Case nº Ruling No. AAR/Cus/12/2015 in Application No. AAR/44/Cus/01/2014 of AAR Cases, November 20, 2015 (case BMW India Pvt. Ltd. Vs Commissioner of Customs (Port-Import))
| Judge | For Appellant: Arvind Datar, Sr. Advocate and Prashant Agarwal, C.A. |
| President | V.S. Sirpurkar, J. (Chairman) and S.S. Rana, Member |
| Resolution Date | November 20, 2015 |
| Issuing Organization | AAR Cases |
Judgment:
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M/s. BMW India Pvt. Ltd. (hereinafter also referred to as BMW India or applicant) is a wholly owned subsidiary of a foreign company. Applicant 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.
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Applicant has narrated the evolution of their business relating to manufacture of motor vehicles at Chennai plant, which is as under:
"Applicant started its business in India with the import of Completely Built Units (CBUs) of motor vehicles from BMW Group Companies outside India and assembly of motor vehicles from imported CKD kits (with the exception of seats which were locally procured) at its Chennai plant."
TILL FEBRUARY, 2011- IMPORT OF MOTOR VEHICLES IN CKD KITS: At the start of the business, since the business was at a nascent and low volume stage, applicant chose to import the motor vehicles in CKD form and undertaking assembling of the motor vehicles from such imports at its plant in Chennai. The only exception was the vehicles seats which were locally manufactured in India by a local third party vendor. Since the Government allowed import of motor vehicles in CKD form at concessional rate of Basic Customs Duty of 15% [applicable to motor vehicle if imported as CKD unit] being covered by Serial No. 344 for Customs Tariff Heading No. 8703 of Notification No. 21/2002-Cus., dated 1-3-2002, as amended by Notification No. 11/2005-Cus., dated 1-3-2005 and the Customs Notification during the relevant period did not provide for any definition of CKD, the applicant filed for a ruling before this Authority to attain certainty on applicable duty structure for its imports. This Authority held that the import of assemblies and sub-assemblies, except local procurement of vehicle seats which were locally manufactured in India by a local third vendor, would be considered as import of motor vehicle in CKD form, eligible to the concessional rate of Custom duty.
FROM MARCH, 2011 TO APRIL 11, 2013- IMPORT OF MOTOR VEHICLES IN CKD KITS: With effect from March 1, 2011 (vide Notification No. 21/2011-Customs), the CKD definition was introduced under Customs Law, at Sr. No. 344 of the Customs Notification providing for concessional rate of Basic Customs Duty on import of motor vehicles in CKD form. The said entry of the Notification was further amended on March 24, 2011 (vide Notification No. 31/2011-Customs) to provide differential Basic Customs Duty rates (i.e. 10% and 30%) on import of motor vehicles in CKD form depending on the nature of CKD imports. During the aforesaid period, applicant continued to import vehicles in CKD form.
Adjudication of dispute: For the imports made by the applicant during the period March 2011 till 11 April 2013, a dispute arose as regards the rate of duty applicable to import of motor vehicles by the applicant in CKD form. The Department is contending that the applicable rate of Basic Customs Duty on CKD kits should be 30% as against 10% claimed by the applicant, on the ground that the applicant has imported engine and transmission in a pre-assembled form. The Department had issued a show cause notice which has been confirmed by the adjudicating authority and the matter is now pending before the Tribunal.
FROM APRIL 2013 TO DECEMBER 2014- IMPORT OF PARTS: The CKD model as adopted by the applicant from the inception of the business was felt inadequate over a period of time since the business was growing and the BMW Group had planned significant increase in volumes/production for the Indian markets considering the huge potential. Accordingly, to cater to the future growth, the applicant introduced a part based supply chain and logistic model from 11 April 2013 up-to December 2014, wherein instead of importing motor vehicles in CKD form, the applicant started importing all the parts of the motor vehicle from different locations, namely; Germany, United States, Japan and South Africa, with the exception of seats and wiring harness (for two models only) which were locally procured, for assembly at its Chennai plant.
FROM 1 JANUARY 2015-NEW ACTIVITY OF IMPORT (LOCALISATION MODEL): Effective from January 2015, the applicant has moved to an entirely new business model i.e. the localization model, whereby in addition to seats and wiring harness, 6 critical parts/components/sub-assemblies of the car are being localized resulting in more than 40% of the value of the motor vehicle being locally sourced from approved third party vendors in India. Further, the applicant is importing the balance parts/components/sub-assemblies from BMW Group Companies located outside India.
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Applicant further submits that BMW Group is committed to the Indian market and supports Government of India's "Make in India" initiative; that this is clearly evident from the localization model started by the applicant from January 2015. It is noticed that the Government of India's "Make in India" initiative inter-alia envisages increase in indigenous manufacturing sector growth, which will result in imports reduction and thus saving precious foreign currency reserves. Further, creating additional jobs is also expected.
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Applicant has raised the following questions in respect of which advance ruling have 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...
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