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2015 (12) TMI 482 - AUTHORITY FOR ADVANCE RULINGS

2015 (12) TMI 482 - AUTHORITY FOR ADVANCE RULINGS - 2016 (332) E.L.T. 537 (A. A. R.) - Classification - Rate of duty on Import of components/parts/sub-assemblies of motor vehicles in CKD form - appellant contended that he has imported engine and transmission in a pre-assembled form - Held that:- Applicant proposes localization of six essential components / parts / sub-assemblies, which will be manufactured by local third party vendors on payment of Central Excise duty and supplied to the applica .....

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se by two units in same container, unlike in Sony India Ltd case. It was also held that Rule 2(a) of Rules of Interpretation of Tariff are applicable only if all components intended to make a final product presented at same time for customs clearance. - In fact they are not even likely to be imported at same time and require further manufacture by different local third party vendors.

Tariff Item 8703 is in respect of "Motor Cars and other Motor Vehicles etc." Note 2 to Section XVII, w .....

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d under that heading which corresponds to the principal use of that part or accessory. Therefore, in order for an article to fall under headings covered by Section XVII, those parts or accessories should comply with all conditions - The import of components / parts/ sub-assemblies by the applicant will not be classified as motor vehicle under Tariff Heading 87.03 or as Completely Knocked Down (CKD) kit under Sr. No. 437 of Notification No. 12/2012-Cus., dated 17.3.2012 - The import of components .....

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a or applicant) is a wholly owned subsidiary of a foreign company. Applicant submits that under the proposed new activity of import, while the imports of certain components / parts / sub-assemblies of the motor vehicles will continue to be effected by the applicant from BMW Group companies, there will be localization of following six essential components / parts / sub-assemblies required for manufacture of motor vehicles in India, namely; Engine (along with engine and transmission unit); Axel as .....

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the motor vehicles; that the applicant will import only the balance components / parts / sub-assemblies of the motor vehicle from BMW Group companies; that under the proposed localization concept it is estimated that about 13% to 16% net value addition will be performed by local third party vendors; that there would be an increase in proportion of locally sourced parts / components / sub-assemblies; that the proportion of direct imports by local third party vendors will be around 28% to 32% of .....

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start of the business, since the business was at a nascent and low volume stage, applicant chose to import the motor vehicles in CKD form and undertaking assembling of the motor vehicles from such imports at its plant in Chennai. The only exception was the vehicles seats which were locally manufactured in India by a local third party vendor. Since the Government allowed import of motor vehicles in CKD form at concessional rate of Basic Customs Duty of 15% [applicable to motor vehicle if imported .....

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rement of vehicle seats which were locally manufactured in India by a local third vendor, would be considered as import of motor vehicle in CKD form, eligible to the concessional rate of Custom duty. FROM MARCH, 2011 TO APRIL 11, 2013- IMPORT OF MOTOR VEHICLES IN CKD KITS: With effect from March 1, 2011 (vide Notification no. 21/2011-Customs), the CKD definition was introduced under Customs Law, at Sr. No. 344 of the Customs Notification providing for concessional rate of Basic Customs Duty on i .....

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e arose as regards the rate of duty applicable to import of motor vehicles by the applicant in CKD form. The Department is contending that the applicable rate of Basic Customs Duty on CKD kits should be 30% as against 10% claimed by the applicant, on the ground that the applicant has imported engine and transmission in a pre-assembled form. The Department had issued a show cause notice which has been confirmed by the adjudicating authority and the matter is now pending before the Tribunal. FROM .....

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mporting motor vehicles in CKD form, the applicant started importing all the parts of the motor vehicle from different locations, namely; Germany, United States, Japan and South Africa, with the exception of seats and wiring harness (for two models only) which were locally procured, for assembly at its Chennai plant. FROM 1 JANUARY 2015-NEW ACTIVITY OF IMPORT (LOCALISATION MODEL): Effective from January 2015, the applicant has moved to an entirely new business model i.e. the localization model, .....

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;Make in India" initiative; that this is clearly evident from the localization model started by the applicant from January 2015. It is noticed that the Government of India's "Make in India" initiative inter-alia envisages increase in indigenous manufacturing sector growth, which will result in imports reduction and thus saving precious foreign currency reserves. Further, creating additional jobs is also expected. 4. Applicant has raised the following questions in respect of wh .....

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ventilation and air conditioning unit and (vi) door panels are to be locally assembled / manufactured by approved local third party vendors? b) If the import of components / parts / sub-assemblies by the applicant will not be classified as motor vehicle or as CKD kits, whether the applicants imports will be classified under their respective headings / sub-headings of the Customs Tariff Act, 1975 or under Tariff Heading 87.08 of the Customs Tariff Act, 1975? 5. The case of the applicant is that R .....

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will be classified as complete article; c) Above will be the case even for the goods when the goods as presented in unassembled or disassembled form exhibits the essential characteristics of the complete or finished article. 6. It is submitted by the applicant that under the proposed new activity of import, components / parts required for manufacturing of the above stated six components /parts / sub-assemblies mentioned in paragraph 1 of the ruling will be imported by local third party vendors; .....

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mports proposed will not reflect the essential characteristics of the motor vehicle and hence the imported goods will be liable to be classified as per the respective classification without invoking Rule 2(a) of the Interpretative Rules; that analogy can also be drawn from the Circular No. 666/57/2002-CX. dated 25.09.2002 wherein it was clarified that sub-assembly or assembly of air conditioning machines not having essential charter of complete air-conditioning machines to be considered as parts .....

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s issue, applicant submits that the local third party vendors of the applicant will import components for assembling six essential and critical components / parts / sub-assemblies at its manufacturing facility in India; that under the proposed import pattern, applicant will import only the balance components / parts / sub-assemblies at distinct times and at no point of time the imported goods will exhibit the essential characteristics of a motor vehicle; that in terms of HSN explanatory notes to .....

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3.2012 (S. No. 437), car imports in CKD-kit form, would attract a lower rate of 10% basic customs duty only if the engines and/or gearboxes are not in pre-assembled condition; that Cars imported in CKD kits with engines and /or gearboxes in pre-assembled condition would attract a higher rate of 30% BCD (when the engines and gearboxes are not mounted on the chassis); that it was noticed during investigation that the applicant was importing engines and gearboxes in pre-assembled condition but they .....

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able to the CKD kits imported with pre-assembled engines and / or gearbox); that pending verification, imports made by the applicant (at component part level) from 19.4.2013 are being assessed provisionally at the rate of duty claimed by the importer; that on completion of the said investigation, a Show Cause Notice dated 26.8.2013 has been issued to the applicant, inter-alia, demanding differential duty amounting to more than ₹ 757 crores as the applicant appeared to have availed ineligib .....

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number of parts / components / sub-assemblies from their own group entities (BMW Group companies) for their car manufacturing activities in India. Remainder of the parts / components / sub-assemblies [viz. (i) engine (along-with engine and transmission unit) (ii) axel assembly (iii) exhaust systems (iv) cooling module (v) heating, ventilation and air conditioning unit and (vi) door panels are proposed to be sourced from local third party vendors; that since 19.4.2013, applicant's activity of .....

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overall ongoing import activity; that at best, this proposal is only the latest in the series of incremental and cosmetic changes in the supply and logistics chain and does not substantively alter the fact that parts, components and sub-assemblies for assembling the vehicle continue to have, materially, the same/similar import content as was the position during pre-19.4.2013 phase of the applicant's import activity; that this (reduction in the number of imported parts/components coupled with .....

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rted by the so-called local third party vendors directly from either BMW AG or from its approved suppliers. 11. Commissioner of Customs (Import - Seaport), Chennai submits that considering the huge amount of revenue involved and that the payment of differential duty being made by BMW is subject to disclaimers and riders without prejudice to their claim for lower rates of duty applicable to parts (7.5% to 10% vis-à-vis 30 % otherwise applicable), detailed investigation was launched into BM .....

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les for the Transport of Ten or More persons, including the Driver. 13. Notification No. 21/2002-Customs dated 01.03.2002 was amended vide Notification No. 12/2012-Customs dated 17.03.2012. This notification inter-alia exempts goods of description specified in column (3) of the Table below and falling within the Chapter, heading, sub-heading or tariff item as specified in the corresponding entry in column (2) of said Table, when imported into India. Relevant entry S. No. 437 reads as under; S.No .....

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for assembling a complete vehicle, with, (a) Engine, gearbox and transmission mechanism not in a pre-assembled condition; 10% - (b) Engine or gearbox or transmission mechanism in Pre-assembled form but not mounted on a chassis or a body assembly 30% - (2)in any other form,- 75% - (a)with FOB value more than US$ 40000 and with engine capacity more than 3000 cc for petrol-run vehicles and more than 2500 cc for diesel-run vehicles; (c) Other than (a) above 60% - 14. Rule 2 (a) of the General Rules .....

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disassembled. 15. The Central Board of Excise and Customs ('CBEC') Circular F .No. 528/128/97-Cus-TRU dated 5-12-1997 is reproduced below; It may be considered that the following parts or components or sub-assemblies could be construed as most essential to bring into effect a finished motor car, namely; engine, gear box, chassis, transmission assembly system, body/cab suspension system, axles front and rear. In general, it may be mentioned that if all these components or parts or sub-as .....

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ot; of a motor car has been achieved without these parts. 16. HSN explanatory notes to Rule 2(a) of the Interpretative Notes further provide as under: (V) The second part of rule 2(a) provides that complete or finished articles presented unassembled or disassembled are to be classified in the same heading as the assembled article. When goods are so presented, it is usually for the reasons such as requirements or convenience of packing, handling or transport; (VI) This rule also applies to incomp .....

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n in that regards of the complexity of assembly method. However, the components shall not be subject to any further working operations for completion in to finished state. Unassembled components of an article which are in excess of the number required for that article when complete are to be classified separately. 17. Revenue has raised following issues before the Authority opposing the application. First issue raised is that it is not a proposed activity, as they have already commenced new loca .....

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riteria of "proposed activity" and does not preclude the Advance Ruling Authority from giving its ruling. This point is not relevant at this juncture; as we had admitted the application vide Misc. Order No. AAR/44/Cus/01/2015 dated 16.01.2015. 18. Revenue submits that a Customs case was adjudicated against the applicant vide Order-in-Original No. 35113/2015 dated 13.02.2015 wherein facts regarding actual nature of imports were suppressed. This order reportedly is regarding imports duri .....

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uld be 30% instead of 10%, if imported in unassembled form and as claimed by BMW before the Customs authorities, vide Notification No. 12/2012-Cus dated 17. 03. 2012. The issue before this Authority is whether, after 6 essential parts, as mentioned in paragraph 1, are manufactured in India, the remaining items imported can be classified as parts under individual heading and not as CKD. In short, the question before the Customs authorities was basically relating to interpretation of Notification .....

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al third party vendors appear to import basically items which are relevant to BMW cars only; that these imports made by local third party vendors and applicant converge in the manufacture of BMW cars by the applicant. It is further submitted by the Revenue that third party vendors appear to be mere extension of the applicant; that local third party vendors do not function independently as they import only items relevant to BMW cars; that the fact remains that the common thread of all activities .....

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and the entire manufacture of the engine is being undertaken by the vendor in India. Applicant further submits that except for parts of engines (which is imported by Force Motors Ltd from BMW AG), none of the local third party vendors are importing raw materials from BMW AG or any BMW Group Company; that third party local vendors are renowned global suppliers and have own independent factories. Applicant also submits that merely because for engines, the IPR is with BMW AG, to contend that locali .....

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ansmission unit India Draeximaier Door Panel Germany Valeo HVAC and cooling Module France Mahle Behr HVAC and Cooling Module Germany Tenneco Exhaust System United States JV between ZF India and Hero MotoCorp Axle JV between German and Indian company 22. It is noticed that the above named Companies are known companies. Further, Revenue has not produced any evidence to indicate that these Companies are dummy companies or are working under the leadership and control of the applicant. It is also not .....

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aken by the Revenue. It is reiterated that third party local vendors are independent suppliers, who primarily import raw materials / components from independent overseas suppliers ( with the exception of engine parts); that these third party vendors thereafter undertake manufacturing activity in India, pay Central Excise duty and sell finished goods to the applicant for manufacture of motor vehicles. Revenue alleges that third party vendors appear to be extension of the applicant as they import .....

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local vendors, is without basis and therefore not tenable. 23. Rule 2(a) of General Rules for the Interpretation of Import Tariff inter-alia states that any reference in a heading to an article shall be taken to include a reference to incomplete or unfinished provided it has essential characteristics of finished article. This shall also include unassembled or disassembled goods. It is reiterated that the proposed import by the applicant would not contain 6 essential and critical components / pa .....

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er-alia, mentioned that engine and axle, front and rear, are among the parts or components or sub assemblies, considered most essential to bring into effect a finished motor car. Engine and axle shall not be part of proposed imports of the applicant. Therefore, proposed import would not be classified under CTH 8703 as 'motor cars' but as parts of 'motor cars'. Further, goods imported will be eligible for benefit of Notification No. 12/2012-Cus dated 17.03.2012 (S. No. 437), provi .....

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hich have not been registered anywhere prior to importation. In view of the above, subject goods will not fall under CTH 8703 or as CKD kit under S. No. 437 of Notification No. 12/2012-Cus dated 17.03.2012. 24. Revenue has relied upon Hon'ble Supreme Court judgment in case of Sharp Business Machines Pvt. Ltd., Bangalore vs. Collector of Customs, Bangalore 1990 (49) ELT 640 (SC) wherein it was inter-alia held that the goods imported were fully finished copiers in SKD/CKD form and as such ther .....

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he subsequent years. The import policy was not meant for such entrepreneurs who instead of importing 62% of the components, imported 100% of the components of a fully finished and complete goods manufactured by a foreign country. It is an admitted position that fully finished plain paper copiers were a prohibited item for import and thus the device adopted by the company in the present case was a complete fraud on the import policy itself. Apart from the above circumstances in our view the Tribu .....

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Ltd case, intention of the Govt. was to give incentive and encourage new entrepreneur by permitting import of 62% of the components of the copiers and the balance was to manufacture indigenously. In the case before us, there is no such restriction. Further, the applicant is not proposing to import 100% components / parts etc. himself. Also, there cannot be charge of misdeclaration for proposed import to be affected by the applicant. However, importer in case of Sharp Business Machineries Pvt. Lt .....

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ation of imports made in SKD condition, intention plays an important role in matters in which there is an allegation of duty evasion; that when there is allegation of subterfuge the court has to examine the circumstances surrounding the import to ascertain whether the importer had entered into fictitious arrangement to evade custom duty. 27. It is observed that ratio of Phoenix case, relied upon by the Revenue is not applicable to this case. In the case before us, applicant has not created any s .....

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ble Supreme Court in case of Commissioner of Customs, New Delhi vs. Sony India Ltd 2008 (231) ELT 385 (SC) distinguished the judgment in case of Phoenix International Ltd and observed that all parts were imported in Phoenix case by two units in same container, unlike in Sony India Ltd case. It was also held that Rule 2(a) of Rules of Interpretation of Tariff are applicable only if all components intended to make a final product presented at same time for customs clearance. The judgment of Hon .....

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ts, whether the applicants imports will be classified under their respective headings / sub-headings of the Customs Tariff Act, 1975 or under Tariff Heading 87.08 of the Customs Tariff Act, 1975? 29. Applicant submits that total number of parts proposed to be imported by the applicant would be 1940 and 1436 (depending on the model of the motor vehicle). It does not include parts imported by local third party vendors. It has already been discussed by us that proposed imports of these parts / comp .....

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