By: Ram Chander Sankhla, Advocate | Former Chief Commissioner, GST & Customs| Managing Partner, Sankhla Law associates.

Author can be reached at www.rrsla.com

 

THE CONTROVERSY:

  1. The recent, much talked about Show Cause Notice (SCN) in the media, has asked Škoda Auto Volkswagen India Private Limited (in short Skoda or Volkswagen) to show cause to the Commissioner of Customs, as to why Rs. 11,000 crores (appx) ($1.4 billion), the differential customs duty arising out of the reclassification and re-assessment of the imported goods, should not be demanded and recovered under the provisions of section 28 of the Customs Act, 1962 along with applicable interest thereon under section 28AA ibid. It seems that Skoda declared description of imported goods as “parts for manufacturing motor vehicles”, whereas, DRI opines that such classification should be rejected and, be treated as complete vehicle in CKD/SKD condition and reassessed on merit rate accordingly. If that be so, there must be proposal for confiscation of imported goods under section 111(m) of the Customs Act. 1962, along with penal provisions for imposing Penalty under section 112(a) or/and 112(b) of the Customs Act, 1962 for rendering these goods liable for confiscation.

 

  1. Similar types of SCN appears having been issued to Kia India also, amounting to Rs. 12000 crores (appx) ($1.5 billion). For the sake of convenience, the issue pertaining to Skoda/Volkswagen is being analysed. Thus, the total demand (Rs. 24000 Cr.) is almost one-fourth of the revenue forgone in the annual budget of 2025-26, on account of income tax rebate (Rs. One lac Cr.) to those earning up to 12 lacs annually.

 

  1. The competing entries in the Customs Tariff for such huge demand seems to be under chapter heading 8708 as PARTS AND ACCESSORIES OF THE MOTOR VEHICLES OF HEADINGS 8701 TO 8705, attracting BCD @ 10% and IGST @ 18%/28%, (As per Importer) and heading 8703 as Motor cars attracting BCD @ 15%/35%/70%/100% and IGST @ 18%/28% (As per DRI).

 

  1. Volkswagen has approached the Bombay High Court challenging said show-cause notice arguing that the concept of CKD parts was introduced only in 2002 and lacked a clear definition until 2011. The arguments were that Volkswagen had sought and received a clarification from tax authorities in 2011, which was favourable to the company. That DRI has now changed its interpretation of the rules, leading to the massive tax demand. Whereas, Additional Solicitor General (ASG) N Venkataraman, representing the customs department, told the court that authorities have “incriminating private records” to support their claim.

PROFILING THE IMPORTER-MANUFACTURER:

  1. Škoda Auto Volkswagen India Private Limited (SAVWIPL) represents the passenger vehicle brands of The Volkswagen Group in India. The company was formed following the merger of Škoda Auto India Private Limited (SAIPL), Volkswagen India Private Limited (VWIPL), and Volkswagen Group Sales India Private Limited (NSC). They claim that with their five brands, Volkswagen, Škoda Auto, Audi, Porsche and Lamborghini, they offer the customers in India the most desirable and widest range of designs, body styles and powertrains. It operates two manufacturing facilities in India—at Chakan (Pune) and Shendra (Chhatrapati Sambhaji nagar (earlier Aurangabad)). They have been importing for over a decade.

 

WHAT THE LAW SAYS:

 

CUSTOMS TARIFF:

  1. The imported goods are classified and charged at the rate as per Customs Tariff Act, 1975, more specifically, First schedule of the tariff. There are general rules for the interpretation (in short GIR) of this schedule which governs classification of the goods under this schedule. The rules are provided to ensure uniform legal interpretation of the HSN for proper classification of goods. These rules have to be applied in sequential order. There are six principles under these rules. There are general explanatory notes and additional notes for classification, however, for the present controversy, we will be restricting ourself to the GIR and rule 1 and 2(a) specifically.

 

  1. These two rules are reproduced as,

    RULE 1: The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions:

    RULE 2:(a) 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 article 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.

 

  1. Examples of rule 1:
  • Section XV is entitled “Base metals and articles of base metal but jewellery of base metal is classified in section XIV.
  • Chapter 61 is entitled “Articles of apparel and clothing accessories, knitted or crocheted”, although the chapter also covers certain articles which are not wholly knitted or crocheted, such as those in heading 62.12.
  • Live horses are classified in heading 01.01.

Examples of rule 2:

  • A car without wheels is considered as a complete car.
  • A complete set of wooden panels meant for assembly into a cupboard is considered as a finished cupboard.

 

  1. It is settled that rule 1 has to be applied first, and if the same cannot be applied, then only, further rules can be applied, that to, sequentially. In other words, rule 1 has primacy over other rules. This very question regarding primacy of section and chapter notes as mentioned in rule one came before Hon’ble Supreme Court in the case of Simplex Mills versus Union of India- 2005(181) ELT 345 SC. In para 11 of this judgement, it was ruled that Rule-I gives primacy to the Section and Chapter Notes along with terms of the headings. They should be first applied. If no clear picture emerges then only can one resort to the subsequent rules. Said para is reproduced as,

    “The Central Excise Tariff Act, 1985 have been framed pursuant to the powers under Section 2 of that Act. According to Rule 1 titles of sections and chapters in the Schedule are provided for ease of reference only. But for legal purposes, classification “shall be determined according to the terms of the headings and any relevant sector or chapter Notes”. If neither the heading nor the notes suffice to clarify the scope of a heading, then it must be construed according to the other following provisions contained in the Rules. Rule-I gives primacy to the Section and Chapter Notes along with terms of the headings. They should be first applied. If no clear picture emerges then only can one resort to the subsequent rules.”

 

  1. Thus, it is clear that GIR 2(a) is not applicable unless the authorities rule out the applicability of rule one i.e., section and chapter notes. Without such findings any action discarding rule one is arbitrary, unreasonable and lacking legal authority.

 

  1. Further, Rule 2(a) states 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 article has the essential character of the complete or finished article. Thus, the goods as presented must have the essential character of the complete or finished article. The words ‘AS PRESENTED AND ESSENTIAL CHARACTER’ are very important. Not only that, the goods must also be presented at the SAME TIME. The remaining part of rule 2(a) states that it shall be taken to include a reference to that article complete or finished, presented unassembled or disassembled. Thus, the later part of rule 2(a) speaks about parts being unassembled or disassembled that is in CKD or SKD conditions but being article complete or finished. However, at the cost of repetition it is stated that unless the imported goods as presented, at the same time, having essential character of the complete or finished article, it will not be classified as complete or finished article. In such situations the parts cannot be taken as complete or finished article.

 

  1. This very question came before Hon’ble Supreme Court in case of CC New Delhi versus Sony India limited- MANU-SC- 4151- 2008. The Supreme Court ruled that the incomplete or unfinished article should be as presented at the same time and must have the essential character of the complete or finished article. It is not that the incomplete or unfinished articles further processed or worked upon and then it is alleged that they have the essential character of the complete or finished article. It was also ruled that the CKD or SKD conditions will only be applicable if the incomplete or unfinished article as presented has the essential character of the finished article. The relevant para of said judgment is reproduced as under,

    “11. Again, the meaning of terms “as presented” in Rule 2(a) would clearly imply that the same refers to presentation of the incomplete or unfinished or unassembled or dis-assembled articles to the customs for assessment and classification purpose. It is also a settled position in law that the goods would have to be assessed in the form in which they are imported and presented to the customs and not on the basis of the finished goods manufactured after subjecting them to some process after the import is made. In the reported decision in Vareli Weaves Pvt. Ltd. v. Union of India [1996 (83) ELT 255 (SC)] the question was as to whether the countervailing duty was liable to be left on the imports made by the assessee at a stage, they would reach subsequent to their import after undergoing a process. It was contended that such goods could be subjected to duty only in the State in which they were imported. It was held that the countervailing duty must be levied on goods in the State in which they are when they are imported. This was on the basis of Section 3 of the Customs Tariff Act. Though there is no reference to Rule 2(a), in our opinion, the same Rule should apply subject of course to the applicability of the Rule. We have already held that the Rule is not applicable. Similar view was taken in Dunlop India and Madras Rubber Factory Ltd. v. UOI [1982 (13) ELT 1566 (SC).

    12.…………. The interpretation that we have given to Rule 2(a) would mean that Rule 2(a) would be applicable only and only if all the components which are intended to make a final product would have to be presented at the same time for customs clearance. Such is not the case in the present situation where the goods have been brought in 94 different consignments.

 

  1. Thus, any decision or action in violation of Hon’ble Supreme Court judgements read with relevant legal provisions are arbitrary.

 

  1. In case of Modi Xerox Ltd vs. CCE 1998(103) ELT 109 (T) as confirmed by Supreme Court- 2001 ELT A91, the appellant imported the parts in CKD condition and declared that complete Fax machine has been imported. However, department did not agree and concluded that only parts have been imported and not the complete Fax Machine. The Hon’ble tribunal confirmed the same. The relevant paras are reproduced,

    “14. For the purposes of Rule 2(a) of the general rules for the interpretation of the Tariff the articles presented unassembled or disassembled means articles the components of which are to be assembled either by means of simple fixing devices (screws, nuts, bolts etc.) or by riveting or welding, for example, provided only simple assembly operations are involved. Fax machines are a sophisticated electronic equipment and could not be manufactured/assembled by simple fixing devices. In the fax machine the documents are transmitted over long distances by wire or radio. It involves scanning, modulation, recording, synchronization, transmission, recording etc. The modems are used for translating out going data into forms suitable for transmission over telephone or radio channels. The importers Production Engineer had at the time of examination of the goods had certified that the items in exact quantities were required for manufacturing (assembly) of the fax machines. Even when assembly was made from the components it was done by the Production Engineer of the appellants.

    15.In case of Koron Business Systems Ltd. v. Union of India [1992 (58) E.L.T. 48 (Bombay)], the Bombay High Court had held that assembly of components purchased from the market amounted to the process of manufacture of the photocopying machine. The High Court had observed as under: “The items though purchased in the market are assembled while manufacturing the copiers machine and, therefore, the process of assembling amounts to manufacture”.

    16.As already briefly referred to above, the principles as contained in the general rules are for the classification of the goods imported. Rule 1 of the general rules provides that for legal purposes classification of the goods shall be determined according to the terms of the headings and any relevant section or chapter notes. It is only when such headings or notes do not help in determination of the classification that the provisions of the general rules will apply. It is thus clear that the terms of the headings and the relevant section and chapter notes are paramount. They are the first consideration in determining the classification. If the goods are clearly classifiable in terms of the heading read with section and chapter notes then the scope of the heading could not be extended to include the goods which otherwise might have been included by reason of the general rules……………”.

 

  1. There are other decisions to the same effect i.e.,
  • Sushma Electronics Inds. Vs. CCE – 1989 (39) ELT 585 (T)
  • Trident Television Pvt Ltd Vs. CC – 1990 (45) ELT 24 (T)
  • Vishal Electronics Pvt Ltd Vs. CC Bombay- 1998 (102) ELT 188 (T)

 

CUSTOMS LAW:

  1. Section 17 of Customs Act, 1962 talks about assessment of duty. An importer entering any imported goods under section 46 is required to self-assess the duty leviable on such imported goods. Subsequent to such self-assessment u/s 17(1), the proper officer shall verify the self-assessment of goods carried out by the importer under sub-section (1) and upon his satisfaction, approve the same. For the purpose of the said verification, the proper officer may examine or test the concerned goods or may require the importer to produce any document which he deems fit are important to ascertain the veracity of the self-assessment. Thus, the self-assessment declared by the importer u/s 17(1) of the Customs Act stands to be approved /verified by the proper officer u/s 17(2) of the same Act.

 

  1. As per sub-section 3 of this section, the proper officer may ask the importer to produce any document or information for the verification or otherwise. Sub-section 4 empowers the proper officer when on verification or examination or testing of the goods, he comes to the conclusion that the self- assessment is not done correctly, he can re-assess the duty in addition to any other action which may be taken under this Act. Whereas subsection 5 mandates that where any re-assessment is done under sub-section 4 which is contrary to self-assessment done by the importer, the proper officer, on being asked by the importer shall pass a speaking order on such re-assessment within 15 days from the date of such re-assessment of the Bill of Entry.

 

  1. The self-assessment must have been resorted to as per terms of the heading and any relative section or chapter notes. Also, BoEs must have been given Out of Charge (OOC) order, after accepting self-assessment. Further, in Part V of BoEs, it is normally directed by the department that “Assessment and Examination has not been prescribed for this BE”. There appears no order by the department that the self-assessment was not done correctly. Despite that, asking the importer/Skoda to pay higher rate of duties on these imported goods on the alleged basis that the parts are in CKD/SKD condition after applying rule 2(a) of general interpretation rules (in short GIR), lacks lawful authority.

 

  1. It is of importance to mention section 47 of Customs Act 1962. This section states that where the proper officer is satisfied that any goods entered for home consumption are not prohibited goods and the import duty stands paid the proper officer may make an order permitting clearance of the goods for home consumption. The proper officer must have duly made such order (OOC).

 

 

  1. There appears no proposal in the SCN to cancel or modify section 47 order. Even if it is assumed that SCN is decided against the importer/Skoda, there will be two orders standing in case of same imported goods, which are contrary to each other. There will be utter chaos if such situation occurs. The rule of law does not allow such situations to occur, hence SCN is liable to be quashed, on this ground also.

 

BOARD CIRCULAR:

 

  1. There is Board circular number 44 of 1997 dated 30th September 1997, which is specific to rule 2(a) of the general rules for the interpretation of the first schedule of the customs tariff act 1975. That circular was issued in the matter of classification of components of colour television sets (CTV). The relevant paras are produced as,

    “4. The question relating to assessment of goods imported in disassembled or unassembled form is not a new one, having been examined earlier at various levels including the Hon’ble Supreme court, High Courts and CEGAT. Board has also examined this matter and vide letter of even no. dated 30th May, 95 it has advised the field formations to take due note of the provisions of Rule 2 (a) of the General Rules for the Interpretation of the first Schedule to the Customs Tariff Act, 1975 while dealing with such cases.

    5.………. . However, the components shall not be subjected to any further working operations to bring it to completion into finished state. Thus, this rule is applicable in cases where, – (i) only assembly operations are involved irrespective of the complexities of the assembly methods; and (ii) components themselves should not be subjected to any further working operations for completion into finished state.

    6.The factory premises of the said manufacturing company was visited by officers of the Department and also by the officers of Department of Electronics separately to study the process of manufacture undertaken. On the basis of the studies made by these Officers, it would seem that the manufacturer had a large well-established factory, the processes involved were elaborate and require highly skilled as well as well as semi-skilled workforce and technical know-how of high degree to complete the finished article from the components/ parts. It also appears that the process of populating the PCB, a critical component of the TV, amounts to working on the bare (unmounted) PCB, thus, satisfying the criterion brought in as a sequel to the amendment of the Explanatory notes.

    7. There is merit in these arguments and if accepted it would, from the beginning, take the imports of components/ parts meant for bringing into effect a colour TV by this company or similarly placed other companies out of the ambit of Rule 2 (a). Board desires that these facts may be taken into consideration while finalising the classification of this kind of imports.”

 

  1. This circular clearly brought out among other that the HSN explanatory note to this rule 2(a), after its recent amendments explains that the components in such cases are to be assembled either by means of simple fixing devices by screws, nuts, bolts etc. or by riveting or by welding provided only assembly operations are involved. It further said that after the field visit and studies by the officers it would seem that the manufacturer had a large well-established factory, the processes involved were elaborate and require highly skilled as well as semi-skilled workforce and technical knowhow of high degree to complete the finished article from the components/ parts. It also appears that the process of populating the PCB a critical component of the TV amounts to working on the bare or unmounted PCB thus satisfying the criteria brought in as a sequel to the amendment of the explanatory notes.

 

  1. In the issue at hand the importer-manufacturer has a large and well-established factory. The importer is a regular importer. There may/must be elaborate processes involved after the import of parts in question, requiring highly skilled as well as semi-skilled workforce and technical know-how of high degree to complete the finished article. It seems not a simple case of assembling or putting together parts. Thus, the import by the importer seems covered by board circular.

 

  1. It is trite that departmental instructions and circulars are binding on the departmental officers as held by Hon’ble Supreme Court in case of Ranadey Micronutrients v/s Collector of Central Excise 2002-TIOL-184-SC-CX, Union of India & Others v/s Arviva Industries (I) Ltd & Others 2007-TIOL-12-SC-CX.

 

PAYING GST ON FINISHED GOODS:

  1. It is a fact that the importer-manufacturer is paying customs duty on parts and highly likely, GST on manufactured items using these imported parts and/or other locally procured parts.

 

 

TECHNICAL OPINION:

  1. The importer/Skoda can get technical opinion about the details of space and departments available at the manufacturing plant, technical experts and staff available, machinery/ equipment installed, availability of essential parts/components at the plant, availability of R&D unit, availability of service department for repair etc. It may also get the manufacturing processes involved and how the parts/components are being fit into that process.

 

PRICE AT THE TIME OF IMPORT Vs. DOMESTICALLY SOLD:

 

  1. There is likely to be significant value addition by the importer-manufacturer at its factory, after the import.

 

IMPORTED GOODS CANNOT BE HELD LIABLE FOR CONFISCATION AND NO PENALTY IMPOSABLE UNDER SEC. 112(a) OF THE CUSTOMS ACT:

  1. It is clear and undisputed that the present issue is of classification, which is a matter of interpretation. In such matters, it is very difficult to prove that the importer manufacturer has suppressed any information or committed any misdeclaration/fraud. It is settled position that goods cannot be confiscated when matter of interpretation or classification is involved.

 

  1. In this case, it must have been alleged that the goods imported and cleared for home consumption are liable for confiscation under section 111(m) of the Customs Act, for the reason that the imported goods were not parts but complete finished article. However, as explained supra, it appears to be more of the DRI’s opinion based on assumption and presumption.

 

 

  1. Even if the classification is decided against importer, classification of goods is only a matter of interpretation and no mis-declaration can be alleged. Consequently, there is no basis to hold that the goods were liable for confiscation under section 111(m). Consequently, no penalty can be imposed under section 112.

 

  1. The imported goods do not become liable to confiscation under section 111(m) on the ground that the importer classified the goods under a CTH different from the opinion of the officer. Firstly, the importer-manufacturer is not an expert in taxation and can make mistakes and cannot be penalized for making mistakes. Secondly, classification is a matter of opinion and the importer’s goods cannot be confiscated nor can he be penalized for his opinion. Thirdly, the filing of the Bill of Entry and the self-assessment precede re-assessment by the proper officer and it is impossible for the importer to anticipate under which heading the officer is likely to classify the goods and file the Bill of Entry accordingly. Fourthly, there is no legal obligation on the importer to conform to the possible subsequent view of the officer. The law cannot be read to obligate the importer to do the impossible task of predicting the views of the officer and following them. For all these reasons, wrong classification or wrong claim of an exemption notification, in the Bill of Entry even if they are found to be completely incorrect, do not attract section 111(m) or the consequential penalty under section 112.

 

  1. Thus, as per Section 17 the importer or exporter has to self-assess duty and the proper officer can re-assess the duty. Both the self-assessment by the importer (or, as the case may be, the exporter) and the re-assessment by the proper officer fall under the definition of assessment as per section 2(2). Thus, the importer (or exporter) and the proper officer are competent to classify the goods and assess the duty payable on them. The remedy against self-assessment is re-assessment by the officer or an appeal to Commissioner (Appeals). The remedy against the re-assessment is an appeal to the Commissioner (Appeals) which option is available to both sides or a notice under section 28 (which is available only to the Revenue and only to recover duties not levied, not paid, short levied, short paid or erroneously refunded).

 

  1. However, there is no separate document or procedure through which the importer can self-assess the duty on the imported goods under Section 17. All the elements necessary for assessing the duty are filled online in the Bill of Entry itself which is the entry of the goods made under section 46. Thus, the Bill of Entry has factual elements such as the nature of the goods, quality, quantity, weight, transaction value, country of origin, etc. which all need to be correctly declared and elements which are in the nature of the opinion of the importer such as classification of the goods, exemption notifications which apply to the import, etc. While the facts are verifiable as correct or incorrect, opinions can differ. The importer may find that the goods are classifiable under one CTH while the officer re-assessing the goods may classify them under a different CTH. If appealed against, different views can be taken at different levels of judicial hierarchy from Commissioner (Appeals) all the way up to the Supreme Court. Similar will be the case with exemption notifications.

 

  1. Thus, in case of classification, which is a matter of interpretation and which is kept influenced and changed by the subjective analysis and approach of each individual, no wilful misdeclaration, suppression or fraud be alleged, more so, held so. Hence, imported goods are not liable to be confiscated.

 

  1. This is so held in case of AUREOLE INSPECS INDIA PVT. LTD. Versus PRINCIPAL COMMISSIONER, CUSTOMS Final Order No. 51024 of 2023 in Appeal No. C/51191 of 2020, decided on 9-8-2023, as reported at (2023) 11 Centax 211 (Tri.-Del).

 

 

  1. Further, in case of LEWEK ALTAIR SHIPPING PVT. LTD. Versus COMMISSIONER OF CUS., VIJAYAWADA-2019 (366) E.L.T. 318 (Tri. – Hyd.), which was a case classification and claiming benefit of Exemption notification. As per Revenue goods were correctly classifiable under Customs Tariff Heading 8905 90 00 and are not eligible for exemption under Notification No. 12/2012-Cus., dated 17-3 2012, whereas, appellant claimed that the goods are classifiable under CTH 8901 90 00 and are eligible for exemption under Notification No. 12/2012-Cus., dated 17-3-2012 (S. No. 461). In such scenario, it was held by the Hon’ble Tribunal that,

    “7. ……. ……., In our considered view, claiming an incorrect classification or the benefit of an ineligible exemption notification does not amount to making a false or incorrect statement because it is not an incorrect description of the goods or their value but only a claim made by the assessee. Thus, even if the appellant makes a wrong classification or claims ineligible exemption, he will not be liable to penalty under Section 114AA of the Customs Act, 1962………”

  1. This case was affirmed by Hon’ble Supreme Court as reported at Commissioner v. Lewek Altair Shipping Pvt. Ltd. – 2019 (367) E.L.T. A328 (S.C.).

 

  1. BECAUSE OF THESE DETAILED REASONS, EXTENDED PERIOD OF LIMITATION IS NOT INVOKABLE.

 

  1. And finally, very few can look into the future, and such people believe in not revealing it, beforehand. Since the issue is before court, only time will reveal how this issue pans out. Till then, there is no option but to wait.

 

 

DISCLAIMER:  The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the official policy or position of any other individual, organization, employer or Firm. The information provided in this article is accurate and true to the best of the author’s knowledge, but there may be omissions, errors, or mistakes. The authors shall not be liable for any damages, losses, or injuries arising from the use of or reliance on the information presented in this article. Readers are advised to verify any information provided here and to consult with appropriate professionals for specific advice tailored to their individual circumstances. ***************************************************************************************************************************************************