Import Of Components/ Parts/ Sub-assemblies Of The Motor Vehicle Are To Be Classified Under Their Respective Heading/ Sub-heading Under The Customs Tariff Act, 1974

BRIEF FACTS OF THE CASE

• M/s BMW India Private Limited ['BMW'] is a wholly owned subsidiary of M/s Bayerische Motoren Werke Holding B.V., Netherlands and M/s Bayerische Motoren Werke, Aktiengesellschaft, Germany ['Collectively referred as Parent Company']. The parent company is engaged in the business of the manufacture and sale of 'BMW cars' outside India.
• At the start of its operations, BMW was importing Compleztely Built Units ['CBU'] of motor vehicles from BMW Group companies outside India and assembling motor vehicles from imported Completely Knocked Down ['CKD'] kits at its Chennai Plant, with only the seats being sourced locally in India. Under this business model, BMW sought an advance ruling¹ from Customs regarding applicable tax rate on these imports. The ruling determined that the import of car parts would be classified as the import of motor cars as CKDs, thereby qualifying for a concessional customs duty at the rate of 15% as per Entry 344² of Customs Tariff No. 8703. As a result, BMW paid an import duty of 15% on the vehicle parts.
• In 2011, BMW revised its business model and began importing engines, gearboxes, and transmissions in an unassembled condition. The definition of CKD was introduced in Customs regulations in 2011. BMW notified the customs authorities of this change in their business model and requested clarification on the applicable tax rate. Consequently, the custom authorities allowed BMW to clear these imports at a concessional basic customs duty rate of 10%, applicable to CKD kits.
• An investigation was initiated by the Special Intelligence Investigation Branch ['SIIB'] to examine the applicability of a concessional rate of 10% on imports of CKD kits. Pursuant to such investigation, a show cause notice ['SCN']³ proposing to levy basic customs duty at 30% for the imports done till that date.
• BMW from April 2013 onwards, proposed to change its business model wherein import of CKD kits was to be discontinued and goods were to be imported as 'parts of motor vehicles'. Under this model BMW intended to procure the engine, axile assembly, exhaust systems, cooling module, heating, ventilation, and air conditioning unit [HVAC] and door panels [6 essential components/ parts] required for the manufacture of motor vehicles locally from India. With this background, BMW again approached the Customs authorities with the following questions:
  i. Whether the parts import of components/ parts/ sub-assemblies by BMW will be classified as motor vehicle under tariff 8703 or CKD kits4 when essential and critical components/ parts/ assemblies [6 essential components as mentioned above] are to be locally assembled/ manufactured by approved third party vendors? ii. If the import of components/ parts/ sub-assemblies by BMW will not be classified as motor vehicle or as CKD kits, whether the imports will be classified under their respective heading/ sub-heading of the Customs Tariff Act, 1975 or under Tariff heading 8708?

• The advance ruling authority ruled⁵ that the import of components/ parts/ sub-assemblies will be classified under their respective heading/ sub-heading of the Customs Tariff Act, 1975.
• It is worth mentioning that in 2011, CKD was defined to mean a unit having all necessary components, parts or sub-assemblies for assembling a vehicle but excluding a kit containing a pre-assembled engine or gearbox or transmission mechanism or a chassis or body assembly of a vehicle on which any of the components or sub-assemblies viz. engine or gearbox or transmission mechanism is installed.
• Revenue [Commissioner of Customs] challenged the ruling dated 20 November 2015 before the Hon'ble Madras High Court with a specific prayer to call for records of Advance Ruling Application⁶ against which the moot ruling was issued on the following grounds:
• Maintainability of application before the Advance ruling authority under section 28E of the Customs Act 1962 to determine a question of law or fact specified in the application regarding the liability to pay duty in relation to an 'activity' which is proposed to be undertaken by the applicant and not the activity which has already been undertaken
• Third-party vendors act as an extension of BMW, established specifically to locally procure the essential six parts of the motor vehicle. These parts are then assembled and supplied exclusively to BMW, with no distribution to other parties.
• These third parties also import the essential six parts. Therefore, by applying Rule 2(a) of the Rules of Interpretation of the Tariff, it is considered that all the components intended to make the final product are imported simultaneously.

➢ The Hon'ble High Court dismissed the challenge to the maintainability of the advance ruling application, on the grounds that the Revenue has taken a very narrow interpretation of the term 'business'. Further, the court clarified that the maintainability of the advance ruling application needs to be tested on the date of the application of the advance ruling and not when the order is passed by the Advance Ruling authority.

➢ It was further held that Rule 2(a) of the General Interpretative Rules deals with classification of incomplete, unfinished, disassembled or knocked down products as that of the finished or complete goods, if such incomplete, unfinished, disassembled or knocked down products have the essential character of the finished or complete goods [at the time of presentation]. The Hon'ble High Court observed that said rule can be applied only if the imported parts, components, or sub-assemblies bear the essential character of motor vehicles. Following established jurisprudence⁷ on the Rule's applicability, the Court noted that all components forming part of the assembly or complete goods must be presented together simultaneously. Therefore, consignments removed or presented at different times from various factories cannot be combined to classify the parts as a complete article. The rule can only be applied if the imported article, "as presented," has the essential character of a "complete or finished article." In the context of the present case, since the essential six parts are procured locally, the import cannot be considered to have the essential character of a motor vehicle, as these six parts were crucial for creating a finished motor vehicle.

➢ The Court disregarded the Revenue's reliance on the case of Westinghouse Saxby [(2021) 5 SCC 586], noting that the judgment pertained to the application of a more specific rule, specifically Rule 3(a) of the General Interpretative Rules which inter alia provides that where two or more headings seem to apply on classification of a product, then the one which provides the most specific description of the product in question should be used. Per contra, the present case involved the application of Rule 2(a) [which classifies the incomplete or unassembled product at the time of importation as if they were complete or finished if they have the essential character of such complete or finished product].

➢ The court also clarified that the judgmenttests the correctness of the Advance Ruling Order⁸ and held that the import of components/ parts/ sub-assemblies will be classified under their respective headings/ sub-headings of the Customs Tariff Act, 1975.

AURTUS COMMENTS

• The issue of classification of parts of motor vehicles has always been a vexed issue. The Revenue authorities at several stages has alleged that that imported parts and components should be classified under the same heading or sub-heading as the complete or finished goods, especially as motor vehicles are taxed at higher rates than individual components, parts, or sub-assemblies and classifying these items separately led to lower revenue collections, making the authorities circumspect of the position taken by the importers.
• The issue of unfinished or incomplete products imported at the same time was settled in the case of Sony [supra], where the Hon'ble Supreme Court held that goods brought in different consignments separately on the basis of a valid import license would not be considered as finished goods. It was further held that parts and components, where they do not have the essential character of the finished goods should be classified under their respective headings or sub-headings, rather than those of the complete or finished goods.
• Under the current regime the Notification 50/2017, provides a concessional duty rate for CKD imports and defines CKD (for ICE motor vehicles) to mean kits containing all the necessary components (including engine, gearbox and transmission mechanism) imported for assembly. Also, pre-assembled components like engines, gearbox or transmission mechanism when mounted on a chassis are not considered as CKD imports. Similarly, for electric vehicles ('EVs'), a knocked down kit containing battery pack, motor, motor controller, charger, power control unit, energy monitor, contactor, brake system, electric compressor etc., [whether inter-connected or not but not mounted on a chassis] is entitled to a concessional duty benefit. Further for EVs, an explanation was introduced in 2022, to provide that even where one or more essential parts are not imported, if the imports are presented as kit classifiable under CTH 8703, the concessional duty benefit would be available for such imports. Thus, the Government has over a period of time, keeping in mind the ensuing litigation has sought to clarify the scope and coverage of the benefits and the rates applicable on the import of parts and components whether as kits or otherwise.
• Further, in cases where essential parts or accessories were procured locally from third parties (who in turn had imported such parts or accessories from outside India), the revenue authorities have always alleged that these third parties were set up specifically to avoid higher tax implications and in some instances these allegations have been found to be accurate by the Apex Court⁹. A similar allegation was made in the present case of BMW. However, the High Court dismissed this claim, noting that BMW does not control the timing of the imports by these third parties. Additionally, the third parties did not import all the parts and accessories simultaneously. According to Rule 2(a), classification as complete or finished goods can only be applied if all the parts and accessories are imported at the same time and collectively possess the essential character of finished or complete goods, a principle also upheld in Sony [Supra] by the Supreme Court.
• Thus, merely creating a façade to show dis-assembly or sub-assembly to overcome any import policy regulation or any other conditions placed on the exporter / importer, is strictly looked at by courts as a means to overcome import policy conditions.

Footnotes

1 Vide order dated 28 October 2005

2 Notification No. 21/2002-Cus. Dated 1 March 2002 as amended by Notification No. 11/2005-Cus. Dated 1 March 2005

3 Show cause notice dated 26 August 2013

4 Entry 437 of Notification No. 12/2012-Customs dated 17 March 2012

5 Advance Ruling No. AAR/Cus/12/2015 dated 20 November 2015 issued in respect to the application no. AAR/44/Cus/01/2014

6 Advance Ruling Application No. AAR/44/Cus/01/2014 filed on 31 January 2014

7 Commissioner of Customs vs. Sony India Limited [(2008) 13 SCC 145]

8 Order dated 20 November 2015

9 Commissioner of Customs, New vs. Phoenix International Limited [2007 (9) TMI 275-SC]

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