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With around 50 new cars estimated to be launched in 2011, India is emerging as a prominent automobile market. For varied reasons, the sector thrives on imports. Consequently, customs duty implications for import of cars and vehicles into India assumes importance.

While the basic customs duty (BCD) on import of cars, as completely built units (CBU), is 60% or 100% (subject to certain conditions), import in the form of knocked down car kits attracts concessional rates as set out in Notification 21/2002-Cus., dated 1 March 2002 (as amended).

BCD at 10% (ad valorem) is prescribed for cars imported in “completely knocked down” (CKD) form and at 60% for imports in “any other form”. This reflects the existing auto policy that requires tariffs to be fixed in a manner that facilitates the development of manufacturing capabilities.

Beneficial rates are available only if the imported car kit, when assembled, constitutes a CBU. Even a disassembled or unfinished car (for example, without tyres or a battery) is deemed to be a finished or complete car for classification and assessment purposes, if it has the essential character of a complete or finished car. This is in terms of rule 2(a) of the General Rules of Interpretation of the Customs Tariff, read with the explanatory notes to chapter 87 of the Harmonized System of Nomenclature.

Understanding terms

As car kits imported in CKD form attract less duty, the relevant questions are:

(i) when can a car be said to be in CKD form?
(ii) what distinguishes a CKD kit from a kit in any other form?

The term “CKD” is not defined in the notification or in any statute. International interpretations are also varied and inconclusive. This warrants resort to the ordinary trade meaning of the term.

In Union of India v Tarachand Gupta & Bros, the Supreme Court endorsed the following definition of CKD:

“Made or constructed so as to be capable of being knocked down or taken apart, as for transportation: in parts ready to be assembled.”

The Administrative Appeals Tribunal of Australia, in Renault (Wholesale) Pty Ltd and Collector of Customs, defined CKD as “a terminology used in the motor vehicle industry to describe parts in the form in which they are delivered ready for their assembly together”.

These definitions neither demarcate the exact scope of the term nor endorse its literal interpretation.

Indian position

In the context of the notification, the issue of what constitutes imports in CKD form has been examined by the Authority for Advance Rulings (AAR) in the Bayerische Motoren Werke Aktiengesellschaft (BMW) ruling in 2005 and the H-D Motor Company India Pvt Ltd ruling in 2010.

On a cumulative reading of these rulings, the emerging position is distilled as follows:

The term CKD is a “loose and nebulous expression”. In the absence of precise definitions, a practical interpretation needs to be adopted.

The practice followed for dispatch of CKD car kits to the countries of import is different from that for kits in semi-knocked down (SKD) form (a term used interchangeably with imports in “any other form”). In CKD imports, the parts required to constitute a car (including bought-out parts procured from third-party suppliers) are exported to the importing countries for assembly and manufacture. In case of SKD kits, the cars are first completely built up, subsequently disassembled into sub-assemblies for dispatch to importing countries.

With the increased trend of outsourcing, the exporter is not expected to disassemble every bought item.

The notification requires the imported car to be in CKD form and not each part or component thereof. Accordingly:

(a) certain parts of a car kit being in SKD form does not militate against the CKD form of the car kit; and
(b) so long as the imported car kit is disintegrated into basic identifiable sub-assemblies, based on parameters of function and design, it would qualify as an import in CKD form.

Integration that violates the basic identifiable sub-assembly criterion would take the article out of the scope of CKD.

Implications for importers

These rulings negate the extreme view that imports should be only in the form of completely broken down parts and that an elaborate process of manufacture, not merely assembly, should be undertaken post importation.

The pragmatic approach taken by these advance rulings has persuasive value. But being fact-specific, they cannot serve as binding precedent for importers other than those in whose favour the rulings were issued.

Without a precise test as regards what constitutes a CKD kit, importers looking to benefit from the notification may consider seeking an advance ruling in their fact profile. Simultaneously, legislators should consider clarifying the meaning of this expression to avoid possible litigation.

By Ranjeet Mahtani and Anuradha Mohanty, Economic Laws Practice