2005 (10) TMI 548 - AAR - Customs

Import of Car Parts as CKD Units Eligible for Concessional Customs Duty Rate of 15% Due to Essential Character Rule.

In Re : Bayerische Motoren Werke Aktiengesellschaft

The Authority concluded that the import of car parts listed in Annexure-III qualifies as completely knocked down (CKD) units, thereby making them eligible ... Application seeking advance ruling u/s 28H - Non-resident company - Whether the import of car parts, listed at Annexure III, would be considered as import of completely knocked down (‘CKD”) unit, eligible to the concessional rate of customs duty of 15% being covered by Entry 344 of CTH No. 8703 (1) of Notification No. 21/2002-Cus. as amended by Notification No. 11/2005-Cus.? - Majority decision of the Members of the Authority - HELD THAT:- It may be noted from the clarification report that (1) there are no specific guidelines prescribed for defining CKD and SKD kits; (2) there are some parts in the Annexure which could be taken as component form while there are other parts which could be termed as SKD form. (3) on the basis of the analysis carried out by ARAI and the discussions held with BMW, it was learnt that seats would be manufactured locally and then installed in the vehicle; (4) inasmuch as without seats the vehicle could not be treated as complete, the words “by and large” have been used. From the perusal of these reports, the position that emerges is that parts listed in Annexure-III to the application represent the CKD Unit and with the assembly of seats, which will be procured locally, the parts would constitute a complete car. There are some parts, which could be taken as component form while there are other parts which could be termed as SKD form. It is true that there are no definitions of the terms “CKD” and “SKD” in the Customs Act or Rules framed thereunder. But from the material furnished by the applicant for comparison of CKD and SKD, it appears that the components for the CKD vehicle are procured from the suppliers who supply to main BMW production facility at the CKD location and approximately 1400 single parts and body parts are transported to the CKD country. In the case of SKD, the vehicles are completely built up in a main BMW production facility in Germany and subsequently certain components are disassembled; the partially disassembled vehicles are mounted on transport skids and shifted to the respective countries where the disassembled components are fitted. The reports of the expert, as may be seen, refer to Annexure–III as CKD unit. The notification does not use the term “SKD”. The Notification for purposes of concessional duty refers to two categories : (i) imported as completely knocked down (CKD) unit dutiable 15%; and (ii) imported in any other form 60%. The reports of the expert do not mention that the car is not imported in completely knocked down (CKD) unit. What they say is that some parts of the car are in SKD form, thereby meaning, they can be further knocked down into components. This, in our view, may not be a relevant factor because it is clear from the report that Annexure–III represents completely knocked down unit of motor cars. If that be so, the contention of the Commissioner that Sl. No. 344 (2) prescribing 60% duty would apply, cannot be accepted; the applicable rate of duty would be 15%. We hasten to make it clear that the motor cars if imported in any form other than completely knocked down (CKD) unit, the rate of duty applicable would be 60%. Thus, we rule on the question set forth in the application that import of car parts as listed in Annexure-III to the application would be considered as import of motor car as a completely knocked down unit (CKD), eligible to the concessional rate of customs duty of 15% [applicable to motor cars if imported as completely knocked down (CKD), unit] being covered by Entry 344 of CTH No. 8703 of Notification No. 21/2002-Cus., dated 1-3-2002 as amended by Notification No. 11/2005-Cus., dated 1-3-2005. RULING OF THE AUTHORITY - In view of the opinion of the majority of the Members of the Authority on the question set forth in the application, it is ruled that import of car parts as listed in Annexure-III to the application would be considered as import of motor car as a completely knocked down unit (CKD), eligible to the concessional rate of customs duty of 15% [applicable to motor cars if imported as completely knocked down (CKD) unit] being covered by Entry 344 of CTH No. 8703 of Notification No. 21/2002-Cus. as amended by Notification No. 11/2005-Cus. Issues Involved:1. Whether the car parts listed in Annexure-III would be considered as completely knocked down (CKD) units.2. Applicability of Interpretative Rule 2(a) to the description of goods specified in the exemption notification.3. Whether the goods would be eligible for the concessional rate of customs duty of 15% under sub-clause (1) of Entry 344 of the Notification No. 21/2002-Cus., dated March 1, 2002, as amended by Notification No. 11/2005-Cus., dated 1-3-2005.Detailed Analysis:1. Whether the car parts listed in Annexure-III would be considered as completely knocked down (CKD) units:The applicant, a German company, proposed to import car parts to assemble high-end BMW motor cars in India. The question raised was whether these parts could be considered as CKD units eligible for a concessional customs duty rate of 15%. The Authority sought a report from the Automotive Research Association of India (ARAI), which indicated that the parts listed in Annexure-III could be considered a CKD kit, with the assembly of seats procured locally completing the car. However, the use of the term 'by and large' by ARAI created ambiguity, leading to a clarification request. ARAI clarified that some parts were in component form while others were in semi-knocked-down (SKD) form, but overall, the list represented a CKD unit.2. Applicability of Interpretative Rule 2(a) to the description of goods specified in the exemption notification:The applicant argued that Rule 2(a) of the General Rules for Interpretation of the First Schedule to the Customs Tariff Act, 1975, should apply. This rule states that incomplete or unfinished articles, if they have the essential character of the complete or finished article, should be classified similarly. The applicant contended that the car parts, when assembled, would acquire the essential character of a motor car, thus qualifying for the concessional rate under the exemption notification. The Commissioner agreed that Rule 2(a) was applicable for interpreting the exemption notification.3. Whether the goods would be eligible for the concessional rate of customs duty of 15% under sub-clause (1) of Entry 344 of the Notification No. 21/2002-Cus., dated March 1, 2002, as amended by Notification No. 11/2005-Cus., dated 1-3-2005:The Authority examined whether the description of goods in the exemption notification could include incomplete or unfinished motor cars. The notification specified that motor cars and other motor vehicles, if imported as CKD units, would be eligible for a 15% customs duty rate. The Authority noted that the term 'motor car' commonly refers to a complete and finished vehicle. However, the majority opinion held that the Interpretative Rule 2(a) applied, meaning that the incomplete motor cars, as presented, had the essential character of complete motor cars. Hence, the import of car parts listed in Annexure-III would be considered as CKD units eligible for the concessional rate of 15%.Conclusion:The majority of the Authority ruled that the import of car parts listed in Annexure-III would be considered as CKD units, eligible for the concessional rate of customs duty of 15% under Entry 344 of CTH No. 8703 of Notification No. 21/2002-Cus., dated March 1, 2002, as amended by Notification No. 11/2005-Cus., dated 1-3-2005. The ruling emphasized the applicability of Interpretative Rule 2(a) in classifying the goods for both customs duty and exemption purposes.