CKD kits falls under heading 8703 & eligible for 30% rate of BCD

In re Volvo Auto India Private Limited (CAAR Delhi)

vehicle kits being imported by the applicant would be covered under sub-category 1 as Completely Knocked Down kit or under sub-category 2 as motors cars in any other form; and if under sub-category 1, whether under 1(a) or 1(b), attracting effective rate of BCD of 15% or 30% respectively.

The applicant has submitted that the cars are being imported as CKD kit, which has also been accepted by the concerned Commissioners of Customs. This contention is based on the description of the goods being imported, the procedure of putting in place the semi-assembled cars at site, disassembling thereof before import into India. The alternative form in which the cars can be imported would be as Completely Built Unit (CBU). It is evident that these kits being imported are not in the said form, being in a state which is not marketable and roadworthy, besides not including certain parts and final operating software. Therefore, I hold that the cars being imported are in CKD condition, falling under sub-category 1, without belabouring the same.

9.3 Moving forward, I find that the further sub-categorisation under the aforesaid notification and eligibility for the lowest rate of 15% duty is based on the state of assembly of three critical parts/components of car, namely engine, gearbox and transmission mechanism. I find that the applicant has clearly stated that the CKD kits include pre-assembled engine and gear-box, which has also been accepted by the concerned Commissioners of Customs. I note that the applicant has clearly mentioned in para 9 of Annexure 1 that the parts comprising the CKD include “pre-assembled engine” and “pre-assembled gearbox”. Further, they are not mounted on a chassis or a body assembly. Therefore, I find that the CKD kits will fall under sub-category 1(b) and attract effective rate of BCD of 30%, being ineligible of the lower rate of 15% since the engine and gear-box are being imported in pre-assembled condition.

9.4 In coming to my aforesaid findings, besides relying on the General Rules for Interpretation of Import Tariff, Harmonized Commodity Description and Coding System of the World Customs Organization, to which India is a signatory, I have also taken note of the decisions of erstwhile Authority for Advance Rulings in Re: Oracle India Pvt. Ltd., 2012 (277)E.L.T. 128 (A.A.R.) and Re: BMW India Pvt. Ltd., 2016(332)E.L.T.537(A.A.R.).

In view of the above, I rule as under:

• The CKD kits, as described by the applicant and presented together as a kit merits classification under heading 8703; and
• The CKD kits are eligible for 30% rate of BCD under notification No. 50/2017-Cus. dated 30.06.2017, since they are covered under S.No.526(1)(b).

FULL TEXT OF ORDER OF CUSTOMS AUTHORITY OF ADVANCE RULING, DELHI

M/s Volvo Auto India Private Limited, Gurgaon, having IEC No. 0509035621 and PAN AADCV0346E [M/s VAIPL, in short], had filed an application dated 13.01.2017 seeking advance ruling under section 28-H of the Customs Act, 1962 before the Authority for Advance Ruling (Central Excise, Customs and Service Tax), New Delhi (AAR, in short) on the question, `whether the CKD kits imported by M/s VAIPL are classifiable under Customs Tariff Entry 8703 and eligible for exemption under Serial No. 437(1) of the Notification No.12/2012-Cus. dated March 17, 2012?’ The application was received in the 0/o of AAR on 16.01.2017.

2. The said application was being processed in terms of section 28-I of the Customs Act, 1962 by the O/o AAR. In the meanwhile, consequent upon the appointment of Customs Authority for Advance Rulings (CAAR, in short) in New Delhi and Mumbai with effect from 04.01.2021, the said application was transferred to CAAR, New Delhi in terms of section 28-F (3) of the Act, ibid and regulation 31 of Customs Authority for Advance Rulings Regulations, 2021 (CAAR Regulations, in short).

3. On scrutiny by this Authority, it appeared that the aforesaid application received in the O/o AAR, New Delhi on 16.01.2017 had lapsed since no ruling was given within three months as mandated under Sub-section 6 of Section 28-1 of the Act. However, on constructive interpretation of the law, the applicant was advised to intimate whether they continued to be interested in obtaining ruling of this Authority, and if so re-submit an application in the Form CAAR-I appended to CAAR Regulations, 2021, or simply affirm that the declarations made in the earlier application to AAR remain valid and unchanged. The applicant through their authorized representative affirmed vide email dated 14.05.2021 that they are desirous of obtaining the ruling and that the declarations made by them in their earlier application are valid and remain unchanged.

4.1 In response to the original application dated 16.01.2017, Airport and Air Cargo Complex, Bangalore Commissionerate had opined vide letter dated 23.02.2017 that the cars proposed to be imported in CKD condition by the applicant falls under CTH 8703 provided it satisfies the condition of rule 2(a) of the General Rules of Interpretation of Import Tariff and such cars shall be principally used for transport of persons; further, the condition of Notification No. 12/2012-Cus dated 17.03.2012 under Si. No. 437 (1) appears to be not satisfied since engine and gear box are in pre-assembled condition. The same stand was taken by the Principal Commissioner of Customs, Air Customs Commissionerate, Bengaluru vide letter dated 27.03.2017. Commissioner of Customs, Chennai-II, vide letter dated 17.03.2017 stated, inter-alia, that the CKD kits imported by the applicant cannot be classified under CTH 8703 as these semi-assembled vehicles are not marketable and road worthy and not being a whole vehicle can be properly classified under CTH 8708. He further opined that the CKD kits are not eligible for exemption under serial No. 437(1) – of Notification No. 12/2012-Cus. dated 17.03.2012 as the description of the item eligible for notification benefit is “a completely knocked down (CKD) kit containing all the necessary components, parts or sub-assemblies, for assembling a complete vehicle'”.

4.2 M/S VAIPL through their authorized representative affirmed and revalidated their original application vide email dated 14.05.2021. Therefore, all the concerned Commissionerates were requested to communicate their comments or re-affirm the earlier comments submitted to AAR.

4.3 In response, Commissioner of Customs, City Customs, Bengaluru vide letter dated 10.06.2021 had commented, inter-alia, that the relevant notification has been re-introduced consequent to GST implementation. Further, it is not known whether the applicant has undertaken the import activity as proposed with regard to import of parts, components and sub-assemblies in CKD condition. In case, the importer has already undertaken import activity, then their application is not maintainable since their application concerned with eligibility of Sl.No.437 (1) (b) Notification No.12/2012-Cus dated 17.03.2012 which is not in existence at present. However, while mentioning that the ruling sought by the applicant pertains to old notification, he has helpfully cited reference to the current notification No.50/2017-Cus. dated 30.06.2017 that would be presently applicable in the instant case. I will revert to this at the discussion stage.

4.4. The Commissioner of Customs, City Customs, Bengaluru has referred to certain rulings of the erstwhile AAR and decision of the CESTAT, Chennai and contended that based on these case laws, the proposed activity of the importer would not be eligible for concessional rate of duty of BCD 10%. He has further submitted that however, pre-assembled engine, pre-assembled gear box but not mounted on chassis or a body assembly is eligible for BCD of 30% under Si. No. 437(1) (b) Notification No. 12/2012-Cus dated 17.03,2012. Further, other goods mentioned in the application falls under the category of Sl. No. 437(2) (b) attracting BCD of 60% under Notification No. 12/2012-Cus dated 17,03.2012.

4.5 Commissioner of Customs, Chennai Import Commissionerate vide letter dated 03.08.2021 has submitted the following:

4.5.1 It is seen from the packing list that the CKD kit consisting of listed parts are giving an

essential characteristics of motor vehicle. If these items are brought together, they can be classified under Chapter 8703. He cited Rule 2(a) of the General Rules for  Interpretation and relied upon the case law of Procal Electronics India Pvt. Ltd. Vs Commissioner-2005 (185) E.L.T.A58 (S.C.);

4.5.2 Notification No. 12/2012-Customs dated 17,03.2012 has been replaced by the Notification No. 50/2017-Customs dated 30.06.2017, At present, the importer is availing the benefit of S. No. 526 (1) (b) at 30%. The CKD kits as per the packing list would be eligible for the S. No. 526 (1) (b) at 30% if imported as a knock down (CKD) kit with engine or gearbox or transmission mechanism in pre-assembled form but not mounted on a chassis or a body assembly.

5.1 Thereafter, personal hearing in the matter was held on 19.07.2021. Initially, the learned Senior Advocate briefed about the question raised in the application for advance ruling. The following queries were posed by the Authority during the PH:

5.1.1 Issue about classification of specific items which are not part of CKD unit, meaning those which may be imported in excess numbers. For example, nuts/bolts which are component of a CKD unit may merit classification under a heading meant for that CKD unit, but nuts/bolts being imported in excess may merit classification where such goods are specifically classified or as parts of the motor vehicle. Senior Advocate replied that they agree with the view expressed and all such parts which are not covered under a CKD unit, would merit classification under the heading appropriate to them when they are imported in stand-alone manner.

5.1.2 Issue regarding relevant notification number. The learned advocate referred to the reply of the Commissioner of Customs, Bengaluru, and explained that though the application has been given seeking question on the applicability of classification and exemption vide notification No. 12/2012-Cus., the said notification has been superseded by Notification 50/2017-Cus, with other facts in the application continue to remain the same.

5.1.3 He further clarified that they are seeking ruling on classification of CKD unit where three major components, i.e Engine, Gear Box and Transmission equipment are imported in assembled form, not mounted on a Chassis. He also referred to ruling in the similar matter in the case of M/s BMW. It was also clarified that after filing the application for advance ruling before the Authority for Advance Rulings and pending ruling on the same, they have been importing such goods claiming exemption and paying BCD @30°/0, on provisional assessment basis. The Authority, asked the representatives of the applicant to give a brief submission regarding their act of importation of the goods in question along with exemption availed and status of assessment.

5.1.4 The applicant assured to furnish the reply at the earliest, which has since been received vide email dated 20.07.2021..

5.2 The applicant vide e-mail dated 20.07.2021 has submitted the following:

5.2.1 M/s VAIPL has been importing goods in CKD units condition since September 2017 for the purpose of commercial production in India;

5.2.2 M/s VAIPL dated 30 June 2017 has been paying BCD @ 30% as per Notification No. 50/2017-Cus. , under SI. No. 526(1)(b), since the engine or gearbox or transmission mechanism are imported in pre-assembled form but not mounted on a chassis or a body assembly;

5.2.3 Engine as well as gearbox are pre-assembled individual units, however, not integrated with each other in any shape or form;

5.2.4 All above mentioned imports have been assessed provisionally by the Customs Authorities ever since 2017;

5.2.5 The CKD kits are being imported at the Chennai port. Further, certain replacement items (as required) are imported in Bangalore on need basis;

5.2.6 Any parts imported in excess of CKD kits, such as replacement parts, nuts, bolts etc. are assessed on merits.

6. Having completed the procedure laid down in the CAAR Regulations, I proceed to examine the advance ruling application on merits. However, before taking up the question posed for advance ruling, certain aspects of the application merit discussion and clarification.

6.1 M/s VAIPL in the original application dated 13.01.2017 filed before erstwhile AAR, stated inter alia that the activity of import of CKD kits of vehicles and thereafter undertake assembling the cars in India through a contract manufacturer is a new business activity. Thereafter, applicant in the email dated 14.05.2021 addressed to this Authority averred that the declarations made in the earlier application remain unchanged. However, the fact of the matter is that the applicant has commenced import of such CKD kits of cars of different models subsequently, as admitted during the personal hearing and in email dated 20.07.2021. M/s VAIPL has stated that these imports have been assessed provisionally ever since 2017. It is understood that the provisional assessment has been resorted to for valuation purposes on account of related party transaction, an issue that is not before this Authority for advance ruling.

6.2 In this regard, I also note that the applicant had filed advance ruling application before the erstwhile AAR in 2017 for new activity of import, an application that was transferred to this Authority in terms of section 28-F (3) of the Customs Act and regulation 31 of CAAR Regulations; M/s VAIPL vide letter dated 05.04.2021 submitted to the CAAR stated inter-alia that they have commenced import of CKD kits of passenger cars for local assembly in India from June, 2017 onwards; they requested vide letter dated 05.04.2021 for a ruling at the earliest. Reading together the scope of “advance ruling” as per section 28-E (b) and the restriction imposed vide the first proviso to section 28-1 (2), I am of the view that advance ruling on the questions posed by the applicant merits answer by this Authority.

6.3 The second material change since the filing of the original advance ruling application dated 13.01.2017 is that the relevant notification No. 12/2012-Customs dated 17.03.2012 has since been superseded by notification No. 50/2017-Customs dated 30.06.2017. This too was discussed in the personal hearing and has been referred to by concerned Commissioner of Customs. Bengaluru.

6.4 Having taken note of the above issues, I do not intend to deny the facilitative benefit of advance ruling on the substantive question of classification of the semi-assembled cars and the eligibility for appropriate rate of duty under the relevant notification issued under section 25 of the Customs Act, viz. No. 50/2017-Customs dated 30.06.2017. Therefore, on the basis of the scrutiny of the application, submissions made during the personal hearing and comments of the concerned Principal/Commissioner of Customs, the application is found to be valid in terms of the provisions of the Customs Act and the CAAR Regulations, and is allowed in terms of section 28-1 (2) of the Customs Act, 1962 read with regulation 10 of the CAAR Regulations, 2021.

 7. I now proceed to discuss the questions posed in the application and pronounce my rulings.

7.1 The first question relates to classification of partially assembled vehicles, described by the applicant as “Completely Knocked Down (CKD) kits of vehicles”. The following are the salient features of the said kit (refraining from describing them as CKD kits):

7.1.1 Kits relate to passenger car models of Volvo brand with their hybrid variants, i.e. (i) XC90-D5 & T8; (ii) S90-D5 & T8; and (iii) XC60-D5 and T8;

 7.1.2 Kits will consist of various separately identifiable parts, components and sub-assemblies;

 7.1.3 Certain parts, which are defined as one-time usage parts such as bolts, nuts, screws, oils and lubricants will be imported as separate unit loads;

7.1.4 After import into India, M/s VAIPL would assemble the vehicle from the kits through contract manufacturer;

 7.1.5 The list of parts, components, sub-assemblies that are shipped as part of the kit are detailed in para 9 of Annexure -1, which significantly include pre-assembled engine, pre-assembled gearbox and drive shafts;

 7.1.6 The kit does not’ include few parts, i.e. second row seats, luggage compartment, rear bumper with proximity sensors and final operating software, thereby the semi-assembled vehicles not being marketable and roadworthy; and

 7.1.7 The semi-assembled vehicles are disassembled after thorough verification and testing and then shipped to India.

8. I find that under the Schedule 1 to the Customs Tariff Act, motor cars and other motor vehicles principally designed for the transport of persons [other than those of 87.02 (covering motor vehicles for transport of ten or more persons, including the driver)], including station wagons and racing cars fall under heading 8703; whereas parts and accessories of the motor vehicles of heading numbers 87.01 to 87.05 fall under heading 8708.

8.1 Commissioner of Customs, Chennai —II vide letter dated 17.03.2017 submitted to the erstwhile AAR had, inter alia, contended that since the assembly of vehicle is not fully completed at site, few parts will not be assembled at the site, and these semi-assembled vehicles are not marketable and road worthy, they can be properly classified under heading 8708. I note that Commissioner of Customs, Chennai Import has subsequently vide letter dated 03.08.2021 addressed to this Authority submitted that it is seen from the packing list that the CKD kits consisting of listed parts are giving an essential characteristics of motor vehicle. If these items are brought together, they can be classified under heading 8703.

8.2 For determining the appropriate classification of goods being imported as kit comprising the items mentioned in the packing list, reliance needs to be placed on rule 2(a) of the General Rules for Interpretation of Import Tariff (GIR in short), which provides that, “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 articles 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.”

8.3 In the instant case, the applicant has stated that they will be importing kits of passenger cars and it is also settled, if all the parts are presented in knocked down condition and they have the essential character of a complete article, they have to be assessed as complete article, in terms of said rule 2(a) of GIR. I find that in the present case, the motor vehicles are initially assembled at site to a substantive extent for thorough verification and testing, albeit with few missing components. I hold that at this stage the vehicles have acquired the essential characteristics of motor vehicle to merit classification under heading 8703. Their subsequent disassembling and import in such disassembled form as a kit, will not change the essential character of the goods. Therefore, these disassembled parts of motor vehicles, with specified missing parts, will be classified as the motor vehicles under heading 8703, noting that they are principally designed for the transport of persons, numbering less than ten persons.

8.4 In coming to the aforesaid finding, I have also taken note of the C.B.E.C. Circular F. No. 528/128/97Cus-TRU, dated 5-12-1997, wherein explaining the scope of said 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. The relevant part of the said Circular dated 5-12-1997 reads as “It may be considered that the following parts or components of 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-assemblies are imported, Rule 2(a) of the aforesaid rules for interpretation would come into play, inasmuch 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.”

9. I now take up the question of effective rate of duty applicable under notification No. 12/2012-Customs dated 17.03.2012, which has since been replaced by the Notification No. 50/2017-Customs dated 30.06.2017, as amended. The relevant entry No. 526 in the said notification No. 50/2017-Customs is reproduced below:

9.1 The question before me, therefore, narrows down to whether the vehicle kits being imported by the applicant would be covered under sub-category 1 as Completely Knocked Down kit or under sub-category 2 as motors cars in any other form; and if under sub-category 1, whether under 1(a) or 1(b), attracting effective rate of BCD of 15% or 30% respectively.

9.2 The applicant has submitted that the cars are being imported as CKD kit, which has also been accepted by the concerned Commissioners of Customs. This contention is based on the description of the goods being imported, the procedure of putting in place the semi-assembled cars at site, disassembling thereof before import into India. The alternative form in which the cars can be imported would be as Completely Built Unit (CBU). It is evident that these kits being imported are not in the said form, being in a state which is not marketable and roadworthy, besides not including certain parts and final operating software. Therefore, I hold that the cars being imported are in CKD condition, falling under sub-category 1, without belabouring the same.

9.3 Moving forward, I find that the further sub-categorisation under the aforesaid notification and eligibility for the lowest rate of 15% duty is based on the state of assembly of three critical parts/components of car, namely engine, gearbox and transmission mechanism. I find that the applicant has clearly stated that the CKD kits include pre-assembled engine and gear-box, which has also been accepted by the concerned Commissioners of Customs. I note that the applicant has clearly mentioned in para 9 of Annexure 1 that the parts comprising the CKD include “pre-assembled engine” and “pre-assembled gearbox”. Further, they are not mounted on a chassis or a body assembly. Therefore, I find that the CKD kits will fall under sub-category 1(b) and attract effective rate of BCD of 30%, being ineligible of the lower rate of 15% since the engine and gear-box are being imported in pre-assembled condition.

9.4 In coming to my aforesaid findings, besides relying on the General Rules for Interpretation of Import Tariff, Harmonized Commodity Description and Coding System of the World Customs Organization, to which India is a signatory, I have also taken note of the decisions of erstwhile Authority for Advance Rulings in Re: Oracle India Pvt. Ltd., 2012 (277)E.L.T. 128 (A.A.R.) and Re: BMW India Pvt. Ltd., 2016(332)E.L.T.537(A.A.R.).

10. In view of the above, I rule as under:

10.1 The CKD kits, as described by the applicant and presented together as a kit merits classification under heading 8703; and

10.2 The CKD kits are eligible for 30% rate of BCD under notification No. 50/2017-Cus. dated 30.06.2017, since they are covered under S.No.526(1)(b).