Main components of preferential Rules of Origin in existing Trade Agreements - CBEC's Customs Manual 2023 - Customs

6. Main components of preferential Rules of Origin in existing Trade Agreements: 6.1 While there are no harmonized preferential rules of origin, the existing trade agreements do follow the general principles as laid out in the Uruguay round Agreement on Rules of Origin. The main components have been listed and briefly explained to assist in comprehension of rules of origin under various existing bilateral and regional trade agreements. Each Trade Agreement, however, has its own set of Rules of Origin, and precise definition of each of the term listed below may vary. Customs officers are, therefore, advised to refer to the respective Rules of Origin also, as notified in terms of sub-section (1) of section 5 of the Customs Tariff Act, 1975. 6.2 (i) Originating Criteria A good is originating if it is wholly obtained in the partnering country or deemed to be originating if it undergoes substantial transformation. (a) Goods Wholly Obtained The origin category of Goods Wholly Obtained covers the good which is entirely obtained, extracted, or produced in a single country, without incorporating any non-originating input material. (b) Goods that are produced using non-originating materials, i.e. not Wholly Obtained Goods under this category are required to undergo substantial transformation in a country for the good to be qualified as originating. Each Trade Agreement sets its own rules to define substantial transformation/sufficient working. However, broadly, there are three criteria used to define the originating criteria, which are used in various combinations or standalone, which are as given in the Table 35.1 below: Table 35.1: Criteria used to define the originating criteria in Trade Agreements Change in Tariff Classification (CTC) criterion This rule requires that non-Party goods, when used in manufacture of the final product, must undergo changes in tariff classification. Depending upon Trade Agreement requirements, the changes could range from mere change at Sub Heading (HS six digit) level to change at Chapter (HS two digit) level. Value Addition/Ad Valorem criterion This rule requires that a certain minimum percentage of good's value originating in a partner country must be added for the good to be considered as originating. Every Agreement, also, lays down components of value and formula for calculation of such value addition. Process Rule criterion This rule requires the good, which is being considered as originating, to be produced through specific process in the originating country. (c) General Rule versus Product Specific Rules Depending upon the Trade Agreement, either a single set of rule applies to all/most of the goods that are produced using non-originating materials and thus termed as General Rules or specific rules for the goods based on HS classification are framed and termed as Product Specific Rule . Note: There are Trade Agreements which provide option to an exporter to choose general or product specific rule to claim origin. In few cases however, general rule cannot be applied when a product specific rule is provided for. Customs officer should therefore read the Non-Tariff Customs notification to check for same. (ii) Additional Provisions which influence Rules of Origin The originating criteria under trade agreements are additionally influenced by other elements, which either restrict or broaden the application of same. A customs officer should therefore read all provisions as notified under the Customs Tariff Act, 1975, for each trade agreement. Some such elements which should be considered while inspecting a preferential claim or investigating are as listed below: (a) Cumulation Cumulation allows for treating inputs, imported from or, processes carried out, in the partnering country, as originating in or done within the exporting country. In effect, imported inputs would be considered to be domestic for origin purposes. Level of such cumulation is defined under each Trade Agreement and may vary from agreement to agreement. (b) De-Minimis This provision allows that non-originating materials that do not satisfy an applicable rule may be disregarded, provided that the totality of such materials does exceed specific percentages in value or weight of the goods or otherwise said there is a certain tolerance to be applied with regard of the requirements to fulfil the origin criteria. (c) Indirect Materials/ Neutral Elements They are goods used in the production, testing or inspection of goods but not physically incorporated in the goods, such as goods used in the maintenance of buildings or the operation of equipment associated with the production of goods. These materials are either treated as originating or not taken into account while establishing criteria based upon value addition, depending upon the mutually agreed Rules of Origin between the contracting parties. (d) Direct Consignment Under normal conditions all trade agreements allow preferential tariff treatment to only those goods which are transported directly between Parties. However, in case a good is not transported directly, it should meet the conditions and be supported by documents, as laid out under Rules of Origin of the said Trade Agreement. (e) Minimal Operations Rule This rule lists processes or operations considered as insufficient to confer originating status, even if it meets prescribed value addition or/and tariff classification change criterion. (f) Absorption/Roll-up: The absorption or roll-up principle allows intermediate products to maintain their originating status when they are used for subsequent manufacturing operations. This means that if a material which contains non-originating input(s) satisfies the applicable origin criterion and has acquired originating status, the entire material is treated as originating when assessing the origin of the subsequently produced product. (iii) Document submitted as Proof of Origin: Traditionally, all trade agreements have relied upon a CoO, issued by a competent body, as proof of origin and is a requirement to claim tariff preference. Elements like, the format and data, validity, security features, if any, are as prescribed under specific agreement. Note: Following provisions (generally termed as the operational certification procedures) are specific to each agreement and, therefore, cannot be taken as a standard practice as there is a scope of variance from agreement to agreement - i. Need to claim tariff preference at time of filing customs declaration. ii. Need for original proof of origin at time of filing customs declaration. iii. Validity of such document. iv. Provision for rectifying minor errors in such document. v. Time line of issuance of Proof of origin vis-a vis date of shipment. Retroactive documents can only be accepted, if specifically provided for in the Rules of Origin. It, also, defines the conditions and time period within which a proof origin can be issued retroactively. vi. Options available, in case of loss of original document. (iv) Verification of Proof of Origin Rules of Origin for each trade agreement provides for mechanism for seeking details from exporting country, should a need be felt to supplement investigations done domestically to ascertain validity of origin of a good. The procedure and timelines for same are prescribed and vary from agreement to agreement. Rule 6 of CAROTAR, 2020 provides for timeline for receiving information from Verification Authority and subsequent finalization of preferential tariff claim based on information received. [Notification No. 81/2020-Customs (N.T.) dated 21.08.2020] Note: It is important to clearly state reasons for verification request and quote the rule under which same is sought. CBIC has issued detailed guidelines on this issue vide Circular No. 38/2020-Customs dated 21.08.2020. [Circular No. 38/2020-Customs dated 21.08.2020]