THE concept of Third Party Invoicing is widely recognized in domestic as well as international trade.It involves a bill-to-ship-to model between 3 parties. Equally popular is the concept of trade between countries which are signatories to a Free Trade Agreement. It results in the trade of goods between countries at preferential tariff rates to boost economic activity. This article seeks to examine the process in which the two concepts of Third Country Invoicing and FTA benefits can be reconciled. For the aforementioned purpose,an illustration for the bill-to-ship-to model would be as follows:-

Parties "A", "B", and "C" are residents of three different counties. "A" sells goods to "B" against an invoice, who in turn sells the goods to "C" against another invoice. However, the goods are never physically delivered by "A" to "B" but directly from "A" to "C".

Briefly stated, under such a model, the "Importer" ("Party C") will place a purchase order on the "Seller" ("Party B") located in a third Country), from where the goods will not be exported, but only be invoiced. In turn, the Seller (Party B) shall place a purchase order on the "Exporter" ("Party A") of the goods located in an FTA Country. The Exporter of goods will directly ship the goods to the Importer and raise a bill on the Seller and the Seller in turn will issue an invoice to the Importer.

For the purposes of this example, it is to be assumed that there is a Free Trade Agreement (FTA) between the countries where Parties A and C are located. It is also to be assumed that the goods being exported by Party A originate either completely in the country where party A is situated or meet the value addition requirements as set out in the FTA between the countries of Party A and C. This assumption is necessary as the following paragraphs shall discuss whether Party C at the time of import is eligible to the FTA benefits for the imported goods. If so, what is the rate at which such benefits shall be available to Party C as two separate invoices are being raised in the afore-stated example.

The transaction with different invoices may hypothetically take place in the following manner:

"Party ‘A' will raise an invoice of $100 on ‘Party B' and also provide a Certificate of Origin (COO) with FOB being indicated as $100. In turn, Party ‘B' shall issue an invoice of $140 (FOB) on Party ‘C' (the importer.) Party ‘C' shall import the goods into the Country on the cover of the COO and the commercial invoice."

Under such a scenario, two important questions arise for consideration. Firstly, whether in a transaction wherein the importer has imported goods under a bill-to-ship-to model, the FTA benefit shall be available to the importer or not? Secondly, what shall be the value at which the FTA benefit shall be provided to the importer?

To answer the aforementioned queries, an examination of the Customs Tariff [Determination of Origin of Goods under the Preferential Trade Agreement between the Governments of Member States of the Association of Southeast Asian Nations (ASEAN) and the Republic of India] Rules, 2009 ("Asean PTA Rules") is undertaken as it governs trade between various countries in the South East Asian region.

Rule 13 of the ASEAN PTA Rules states that any claim that a product shall be accepted as being eligible for preferential treatment under the agreement shall be supported by a valid COO in terms of the "Operational Certification Procedures" (OCP).

Annexure-III to the ASEAN PTA Rules provides for the OCP on the issuance and verification of the AIFTA COO and other related matters for the purposes of implementation of the ASEAN PTA Rules.

Para 22 to the Annexure-III provides for special cases under the ASEAN PTA Rules. Para 22 specifically provides that the Customs Authority in the importing party shall accept an AIFTA COO where the sales invoice is issued by a company located in a third country on account of the said company, provided that the product meets the requirements of the ASEAN PTA Rules. The relevant para is reproduced for ready reference: -

"The Customs Authority in the importing party shall accept an AIFTA Certificate of Origin where the sales invoice is issued either by a company located in a third country or an AIFTA exporter for the account of the said company, provided that the product meets the requirements of these rules."

Accordingly, in the above example, where the bill-to-ship-to model is being followed, the goods can be imported under Third Country Invoicing method provided the goods meet the other requirements of the ASEAN PTA Rules.

Therefore , where a valid AIFTA COO is produced before the Customs Authority, the Customs is bound to accept the AIFTA COO notwithstanding that the Bill-to-Ship-to model is being followed. Also, Third Country Invoice from a non-member ASEAN Country under the ASEAN PTA Rules will also not be a matter of concern for the Customs and is to be permitted as envisaged under the Rules, subject to the condition that the goods meet the other requirements as laid down under the Rules.

With respect to the availability of benefit of exemption from the payment of BCD, reference is to be made to the Tariff Notification No.46/2011-Cus., dated 01.06.2011, issued in respect of the ASEAN FTA Agreement.The Tariff Notification provides that the goods shall be exempt from so much of the duty of customs leviable thereon as in excess of the amount calculated at the rate as specified in the Table to the Notification, subject to fulfillment of conditions, as explained herein above.

Therefore, the benefit from payment of BCD shall be from a value at which customs duty is leviable. Section 14 of the Customs Act provides that the value of the imported goods shall be the transaction value of the imported goods. As per Section 14, the value for the purposes of calculating customs duty payable shall be the transaction value i.e. price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation and where the buyer and seller of the goods are not related and price is the sole consideration for the sale.

Thus, in the instant case, the importer ("Party C")shall get exemption from payment of BCD at the value at which the goods are being imported by the party and customs duty is levied. The FOB value indicated in the AIFTA COO is not relevant for the purposes of calculation of customs duty benefit under the Tariff Notification. Infact, the AIFTA COO is only a means to verify the origin of the goods and to ensure that the goods are eligible in terms of the benefit available under the ASEAN PTA Rules and consequently, the Tariff Notification.

A case of third country invoicing and claim of FTA benefit was considered by the Hon'ble CESTAT, Chennai in M/s. Olam Enterprises India Pvt. Ltd. v. CC, Tuticorin, (Appeal. No. C/40587/2017 – Final Order No. 40459/2018 dated 19.02.2018) wherein the Hon'ble Tribunal has recognized the concept of third country invoicing and extended the benefit subject to the goods fulfilling the origin criteria.

Therefore, in terms of the Tariff Notification, the benefit available to the goods will be at the value at which duty of customs is paid i.e. FOB value of the goods as indicated in the commercial invoice and not the value as indicated in the AIFTA COO.

Further, similar provisions for third party/ country invoicing are found in the following Free Trade Agreements/ Preferential Trade Agreements and benefits shall be accorded similarly for third country invoicing under these Agreements also: -

(a) Para 15 to Annexure-I of the Customs Tariff (Determination of Origin of Goods under the Preferential Trade Agreement Between the Governments of the Republic of India and Malaysia) Rules, 2011;

(b) Para 7 to Appendix- A to Annexure- 2 of the Customs Tariff (Determination of Origin of Goods under the Comprehensive Economic Partnership Agreement between the Republic of India and Japan) Rules, 2011;

(c) Para 5 to Annexure-III of the Customs Tariff ((Determination of Origin of Goods under the Preferential Trade Agreement between the Governments of the Republic of India and the Republic of Korea) Rules, 2009.

(Dhruv Matta, Senior Associate and Raghav Khurana, Associate, Lakshmikumaran and Sridharan Attorneys)