By TIOL News Service

NEW DELHI , JULY 28, 2010: M/S H-D Motor Company India Private Limited, the applicant, is a wholly owned subsidiary of Harley-Davidson Singapore Pte. Ltd. The applicant proposes to import parts / components of motorcycles from Harley-Davidson Group of Companies and their vendors located in different countries for assembly of Harley-Davidson brand of motorcycles in India. The said parts are proposed to be packed into motorcycle kits. In general all the parts, components and sub assemblies required to build a standard order quantity of motorcycles would be shipped together. The vehicles would be assembled in India by fastening the various components together in a predefined sequence of operations. The operators will use a combination of hand tools (wrenches, sockets, screw drivers, etc.) and power tools (electric or pneumatic wrenches, nut drivers, drills, guns etc.) in assembling the vehicles. No other process such as machining, fabrication, stamping etc is proposed to be undertaken with respect to imported parts and components. Routine quality checks would be performed during the assembly operations and motorcycles would be released for distribution after final vehicle inspection.

Motorcycles imported by the applicant are claimed to be covered under Custom Tariff sub heading 8711 50 00 of the First Schedule to the Custom Tariff Act, 1975. Further, motorcycles imported as “completely knocked down (CKD) unit” are eligible for a concessional rate of duty of 10% ad valorem under notification no. 21/2002-Customs, dated 1st March, 2002.

Based on the aforesaid facts the applicant has sought a ruling on the following question, namely:-

Whether in the facts and circumstances of the present case, the import of motorcycle in the form of components, parts and sub-assemblies, proposed to be imported by the applicant, would constitute import of motorcycles in Completely Knocked Down form and as such would be eligible for concessional rate of basic customs duty at the rate of 10% provided under Entry 345 of Notification No. 21/2002-Cus, dated 1st March 2002 (as amended)?

The applicant has observed that the term “completely knocked down” is not defined under the Customs Law or any other Indian Laws. In the circumstances it is relevant for the applicant to ascertain whether the manner in which it proposes to import motorcycles would constitute an import as a completely knocked down unit so as to qualify for the concessional rate of duty in the aforesaid entry. Under the present industry practice only key components/parts are manufactured by the motor vehicle manufacturers in their own facility; most of the other components/parts are outsourced for manufacture by the ancillary units. All components/parts required to be assembled to manufacture a motorcycle are proposed to be imported from H-D Group Companies into India in a knocked down condition in the form of motorcycle kits. The applicant has submitted that it would import motorcycles in the same condition that Harley-Davidson would have presented the parts, components and assemblies to Harley-Davidson’s motorcycles assembly lines in United States. The applicant has further submitted that because of the developing industry practice of outsourcing of manufacturing operations, the literal meaning of the expression “ completely knocked down” cannot be adopted since it would not only be unviable but also unworkable.

The applicant has further submitted that the Authority has already examined a similar issue in the matter of Bayerische Motoren Werke (BMW) reported in 2005-TIOL-08-ARA-CUS wherein based on the opinion of the ARAI, the Authority held that even though some individual parts of the car may be imported in semi knocked down condition, the car itself would be viewed as having been imported in completely knocked down condition. The applicant has claimed that since the description of Entry No. 345 of the Notification is identical to the description of Entry No. 344, the motorcycle kits imported by the applicant would be eligible to claim the concessional rate of duty applicable to CKD kits

The Commissioners of Customs have submitted that as the expression itself implies, “Completely Knocked Down” refers to items which cannot be dismantled any further into parts/components. The applicant has proposed to import a large number of assemblies or sub assemblies which can admittedly be dismantled further into various components; therefore, these cannot be categorized as goods in a Completely Knocked Down condition. The views expressed by ARAI have also been contested by the Commissioners. It has been contended that the opinion of ARAI confirms that the imported goods are sub assemblies or assemblies and therefore CKD condition could not have been inferred. During the course of arguments, the Department has even questioned the competence of ARAI to give an opinion on the expression CKD since the organization is mandated only to certify on issues related to homologation of vehicles and other such matters as per the Motor Vehicles Rules. It has also been claimed on behalf of the Department that the facts and circumstances of the BMW case are different from the facts provided by the applicant. An opinion from a Chartered Engineer has been submitted pointing out that the goods proposed to be imported are in Semi Knocked Down condition and not in Completely Knocked Down condition.

The issue before the AAR is whether the motorcycle kit in the form it is proposed to be imported by the applicant can be said to be imported as a Completely Knocked Down unit to be eligible for the concessional rate of duty of 10% under Notification No. 21/2002-Cus.

The AAR observed,

“It is difficult to accept the proposition put forth by the Department that CKD implies articles disassembled to such a degree that they cannot be further dismantled into components/parts. A note has also to be taken of the industry practice in the manufacture of motor vehicles. There are no instances of manufacturers undertaking manufacture of each and every component part required for assembly of a motor vehicle in their own factories. With continuous R & D efforts, a greater degree of specialization than ever before is being achieved in the manufacture of components/ parts. For example Bosch is a well known brand for manufacture of spark plugs nozzles etc. for motor vehicles. It cannot be expected that Bosch would supply spark plugs in a completely unassembled form to a motor vehicle manufacturer so as to comply with the definition of CKD as proposed by the Department. Even in India it is an accepted fact that indigenous manufacturers of motor vehicles undertake the manufacture of key components/parts (such as car bodies, engines, transmission assembly etc.) within their own facility. There are several ancillary units who manufacture hundreds of other components and sub assemblies required in the manufacture of a complete motor vehicle. Apparently this trend is not confined only to India but this practice is observed the world over. In the absence of the definition of “Completely Knocked Down” in the Notification itself we are unable to be persuaded by the interpretation of the expression of CKD as sought to be given by the Department that is kits of motorcycles dismantled to the last individual components alone would be covered by this exemption. In our view the expression CKD in the context of motorcycles also includes parts in the form of identifiable basic sub assemblies, such as the engine assembly, the transmission assembly, the clutch assembly, the axle assembly, the body assembly, the exhaust pipe assembly, the fork assembly, the mirror assembly, the front wheel assembly, the head light assembly, the rear wheel assembly, the oil tank assembly, shock absorber assembly etc..”

The Ruling: The Authority ruled: The import of motorcycles “Sportster-XL883N” and “Softail-FLSTC” in the form of components, parts and sub assemblies as per the lists filed by the applicant would constitute import of motorcycles in Completely Knocked Down form provided the engine and the transmission assemblies are designed to be housed and are so assembled in a single housing. Consequently it would be eligible for concessional rate of duty provided under Serial No. (1) of the description against Entry No. 345 of Notification No. 21/2002-Cus dated Ist March, 2002. All other models of motorcycles will equally be eligible for the concessional rates of import duty as aforesaid if these are imported in the form of identifiable basic sub assemblies or components as per the illustrative list of components, parts and sub-assemblies for the two models mentioned above. The benefit of exemption would however be applicable only in case the engine and transmission assembly imported as a single part is designed to be housed and is so assembled in a common single housing.

The Chairperson of the AAR, Justice Reddy while concurring with the above ruling added,

“The term ‘completely knocked down condition’ is a term of brevity which has no definite connotation. Its parameters cannot be defined with certainty either by taking recourse to dictionaries or scientific terminology. We have two apparently contradictory opinions of experts which itself exposes the difficulty in assigning a clear and precise meaning to it. To put it in straight language, it is a loose and nebulous expression used to describe a state of things concerning the article which it qualifies. ‘Completely knocked down’ (CKD) and ‘Semi knocked down’ (SKD) are the two expressions that are distinctly used. The difference between ‘complete’ and ‘semi’ is a difference in degree. The distinction is often thin. The example of a motor cycle unit in a semi-knocked down condition has been given by the learned Member. In the absence of a definition or a definite connotation, we must understand the said expression (CKD) in a practical sense, without adopting an extreme view that the import should take place only in the form of parts and the elaborate process of manufacture, not merely assembly, should be done only after import. Viewed from this angle, ‘completely knocked down’ condition does not necessarily mean that at the time of import, nothing is capable of being identified as a critical component of motor cycle and that the importer should start manufacturing ‘from scratch’. There is no warrant to hold that, if in addition to other parts, sub-assemblies are imported, the CKD terminology would cease to apply. The BMW ruling clearly rules out the adoption of such a view. There is considerable force in the contention of the applicant’s counsel that if the Revenue wanted to deviate from the opinion expressed therein, the Central Government should have been moved to suitably amend the notification. In any case, we do not find any compelling reason to depart from the view taken in the said ruling."

(See 2010-TIOL-02-ARA-CUS in 'Customs')