[1]

Dual-use items are subjected to provisions of export control in order to prevent proliferation of weapons of mass destruction[2], in accordance with Foreign Trade Policy 2023[3] (“FTP”) and Handbook of Procedures (“HBP”)[4]. “Dual-Use Items” are defined as goods, including software and technologies, which have potential to be used in both civilian / industrial applications as well as use in weapons of mass destruction.[5] They constitute or have a potential to constitute threat to international peace and security. These Dual Use items may be (i) listed or (ii) unlisted (as discussed in the succeeding paragraphs).

In this regard, the control of unlisted dual use items is governed under the concept of Catch all controls (“CAC”). CAC is still unexplored and vide the present article, the authors have explained this concept, what are the triggers and action points that can be taken by the exporters to safeguard themselves.

Background

It is significant to highlight that CAC is an internationally accepted best practice to govern dual use items under export control regulations. The objective is to ensure that the transfer of non-listed Dual Use items is regulated under authorisation when (a) either the authorities of the exporting country inform the exporter or (b) when the exporter is aware that the items in question are or may be intended, entirely or in part, for a military end-use. Accordingly, catch-all provision is triggered only in those situations where there is “information” indicating that such goods can potentially be used for a prescribed activity or by a prescribed end user.

In this regard, the national laws and regulations (including control lists) of India determine the universe of goods considered strategic[6] (Dual Use) (generally including both listed items and a catch-all provision allowing for governmental control over unlisted items under certain circumstances), define a licensing regime and associated offences, and establish stringent graded penalties for violations, if any.

Control over Dual Use items under the Indian legislations(s)

1. Listed Dual Use Items – SCOMET List

India has formulated the National Export Control List of Dual Use items munitions and nuclear related items, including software and technology called SCOMET List, that has been notified under Appendix 3 to Schedule 2 of ITC (HS). SCOMET is an acronym for Special Chemicals, Organisms, Materials, Equipment and Technologies[7]. The said List is aligned with the control lists of all the multilateral export control regimes and conventions.[8] The Dual Use items specified under SCOMET are either (i) prohibited or (ii) is permitted under an Authorization, unless specifically exempted.

2. Unlisted Dual Use Items - CAC

Export of items not in the SCOMET List may also be regulated under provisions of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (“WMD Act”) i.e. additional controls may be imposed on unlisted non-SCOMET items for Dual Use. The Dictionary meaning of “catch-all” is something that is general and intended to include everything.[9]

It is pertinent to note that although the relevant provision and term “CAC” have been introduced in Indian legislation vide amendment in the Foreign Trade (Development and Regulation) Act, 1992( “FTDR Act”) in 2010[10] for the first time, yet, in effect the concept had already found place under Section 11 of the WMD Act since 2005 by the virtue of Section 14C of the FTDR Act[11] and Section 11 of the WMD Act[12]. The CAC provision under these legislations is in line with Government’s non-proliferation policy of ensuring that India’s exports do not inadvertently land up in the wrong hands for illicit use.[13]

Scenarios where CAC is triggered:

As per Para 10.05 of the FTP, the CAC provision is triggered only in the following scenarios:

1. The exporter has been notified in writing by the Directorate General of Foreign Trade (“DGFT”).
2. The exporter “knows” or “has reason to believe” that an item not covered in the SCOMET list has a “potential risk of use” in or diversion to weapons of mass destruction or in their missile system or military end use (including by terrorists and non-state actors).  

In the above-mentioned scenarios, the export of such an item may be denied or permitted subject to the grant of a license, as per the procedure provided for SCOMET items under HBP[14] Pertinently, an identical provision was present under Handbook of Procedures 2015-20[15].

CAC provision can be invoked by the DGFT Authorities vis-à-vis any product not covered in the SCOMET list when there is “reasons to believe” and “potential risk of use” of such a product for mass destruction or by non-state actors. These terms which are triggers of CAC have not been defined and in  absence of any specific parameters, it is not possible to determine as to what is ‘potential risk of use’ at a given point of time and consequently, what may trigger DGFT authorities to form so-called ‘reasons to believe’ under CAC. One should not forget that use of any dual use item would always fall under “potential risk of use” at some point of time and will always be subject to the whims of the Authorities when comes to application of CAC. Further, in absence of any defined triggers, the DGFT may extend the application of CAC to even to those items which are only for civil use, especially when the goods are being exported to countries subject to US Sanctions. Whether in such cases end use certification that such goods will be for civil use only is good enough for the DGFT Authorities to not invoke CAC?

In this regard reference is made to a recent judgment of the High Court of Delhi in the case of AR Sales Pvt Ltd v Union of India, 2024 (8) TMI 729 where CAC was invoked by the DGFT and an export authorisation was insisted upon when Aircrafts for civil use were exported from India to Russia. The DGFT argued that the authorisation is required as the Aircrafts have potential of both civil and military use.

The High Court held that the goods in question are purely for civil application and will not attract the provisions of SCOMET or CAC. The Court also held that rationality must guide the implementation of export regulations. Import and export regulation must be rational to effectively balance economic interests with national and global security concerns. Items that have been certified by subject matter experts as having civil use and are allowed within the ambit of the export policy, cannot be stopped from being exported to countries with which India has established export ties, with no restrictions in the realm of economic policy, on the pretext that the products may have a potential military use.

The judgment of the High Court clearly indicates the potential misuse of the CAC provisions at the hands of DGFT and that in such a situation the only remedy available with the exporters would be to prove beyond doubt that the goods are for civil use only. However, will the above logic also apply to cases where the goods actually have the potential of dual use?

In this regard, it is pertinent to note that the onus of identifying the nature of the material, equipment or technology that can potentially be a Dual Use good (either listed or unlisted) is primarily on the exporter. This is more so in the case of dual use goods which are not listed. Hence, a robust internal compliance program is required to be followed by the exporters for better implementation of export control on the dual use goods, both listed and unlisted to ensure the practices followed by the exporter are aligned with the prevailing laws. In this regard, the Exporters must undertake the following steps:

1. Establish an internal organizational structure responsible for export control;
2. Undertake due diligence with the help of legal experts to establish whether items to be exported require undertaking export control compliance;
3. Basis the due diligence, obtain the license where necessary;
4. Undertake end use screening and end-to end customer due diligence to ensure that the goods supplied by the exporter are not used or modified to be used as dual use item having potential risks;
5. Regular performance review to confirm that export control laws are strictly implemented.
6. Educate and train employees on their export control responsibilities by organizing regular training and awareness-raising sessions.
7. Subject to the outcome of the due diligence at point b. above, the exporters should consider certification by subject matter experts as having civil use of the products exported by the exporter.

Conclusion

An internal compliance program covering all of the above is the need of the hour for the Exporters in India to safeguard themselves from any non-compliance under the export control regime which has severe consequences in the form of penalties, fines and punishment. It will also help the Exporters to deal with any potential misuse of CAC provisions by the DGFT enabling them to prove beyond doubt that the goods have been used for civil use only.