TaxTMI 
TaxTMI 
2024 (8) TMI 1690
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....nt 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 imports 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 e....
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....ate. Keeping in view the potential of the Indian market and growing volumes, the Applicant altered its supply chain so as to import the goods in part- by-part format instead of as CKD kits. - Under this supply chain all the underlying components/parts/ sub-assemblies required for manufacturing motor vehicles were imported [with the exception of seats and wire harness (for 2 models), which are locally sourced from local third- party vendors in India] from various BMW Group Companies and some third-party overseas vendors at distinct points of time. - The imported components/parts/sub-assembles did not exhibit the essential characteristics of a motor vehicle, and hence they were not classifiable as motor vehicles in accordance with Rule 2(a) of the General Rules of Interpretation under the Customs Tariff Act, 1975 ('CTA'). The imported components/parts/sub- assemblies were accordingly classified under their respective headings of the Customs Tariff. From January 2015 to Till Date: Local Sourcing of Six Essential Components/Parts/Sub-assemblies - The Applicant continued its phased approach of achieving integrated manufacturing for it....
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.... 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 essential and critical components / parts / sub- assemblies (namely engine, axles etc.) at their manufacturing 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 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....
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....his 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 activities, there will be impact on custom duty payable. Accordingly, even though the Applicant will import 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 entities. In regard to above said facts of supply-c....
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....ix 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 Organization. The relevant portion of the said Explanatory Notes reads thus: "Rule 2 (a) (Articles presented unassembled or disassembled) (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 unfinished 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 operations are involved. No account is to be ta....
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....f 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 heading, only then the items would warrant classification as the item which will emerge post assembling. 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. Hence it becomes pertinent to discuss the concept of 'essential character' as used under the GRI 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 character 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....
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....m, 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 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 labour 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 vehicle. 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 classifie....
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.... 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." 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 be 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 an....
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.... "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 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 a pre-assembled condition 15% - - (b) engine or gearbox or transmission mechanism in pre-assembled form but not m....
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....r Explanatory Note to Heading 87.08 of the HSN which reads as under: "(III) 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 following 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 motor 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 be applied is: whether the goods are more specifically included elsewhere in the Customs....
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.... 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 principally designed for the transport of persons (other than those of heading 8702) including station wagons 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 to 31199 that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the compete 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. Explanation: Rule 2 (a) deals with the classification of unfinished, incomplete, unassembled or disassembled goods. Unfinished a....
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.... value more than US Dollar 40,000 or with engine I capacity 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 mechanism 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 components/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 Chapter 8703. In view of the above, it is informed that as per Annexure Il 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 of the 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 applic....
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....urt has reserved the Order. 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 towards ... 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 processes 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 / sub- assemblies (namely engine, axles etc.) at their manufacturing facility in India. 4.3 In the proposed scenario i.e. under the proposed manufacturi....
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....les of Sections, Chapters and Sub-Chapters are provided 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 articles. 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 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 Organization. The relevant portion of the said Explanatory Notes reads thus: "Rule 2 (a) (Articles presented unassembled or disassembled) ....
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....ed 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 heading, 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 becomes 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 f....
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.... 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 party 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 ....
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....mblies 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 / 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 i....
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....hird-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 MotoCorp 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 irregula....
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....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 o....
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....arned 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 asses....
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....t 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-Il 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 alo....
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....s 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 proposed 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 XVI....