TaxTMI 
TaxTMI 
2015 (12) TMI 482
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.... unit (HVAC) and Door Panels; that the local third party vendors will source the components / parts / sub-assemblies of the above said component / parts / sub-assemblies of the motor vehicles independently from BMW AG and its approved suppliers ( if any); that the local third party vendors will manufacture the above said components / parts / sub-assemblies at their factory and sell to the applicant for manufacturing the motor vehicles; that the applicant will import only the balance components / parts / sub-assemblies of the motor vehicle from BMW Group companies; that under the proposed localization concept it is estimated that about 13% to 16% net value addition will be performed by local third party vendors; that there would be an increase in proportion of locally sourced parts / components / sub-assemblies; that the proportion of direct imports by local third party vendors will be around 28% to 32% of a motor vehicle. 2. Applicant has narrated the evolution of their business relating to manufacture of motor vehicles at Chennai plant, which is as under: Applicant started its business in India with the import of Completely Built Units (CBUs) of motor vehicles from BMW Group....
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....c Customs Duty on CKD kits should be 30% as against 10% claimed by the applicant, on the ground that the applicant has imported engine and transmission in a pre-assembled form. The Department had issued a show cause notice which has been confirmed by the adjudicating authority and the matter is now pending before the Tribunal. FROM APRIL 2013 TO DECEMBER 2014- IMPORT OF PARTS: The CKD model as adopted by the applicant from the inception of the business was felt inadequate over a period of time since the business was growing and the BMW Group had planned significant increase in volumes / production for the Indian markets considering the huge potential. Accordingly, to cater to the future growth, the applicant introduced a part based supply chain and logistic model from 11 April 2013 up-to December 2014, wherein instead of importing motor vehicles in CKD form, the applicant started importing all the parts of the motor vehicle from different locations, namely; Germany, United States, Japan and South Africa, with the exception of seats and wiring harness (for two models only) which were locally procured, for assembly at its Chennai plant. FROM 1 JANUARY 2015-NEW ACTIVITY OF IMPOR....
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....ristics 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. 6. It is submitted by the applicant that under the proposed new activity of import, components / parts required for manufacturing of the above stated six components /parts / sub-assemblies mentioned in paragraph 1 of the ruling will be imported by local third party vendors; that Rule 2(a) of the Interpretative Rules will not be applicable in the proposed scenario in the absence of the 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. 7. Applicant reiterates that they are proposing to localize few of the essential components / parts / sub-assemblies listed above and accordingly, in terms of Circu....
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....xes are not mounted on the chassis); that it was noticed during investigation that the applicant was importing engines and gearboxes in pre-assembled condition but they were misdeclaring the same as sub-assemblies of transmission/engine; that during the course of the investigation, the applicant changed their model of import (for the bills of entry filed from 19.4.2013) from their earlier model of 'CKD-kit' based import of cars to importation of cars claiming that the imports are at 'component part level' (thereby taking advantage of the rate of duty applicable for individual parts, BCD for which is @ 7.5% or 10% only, in lieu of 30% BCD applicable to the CKD kits imported with pre-assembled engines and / or gearbox); that pending verification, imports made by the applicant (at component part level) from 19.4.2013 are being assessed provisionally at the rate of duty claimed by the importer; that on completion of the said investigation, a Show Cause Notice dated 26.8.2013 has been issued to the applicant, inter-alia, demanding differential duty amounting to more than Rs. 757 crores as the applicant appeared to have availed ineligible Customs duty benefit for such imp....
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....oposes not to import would be imported by the so-called local third party vendors directly from either BMW AG or from its approved suppliers. 11. Commissioner of Customs (Import - Seaport), Chennai submits that considering the huge amount of revenue involved and that the payment of differential duty being made by BMW is subject to disclaimers and riders without prejudice to their claim for lower rates of duty applicable to parts (7.5% to 10% vis-à-vis 30 % otherwise applicable), detailed investigation was launched into BMW's 'new model' of imports (starting from 19.4.2013) also; that further investigation is in progress. 12. It is observed that import of motor vehicle is covered under Tariff Heading 87.03. Tariff Heading 8703 reads as under; Tariff Item Description of goods 8703 Motor cars & other Motor Vehicles Principally Designed for the Transport of Persons (Other Than those of heading 8702), including Station Wagon & Racing Cars. CTH 8702 of Customs Tariff reads as under 8702 Motor Vehicles for the Transport of Ten or More persons, including the Driver. 13. Notification No. 21/2002-Customs dated 01.03.2002 was amended ....
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....to 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, 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. 16. HSN explanatory notes to Rule 2(a) of the Interpretative Notes further provide as under: (V) The second part of rule 2(a) provides that complete or finished articles presented unassembled or disassembled are to be classified in the same heading as the assembled article. When goods are so presented, it is usually for the reasons such as requirements or convenience of packing, handling or transport; (VI) This ru....
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....sion were imported in pre-assembled condition, concessional rate of BCD in respect of CKD imports by the applicant would be 30% instead of 10%, if imported in unassembled form and as claimed by BMW before the Customs authorities, vide Notification No. 12/2012-Cus dated 17. 03. 2012. The issue before this Authority is whether, after 6 essential parts, as mentioned in paragraph 1, are manufactured in India, the remaining items imported can be classified as parts under individual heading and not as CKD. In short, the question before the Customs authorities was basically relating to interpretation of Notification and before this Authority is classification issue. Therefore, it is concluded that the said Order-in-Original is neither the subject matter before this Authority nor directly related to the issue of proposed activity of the applicant. 19. Further, Revenue submits that applicant has not submitted any documents supporting any domestic manufacturing of the parts for car like engines, gear box etc., therefore the term localization model does not translate into domestic manufacturing; that stated local third party vendors appear to import basically items which are relevant to BM....
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....s are dummy companies or are working under the leadership and control of the applicant. It is also noticed that none of these Companies belong to the BMW Group. Applicant has also produced sample copies of Excise invoices issued by local third party vendors to show that they (local third party vendors) are manufacturing said critical parts/components/sub-assemblies, which has not been refuted by the Revenue. We also agree with the submission of the applicant that merely because for engines, the IPR is with BMW AG, to contend that the localization is not taking place in India, is incorrect plea taken by the Revenue. It is reiterated that third party local vendors are independent suppliers, who primarily import raw materials / components from independent overseas suppliers ( with the exception of engine parts); that these third party vendors thereafter undertake manufacturing activity in India, pay Central Excise duty and sell finished goods to the applicant for manufacture of motor vehicles. Revenue alleges that third party vendors appear to be extension of the applicant as they import and manufacture items which are relevant to BMW cars only. It is to be observed that there is noth....
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....have not been registered anywhere prior to importation. In view of the above, subject goods will not fall under CTH 8703 or as CKD kit under S. No. 437 of Notification No. 12/2012-Cus dated 17.03.2012. 24. Revenue has relied upon Hon'ble Supreme Court judgment in case of Sharp Business Machines Pvt. Ltd., Bangalore vs. Collector of Customs, Bangalore 1990 (49) ELT 640 (SC) wherein it was inter-alia held that the goods imported were fully finished copiers in SKD/CKD form and as such there was a mis-declaration that the imported goods were only parts of the copiers. Hon'ble Supreme Court in this case observed as under; The intention and purpose of the import policy was to give incentive and encouragement to the new entrepreneurs establishing small scale industries and in the first phase to import 62% of the components of the copiers and the balance of 38% was to be manufactured by them indigenously. According to the import policy this percentage of 62% was to be reduced in the subsequent years. The import policy was not meant for such entrepreneurs who instead of importing 62% of the components, imported 100% of the components of a fully finished and complete goods manu....
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.... 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. These local third party vendors are reputed companies. Revenue has not produced any tangible evidence to indicate that the applicant has entered into any fictitious arrangement to evade Customs duty. It is noticed that the Hon'ble Supreme Court in case of Commissioner of Customs, New Delhi vs. Sony India Ltd 2008 (231) ELT 385 (SC) distinguished the judgment in case of Phoenix International Ltd and observed that all parts were imported in Phoenix case by two units in same container, unlike in Sony India Ltd case. It was also held that Rule 2(a) of Rules of Interpretation of Tariff are applicable only if all components intended to make a final product presented at same time for customs clearance. The judgment of Hon'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....