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Chinese Goods, India Exports: Substantial transformation or risky transshipment?

There is increasing uncertainty surrounding the legal and commercial aspects of trade, against the backdrop of the United States imposing new tariffs. This evolving landscape of international trade exposes Indian exporters to heightened scrutiny under the US customs regulations, specifically those concerning transshipment of goods and adherence to the US Customs and Border Protection (“CBP”) rules of origin (“Rules of Origin”).

The issue was deliberated at a recent stakeholders’ consultation on US-India trade ties, convened by the Indian Ministry of Commerce (“Commerce Ministry”) on May 2, 2025 (“Stakeholders’ Consultation”). This meeting was chaired by the special secretary in the Commerce Ministry, Mr. Rajesh Agarwal. Industry representatives, including stakeholders of various Export Promotion Councils and Industry Associations, were apprised of the recent developments and the views of these stakeholders were solicited for further deliberations and for representation in the ongoing discussions with the United States.

Transshipment and legal risks

Transshipment refers to the import of goods into one country, not for consumption, but for exporting them to another, without any significant processing.

There are several legal risks emanating from this practice, considering the complex legal framework of international trade today, which is underpinned by geopolitical relations. This can lead to complexities such as export controls, sanctions and now even tariff issues. Indian exporters have specifically been warned against re-routing Chinese products through India to enable China, which is subject to higher tariffs, to benefit from India’s preferential trade terms with the United States.

Consider a scenario where a Chinese company manufactures LED bulbs and ships them to India. In India, these LED bulb are packaged and branded and exported to the United States as ‘Made in India’. This would be considered as transshipment. Any such re-routing of goods from high-tariff countries, if done without “substantial transformation”, could be classified as transshipment and can attract higher duties.

Hence, the Commerce Ministry, in the Stakeholders’ Consultation, has cautioned Indian exporters to adhere to the Rules of Origin of the CBP.

The Rules of Origin

The US Tariff Act of 1930 requires that every article of foreign origin imported into the United States shall be marked with the country of origin. Subsequently, the CBP assesses the duties and other applicable legal requirements, basis the information received from importers on country of origin and value of imports.

The CBP enforces the Rules of Origin, which form the primary test for all imports. It is important that Indian exporters understand these to safeguard against shipment delays, imposition of fines or tariff shocks.

The United States also applies preferential and non-preferential rules of origin (“NP Rules of Origin”). Whereas preferential rules of origin apply to goods covered within trade agreements or special legislations and imply eligibility for special treatment, NP Rules of Origin are the generally applicable rules, absent any trade agreement.

The NP Rules of Origin scheme employs two criteria of assessment:[1]

  • The “wholly-obtained” criterion, which is used for goods that are “wholly the growth, product or manufacture of a particular country”; and
  • The “substantial transformation” criterion, which is used for goods that “consist in whole or in part of materials from more than one country”.

Substantial transformation

If an article is manufactured or assembled entirely in the same country, the wholly-obtained criteria applies and determining the country of origin is straightforward. However, if raw materials or components are sourced from different countries, to be used in the manufacture or assembly of an article, it needs to be determined whether the raw materials or components obtained from other countries have undergone any significant transformation.

The substantial transformation rule has largely evolved through case laws, and is typically applied on a case-to-case basis. In United States v. Gibson-Thomson Co., it was held that substantial transformation is a test of change, resulting in “new name, character, and use” of the article in question, such that it transitions from its original identity into a completely new product.[2] Simple assembling, packaging or labelling would not constitute substantial transformation and some value addition is necessary.

In line with the above illustration, consider that a Chinese company sends electronic components to India. An Indian company then assembles these and builds an LED bulb with added features such as smart controls and exports it to the United States with a ‘Made in India’ label. This would constitute substantial transformation.

Application of the substantial transformation criteria, however, has been controversial in recent years and there has been a marked shift from the Gibson test. CBP has claimed that the origin of an article is when it acquires its “essential character” and it applies the concept of “sufficient working or processing”, which has not been defined.[3] The uncertainty in the manner of application of the rule can lead to difficulties in determining the correct country of origin, which could lead to delays and detentions in the least and if found to be negligent or fraudulent, it could lead to monetary penalties and even criminal sanctions.

India aligns with the Rule of Origin

Effective March 18, 2025, an amendment to the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (“CAROTAR Rules”), critically changed the trade compliance framework by replacing the term “certificate of origin” with “proof of origin”. This implies that Indian custom’s authorities have been given greater powers to demand additional documents beyond certificate of origin, making them better equipped to accurately verify the country of origin of the goods being imported into India. This in turn allows Indian authorities to counter any third-country re-routing, whether to India or for goods to be sent onwards from India (by way of reexporting or transforming into a different product). Resultantly, routing of goods through India merely to exploit favorable terms will be deterred.

Legal implications for Indian exporters

Potential red flags

Indian exporters must specifically be mindful of the following red flags in their trade with the United States:

  • Misclassification or mislabeling- Indian exporters must ensure that their exports have accurate country of origin markings and are correctly classified, according to the harmonised tariff schedule;
  • Inadequate documentation- Indian exporters must maintain all documentation relating to exports, including origin documentation, bills of materials, manufacturing processes and supplier declarations; and
  • Transshipment red flags- If Indian goods are re-routed through third countries, such as countries that have free trade agreements with the United States, or if goods from countries like China are routed through India, without any substantial transformation, CBP may suspect transshipment to evade duties, which could trigger investigations or verification audits of Indian suppliers.

Legal challenges

In addition to the above, Indian exporters also face challenges emanating from the complexity of customs rules. Indian exporters must be mindful of CBP rules as well as Indian customs laws. The ambiguity in US laws due to uncertainty in the application of the substantial transformation criteria further adds to the difficulties for exporters. This leads to stricter documentation and compliance requirements, coupled with increased likelihood of exposure.

While the Commerce Ministry has assured industry representatives during the Stakeholders’ Consultation that efforts will be made to codify the value addition norms to provide clarity to exporters, the current situation remains laden with lack of clarity. Exporters could face serious consequences, including liabilities under the False Claims Act, 1863 (“FCA”). The current shift in the US strategy towards FCA enforcement further underpins potential liability.[4]

Violation of the FCA through falsification or misrepresentation of compliance documents on quality, customs classification, or export documentation/ certification is met with penalties in the following manner:

  • Civil penalty ranging between for each false claim as adjusted from time to time;[5] plus
  • Treble damages (three times the amount of damages sustained by the U.S. government);

The penalty may be reduced based on mitigating factors, but in any case, it will not be less than two times the damages sustained.

Solutions and conclusions

Indian businesses must engage legal counsel to formulate the right strategy for exports and implement adequate policies to mitigate potential liabilities and conduct business in a commercially viable and legally sound manner.

It is crucial that Indian exporters seek legal aid to obtain sufficient information and training related to Indian and international trade and customs laws, especially to navigate the myriad rules and tests in relation to classification of goods as substantial transformation or transshipment. Finally, legal advice may be taken for strategising exports.

The Commerce Ministry has noted stakeholders’ suggestions for representation in future negotiations with the US representatives. Additionally, clarification on codification and quantification of value addition norms, to make substantial transformation criteria more accessible and objective, has been sought. Meanwhile, Indian exporters have been advised to “be prepared to justify how and where value was added if they want to avoid having their products reclassified, especially as Chinese, and face high tariffs.”[6] In this dynamic geopolitical scenario, it is important that exporters are mindful of the legality of the tariffs while navigating their commerciality. Re-routing of Chinese or other third country products through India to the United States could be considered as a monetarily profitable endeavor, but would leave the Indian exporter exposed to legal troubles.

[1] ICP – U.S. Rules of Origin

[2] United States v. Gibson-Thomsen Co., 27 C.C.P.A. 267 (1940)

[3] J.H. Peterson, Substantial Transformation” – The worst rule for determining origin of goods – except for all the rest. Substantial Transformation.pdf

[4] We have explored this shift towards FCA in our blog titled ‘FCPA, FCA and the Trump Effect: What Indian companies need to know’. FCPA, FCA and the Trump Effect: What Indian companies need to know | Dispute Resolution Blog

[5] Currently, the minimum FCA penalty is $14,308 per claim and the maximum penalty is $28,619 per claim.

[6] Commerce Ministry warns industry against transhipment to US; assures clarity on value addition norms – The Economic Times