2015 (12) TMI 482 - AAR - Customs

Classification - Rate of duty on Import of components/parts/sub-assemblies of motor vehicles in CKD form - appellant contended that he has imported engine and transmission in a pre-assembled form - Held that - Applicant 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. 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 (9) TMI 19 - SUPREME COURT 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. - In fact they are not even likely to be imported at same time and require further manufacture by different local third party vendors. Tariff Item 8703 is in respect of Motor Cars and other Motor Vehicles etc. Note 2 to Section XVII, which also covers vehicles gives a list of 11 articles, where expressions parts and parts and accessories do not apply. Further, Note 3 to Section XVII states that references in Chapter 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 accessory. Therefore, in order for an article to fall under headings covered by Section XVII, those parts or accessories should comply with all conditions - The import of components / parts/ sub-assemblies by the applicant will not be classified as motor vehicle under Tariff Heading 87.03 or as Completely Knocked Down (CKD) kit under Sr. No. 437 of Notification No. 12/2012-Cus., dated 17.3.2012 - 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 - Appeal disposed of.

Issues Involved:

1. Classification of imported components/parts/sub-assemblies by the applicant.
2. Applicability of Rule 2(a) of the Interpretative Rules under the Customs Tariff Act, 1975.
3. Classification under respective headings/sub-headings or under Tariff Heading 87.08 of the Customs Tariff Act, 1975.
4. Jurisdiction and relevance of previous adjudications and investigations.
5. Revenue's contention on the localization model and its implications.

Issue-wise Detailed Analysis:

1. Classification of Imported Components/Parts/Sub-assemblies by the Applicant:

The applicant, a wholly-owned subsidiary of a foreign company, proposed a new activity of importing components/parts/sub-assemblies while localizing six essential components/parts/sub-assemblies for manufacturing motor vehicles in India. The applicant sought an advance ruling on whether these imports would be classified as motor vehicles under Tariff Heading 87.03 or as Completely Knocked Down (CKD) kits under Sr. No. 437 of Notification No. 12/2012-Cus., dated 17.3.2012, as amended, given the localization of six critical components/parts/sub-assemblies.

The ruling concluded that the import of components/parts/sub-assemblies by the applicant would not be classified as motor vehicles under Tariff Heading 87.03 or as CKD kits under Sr. No. 437 of Notification No. 12/2012-Cus., dated 17.3.2012, because the six essential and critical components/parts/sub-assemblies (engine, axle assembly, exhaust systems, cooling module, HVAC unit, and door panels) are to be locally assembled/manufactured by approved local third-party vendors.

2. Applicability of Rule 2(a) of the Interpretative Rules under the Customs Tariff Act, 1975:

The applicant argued that Rule 2(a) would not apply as the imported goods would not exhibit the essential characteristics of a finished motor vehicle. Rule 2(a) states that incomplete or unfinished articles presented for customs clearance must exhibit the essential characteristics of the finished article to be classified as such.

The ruling supported the applicant's position, stating that the proposed imports would not contain the six essential and critical components/parts/sub-assemblies, and thus, would not exhibit the essential character of a motor vehicle. Therefore, Rule 2(a) would not be invoked for classification purposes.

3. Classification under Respective Headings/Sub-headings or under Tariff Heading 87.08 of the Customs Tariff Act, 1975:

The applicant proposed that if the imports were not classified as motor vehicles or CKD kits, they should be classified under their respective headings/sub-headings of the Customs Tariff Act, 1975, rather than under Tariff Heading 87.08.

The ruling agreed with the applicant, stating that the import of components/parts/sub-assemblies would be classified under their respective headings/sub-headings of the Customs Tariff Act, 1975, as they do not fall under Tariff Heading 87.03 for motor vehicles.

4. Jurisdiction and Relevance of Previous Adjudications and Investigations:

Revenue argued that the new localization model of import had already commenced, and hence, the Authority for Advance Rulings had no jurisdiction. However, the ruling clarified that the application was filed before the commencement of the new activity, and subsequent imports did not preclude the Authority from giving its ruling.

Revenue also mentioned a previous adjudication against the applicant regarding the import of CKD kits with pre-assembled engines and transmissions. The ruling noted that the previous adjudication was not directly related to the current issue of classification and was more about the interpretation of a notification.

5. Revenue's Contention on the Localization Model and Its Implications:

Revenue contended that the localization model did not translate into domestic manufacturing and that local third-party vendors were mere extensions of the applicant. The ruling rejected these contentions, stating that the local third-party vendors were independent suppliers, and the applicant had provided evidence of domestic manufacturing.

The ruling emphasized that the absence of six essential components/parts/sub-assemblies from the proposed imports meant that the imports would not have the essential character of a motor vehicle. Thus, the proposed imports would be classified as parts of motor vehicles and not as motor vehicles themselves.

Conclusion:

The ruling concluded that the import of components/parts/sub-assemblies by the applicant would not be classified as motor vehicles under Tariff Heading 87.03 or as CKD kits under Sr. No. 437 of Notification No. 12/2012-Cus., dated 17.3.2012. Instead, these imports would be classified under their respective headings/sub-headings of the Customs Tariff Act, 1975.

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