will typically still be based on this commercial value.

2. Regional Value Content (RVC) and FOB Value:

• The RVC requirement under the India-Korea CEPA typically requires that a certain percentage of the goods' value be added in the region (India or South Korea), and this percentage is calculated based on the FOB value of the goods.

• FOB Value: The FOB (Free on Board) value is the value of the goods excluding shipping and insurance costs. Under the CEPA, RVC is generally calculated based on the FOB value.

• In cases where the goods are FOC, and thus have a nil value, the commercial value (which is the market value or transaction value used for customs duty purposes) would be used in place of the nil value.

Concerns:

• The RVC requirement is typically calculated based on the FOB value. Since in your case, the actual value is nil due to the FOC nature of the goods, this can raise concerns about meeting the RVC requirement, as the FOB value would technically be zero if you were using the actual cost.

• However, the commercial value used for customs duty purposes will typically be the value you will report to satisfy the RVC requirement. The commercial value reflects the fair market price or the price at which the goods are traded in the market.

3. RVC Calculation and Use of Commercial Value:

• According to India-Korea CEPA, if customs duties are paid based on the commercial value (even though the goods were FOC), that value will likely be used for calculating RVC as well. The RVC is determined as a percentage of the customs value or the transaction value of the goods, which in this case, is the commercial value.

• This means you would still calculate the RVC requirement based on the commercial value used for customs duty, which avoids the issue of a nil value.

4. Documentation and Compliance:

• You should ensure that the commercial value is clearly documented and justified. Customs authorities would need to see the invoice, contract, or other relevant documents to verify the commercial value for both customs duty and RVC purposes.

• It’s also important to ensure that the rules of origin are met according to the CEPA’s requirements, including RVC and other possible requirements like direct shipment or non-alteration of goods after importation.

5. Practical Steps:

• Consult CEPA Rules: It’s critical to refer to the rules of origin and the RVC calculation formula under the India-Korea CEPA to verify how the commercial value will affect the RVC and eligibility for duty benefits.

• Consult Customs Experts: Since this involves both FTA compliance and customs duty payments, it may be beneficial to consult with a customs expert or a trade consultant who specializes in FTAs and can guide you on how to properly declare the commercial value and meet RVC requirements under the CEPA.

Conclusion:

In summary, while the goods are imported as FOC (free of cost), you can still avail the FTA benefits under the India-Korea CEPA as long as you pay customs duty based on the commercial value and ensure the RVC requirement is satisfied based on that commercial value. The RVC calculation should be done using the customs value (commercial value) rather than the actual "nil" value, and the necessary documentation should support the commercial value declared for both customs and FTA compliance.

[YAGAY and SUN]

Also take care of Notification No. 14/2025-Customs (N.T.) New Delhi, the 18th March, 2025 G.S.R.178 (E) as In the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, -

(a) in rule 2, in sub-rule (1), in clause (f), for the word "certificate", the word "proof' shall be substituted;

(b) in rule 3, —

(i) in sub-rule (1), —

(A) in clauses (c) and (d), for the word "certificate", the word "proof' shall be substituted;

(B) in clause (d), in sub-clauses (i), (ii) and (v), for the word "certificate", the word "proof' shall be substituted;

(ii) in sub-rule (2), for the word "certificate", the word "proof" shall be substituted;

(c) in rule 6, -

(i) in sub-rule (1), for the word "certificate", the word "proof' shall be substituted;

(ii) in sub-rule (1), in clauses (a) and (b), for the word "certificate", the word "proof' shall be substituted;"

3. In Form I, in Section III, in Part B, in paragraph 2, at serial number g, for the letters "CoO", the words "proof of origin" shall be substituted.

AI Summary

Regional Value Content requirement: FOC imports may meet FTA eligibility when commercial value is used and documented.
Eligibility for FTA tariff treatment of Free of Cost (FOC) imports hinges on satisfying the Rules of Origin, notably the Regional Value Content (RVC). Where transactional value is nil, the commercial value declared for customs duty is generally used to calculate RVC, provided that value is supported by appropriate commercial documentation and other origin conditions of the CEPA are met.