ADVANCE RULING ON THE APPLICABILITY OF CONCESSIONAL RATE OFCUSTOMS DUTY IN RESPECT OF CAR KIT IMPORT IN CKD CONDITION

[Mr. M. GOVINDARAJAN]

Completely Knocked Down (CKD) Kits is an acronym for Kits of loose parts necessary to assemble a complete vehicle in a customer’s own plant.  It is used for the car makers to sell their products to their foreign licensees in loose kits respecting knocking down standards defined during the commercial negotiations on the basis of the company’s industrial capability.  Whether such Kids are eligible for concessional rate of customs duty while importing in CKD condition?  The Authority for Advance Ruling for Customs analyzed the above in the following case law and gave the ruling.

In re M/S VOLVO AUTO INDIA PRIVATE LIMITED VERSUS PRINCIPAL COMMISSIONER OF CUSTOMS, BANGALURU AND COMMISSIONER OF CUSTOMS, CHENNAI [2022 (3) TMI 560 - CUSTOMS AUTHORITY FOR ADVANCE RULINGS- NEW DELHI] the applicant has been importing goods in CKD units since September 2017 for the purpose of commercial production in India.  The applicant has been paying 30% of basic customs duty (at concessional rate) as per Notification No. 50/2017-Cus, dated 30.06.2017 under Sl. 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.           The engine as well as gear box are pre-assembled individual units and not integrated with each other in any shape or form.

The imports of the applicant, since 2017, have been provisionally assessed.  The applicant filed an application for advance ruling under Section 28H of the Customs Act, 1962 before the Authority for Advance Ruling (Central Excise, Customs and Service Tax), New Delhi as to whether the CKD Kits imported by the applicant are classifiable under Customs Tariff Entry 8703 and eligible for exemption under Sl. No. 437(1) of the Notification No. 12/2012-Cus, dated 17.03.2017.    The said application was processed by the Authority for Advance Ruling.  In the meantime separate Authority for Advance Ruling for Customs was constituted with effect from 04.01.2021.  Therefore the said application was transferred to the present Authority for Advance Ruling.

Since the Advance Ruling was not given to his application on the application filed by the applicant, the Authority advised the petitioner to intimate whether the applicant continued to be interested in obtaining the Advance Ruling of the present Authority; if so the applicant was advised to resubmit an application in the Form No. CAAR – 1 or simply affirm the declarations made in the earlier application.  The applicant affirmed the declarations made in the earlier application.

The Commissioner of Customs, City Customs, Bangalore submitted before the Authority for Advance Ruling that the relevant notification was superseded in the GST regime vide Notification No. 50/2017-Cus, dated 30.06.2017.  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.  If the applicant already undertaken import activity then the application is not maintainable since their application concerned with eligibility of Sl. No. 437(1)(b) of Notification No. 12/2012-Cus, dated 17.03.2012 which is not in existence at present.

The Commissioner of Customs further submitted that the proposed activity of the importer would not be eligible for concessional rate of basic customs duty 10%.  However pre-assembled engine, pre-assembled gear box but not mounted on chassis or a body assembly is eligible for basic customs duty @ 30% under Sl. No. 437(1)(b) of Notification No. 12/2012-Cus, dated 17.03.2012.    The other goods mentioned in the application falls under category of Sl. No. 437(2)(b) attracting duty @ 60%.

The Commissioner of Customs, Chennai Import Commissionerate submitted that the CKD kit consisting of listed parts are giving essential characteristics of motor vehicle.  If these items are brought together, they can be classified under Chapter 8703. 

The Authority for Advance Ruling considered the submissions made by both the applicant and the Revenue.  The following queries were posted by the Authority during the personal hearing-

• Issue about classification of specific items which are not part of CKD unit, meaning those which may be imported in excess numbers;
• Issue regarding relevant notification number.

The applicant agreed that all such parts are not covered under a CKD unit and would merit classification under the heading appropriate to them when they are imported in standalone manner.  The Authority for Advance Ruling observed that the Notification No. 12/2017-Customs under which the exemption has been claimed by the applicant has been superseded by Notification No. 50/2017-Customs with other facts in the application continues to remain the same.

The Authority for Advance Ruling examined the application for advance ruling on merits.  The Authority for Advance Ruling, on the basis of the scrutiny of the application, submissions made during the personal hearing and comments of the concerned Principal Commissioner of Customs, found the application is valid and is allowed in terms of the provisions of the Act and Regulations.

The following are the features of CKD kit-

• Kit relates to passenger car models of Volvo brand with their hybrid variants i.e.,-

• XC90-Dg and T8;
• S90-D5 and T8; and
• XC60-D5 and T8;

• Kits will consist of various separately identifiable parts, components and sub-assemblies;
• 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;
• After import into India the applicant would assemble the vehicle from the kits through contract manufacturer;
• The list of parts, components, sub-assemblies that are supplied as part of the kit which include pre-assembled engine, pre-assembled gearbox and driver shafts;
• 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
• The semi-assembled vehicles are disassembled after thorough verification and testing and then shipped to India.

The Authority for Advance Ruling observed that the motor cars and other motor vehicles principally designed for the transport of persons including station wagons and racing cars fall under Heading 8703; whereas parts and accessories and accessories of the motor vehicles of heading numbers 87.01 to 87.05 fall under Heading 8708.

To determine 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 General Rules for interpretation of Import Tariff, 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.

The Authority for Advance Ruling held that-

• the vehicles have acquired the essential characteristics of motor vehicle to merit classification under Heading 8703;
• the subsequent disassembling and import in such disassembled form as a Kit, will not change the essential character of the goods and these will classified as the motor vehicles under Heading 8703, noting that they are principally designed for the transport of persons, numbering less than 10 persons.

The Authority for Advance Ruling now took the question of effective rate of duty applicable under Notification No. 12/2017-Customs, dated 17.03.2012 which has been replaced by the Notification No. 50/2017-Customs, dated 30.06.2017 as amended.  The relevant entry No. 526 in the said notification is as below-

Sl. No. 526 – Chapter of Heading or sub-heading or tariff item – 8703 – Motor cars and other vehicles (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 transportation, if import-

1. As a Completely Knocked Down (CKD) kit containing all the necessary components, parts or sub-assemblies, for assembling a complete vehicle with,-

1. Engine, gear box and transmission mechanism not in a pre-assembled condition – rate of duty – 15%;
2. Engine or gearbox or transmission mechanism in pre-assembled form but not mounted on a chassis or a body assembly- rate of duty – 30%;

2. in any other form,-

1. with CIF value more than US $ 40,000 or with engine capacity more than 3000 cc for petrol-run vehicles and more than 2500 cc for diesel-run vehicles, or with both – rate of duty – 100%;
2. other than (a) above – 60%.

The Authority for Advance Ruling is now to decide whether the vehicle kits being imported by the applicant would be covered under sub-category 1 of sub-category 2.  The contention of the applicant that the cars are being imported as CKD kit, that has been accepted by the concerned Commissioners of Customs Department.  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 the Authority for Advance Ruling held that the cars being imported are in CKD condition, fall under sub-category 1.

The Authority for Advance Ruling found that the 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.  The applicant has clearly stated that the CKD include pre-assembled engine and gear box, which has also been accepted by the Department.  They are not mounted on a chassis or a body assembly.  Therefore the Authority for Advance Ruling found that the CKD kits will fall under sub-category 1(b) and attract effective rate of duty @ 30%. 

The Authority for Advance Ruling held that-

• 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 basic customs duty under Notification No. 50/2017-Cus, dated 30.06.2017 since they are covered under Sl. No. 526(1)(b).