By TIOL News Service

CHENNAI, OCT 16, 2018: THE appellant imported through Chennai Sea Port, goods declared in the Bills of Entry as "BMW CARS IN CKD", classifying them under CTH 8703 and claiming concessional rate of customs duty @ 10% under clause (i) of Sl. No. 344 of Table appended to Notification 21/2011-Cus. and sub-clause (1)(a) of Sl. No. 437 of Notification 12/2012-Cus.

The Department viewed that as the imported goods namely "Engine Assembly" and the "Transmission Sub-assembly/Gear Box" were in a pre-assembled form, the appellant was not eligible to avail the concessional rates provided in the said Notifications.

Accordingly, a Show Cause Notice dt. 26.08.2013 was issued to the appellants inter alia demanding differential customs duty in respect of CKD kits for motor cars imported during the period 24.03.2011 to 11.04.2013 and imports of motor cars in a form other than CKD for the period 01.03.2011 to 23.03.2011.

The SCN inter alia proposed demand of differential duty amounting to Rs.757,61,37,381/- with interest thereon and imposition of penalties under Sections 112(a) and 114A of the Customs Act, 1962.

The Commissioner of Customs (Imports), Chennai by an O-in-O dated 13.02.2015 confirmed the differential customs duty to the extent of Rs.704,67,90,260/- in respect of 706 Bills of Entry with interest thereon, penalty of Rs.696,44,66,115/- u/s 114A of the Act, penalty of Rs.3,00,00,000/- u/s 112(a) ibid., confiscation of the goods imported under provisionally assessed Bills of Entry u/s 111(m) and (o) ibid; however, appellant was given option to redeem the same on payment of fine of Rs.3,00,00,000/- u/s 125(1) ibid.

The appellant is before the CESTAT.

Hearing in respect of the said appeal took place on several dates and an order has been passed recently.

Elaborate submissions were made by both sides on merits as well as on the point of limitation.

The CESTAT crystallized the issues involved as under :

I. Whether imports made by the appellant :

(i) Are CKD imports for the period 1.3.2011 to 23.3.2011, entitled to a rate of Customs duty at 10% (as claimed by the appellant) or a rate of Customs duty at 60% (as claimed by the Department);

(ii) Are CKD imports for the period 24.3.2011 to 11.4.2013, entitled to a rate of Customs duty at 10% (as claimed by the Appellant) or a rate of Customs duty at 30% (as claimed by the Department)

II. Whether in the facts and circumstances of the present case, the longer period of limitation under Section 28 (4) of the Customs Act, 1962 could be invoked ?

III Whether in the facts and circumstances of the present case, the imposition of penalty under Section 114A and Section 112(a) of the Customs Act, 1962, as well as the imposition of redemption fine in lieu of confiscation under Section 125 of the Customs Act, 1962, is justified ?

In a verbose order sprinkled with dollops extracted from the decisions delivered by the Advance Ruling Authority in the appellant's own case and that of Harley Davidson Motor Company, interactions between the Society for Indian Automobile Manufacturers (SIAM) and the Ministry of Finance, in relation to the proposed definition of CKD for the purpose of the exemption Notification, findings recorded by the adjudicating authority, the CESTAT inter alia observed -

Merits:

+ It appears that pursuant to the decision given by the AAR in their case, the appellant commenced production of their motor cars at their Chennai Plant from February, 2007 without any problem or dispute.

+ It also appears that appellants had informed the Customs Department, Chennai vide letter dt. 21.03.2007 seeking approval for import of cars of 5-Series model in CKD form at concessional rate under exemption Notification and that Department vide a letter dt. 26.04.2007 had apparently allowed such imports in CKD condition at concessional rates. So also, appellants had preferred a letter dt. 28.04.2010 with the Department seeking approval for import of X1 and X3 models as CKD import at concessional rates under the Notification. The Department after seeking clarifications from the appellant, apparently allowed the import of the said X1 and X3 series models in CKD condition at concessional rates vide a letter dt. 2.07.2010.

+ Discernibly, the changes brought about by Notification No. 31/2011-Cus. not only created an additional slab of concessional duty, but also further clarified what exactly would be considered as CKD.  Notification 31/2011-Cus. in fact expanded the types of imports which could be considered as CKD unit.  In the Notification 31/2011, if the engine, gearbox and transmission mechanism was not in a pre-assembled condition, this would be considered as a CKD kit, meriting the lowest rate of 10% BCD.

+ At the same time, even if the engine, gearbox and transmission mechanism was in a pre-assembled form, however, not mounted on the chassis or a body assembly, even if such imported kit may well be considered as a CKD kit for the purposes of the notification, that will be required to suffer BCD @ 30%. If the imports do not fit into any of these two categories, they would have to pay customs duty @ 60%. As clarified by the TRU in their letter dt. 25.04.2011, only those CKD kits where all the parts and components including engine/gearbox and transmission assembly which are imported in a completely knocked down condition, will alone benefit from the lowest rate of 10% BCD.

+ Thus, as per the amended Notification (31/2011-Cus.) when all the parts and components are imported in completely knocked down condition, the lower rate of 10% BCD will be applicable. A combined reading of the Notification No.31/2011-Cus. as also the TRU letter dt.25.4.2011 serves to clarify that 'not in a preassembled condition' meant imported in 'completely knocked down condition'. However, even when the engine or gearbox or transmission mechanism was imported in pre-assembled form, with the remaining parts, components etc., the entire kit would still be treated as a CKD kit, though required to suffer a higher rate of 30% BCD.

+ It is also pertinent to note that if the imported automobile CKD kit has the engine or gearbox or transmission in preassembled condition, the entire kit will not get the benefit 10% BCD under entry 344(1)(a) but will have to suffer 30% BCD under entry 344(1)(b).

+ Further amendment to its duty rate was caused about by Notification No.12/2012-Cus.dt. 17.03.2012 …It is thus seen that definition of CKD kit has continued to remain unchanged except that for the words "engine or gearbox or transmission mechanism not in a preassembled condition" meriting rate of 10% BCD, the Notification 12/2012 had the words "engine, gearbox and transmission mechanism not in a preassembled condition", also with the same concessional BCD rate of 10%.

+ In the present case, the meaning of the word "and" has to be understood and read in the context of the entire sentence as a whole, namely "engine, gearbox and transmission mechanism not in a preassembled condition". It is pertinent to note that to qualify for inclusion under this description, the imported goods will primarily require to be "not in a preassembled condition". We also note the use of the punctuation mark - namely, the 'comma' (,) between the words "engine, gearbox". In our view, therefore, the sentence as a whole should be interpreted only as 'engine or gearbox or transmission mechanism in a preassembled condition' i.e. the word "and" between gearbox and transmission has to necessarily to be read as "or", since, any other interpretation would lead to absurdity and defeat the intention of the legislature, which obviously is to extend the lowest concessional rate to the highest level of "knocked down parts".

+ In the circumstances, the effect of notification No.31/2011-Cus. and also Notification No.12/2012-Cus. is that 10% BCD will be available only when the CKD kit imported contains engine/gearbox/transmission assembly in completely knocked down condition, i.e. not in preassembled condition.

+ There is also no caveat in the concerned Notification that non-inclusion of such "Add-on parts" would have the effect of treating the otherwise pre-assembled engine/transmission mechanism/gearbox as "not" pre-assembled.

+ For arguments' sake, even if there had been an ambiguity in the Notifications No.31/2011-Cus. and No.12/2012-Cus. as claimed by appellant, in our view, that will not have bearing effect in the case on hand. The benefit of such ambiguity even if it existed, cannot be claimed by the appellant-importer BMW and as laid down by the Hon'ble Apex Court, the same must be interpreted in favour of the Revenue. [Commissioner of Customs (Import) Mumbai Vs Dilip Kumar and Company & Ors. - 2018-TIOL-302-SC-CUS-CB refers]

+ We are, therefore, of the considered opinion that the goods imported by the appellants will not benefit from the B.C.D rate of 10% but will only be eligible for higher B.C.D. rate since the CKD kits imported contained engine or gearbox or transmission mechanism in preassembled form (but not mounted on chassis or body assembly).

+ Both, for the periods 01.03.2011 to 23.03.2011 as also 24.03.2011 to 11.04.2013, the appellants are not entitled to a rate of B.C.D. @ 10% but will necessarily have to discharge B.C.D @ 60% and 30% respectively only.

Limitation:

+ Once the goods have been cleared with examination reports, it is but obvious that the Department cannot now rake up an argument that the engine/gearbox/transmission mechanism were in fact pre-assembled and/or were brought mated to each other at the time of import.

+ It is pertinent to note that the appellant had written to the Commissioner of Customs, Chennai vide a letter dt. 05.07.2010, referring to a meeting and requesting that the CKD import duty rate being given to their 3-series CKD Kits may also be extended to their X1 and X3 models as well.

+ Even after the issue of Notifications 21/2011-Cus. dt. 01.03.2011 and 31/2011-Cus. dt. 24.03.2011, appellant appears to have sent another communication to the Commissioner of Customs, Chennai, on 30.03.2011, submitting that the engines, gearboxes and transmission mechanism imported by them as a part of their CKD kits, are in the form of sub-assemblies; that their CKD operations fall within the purview of sr.344(1)(a) of the definition of CKD; that they will continue to file their Bills of Entry as was done in the past.

+ These are facts and happenings that will stare the Customs Authorities in the face and demolish the allegation that appellant has suppressed facts of import of pre-assembled engine and pre-assembled transmission mechanism or that they have misstated the description of the goods to avail concessional rate of duty.

+ Precisely for these reasons, we have no hesitation in holding that the extended period of limitation cannot be invoked in this case and hence, the differential duty liability can be confirmed and demanded only for the normal period of limitation from the date of issue of the Show Cause Notice. For this limited purpose, the matter would be required to be remanded to the adjudicating authority to work out the duty liability afresh limited to the normal period of limitation.

Penalty:

+ For the very reason that ingredients justifying invocation of extended period not being present in this case, further also taking into account that the issue per se revolves around interpretation of the notification which itself underwent a number of changes, held that the penalty under Section 114A of the Customs Act, 1962 is not just and fair and is therefore set aside.

+ Penalty of Rs.3,00,00,000/- imposed under Section 112(a) is on the higher side and in our view penalty of Rs.1,00,00,000/- would merit the interest of justice in this case.

Confiscation:

+ As there has been definite contravention of Section 111 (m) and (o) of the Customs Act, 1962, the confiscation ordered by the adjudicating authority is upheld. However, the redemption fine is reduced to Rs.1,00,00,000/-.

Appeal was partly allowed and partly remanded in above terms.

(See 2018-TIOL-3126-CESTAT-MAD)