By TIOL News Service

NEW DELHI, DEC 07, 2015: BEFORE the Authority for Advance Rulings, M/s BMW India Pvt. Ltd submits that under the proposed new activity of import, while the imports of certain components / parts / sub-assemblies of the motor vehicles will continue to be effected by the applicant from BMW Group companies, there will be localization of following six essential components / parts / sub-assemblies required for manufacture of motor vehicles in India, namely; Engine (along with engine and transmission unit); Axel assembly; Exhaust system; Cooling module; Heating, Ventilation and Air Conditioning 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.

Harping on the plea that they support Government of India's "Make in India" initiative the Applicant has raised the following questions in respect of which advance ruling has been sought -

a) Whether the import of components / parts/ sub-assemblies by the applicant will 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, as amended, when six essential and critical components / parts/sub-assemblies, namely; (i) engine (along with engine and transmission unit) (ii) axle assembly (iii) exhaust systems (iv) cooling module (v) heating, ventilation and air conditioning unit and (vi) door panels are to be locally assembled / manufactured by approved local third party vendors?

b) If the import of components / parts / sub-assemblies by the applicant will not be classified as motor vehicle or as CKD kits, whether the applicants imports will be classified under their respective headings / sub-headings of the Customs Tariff Act, 1975 or under Tariff Heading 87.08 of the Customs Tariff Act, 1975?

After considering the detailed submissions made by both sides, the Authority observed -

++ Ratio of Phoenix case - 2007-TIOL-165-SC-CUS , relied upon by the Revenue is not applicable to this case. In the case before us, applicant has not created any subterfuge to bypass the law. 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-TIOL-183-SC-CUS 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 by different local third party vendors.

++ 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, namely;

a) They must not be excluded by the terms of Note 2 of Section XVII.

b) They must be suitable for use solely or principally with articles of chapter 86 to 88.

c) They must not be more specifically included elsewhere in the, nomenclature.

Conclusion:

a) 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, as amended, when six essential and critical components / parts/sub-assemblies, namely; (i) engine (along with engine and transmission unit) (ii) axle assembly (iii) exhaust systems (iv) cooling module (v) heating, ventilation and air conditioning unit and (vi) door panels are to be locally assembled / manufactured by approved local third party vendors.

b) 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.

(See 2015-TIOL-09-ARA-CUS)