Case Law Details
In re BMW India Pvt. Ltd. (CAAR Delhi)
In the case of BMW India Pvt. Ltd. (CAAR Delhi), it was determined that the importation of certain automotive components, such as engines, exhaust systems, cooling modules, HVAC units, and door panels, will not be categorized under ‘Motor Vehicles’ (Tariff Item 8703) or as CKD kits (Entry No. 526 of Notification No. 50/2017-Cus., dated 30.06.2017). Instead, these components are to be locally manufactured in India by BMW Group-approved vendors. Consequently, the imports will be classified under their respective headings and sub-headings of the Customs Tariff Act, 1975, rather than under Tariff Heading 87.08. This classification aligns the components with the detailed descriptions provided in the Customs Tariff Act rather than broad vehicle or kit categories.
FULL TEXT OF THE ORDER OF CUSTOMS AU-THORITY OF ADVANCE RULING, MUMBAI
BMW India Pvt. Ltd (`Applicant’ / ‘BMW India’) is a company incorporated in 2006 under the Companies Act, 1956 and is, inter-alia, engaged in the assembling/ manufacturing at its Plant in Chennai and sale of BMW passenger cars in India. BMW India is part of the German multinational manufacturer of luxury vehicles i.e. Bayerische Motoren Werke AG. For the above activity of manufacture, based on the approval by the Foreign Investment Promo-tion Board (PIPIT), Government of India, on August 23, 2005, the Applicant commenced import of motor cars in Completely Knocked Down (`CKD’) kit form and its assembly at its Chennai Plant.
1.1 Subsequently, on January 3, 2013, the Applicant applied to the FIPB for amendment of the FIPB approval for inclusion of the words ‘manufacturing and import of parts’. The FIPB, vide letter dated January 28, 2013, stated as follows:
that your proposal regarding proposed additional activities of (i) Manufacture of automobiles using car parts imported from overseas and procured locally and (ii) Import of car parts are covered under automatic route …….
1.2 With the passage of time, the business of the Applicant has undergone significant change. Buoyed by the increase in volume of the cars sold and the potential of the luxury car market in India, the Applicant has gradually increased its focus on India. This led to a gradual but important shift in the sourcing pattern of motor vehicles by the Applicant. The Applicant’s evolution of im-ports started from CKD kits and then progressed to procurement of local assembly / manufacture of six essential and critical components / parts / sub-assemblies.
1.3 The evolution of BMW India’s business model is summarized in the table below:
1.4 In 2022, India has become one of its fastest growing markets for the Applicant. To increase business in India and meet the competitive demands of the market, Applicant is optimizing the local operation and at the same time increase its local manufacturing footprint. Hence, the Ap-plicant is attempting to move to in house assembly of Axel as step towards increase in local pro-duction.
1.5 Over the time, BMW India has developed adequate in-house expertise by imparting training to its workforce. Accordingly, the Applicant is in a good position to start the manufacturing process-es of Axel. Under the present localization model, there has been a significant local procurement of six essential and critical components /parts / sub-assemblies required for manufacturing the motor vehicles along with direct importation of balance components of the motor vehicle at part level. The local third-party vendors of the Applicant import components for assembling six essen-tial and critical components / parts / subassemblies (namely engine, axles etc.) at their manu-facturing facility in India.
1.6 In the proposed scenario i.e. under the proposed manufacturing model, the Applicant shall import sub-assembly and parts of axle and assemble them at its own manufacturing Plant in Chennai.
1.7 Notably, the axle is one of the critical and essential components for manufacturingmotor ve-hicles . The sourcing model of the other five critical parts – engine, exhaust system, cooling mod-ule, HVAC and door panel will continue in the present form. However, the wire harness which is presently locally sourced from third party vendors shall be imported under the proposed activity. Depending upon the success and the outcome of the activity to assemble the axle, the Applicant could gradually move towards greater in-house manufacturing and assembly of other criti-cal/essential components and parts at its own manufacturing Plant.
1.8 With the proposed in-house manufacturing of axle-assembly at the Plant in Chennai, the Ap-plicant would import around 120 different types of sub-assemblies and parts directly from BMW AG Group entities. However, number of assembly parts could vary on model to model manufac-tured in India & technical advancement of the assembly process. A sample Bill of Materials for axle assembly in case of U11 model is attached as Appendix 2.
1.9 This will result in alteration of the procurement pattern and the complexion of the import transaction of the Applicant and hence will constitute a new activity of import by the Applicant.
1.10 The Applicant relies on the advance ruling in Xerox India Ltd. 12011 (272) ELT 623 (AAR)]. As per the fact pattern of this advance ruling, Xerox used to import the parts for the purpose of reselling, warranty etc. However, initially it was not able to identify the items whether they are meant for reselling or warranty etc. Accordingly, in the ab-sence of such identification, the importer discharged custom duty without taking the benefit of exemption notification available for the goods meant for retail sale. Subsequently, the importer developed their systems for recognizing the end use to which these components will be put to use and sought an advance ruling regarding the applicability of exemption notification to the imported goods. The authorities objected to the admission of application citing that as the goods are al-ready imported by the importer. The authority of advance ruling overruled these objections and admitted the application on the basis that although the imported goods remain same, structure of transaction has changed with the resultant impact on duty payable. On this basis the authority held that proposed activity is different than the activity already undertaken in respect of such goods.
1.11 Relying on the above, Applicants submits that in its case also due to proposed import activi-ties, there will be impact on custom duty payable. Accordingly, even though the Applicant will im-port parts of axle, the proposed indigenous manufacturing activity should be considered different than present localization model.
QUESTION(S) ON WHICH THE ADVANCE RULING IS REQUIRED
1.12 The Applicant humbly seeks an Advance Ruling on the following questions:
A. Supply Chain:
i) Where five essential and critical components/ parts/sub-assemblies namely, (a) engine (along with engine and transmission unit) (b) exhaust systems (c) cooling module, (d) heating, ventilation and air conditioning unit and (e) door panels are locally manufactured in India by BMW Group approved third party vendors;
ii) Axle shall be assembled locally within the Plant premises by Applicant himself;
iii) All other trim parts shall be imported from BMW Group enti-ties.
In regard to above said facts of supply-chain, where-in five critical components of the car are lo-cally manufactured and supplied in India by BMW Group approved third party vendors, whether the import of components / parts / sub-assemblies by the Applicant will be classified as motor vehicle under Tariff Heading 87.03 or as CKD kit under Entry No. 526 of Notification No. 50/2017-Cus., dated 30.06.2017?
B. If the import of components/parts/sub-assemblies by the Applicant will not be classified as motor vehicle or as CKD kit, whether the imports will be classified under their respective head-ings / sub-headings of the Customs Tariff Act, 1975 or under Tariff Heading 87.08 of the Customs Tariff Act, 1975?
STATEMENT CONTAINING THE APPLICANT’S INTERPRETATION OF LAW AND/OR FACTS, AS THE CASE MAY BE, IN RESPECT OF THE AFORESAID QUESTION(S)
NON-APPLICABILITY OF RULE 2(A) OF THE GENERAL RULES OF INTERPRETATION (`GRI’)
1.13 Section 2 of the Customs Tariff Act, 1975 (`CIA’) provides that the rates at which the duties of customs shall be levied under the Customs Act, 1962 (`Custorns Act’) are specified in the First and Second Schedules. The First Schedule on import tariff contains a set of Rules known as “General Rule of Interpretation of this Schedule” (commonly known as GRI). These GRI mandate that the classification of goods in the Schedule shall be governed by the principles laid thereunder.
1.14 Rule 1 of the GRI clarifies that the titles of Sections, Chapters and Sub-Chapters are provid-ed for ease of reference only. That for legal purposes, classification shall be determined solely by the terms of the Headings and Section or Chapter Notes.
1.15 Rule 2(a) of the GRI deals with the rules of interpretation for incomplete or unfinished arti-cles. The relevant extract from Rule 2(a) of the GRI is reproduced below:
“2(a): any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. it shall also be taken to in-clude a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled” [Emphasis sup-plied]
A copy of General Interpretative Rules is enclosed herewith as Appendix 3.
1.16 The above rule is explained further in the Explanatory Notes to the Harmonized Commodity Description and Coding System (`HSN’) developed by the World Customs Or-ganization. The relevant portion of the said Explanatory Notes reads thus:
“Rule 2 (a) (Articles presented unassembled or disassem-bled)
(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 incomplete or un-finished articles presented unassembled or disassembled provided that they are to be treated as complete or finished article by virtue of first part of this Rule.
(VII) For the purpose of this Rule, “articles presented unassembled or disassembled” means articles the components of which are to be- assembled either by means of fixing devices (screws, nuts, bolts etc.) or” by riveting or welding, for example, provided only assembly op-erations are involved.
No account is to be taken in that regards of the complexity of the assembly method. How-ever, 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.” [Emphasis supplied]
A copy of Explanatory Notes to HSN is enclosed herewith as Appendix 4. 1.17 Basis the above it is submitted that Rule 2(a) is applicable in cases where:
– only assembly operations are involved irrespective of the com-plexities of the assembly methods for assembling an article imported in unassembled form; and
– goods unassembled or disassembled can be put together by sim-ple fixing device (screws, nuts, bolts etc.) or by riveting or welding; and
– components themselves should not be subjected to any further working operations for completion into finished state.
1.18 In the proposed activity, parts imported could not be assembled by mere hand tools. The fin-ished goods/motor vehicles will be manufactured after subjecting the parts to various processes after imports. Manufacturing of vehicles is a highly technical skill and subject to wide range of engineering processes of completion is required to be undertaken. Therefore, the goods requiring complicated engineering steps to make final products/motor vehicle cannot be considered as unfinished goods having essential character of complete articles.
1.19 The Applicant submits that Explanatory Notes to the HSN are a safe guide for ascertaining the meaning of any expression for purposes of classification of goods. Reliance is placed on sev-eral decisions of the Supreme Court – in CCE v. Wood Craft Products Ltd. [1995 (77) E.L.T. 23 (S.C.)], CCE v. Bakelite Hylam [1997 (91) E.L.T. 13 (S.C.)), Holostick India Ltd. v. CCE [2015 (318) E.L.T. 529 (S.C.)] and CCE v. Uni Products India Ltd. [2020 (372) ELT 465 (S. c.)], wherein the Supreme Court has time and again recognized the strong persuasive value of the HSN Explanatory Notes.
In absence of import of essential components, the imported goods will not embrace the “essential character” of an article.
1.20 Rule 2 (a) of GIR comes into play for classification purposes as and when the incomplete or unfinished goods presented for custom clearance exhibit the essential characteristics of finished article in a heading. In terms of Rule 2(a), if the imports in question of goods in unassembled or disassembled form, have the essential character of an item/article mentioned in the tariff head-ing, only then the items would warrant classification as the item which will emerge post assem-bling.
1.21 Therefore, in order to invoke Rule 2(a), one of the ingredients is that the imported goods should embrace the essential characteristics of the complete or finished article. Here it becomes pertinent to discuss the concept of ‘essential character’ as used under the gm’
1.22 The expression essential character is not defined under the GRI or the CTA. However, it is stated in the Explanatory Notes to the HSN that the factor that determines the essential charac-ter of a good will vary as between different kinds of goods. The Explanatory Notes provide that the essential character of a good, may, for example, be determined by the nature of the material or component, its bulk, quality, weight or value, or by the role of a constituent material in relation to the use of the goods.
1.23 A similar view on the essential character test has been espoused by the Central Board of Excise a nd Customs (`CBEC’) vide Circular No. 7/90 — CX.3 dated 23.2.1990 wherein it is mentioned that the determination of the essential character may vary as between different kinds of goods. It could be determined by the nature of the material or component, its bulk, quantity, weight or value or by the role of a constituent mate-rial in relation to the use of the goods.
1.24 Further, the Madras High Court in Motor Industries Co. Ltd. v. Assistant Collec-tor of Customs, [1992 (62) ELT 13 (Mad)] held that for determining whether goods have the essential character of finished goods, there is no guideline or yardstick, nor dictionary meaning is applicable. However, the Court went on to hold that incomplete or unfinished goods will have the “essential character” of complete or finished goods if they require only minor ad-justment.
1.25 As concerns the expression essential character in context of motor vehicles, it is relevant to make reference to Circular F.No. 528/128/97-Cus-TRU dated 5.12.1997 (`Circular’) issued by the CBEC. The Circular clarified the intent of Rule 2(a) of the GIR specifically from the perspective of motor vehicle assembly in India. The said Circular provides as under:
“It may be considered that the following parts or compo-nents or sub-assemblies could be construed as most essential to bring into effect a finished mo-tor car namely engine, gear box, chassis, transmission assembly system, body/cab, suspen-sion system, axles front and rear. In general, it may be mentioned that if all these components or parts or sub-assemblies are imported, Rule 2(a) of the aforesaid rules for interpretation would come into play, in as much as it would be possible to take a view that when put together, these parts or components or sub-assemblies constitute essential characteristics of a motor car has been achieved. However, if a few of these components or parts or sub-assemblies are not imported but are wholly manufactured or purchased locally, it would be difficult to take the view that the “essential characteristics” of a motor car has been achieved without these parts.” [Emphasis supplied]
A copy of the Circular is attached as Appendix 5.
1.26 As seen above from the Circular, while explaining the scope of Rule 2(a) it is mentioned that engine, gear box, chassis, transmission assembly system, body/cab suspension system, axle front and rear are among the parts or components or sub-assemblies, considered most essential to bring into effect a finished motor car.
1.27 In view of the above, it is submitted that only if the parts and components have all the essen-tial ingredients imparting character essential for motor vehicle, in that case such parts and com-ponents could be classified as a motor vehicle. In the proposed model, the import goods requiring classification lack some of the most critical components such as the engine axle assembly, ex-haust systems, cooling modules, HVAC and door panels. These essential components will under-go complex assembly/manufacturing operations by using highly skilled labor in India. Therefore, in absence of the above-mentioned essential components, it is incomprehensible to say that the incomplete or unfinished vehicles (as may be) resemble the essential character of a motor vehi-cle.
1.28 Reference is also made to the advance ruling obtained by BMW in 2015 [Re: BMW India Pvt. Ltd., 2016 (332) ELT 537 AAR]. In the said ruling, this Hon’ble Authority ruled that the import of components/parts/sub-assemblies of motor vehicles by BMW India will be classified under the respective tariff item of the CTA and not as motor vehicle under Tariff Heading 8703 or as CKD kit under Sr. No. 437 of Notification No.12/2012 — Cus. dated 17.03.2012 when the specified essential components are to be locally manufactured by third-party vendors.
1.29 In the proposed indigenization model, the axle assembly will be manufactured in-house by the Applicant from import of the sub-assembly and parts of axle. The engine, exhaust systems, cooling modules, HVAC unit, door panels and seats will continue to be purchased locally from third party vendors in India who shall import the necessary parts and subassemblies. According-ly, in terms of the above Circular the imports proposed to be made by the Applicant will not reflect the ‘essential characteristics’ of a motor vehicle when all the essential components/parts are not being imported and hence the imported goods will be classified as per the respective classifica-tion without invoking Rule 2(a).
Goods can be classified as completed article only and only when ‘as presented’ (i.e. in the state they are presented before the Customs) they have the essential character of the complete article
1.30 At this juncture, the Applicant submits that emphasis is also required to be placed on the ex-pression ‘as presented’ under Rule 2(a) of the GIR. The expression implies that the said rule would apply only when the goods are presented together at the time of import. If there are imports sepa-rately at different points of time at different ports, they cannot be treated as presented together so as to invoke Rule 2(a).
1.31 Reliance is placed on the decision in Commissioner of Customs v. Sony India Ltd., [2008 (231) ELT 385 (SC)J wherein the Supreme Court has held that the sine qua non for the application of the Rule 2(a) is that any imported article, which is ‘as presented’, must have the essential character of the complete or finished article. It means that Rule 2(a) would be applicable only and only if all the components which are intended to make a final product would have to be presented at the same time for customs clearance. The Supreme Court in Sony India (supra) made the following observa-tions:
“The interpretation that we have given to Rule 2(a) would mean that Rule 2(a) would be applicable only and only if all the components which are intended to make a final product would have to be presented at the same time for customs clearance. Such is not the case in the present situation where the goods have been brought in 94 different con-signments.”
1.32 By placing reliance on the decision in Sony India (supra), this Hon’ble Authority in the Applicant’s advance ruling in BMW India (supra) obtained in 2015 has observed as under:
“The judgment of Hon’ble Supreme Court in Sony India Ltd., is more applicable to the case before us as components/parts/assemblies for manufacture of motor vehicle are not likely to be imported in same container. In fact they are not even likely to he imported at same time and require further manufacture by different local third party vendors.”
1.33 It is submitted that the above decisions in Sony India (supra) and in BMW India (supra) are squarely applicable to the instant facts. Under the proposed import pattern under the indigenization model, the applicant will import the parts / sub-assemblies of axle assembly and manufacture the axle at its own Plant. Further, the local third-party vendors of the Applicant will continue to import components for assembling five essential and critical components / parts / sub-assemblies (namely engine, exhaust systems etc.) at their manufacturing facility in India. Fur-thermore, the balance components / other parts will be imported by the Applicant at distinct times and at no point of time the imported goods will exhibit the essential characteristics of a motor vehicle. Hence the import of parts required for manufacturing of components / parts / sub-assemblies of motor vehicle should be assessed as such and not as motor vehicle.
1.34 It is further submitted that the Applicant as per the proposed new business activity, will not be engaged in importing all the products required for manufacturing a motor vehicle. It will source five essential and critical components / parts /sub-assemblies locally from local third-party ven-dors. Accordingly, in absence of import of such goods by the Applicant, the import of components by local third-party vendors manufacturer cannot be attributed to Applicant so as to consolidate all imports as imports of motor vehicle.
1.35 The Tribunal in Baba Baidyanath Trading Co. v. Commissioner of Customs, 12023 (6) TMI 1094 — CESTAT Kolkata] has inter-alia observed that goods imported separately by different importers cannot be clubbed together for the purpose of classification. Therefore, it is the submission of Applicant that import of every party / importer should be taken on standalone basis to ascertain the applicability of Rule 2(a) of GIR. Accordingly, the imported goods will be classified as per the respective classification with-out invoking Rule 2(a).
1.36 To conclude, the Applicant summarizes its submissions that components / parts imported for manufacturing of components / parts / sub-assemblies by local third-party vendors and compo-nents / parts / sub-assemblies (including for axle assembly) imported standalone by the Applicant should be classified under its respective classifications. This is basis the fact that imports will take place at distinct points of time and as presented to customs for clearance do not exhibit the essential characteristic of a motor vehicle. Accordingly, they are not classified as motor vehicle in accordance with Rule 2 (a).
NON-APPLICABILITY OF ENTRY NO. 526 OF THE NOTIFICATION NO. 50/2017 — CUS. DATED 30.06.2017
I. Import of motor vehicles is covered under Tariff Heading 87.03. The said heading provides as under:
“Motor cars and other motor vehicles principally designed for the transport of persons (Other than those of heading 8702), including station wagons and racing cars”
II. Further, Entry No. 526 of the Notification No. 50/2017 — Cus. dated 30.06.2017 (`Notification) covers motor vehicles falling under Tariff Heading 87.03 and provides as under:
| S. No. | Chapter or Heading or sub— heading or tariff item |
Description of goods | Standard rate | Integrated Goods and Services Tax | Condition No. |
| 526. | 8703 | Motor cars and other motor vehicles 150 (excluding electrically operated vehi-cles) principally designed for the transport of persons (other than those of heading 87.02), includ-ing station wagons and racing cars, new, which have not been registered anywhere prior to importation, If imported,-(1) As a Completely Knocked Down (CKD) kit containing all the nec-essary components, parts or sub-assemblies, for assembling a complete vehicle, with,- |
|||
| (a) engine, gearbox and transmission mechanism not in a pre-assembled condition |
15% | – | – | ||
| (b) engine or gearbox or transmission mechanism in pre-assembled form but not mounted on a chassis or a body assembly |
35% | – | – | ||
| (2) in any other form, – | |||||
| (a) with CIF value more than US $ 40,000 or with engine capacity more than30 00 cc for petrol-run vehicles and more than 2500 cc for diesel-run vehicles, or with both; |
100% | – | – | ||
| (b) other than (a) above | 70% | – | – |
A copy of the relevant extract from the Notification is attached as Appendix 6.
III. The afore-said Entry in the Notification provides duty rates ap-plicable for import of motor vehicles in CKD form. In Collector of Customs Vs. Maestro Motors, 2004 (174) ELT 289 (SC), the Supreme Court has, inter-alia, held that when, in a Notification, the exemption is with reference to an item in the First Schedule to the CTA, then the Interpretative Rules would equally apply to such Notification. The Applicant submits that, where a Notification grants exemption with reference to an item in the First Schedule to CTA, the GIR to the Tariff are applicable and the terms used in the Notification shall be understood by applying the applicable Interpretative Rules.
IV. Presently, Serial No. 526 of the Notification provides an exemp-tion on the basis of classification as per First Schedule of the CTA. Accordingly, on the basis of the above judgment, the GIR will be equally applicable for determining the applicability of exemption notification.
V. As submitted above, since the parts imported for manufacturing of components / parts / sub-assemblies under the proposed new business activity will not exhibit the essential characteristic of the motor vehicle classified under Tariff Heading 87.03 of the CTA, the proposed imported goods will not be classified as motor vehicle under Tariff Heading 87.03 in accordance with Rule 2(a) of the GIR. Since the said Notification is applicable to import of motor vehicles only, in the absence of classification of imported goods as motor vehicles, the Notifica-tion will not be applicable to the proposed import.
NON-APPLICABILITY OF TARIFF HEADING 87.08 FOR IMPORT OF COMPO-NENTS/PARTS/SUB-ASSEMBLIES
I. The Tariff Heading 87.08 covers the following:
“Parts and accessories of the motor vehicles of headings 8701 to 8705”
A copy of Tariff Heading 87.08 is enclosed herewith as Appendix 7.
II. To understand the scope of goods covered under Heading 87.08, it is relevant to refer Explana-tory Note to Heading 87.08 of the HSN which reads as under:
“(Ill) Parts and Accessories
It should however be noted that the Heading No.87.08 apply only to those parts and accessories which comply with the all the three follow-ing conditions:
a) They must not be excluded by Note 2 to Section XVII; and
b) They must be suitable for use solely or principally with mo-tor vehicles covered under heading No. 8701 to 8705; and
c) They must not be more specifically included elsewhere in the nomenclature.”
III. Evidently, in order for motor vehicle parts or accessories to be classifiable under heading 8708, they must satisfy all three of the following conditions — (a) they must not be excluded by Section XVII, Note 2, (b) they must be identifiable as being suitable for use solely or principally with motor vehicles of headings 8701-8705 and (c) They must not be more specifically provided for elsewhere in the Customs Tariff.
IV. For the purposes of classification under Tariff Heading 87.08, one of the tests to applied is: whether the goods are more specifically included elsewhere in the Customs Tariff. If the answer is in the affirmative, the goods will not be classified under Tariff Heading 87.08.
V In the proposed model, various parts/components/sub-assemblies are more specifically pro-vided elsewhere in the Customs Tariff (for example automobile tyres which merit classification under Tariff Heading 40.11 being more specifically covered therein). Hence the condition (c) of the Explanatory Notes is not fulfilled. It is submitted that when those imported goods which are specifically classified under other tariff items, they do not qualify as parts and accessories of mo-tor vehicles under Tariff Heading 87.08. However, in case they are not specifically included else-where in the nomenclature, they continue to be covered under Tariff Heading 87.08.
VI Thus, the import of parts/components/sub-assemblies which are more specifically provided elsewhere in the Customs Tariff will be classified under their respective headings/sub-headings/tariff-item under the CTA.
All the grounds submitted are without prejudice to each other, and the Applicant also craves leave to add, to alter, amend and/or modify all or any of the foregoing submissions before any rul-ing is pronounced by the Authority on the above questions.
2. The application duly received forwarded to the Port Commissionerate for soliciting comments. The following response of the Chennai (II) Commissionerate of Customs has been received.
2.1 In this regard, with reference to Para 3 of subject letter, the comment is as detailed below:
(i) The applicant is a valid “applicant” and IEC details (IEC No. 0506005402) as mentioned in the Application has been verified from DGFT portal.
(ii) As on date, the issues / questions raised in the application is not pending in the applicant’s case before any officer of the Customs, Appellate Tribunal, or any Court of Law: or questions / issues raised therein are the same as in a matter decided by an Ap-pellate: Tribunal or a Court of Law, as per the records available with this group.
(iii) Nature of the activity of the Applicant is Proposed.
2.2 The applicant has sought clarity regarding the following:
(a) Classification of the subject goods as motor vehicle under Tariff Heading 8703 or as CKD kit under Entry no. 526 of notification no. 50/2017 dt. 30.06.2017?
(b) If not classified as motor vehicle or CKD kit, whether imports of the subject goods will be classified under their respective headings/ sub-headings or under Tariff heading 8708 of Custom Tariff Act, 1975?
2.3 Comments w.r.t point (a) and (b) above:
As per the Customs Tariff CTH 8703 covers goods “Motor Cars and other Motor Vehicles principal-ly designed for the transport of persons (other than those of heading 8702) including station wag-ons and racing cars.
2.4 For classification of goods in CKD condition, Following Principles shall be followed, as per the General Rules for the Interpretation of the Harmonized System:
Rule 2 (a): Any reference in a heading to an article shall be taken to include a reference t that arti-cle incomplete or unfinished, provided that, as presented, the incomplete or unfinished that arti-cle has the essential character of the compete or finished article. It shall also be take include a reference to that article complete or finished {or falling to be classified as complete or finished by virtue of this Rule), presented unassembled or disassembled. Explanation: Rule 2 {a) deals with the classification of unfinished, incomplete, unassembled or disassembled goods. Unfinished and incomplete goods can be classified under the same heading as the same goods in a finished state provided that they have the essential character of the complete or finished article. As well, unas-sembled or disassembled goods may also be classified the same as the complete finished prod-uct. This rule does not apply if the texts of the Heading or the relevant Legal Notes exclude the unfinished or unassembled product in question.
2.5 In light of the GIR Rule as mentioned above, the imported goods if all the parts are presented in CKD condition and the goods have essential character of complete goods, they have to be classified as complete goods. Goods imported separately cannot be clubbed together because they are not presented as one CKD pack at the time of import. If all the parts are presented in CKD condition and they have essential character of a complete article, they have to be assessed as complete article (as held in case of Procal Electronics India Pvt Ltd vs Commissioner -2005(185) E.L.T.A58(S.C.).
2.6 In reference to GIR as explained above it may be seen the components/parts/sub-assemblies which are proposed to be imported individually does not give essential characteristics of motor vehicle under CTH 8703, as the importer has proposed to procure critical component such as En-gine, Exhaust system, Cooling module, HVAC, Door Panel, Seat etc locally and Axle assembly to be manufactured in their plant premises.
2.7 Further, The CKD kits are eligible for exemption under serial no. 526 of the BCD Notification 050/2017-Customs dated 30.06.2017 if imported in the following condition, the applicable BCD is as detailed below; “Motor car and other motor vehicles (excluding electrically operated vehicles) principally designed for the transport of persons (other than those of/ heading 87.02), including station wagons and racing cars, new, which have not been registered anywhere/prior to importa-tion, If imported:
(1) As a Completely Knocked Down (CKD) kit containing all the necessary components, [ parts or sub-assemblies, for assembling a completed vehicle, with,-
(a) Engine, gearbox and transmission mechanism not in a pre-assembled condition; –
(b) Engine or gearbox or transmission mechanism in pre-assembled form but not mounted on a chassis or a body assembly;- 35%
(2) In any other form,-
(a) With CIF value more than US Dollar 40,000 or with engine I ca-pacity more than 3000cc for petrol-run vehicles and more than 2500 cc for diesel- run vehicles, or with both; which attracts -100%.
(b) Other than (a) above – 70%. It may be seen from the SI. No. 526 of the BCD Notification-050/2017-Customs dated 30.06.2017 that engine, transmission mecha-nism and other components are critical components of the vehicle so as to be considered as a vehicle in CKD condition. However, it is noticed that importer has proposed to import compo-nents/parts/sub-assemblies other than these critical components. Since these items does not appear to give essential character of motor vehicle, therefore it may not be classified under Chap-ter 8703.
In view of the above, it is informed that as per Annexure II submitted by the importer, the import of components/parts/sub-assemblies may be classified as individual motor vehicle parts in their respective headings and subheadings only. This is issued with the approval—Commissioner of Customs, Chennai II(Import).
3. A personal hearing in the matter was conducted on 09.08.2024. During the personal hearing, the authorized representative of the applicant reiterated the submissions al-ready made in their application for advance ruling and laid emphasis on the Rulings issued by the Hon’ble High Court of Madras in the matter of BMW India Pvt. Ltd. (W.P.No.14959 of 2016) dated 05.07.2024.
4. With this in the background, let us look closely at the components sources procured locally and how the latest Ruling put into perspective the classification of the components in the current case. The details of the local sourcing till date chronologically as provided by the applicant is re-produced below:
4.1 In 2022, India has become one of its fastest growing markets for the Applicant. To increase business in India and meet the competitive demands of the market, Applicant is optimizing the local operation and at the same time increase its local manufacturing footprint. Hence, the Applicant is attempting to move to in house assembly of Axel as step to-wards increase in local production.
4.2 Over the time, BMW India has developed adequate in-house expertise by imparting training to its workforce. Accordingly, the Applicant is in a good position to start the manufacturing process-es of Axel. Under the present localization model, there has been a significant local procurement of five essential and critical components /parts / sub-assemblies required for manufacturing the motor vehicles along with direct importation of balance components of the motor vehicle at part level. The local third-party vendors of the Applicant import components for assembling five essential and critical components / parts / subassemblies (namely engine, axles etc.) at their manufacturing facility in India.
4.3 In the proposed scenario i.e. under the proposed manufacturing model, the Applicant shall import sub-assembly and parts of axle and assemble them at its own manufacturing Plant in Chennai.
4.4 Notably, the axle is one of the critical and essential components for manufacturing motor vehicles. The sourcing model of the other five critical parts – engine, exhaust system, cooling module, HVAC and door panel will continue in the present form. However, the wire harness which is presently locally sourced from third party vendors shall be imported under the proposed activity. Depending upon the success and the outcome of the activity to assemble the axle, the Applicant could gradually move towards greater in-house manufacturing and assembly of other critical/essential components and parts at its own manufacturing Plant.
4.5 With the proposed in-house manufacturing of axle-assembly at the Plant in Chennai, the Ap-plicant would import around 120 different types of sub-assemblies and parts directly from BMW AG Group entities. However, number of assembly parts could vary on model to model manufac-tured in India & technical advancement of the assembly process. This will result in altera-tion of the procurement pattern and the complexion of the import transaction of the Applicant and hence will constitute a new activity of import by the Applicant.
4.6 Section 2 of the Customs Tariff Act, 1975 (`CIA’) provides that the rates at which the duties of customs shall be levied under the Customs Act, 1962 (`Customs Act’) are specified in the First and Second Schedules. The First Schedule on import tariff contains a set of Rules known as “General Rule of Interpretation of this Schedule” (commonly known as GRI). These GRI mandate that the classification of goods in the Schedule shall be governed by the principles laid thereunder.
4.6.1 Rule 1 of the GRI clarifies that the titles of Sections, Chapters and Sub-Chapters are provid-ed for ease of reference only. That for legal purposes, classification shall be determined solely by the terms of the Headings and Section or Chapter Notes.
4.6.2 Rule 2(a) of the GRI deals with the rules of interpretation for incomplete or unfinished arti-cles. The relevant extract from Rule 2(a) of the GRI is reproduced below:
“2(a): any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as pre-sented, the incomplete or unfinished article has the essential charac-ter of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled” [Emphasis supplied]
4.6.3 The above rule is explained further in the Explanatory Notes to the Harmonized Commodity Description and Coding System (`HSN’) developed by the World Customs Or-ganization. The relevant portion of the said Explanatory Notes reads thus:
“Rule 2 (a) (Articles presented unassembled or disassem-bled)
(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 head-ing 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 incomplete or unfinished arti-cles presented unassembled or disassembled provided that they are to be treated as complete or finished article by virtue of first part of this Rule.
(VII) For the purpose of this Rule, “articles pre-sented unassembled or disassembled” means articles the components of which are to be as-sembled either by means of fixing devices (screws, nuts, bolts etc.) or by riveting or welding, for example, provided only assembly operations are involved.
No account is to be taken in that regards of the complexity of the 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.” [Emphasis supplied]
4.7 Basis the above it is submitted that Rule 2(a) is applicable in cases where:
– only assembly operations are involved irrespective of the com-plexities of the assembly methods for assembling an article imported in unassembled form; and
– goods unassembled or disassembled can be put together by sim-ple fixing device (screws, nuts, bolts etc.) or by riveting or welding; and
– components themselves should not be subjected to any further working operations for completion into finished state.
4.8 In the proposed activity, parts imported could not be assembled by mere hand tools The finished goods/motor vehicles will be manufactured after subjecting the parts to various processes after imports. Manufacturing of vehicles is a highly technical skill and subject to wide range of engineering processes of completion is required to be undertaken. Therefore, the goods requiring complicated engineering steps to make final products/motor vehicle cannot be considered as unfinished goods having essential character of complete articles.
4.9 Rule 2 (a) of GIR comes into play for classification purposes as and when the incomplete or unfinished goods presented for custom clearance exhibit the essential characteristics of finished article in a heading. In terms of Rule 2(a), if the imports in question of goods in unassembled or disassembled form, have the essential character of an item/article mentioned in the tariff head-ing, only then the items would warrant classification as the item which will emerge post assembling.
4.10 Therefore, in order to invoke Rule 2(a), one of the ingredients is that the imported goods should embrace the essential characteristics of the complete or finished article. Hence, it be-comes pertinent to discuss the concept of ‘essential character’ as used under the GRI.
4.11 As concerns the expression essential character in context of motor vehicles, it is relevant to make reference to Circular F. No. 528/128/97-Cus-TRU dated 5.12.1997 (`Circular’) issued by the CBEC. The Circular clarified the intent of Rule 2(a) of the GIR specifically from the perspective of motor vehicle assembly in India. The said Circular provides as under:
“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 mo-tor 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-assemblies are imported, Rule 2(a) of the aforesaid rules for interpretation would come into play, in as much as it would be possible to take a view that when put together, these parts or components or sub-assemblies constitute essential characteristics of a motor car has been achieved. However, if a few of these components or parts or sub-assemblies are not imported but are wholly manufactured or purchased locally, it would be difficult to take the view that the “essential characteristics” of a motor car has been achieved without these parts.” [Emphasis supplied]
4.12 As seen above from the Circular, while explaining the scope of Rule 2(a) it is mentioned that engine, gear box, chassis, transmission assembly system, body/cab suspension system, axle front and rear are among the parts or components or sub-assemblies, considered most essential to bring into effect a finished motor car.
4.13 In view of the above, it is submitted that only if the parts and components have all the essential ingredients imparting character essential for motor vehicle, in that case such parts and components could be classified as a motor vehicle. In the proposed model, the imported goods requiring classification lack some of the most critical components such as the engine, axle assembly, exhaust systems, cooling modules, HVAC and door panels. These essential components will undergo complex assembly/manufacturing operations by using highly skilled labor in India. There-fore, in absence of the above-mentioned essential components, it could be incomprehensible to say that the incomplete or unfinished vehicles (as may be) resemble the essential character of a motor vehicle.
4.14 Reference is also made to the advance ruling obtained by BMW in 2015 [Re: BMW India Pvt. Ltd., 2016 (332) ELT 537 AAR]. In the said ruling, this Hon’ble Authority ruled that the import of components/parts/sub-assemblies of motor vehicles by BMW India will be classified under the respective tariff item of the CTA and not as motor vehicle under Tariff Heading 8703 or as CKD kit under Sr. No. 437 of Notification No.12/2012 — Cus. dated 17.03.2012 when the specified essential components are to be locally manufactured by third-party vendors.
4.15 In the proposed indigenization model, the axle assembly would be manufactured in-house by the Applicant from import of the sub-assembly and parts of axle. The engine, exhaust systems, cooling modules, HVAC unit and door panels will continue to be purchased locally from third par-ty vendors in India who shall import the necessary parts and sub-assemblies. Accordingly, in terms of the above Circular the imports proposed to be made by the Applicant will not reflect the ‘essential characteristics’ of a motor vehicle when all the essential components/parts are not being imported and hence the imported goods will be classified as per the respective classification without invoking Rule 2(a).
4.16 At this juncture, the Applicant has submitted that emphasis is also required to be placed on the expression ‘as presented’ under Rule 2(a) of the GIR. The expression implies that the said rule would apply only when the goods are presented together at the time of import. If there are imports separately at different points of time at different ports, they cannot be treated as presented together so as to invoke Rule 2(a).
4.17 Reliance has been placed on the decision in Commissioner of Customs v. Sony India Ltd., (2008 (231) ELT 385 (SC)] wherein the Supreme Court has held that the sine qua non for the application of the Rule 2(a) is that any imported article, which is ‘as presented’, must have the essential character of the complete or finished article. It means that Rule 2(a) would be applicable only and only if all the components which are intended to make a final product would have to be presented at the same time for customs clearance. The Supreme Court in Sony India (supra) made the following observations:
“The interpretation that we have given to Rule 2(a) would mean that Rule 2(a) would be applicable only and only if all the components which are intended to make a final product would have to be presented at the same time for customs clearance. Such is not the case in the present situation where the goods have been brought in 94 different consignments.”
4.18 By placing reliance on the decision in Sony India (supra), this Hon’ble Authority in the Applicant’s advance ruling in BMW India (supra) obtained in 2015 has observed as under:
“The judgment of Hon’ble Supreme Court in Sony India Ltd., is more applicable to the case before us as components/parts/assemblies for manufacture of motor vehicle are not likely to be imported in same container. In fact they are not even likely to be imported at same time and require further manufacture by different local third party vendors.”
4.19 It is submitted that the above decisions in Sony India (supra) and in BMW India (supra) are squarely applicable to the instant facts. Under the proposed import pattern under the indigenization model, the applicant will import the parts / sub-assemblies of axle assembly and manufacture the axle at its own Plant. Further, the local third-party vendors of the Applicant will continue to import components for assembling five essential and critical components / parts / sub-assemblies (namely engine, exhaust systems etc.) at their manufacturing facility in India. Furthermore, the balance components / other parts will be imported by the Applicant at distinct times and at no point of time the imported goods will exhibit the essential characteristics of a motor vehicle. Hence the import of parts required for manufacturing of components / parts / sub-assemblies of motor vehicle should be assessed as such and not as motor vehicle.
4.20 It is further submitted that the Applicant as per the proposed new business activity, will not be engaged in importing all the products required for manufacturing a motor vehicle. It will source five essential and critical components / parts /sub-assemblies locally from local third-party vendors. Accordingly, in absence of import of such goods by the Applicant, the import of components by local third-party vendors manufacturer cannot be attributed to Applicant so as to consolidate all imports as imports of motor vehicle.
4.21 To conclude, the applicant summarizes its submissions that components I parts imported for manufacturing of components / parts / sub-assemblies by local third-party vendors and components / parts / sub-assemblies (including for axle assembly) imported standalone by the Applicant should be classified under its respective classifications. This is basis the fact that imports will take place at distinct points of time and as presented to customs for clearance do not exhibit the essential characteristic of a motor vehicle. Accordingly, they are not classified as motor vehicle in accordance with Rule 2 (a).
4.22 Import of motor vehicles is covered under Tariff Heading 87.03. The said heading provides as under: “Motor cars and other motor vehicles principally designed for the transport of per-sons (Other than those of heading 8702), including station wagons and racing cars”.
I. Further, Entry No. 526 of the Notification No. 50/2017 — Cus. dated 30.06.2017 (Notification) covers motor vehicles falling under Tariff Heading 87.03 and pro-vides as under:
| S. No. | Chapter or Heading or sub— heading or tariff item | Description of goods | Standard rate | Integrated Goods and Services Tax | Condition No. |
| 526. | 8703 | Motorcars and other motor vehicles 150 (excluding electrically operated vehicles) principally designed for the transport of persons (other than those of heading 87.02), including station wagons and racing cars, new, which have not been registered anywhere prior to importation, If imported,-(1) As a Completely Knocked Down (CKD) kit containing all the necessary components, parts or sub-assemblies, for assembling a complete vehicle, with,- |
|||
| (a) engine, gearbox and transmission mechanism not in apre-assembled condition |
15% | – | – | ||
| (b) engine or gearbox or transmission mechanism in pre-assembled form but not mounted on a chassis or a body assembly |
35% | – | – | ||
| (2) in any other form, – | |||||
| (a) with CIF value more than US $ 40,000 or with engine capacity more than3000 cc for petrol-run vehicles and more than 2500 cc for diesel-run vehicles, or with both; |
100% | – | – | ||
| (c) other than (a) above | 70% | – | – |
4.23 The important points are extracted from the Hon’ble High Court of Madras Rulings on M/s BMW India Pvt. Ltd. dated 05.07.2024 (WP No.14959 of 2016):
“Classification of Imports on Merits:
4.24. We shall now proceed to examine the classification of imports on merits. It may be relevant rather necessary to note that the 1st Respondent had as a matter of fact, found that 6 critical parts / components / sub-assemblies are sourced by them from local third-party vendors, for the manufacture of motor vehicles at their Chennai plant. Details of such parts, etc. along with names of local third-party vendors are as under:
| Name of the Company | Product Manufactured in India | Parent entity country |
| Force Motors | Engine along-with Transmission unit |
India |
| Draeximaier | Door Panel | Germany |
| Valeo | HVAC and Cooling Module | France |
| Mahle Behr Module | HVAC and Cooling | Germany |
| Tenneco | Exhaust System | United States |
| IV between ZF India and Hero Moto Corp | Axle | IV between German and Indian Company |
4.25. Apart therefrom, the following findings of facts are recorded in the impugned order by the 1st Respondent viz,
(a) That the third-party local vendors are independent suppliers, who primarily import raw materials / components from independent overseas suppliers (with the exception of engine parts);
(b) 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.
(c) The allegation by the Revenue that third party vendors appear to be extension of the applicant as they import and manufacture items which are relevant to BMW cars only is rejected by finding that there is nothing irregular in local third party vendors importing and manufacturing such items, as it is their business decision-specially when these third party vendors are reportedly renowned global suppliers and have their own independent factories. Therefore, the allegation levelled by Revenue that third party vendors appearing to be mere extension due to corporate agreements between the applicant and third local vendors, is without basis and therefore not tenable.
(d) That the Applicant / 2nd Respondent 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 applicant for manufacture of motor vehicle.
(e) That the Revenue has not produced any tangible evidence to indicate that the applicant has entered into any fictitious arrangement to evade Customs du-ty.
(f) That Rule 2(a) of the 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’ble Supreme Court in Commissioner of Customs v. Sony India (2008) 13 SCC 145, is closer to the present case as components / parts /assemblies for manufacture of motor vehicle were not likely to be imported in the same contain-er. They are not even likely to be imported at the same time and require further manufacture by different local third-party vendors.
(g) The attempt by the Revenue to rely upon Rule 2(a) of the General Interpretative Rules is mis-conceived inasmuch as it does not satisfy the test of the imports being made of the various elements /components at the same time.
4.26. Having narrated the factual setting on the basis of which the Advance Ruling was issued, let us now examine Rule 2(a) of the General Interpretative Rules which forms the basis of the appellant case, to submit that the impugned order of the 1st Respondent ruling that Rule 2(a) of the Rules of Interpretation of Tariff is applicable and the imports bear essential character of Motor Vehicle and thus cannot be classified as import of parts.
4.26.1. It may thus be relevant to refer to Rule 2(a) of the General Interpretative Rules:
“2. (a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled.”
4.26.2. The above rule has come up for consideration on more than one occasion before the Apex Court. It has been held by the Apex Court that for the above Rule to get attracted, it is essential that all the components which form part of the assembly or complete or finished goods are presented together at the same point of time.
4.26.3. It has been repeatedly held that until all the components of the complete article are presented together for assessment at the same point of time, Rule 2(a) cannot be invoked to classify the parts as complete article. it has also been held that consignments removed / presented at different points of time from different factories cannot be clubbed together to classify the parts as complete article. The sine qua non for the application of this Rule is that any imported article, which is “as presented”, must have the essential character of the “complete or finished article”. It is also a settled position in law that the goods would have to be assessed in the form in which they are imported and presented on import and not on the basis of the finished goods manufactured after subjecting them to some process after the import is made. In this regard, it may be relevant to refer to the following judgments:
(i) Commissioner of Customs v. Sony India Ltd., reported in (2008) 13 SCC 145 :
“23. We would, therefore, consider the implication of Rule 2(a). Rule 2(a) is as under:
“2. (a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or fall-ing to be classified as complete or finished by virtue of this Rule), presented unassembled or dis-assembled.” The learned ASG, therefore, suggests that the articles though were not the CTVs in CKD form and were incomplete or unfinished ones, they had the essential character of complete or finished CTVs and applying this Rule, every such component, would have to be taken as an import of CTV. The learned ASG heavily relied on the second part of the Rule, starting from words “It shall also to be taken to include a reference….” He says that every component whether it is complete or finished and which is presented in unassembled or disassembled condition, would have to be taken as the finished article, like CTVs in this case. In our opinion, this argument is completely illogical and again that is not the import of the language of the Rule. If the argument of the learned ASG has to be accepted, then we would have to concentrate only on the later part of the Rule, ignoring the first part of the Rule and such dissection, in our opinion, is not possible. The sine qua non for the application of this Rule is that any imported article, which is “as presented”, must have the essential character of the “complete or finished article”. This condition cannot be ignored and we cannot allow the reading only of the second part beginning with words “It shall also to be taken to include a reference….” for application of the Rule. The Rule must apply as a whole.
4.27. Learned ASG was not able to point out as to how the first condition can be satisfied in the present case. A mere PCB or a CRT, in our opinion, under any circumstances, cannot be held to have essential character of the CTV. It is only when this first condition is satisfied that the remaining clause would have to be read and thereby, the words “that article” used in the later part would have to pass them test of the opening words of the clause “as presented, the incomplete or unfinished article has the essential character of the complete or finished article”. Once this condition is satisfied then the further clause is activated, suggesting that even when such article is in disassembled or unassembled condition, it would still be taken to be a complete article. Therefore, essentially the second part would come into play provided the component parts intended to make up the finished product are all presented for customs clearance at the same time which is not the case here.
4.28. Again, the meaning of terms “as presented” in Rule 2(a) would clearly imply that the same refers to presentation of the incomplete or unfinished or unassembled or disassembled articles to the Customs for assessment and classification purpose. It is also a settled position in law that the goods would have to be assessed in the form in which they are imported and presented to the customs and not on the basis of the finished goods manufactured after subjecting them to some process after the import is made.”
(ii) M/s. L. G. Electronic India Pvt. Ltd. and others v. Commissioner, Central Excise,–Noida-II, reported in (2023) 6 Centax 183 (Tri. -All):
“15. The first issue that arises for consideration is regarding Interpretative Rules 2(a) of the Central Excise Tariff. The order of the Commissioner is based on this rule 2(a) and, therefore, it will be necessary to reproduce it and rule 1 also and they are as follows:
“The Schedule-Excise Tariff Rules for the Interpretation of the this Schedule-
1. The titles of Sections and Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the provisions hereinafter contained.
2. (a) Any reference in a heading to goods shall be taken to include a reference to those goods incomplete or unfinished, provided that, the in-complete or unfinished goods have the essential character of the complete or finished goods. It shall also be taken to include a reference to those goods complete or finished (or fall-ing to be classified as complete or finished by virtue of this rule), removed unassembled or disassembled.
(b)**
16. it would be clear that this rule can be applied only if all the components which form part of the assembly or complete or finished goods are removed together at the same point of time. Thus, unless and until all the component or parts which form part of the complete goods, which in the present case are CTVS, are removed together, rule 2(a) would have no applicability.
17. It would also be useful to contrast this Interpretative Rules 2(a) with Interpretative Rules 2(a) of the Customs Tariff, which is identical with the only difference being that instead of “removed”, the expression “presented” appears in the Customs Tariff. In regard to the applicability of Rule 2(a) of the Customs Tariff to import of goods, it has been repeatedly held that until all the components of the complete article are presented together for assessment at the same point of time, Rule 2(a) cannot be invoked to classify the parts as complete article. It has also been held that consignments removed/presented at different points of time from different factories cannot be clubbed together to classify the parts as complete article.” (emphasis supplied)
19.4. The above order of the Tribunal was carried by way of appeal by the Revenue to the Supreme Court and the same was dismissed as under:
(i) Commissioner of Central Excise, Noida-11 v. L.G. Electronics India Pvt. Ltd. Civil Appeal Diary No. 8150 of 2023 dated 10.04.2023:
“Delay condoned.
1. This Court is of the opinion that no substantial question of law arises in regard to interpretation of Note (a) of the General Rules of Interpretation as is urged by the revenue.
2. The appeals are accordingly, dismissed.”
19.5. From a reading of the above judgments, it is clear that Rule 2 (a) if applied to the facts considered by the 1st Respondent, the import cannot be understood as that of motor vehicles. Six essential components viz., Engine along – with Transmission Unit, Door Panel, HVAC and Cooling Module, Exhaust System and Axle are be-ing procured from vendors in India. Now, applying the 1997 circular, it would be clear that in view of the fact that these six parts are being procured locally the import cannot be stated to have the essential character of a motor vehicle inasmuch as it was clarified that the following parts could be construed as most essential to bring into effect, a finished motor vehicle viz., Engine, Gear Box, Chassis, Transmission Assembly System, Body/Cab, Sus-pension System, Axel Front and Rear. It was clarified that if all these components or parts or sub-assemblies are imported, Rule 2(a) of the General Interpretative Rules would come into play since it is possible to take a view that when all these parts, components or sub-assemblies when put together would have the essential character of a complete or finished motor vehicle. Importantly, it was also clarified that if a few of these components or parts of sub-assemblies are not imported but are manufactured or purchased locally it would then be difficult to take a view that the import of the other components or parts or sub-assemblies has the essential character of a complete or finished motor vehicle. The facts considered by the Advance ruling would show that at least 3 out of the six components viz., Engine, Transmission, Axle found as essential for a motor vehicle in terms of the circular is procured locally. It may be relevant to note that it is found by the Advance Ruling Authority that the total number of parts proposed to be imported by the applicant would be 1940 and 1436 (de-pending on the model of the motor vehicle). The above parts are imported from different entities in different consignments at different points of time, thus applying the decision in Sony India and L.G. Electronics to the facts recorded by the 1st Respondent, we agree with the find-ing of the 1st Respondent that Rule 2 A of G.I.R. would not apply.”
4.29 The Port Commissionerate has also commented that the import of components/parts/sub-assemblies may be classified as individual motor vehicle parts in their respective headings and subheadings only.
4.30 The case of the applicant is that Rule 2 (a) of the Interpretative Rules under the Customs Tariff Act, 1975 would not come into play for classification purposes. It can only be applicable, as and when the incomplete or unfinished goods presented for custom clearance exhibit the essential characteristics of finished article. The essential ingredients for invoking Rule 2(a) are as follows:
(a) Imported goods should have the essential characters of the complete or finished article;
(b) Imported goods, as presented, even if incomplete, 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.
As provided by the applicant that under the proposed new activity, the local third party vendors will import the five key components/parts/sub-assembles (engine, exhaust system, cooling module, HVAC, door panel), the Rule 2(a) of the Interpretative Rules will not be applicable in the pro-posed scenario in the absence of essential conditions and hence the classification to be adopted for the imported goods will be the respective classification of the parts and not that of motor vehicle.
4.31 Tariff Item 8703 is in respect of “Motor Cars and other Motor Vehicles etc.” Note 2 to Section XVII, which also covers ‘vehicles’ provides a list of 11 articles, where expressions `parts’ and ‘parts and accessories’ do not apply. Further, Note 3 Section XVII states that references in Chap-ter 86 to 88 to ‘parts’ or ‘accessories’ do not apply to parts or accessories which are not suitable for use solely or principally with the articles of those chapters. Note further mentions that a part or accessory which answers to a description in two or more of the headings of those chapters is to be classified under that heading which corresponds to the principal use of that part or accesso-ry. Therefore, in order for an article to fall under headings covered by Section XVII, those parts or accessories should comply with all conditions, name
a) They must not be excluded by the terms of Note 2 of Section XVII;
b) They must be suitable for use solely or principally with articles of chapter 86 to 88.
c) They must not be more specifically included elsewhere in the nomenclature.
5. In view of the aforesaid, the questions raised by the applicant is answered as follows:
Question 1:
A. Supply Chain:
i) Where five essential and critical components/ parts/sub-assemblies namely, (a) engine (along with engine and transmission unit) (b) exhaust systems (c) cooling module, (d) heating, ventilation and air conditioning unit and (e) door panels are locally manufactured in India by BMW Group approved third party vendors;
ii) Axle shall be assembled locally within the Plant premises by Applicant himself;
iii) All other trim parts shall be imported from BMW Group entities.
In regard to above said facts of supply-chain, where-in five critical components of the car are locally manufactured and supplied in India by BMW Group approved third party vendors, whether the import of components / parts / sub-assemblies by the Applicant will be classified as motor vehicle under Tariff Heading 87.03 or as CKD kit under Entry No. 526 of Notification No. 50/2017-Cus., dated 30.06.2017?
Answer 1: The import of components/parts/sub-assemblies by the applicant will not be classified as ‘Motor Vehicles’ under Tariff Item 8703 or as CKD kit under Entry No. 526 of Notification No. 50/2017-Cus., dated 30.06.2017, as amended, when five essential and critical components/ parts/sub-assemblies namely, (a) engine (along with engine and transmission unit) (b) exhaust systems (c) cooling module, (d) heating, ventilation and air conditioning unit and (e) door panels are to be locally manufactured in India by BMW Group approved third party vendors.
Question 2:
B. If the import of components/parts/sub-assemblies by the Applicant will not be classified
as motor vehicle or as CKD kit, whether the imports will be classified under their respective head-ings / sub-headings of the Customs Tariff Act, 1975 or under Tariff Heading 87.08 of the Customs Tariff Act, 1975?
Answer 2: The import of components/parts/sub-assemblies by the Applicant will be classified under their respective headings/sub-headings of the Customs Tariff Act, 1975.
6. I rule accordingly.
(SAMAR NANDA)
Customs Authority for Advance Rulings
New Delhi
