CESTAT Chennai Upholds Statutory Formula for Value Addition

Aadrikaa Legal Services (ALS) – IDT Tax I Arbitration I Litigation

Date: 08.06.2026

CESTAT Chennai Upholds Statutory Formula for Value Addition

This article provides a comprehensive overview of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chennai’s decision in the case of M/s. Veekay Diamants, focusing on the dispute over the validity of export origin certificates and the methodology for calculating value addition in customs exemption cases.

Background of the Case

M/s. Veekay Diamants, a Mumbai-based importer, brought in two consignments of gold jewellery studded with diamonds and rubies from Thailand. The company claimed customs duty exemption under Notification No. 85/2004-Cus, relying on Certificates of Origin issued by the Thai government under the Indo–Thailand Free Trade Agreement (FTA).

Initially, customs authorities accepted these certificates and cleared the goods. However, years later, the Special Intelligence and Investigation Branch (SIIB) initiated an investigation, alleging that the declared Local Value-Added Content (LVAC) of 22% was incorrect. The Department recalculated the LVAC at only 6.5%, based on their own methodology, and issued a Show Cause Notice demanding differential duty, confiscation, and penalties.

Key Legal Issues

The Tribunal identified two main questions:

1. Was the Department justified in rejecting the Certificate of Origin and recomputing LVAC using a method different from the prescribed statutory formula?
2. Are the demands for duty, extended limitation period, and penalties sustainable under the law?

Tribunal’s Analysis and Findings

1. Validity of Certificate of Origin and LVAC Computation

• Statutory Formula: The Tribunal emphasized that Rule 6(d) of the Interim Rules of Origin prescribes a specific formula for calculating LVAC: (FOB value of export product – CIF value of non-originating materials) / FOB value. This formula includes all economic value in the FOB price, not just labor and handling charges.
• Department’s Error: The Department’s approach of considering only labor and handling charges was found to be a truncated and legally unsustainable method. The Tribunal held that administrative authorities cannot substitute or alter statutory formulas.
• Role of Importer: The Tribunal clarified that importers are only required to produce the Certificate of Origin. They cannot be expected to verify the internal cost structure of foreign suppliers, as such verification is the responsibility of the issuing authority in the exporting country.
• Precedents: The Tribunal relied on previous decisions (Romil Jewellery and Keyur Shah cases) which held that Certificates of Origin are foundational documents and cannot be disregarded without following the prescribed verification mechanism.
• Department’s Reliance on Data: The Department’s use of supplier data without invoking the formal verification process under Rule 15 was deemed insufficient and contrary to the statutory scheme.

2. Demand, Extended Period, and Penalties

• No Suppression or Wilful Misstatement: The Tribunal found no evidence of fraud, suppression, or wilful misstatement by Veekay Diamants. All documents were submitted and accepted at the time of import.
• Extended Limitation Period: Citing Supreme Court judgments, the Tribunal held that the extended period for demand can only be invoked in cases of wilful intent to evade duty, which was not established here.
• Penalties: Penalties under Sections 114A and 114AA of the Customs Act require intentional wrongdoing, which was absent in this case. The dispute was merely over interpretation and methodology.

Final Order and Implications

The CESTAT set aside the impugned order, allowed the appeal, and granted consequential relief to Veekay Diamants. The ruling reinforces the following principles:

1. Statutory procedures and formulas must be strictly followed in customs matters.
2. Certificates of Origin issued by competent authorities are binding unless formally challenged through prescribed verification mechanisms.
3. Importers cannot be penalized for internal supplier data they cannot access or verify.
4. Penalties and extended limitation periods require clear evidence of intent to evade duty.

Conclusion

This decision provides important clarity for importers relying on FTAs and Certificates of Origin. It underscores the need for customs authorities to adhere to statutory procedures and not substitute their own methodologies, ensuring greater legal certainty and fairness in international trade compliance.

Source: CESTAT Chennai

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