2025(01)LCX0158(AAR)

Copeland India Private Limited

decided on 27-01-2025

Customs Authority for Advance Rulings
New Custom House, Ballard Estate, Mumbai - 400 001
E-MAIL: cus-advrulings.mum@gov.in

F.No. CAAR/CUS/APPL/132/2024 - O/o Commr-CAAR-Mumbai                Date :27.01.2025

N.B.:

A copy of this order made under sub-section (2) of Section 281 of the Customs Act, 1962 is granted to the concerned free of charge.

Any officer authorised by the Board, by notification or the applicant may file an appeal before the High Court of concerned jurisdiction against any ruling or order passed by the Authority, within 60 days from the date of the communication of such ruling or order.

The Principal Commissioner or Commissioner shall be authorised to file appeal against the advance ruling in terms of sub-section (1) of section 28KA.

The advance ruling pronounced by the Authority under Section 28 - I shall remain valid for three years or till there is a change in law or facts on the basis of which the advance ruling has been pronounced, whichever is earlier.

Where the Authority finds that the advance ruling was obtained by the applicant by fraud or misrepresentation of facts, the same shall be declared void ab initio.

Advance Ruling

1. Copeland India Private Limited (IEC No. 3193000078) (hereinafter referred as "The Applicant") filed an application for advance ruling in the Office of Secretary. Customs Authority for Advance Ruling. Mumbai. The said application was received in the secretariat of the CAAR, Mumbai on 08.10.2024, along with its enclosures in terms of Section 28H (I) of the Customs Act, 1962 (hereinafter referred to as the "Act'). The applicant is seeking advance ruling regarding classification of Short Block Sub-Assembly being imported by them for manufacturing 'scroll compressors'.

2. Submission by the Applicant:

2.1 Copeland India Private Limited (hereinafter referred to as the "Applicant") is a private limited company incorporated in the year 1993 under the Companies Act, 1956. The Applicant is a leader in the heating, ventilation and air conditioning and refrigeration (HVACR) Sector. The Applicant manufactures scroll compressors, hermetic compressors, semi-hermetic compressors, condensing units, etc. The Applicant is now proposing to import the product 'Short Block Sub-Assembly', a sub-assembly of parts for using in the manufacture of its. 'scroll compressors'. The scroll compressors so manufactured are for use in refrigerating and air conditioning appliances.

2.2 About Short Block Sub-Assembly: Short Block Sub-Assembly (hereinafter referred to as 'product') is a part of a scroll compressor used in air conditioning units and refrigerating appliances. Below is the image of the product that shall be imported by the Applicant:
 

2.3 The applicant stated that post import into India, the product will be fitted with certain parts (imported as well as procured locally) and undergo certain assembly and finishing processes in India. The image of the finished compressor manufactured in India is extracted below:

2.4 The Short Block Sub-Assembly (in as imported form) comprises of the following components:

2.5 The functions performed by the individual components of the Short Block Sub-Assembly are as below:

2.6 The following components will be added in India for manufacturing the scroll compressor:

Scroll Set
Terminal box assembly
Floating seal assembly
Oldham coupling
Crest spring .
Capillary assembly
Compressor oil (Top) Cover assembly
End cap
Screen oil separator
Muffler plate assembly
Plate upper seal

2.7 Parts falling under Category A and Category B would be imported into India, from different manufacturers across the globe, whereas parts under Category C shall be procured locally in india by Applicant. The cost of production of the finished compressor, can be split as follows:

2.8 Of the products added in India, Scroll Set assembled and added in India is one of the most key components of the compressor so manufactured. The functions performed by the key parts/assemblies added in India are as follows:

2.9 The Applicant further stated that they undertake a significant amount of value addition in India in order to complete the compressor, which amounts to 33% of the total cost of the services in the manufacturing of the compressor. Below are the processes that are carried out in India by the Applicant to complete the compressor:

Intermediate Assembly
 

3. Applicants Interpretation of Law/Facts:

3.1 The applicant states that the classification of the goods imported into India is to be determined based on the General Rules of Interpretation (hereinafter referred to as the "GRI") set out in the Tariff. As per Rule 1 of the GRI, classification of the imported products 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 remaining Rules of the GRI.

3.2 The applicant further states that the Tariff is aligned, up to the 6-digit level, with the Harmonized System of Nomenclature ('HSN') issued by the World Customs Organization (' WCO'). Ii has been held by the Hon'ble Supreme Court in the case of Collector of Customs, Bombay vs. Business Forms - 2002 (142) ELT 18 that the HSN Explanatory Notes aid in the interpretation of the Headings of the Tariff and may be used as a safe guide for the same.

3.3 Compressors are classified under I leading 8414 of the Tariff. The relevant extract of Heading 8414, from the Tariff is set out below:

3.4 The imported Short Block Sub-Assembly is classifiable as a part of compressor Tariff Item 84149011: The GRI are applicable sequentially. As per Rule 1 of the GRI, classification of the imported products shall be determined according to the terms of the headings and the Section and Chapter Notes. It is clear that the imported Short Block Sub-Assembly becomes part of the compressor. The finished compressors manufactured by the Applicant are classified under Tariff Item 84143000. Heading 8414 falls under Section XVI. The relevant portion of Section Notes to Section XVI are extracted below:

SECTION XVI

MACHINERY AND MECHANICAL APPLIANCES; ELECTRICAL
EQUIPMENT; PARTS THEREOF; SOUND RECORDERS
AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS
AND REPRODUCERS, AND PARTS AND ACCESSORIES
OF SUCH ARTICLES

2.- Subject to Note 1 to this Section, No. 1 to Chapter 84 and Note i (o Chapter 85, parts of machines (not being parts of the articles of heading 84.84, 85.44, 8545, 85.46 or 85.47) arc to be classified according to the following rules :

(a) Pans which arc goods included in any of the headings of Chapter 84 or 85 (other than headings 84.09, 84.31, 84.48, 84.66, 84.73, 84.87, 85.03, 85.22, 85.29, 85.38 and 85.48) are in all cases to be classified in their respective headings;

(b) Other parts, if suitable for use solely or principally with a particular kind of machine, or with a number of 'machines of the same heading Including a machine of heading" 84.79 or 85.43) are to be classified with the machines of that kind' or in heading 84.09, 84.31, 84.48, 84.66, 84.73, 85.03, 85.22, 85.29 or 85.38 as appropriate. However, parts which are equally suitable for use principally with the goods of headings 85.17 and 85.25 to 85.28 are to be classified in heading 85.17, and parts which arc suitable for use solely or principally with the goods of heading 85.24 are to be classified in heading 85.29;

(c) All other parts are to be classified in heading 84.09, 84.31, 84.48, 84.66, 84.73, 85.03, 85.22, 85.29 or 85.38 as appropriate or, failing that, in heading 84.87 or 85.48.

3.5 Classification of parts of goods of Chapter 84, is to be undertaken as per Section Note 2 to Section XVI of the Tariff, provided it is not excluded by Section Note 1. Section Note 1 to Section XVI is extracted below:

"1. This Section does not cover:

(a) transmission or conveyor belts or belting, of plastics of Chapter 39, or of vulcanized rubber (heading 4010); or other articles of a kind used in machinery or mechanical or electrical appliances or for other technical uses, of vulcanised rubber other than hard rubber (heading 4016);

(b) articles of leather or of composition leather (heading 4205) or of furskin (heading 4303), of a kind used in machinery or mechanical appliances or for other technical uses;

(c) bobbins, spools, cops, cones, cores, reels or similar supports, of any material (for example, Chapter 39, 40, 44 or 48 or Section XV);

(d) perforated cards for Jacquard or similar machines (for example, Chapter 39 or 48 or Section XV);

(e) transmission or conveyor belts or belting of textile material (heading 5910) or other articles of textile material for technical uses (heading 5911);

(f) precious or semi-precious stones (natural, synthetic or reconstructed) of headings 7102 to 7104, or articles wholly of such stones of heading 7116 except unmounted worked sapphires and diamonds for styli (heading 8522);

(g) parts of general use, as defined in Note 2 to Section XV, of base metal (Section XV),
or similar goods of plastics (Chapter 39);

(h) drill pipe (heading 7304);

(ij) endless belts of metal wire or strip (Section XV); (k) articles of Chapter 82 or 83; (I) articles of Section XVII;

(m) articles of Chapter 90;

(n) clocks, watches or other articles of Chapter 91;

(o) interchangeable tools of heading 8207 or brushes of a kind used as parts of machines (heading 9603); similar interchangeable tools are to be classified according to the constituent material of their working part (for example, in Chapter 40, 42, 43, 45 or 59 or heading 6804 or 6909);

(p) articles of Chapter 95; or

(q) typewriter or similar ribbons, whether or not on spools or in cartridges (classified according to their constituent material, or in heading 9612 if inked or otherwise prepared for giving impressions), or monopods, bipods, tripods and similar articles, of heading 9620"

3.6 It is evident that none of the exclusions apply to the product in question which is a part of a compressor. Therefore, Section Note 1 to Section XVI is not applicable to the product in question. As per Section Note 2 (a) to Section XVI, parts which are goods included in any of the Headings of Chapter 84 or Chapter 85 are to be classified in their respective headings. Short Block Sub-Assembly is not specifically covered by any Headings of the Tariff- as it is not a single component, but is an assembly of components. Therefore, Section Note 2 (a) cannot be applied for classification of the product.

3.7 As per Note 2 (b) to Section XVI, parts which are solely or principally suitable for use with a particular machine, are to be classified under the same Heading as the particular machine. The Short Block Sub-Assembly is solely suitable for use in a compressor. The Short Block Sub-Assembly will be used for manufacturing the compressors. Therefore, on applying Note 2 (b). the imported Short Block Sub-Assembly will be classified as part of Compressor under Heading 8414. specifically under Tariff Item 84149011.

3.8 The product is not an incomplete or unfinished compressor on application of Rule 2(a) of GRI: GRI 1 states as follows:

'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:"

3.9 Thus, primacy for classification is to be given to terms of the Headings, Section Notes, Chapter Notes. If these do not otherwise specify, then remaining Rules of GRI can be applied. Section Note 2 to Section XVI was extracted above. The relevant portion is as below:

2 - Subject to Note 1 to this Section, Note 1 to Chapter 84 and Note 1 to Chapter 85, parts of machines (not being parts of the articles of heading 84 84. 8S 44, 85.45, 85.46 or 85.47) arc to be classified according to the following rules :

3.10 Thus, Section Note 2 states clearly that the Section Note 2 will apply, subject to non- application of Section Note 1. Like how Section Note 2 is asking to consider Section Note 1, it is not asking to consider GRI. Thus, Note 2 will apply independent of GRI. Thus, GRI 2(a) will not apply to present case.

3.11 Without prejudice, it is submitted that even if GRI 2(a) is applied to present case the product in question cannot be classified as Compressor in incomplete form or compressor in unassembled form. Rule 2(a) of the GRI is extracted below:

"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. "

3.12 Rule 2(a) deals with two aspects, i.e. classification of incomplete or unfinished articles, and classification of complete or finished articles but presented in unassembled form. The relevant portion of the HSN Explanatory Notes to Rule 2(a) of GRI is extracted below:

EXPLANATORY NOTE

RULE 2
(Incomplete or unfinished articles)

(I) The first part of Rule 2 (a) extends the scope of any heading which refers to a particular article to cover not only the complete article but. also that article incomplete or unfinished, provided that, as presented, it has the essential character of the complete or finished article.

(II) The provisions of this Rule also apply to blanks unless these are specified in a particular heading. The term "blank" means an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which can only be used, other than in exceptional cases, for completion into the finished article or part (e.g., bottle preforms of plastics being intermediate products having tubular shape, with one closed end and one open end threaded to secure a screw type closure, the portion below the threaded end being intended to be expanded to a desired size and shape).

Semi-manufactures not yet having the essential shape of the finished articles (such as is generally the case with bars, discs, tubes, etc.) are not regarded as "blanks".

(III) In view of the scope of the headings of Sections I to VI, this part of the Rules does not normally apply to goods of these Sections.

(IV) Several cases covered by the Rule are cited in the General Explanatory Notes to Sections or Chapters (e.g., Section XVI, and Chapters 61, 62, 86, 87 and 90).

RULE 2 (a)
(Articles presented unassembled or disassembled)

(V) The second part of Rule 2 (a) provides that complete or finished articles presented
unassembled or disassembled are to be classified in the same heading as the assembled
article. When goods arc so presented, it is usually for reasons such as requirements or
convenience of packing, handling or transport. .

(VI) This Rule also applies to incomplete or unfinished articles presented unassembled or disassembled provided that they are to be treated as complete or finished articles by virtue of the first part of this Rule.

(VII) For the purposes of this Rule, "articles presented unassembled or disassembled" "means articles the components of which are to be assembled either by means of fixing devices (screws, nuts, bolts." etc.) or by riveting or welding, for example, provided only assembly"" operations are involved.

No account is to be taken in that regard of the complexity of the assembly method. However, the components shall riot be subjected to any further working operation for completion into the finished state.

Unassembled components of an article which are in excess of the number required foi that article when complete are to be classified separately.

(VIII) Cases covered by this Rule are cited in the General Explanatory Notes to Sections or Chapters (e.g.. Section XVI, and Chapters 44, 86, 87 and 89).

(iX) In view of the scope of the headings of Sections I to VI, this part of the Rule docs not normally apply to goods of these Sections.

3.13 From a perusal of the HSN Explanatory Notes to first part of Rule 2(a). the following is understood:

i. incomplete or unfinished articles which have the essential character of the finished article are to be classified as-the finished-article.

ii. Incomplete or unfinished articles having the approximate shape or outline .of the finished article which can only be used for the completion into the finished article, are to be classified as the finished article.

The product does not have the essential character of the finished compressor and this cannot be regarded to be Compressor in incomplete form

3.14 Product cannot function as compressor in imported form: In the imported form, the Short Block Sub-Assembly cannot function as a "compressor*. Numerous parts have to be added to the product in India, and many operations (as elaborated in facts above) must be carried out in the product in India, to make the product into a compressor.

3.15 Substantial operations are done in India and substantial value addition is undertaken in India: Further, Short Block Sub-Assembly is for use in the manufacture of 'Scroll Compressor'. The scroll set is thus a vital part of the scroll compressor. This scroll set is not a part of the short block assembly, but rather procured separately or locally, and then assembled in India. Therefore, me essential component of the scroll compressor itself, i.e. the scroll set, does not form a part of the Short Block Sub-Assembly, and accordingly the Short Block Sub-Assembly cannot be said to possess the essential character of a compressor.

3.16 The Short Block Sub-Assembly constitutes only 59% of the total cost of materials involved in the finished Compressor. Materials worth 41% (27% imported separately + 14% procured locally) and services worth 33% are added in India to make the imported product into a Compressor. Thus, as substantial value addition is carried out in India, the imported product cannot be regarded to be Compressor in unfinished form.

3.17 With respect to the question of whether a particular unfinished article has the essential character of the finished article, reference is made to the Hon'ble Madras High Court decision of Motor Industries Co. Ltd. v. Assistant Collector of Customs, 1992 (62) E.L.T. 13 (Mad.), wherein it was observed that there are no guidelines laid down for determining the essential character, and in the absence of such guidelines, no definite yardstick can be applied. The Hon'ble Court held that, only those goods which require some minor adjustments can fall under the scope of Rule 2(a). The relevant portion of the decision is extracted below: . . _

"9. Yet another fact may also be considered for the purpose of construing as to whether such imported articles have essential character of complete and finished products is as to whether the articles imported are capable of being used as such without the said articles being subjected to any further process, except for some minor adjustment and whether such articles can be construed as falling within the scope of Rule 2(a) of the Rules of Interpretation. If the goods imported are subjected to major processes like turning, grinding, broaching, groove cutting, heat treatment, surface treatment etc., as pointed out by the learned counsel for the petitioners, such imported goods cannot be construed as having the essential character of complete and finished articles and cannot fall within the scope of Rule 2(a) of the Rules. "

    Therefore, if major processes are to be undertaken to complete the unfinished article into the finished article, then it cannot be construed that the unfinished article has the essential character of the finished article.

3.18 The Tribunal in the decision of New Standard Engineering Co. Limited, Bombay v. Collector of Customs, Bombay, 1986 (26) E.L.T. 419 (Tribunal) held that the goods which required considerable post-importation operations to give the essential character cannot be classifiable in terms of Rule 2(a) as the finished article. The relevant portion of the decision is as below:

"9. We find that considerable post-importation operation was carried out to the imported forgings in this case for the purpose of giving them the essential characteristics of rams. After importation, the diameter and length of the forgings were considerably reduced, intricate collar was made on the top of the T' shaped forgings and Chamfering on the top was necessary. These were in addition to the turning, boring, squaring and dovetailing at the bottom. The appellants ' letter No. Imp/S 76/51 dated 27-2-1979 addressed to the Appellate Collector, shows that post-importation operations for 71 hours in the case of 10 cwt. forging and 50 hours in the case of 5 cwt. forging were necessary, involving expenditure of about 20% of the price of the forgings. The learned Advocate has not controverted the arguments of the learned S.D.R. that without these operations ram cannot function and hydraulic operation is not possible. The forgings at the time of importation properly fell under Tariff Heading 73.04/06(2) C.T.A., 1975 read with item 26AA of C.E.T. for the purpose of countervailing duty. We, therefore, find that the original assessment was correct and the goods do not merit re-assessment as finished ram under Heading 84.45/48 in terms of Rule 2(a) of the Rules for Interpretation of (he First Schedule to the Customs Tariff Act, 1975, as claimed by the appellants. In the result, we uphold the impugned order and dismiss the appeal as untenable. "

    Thus, in light of the considerable amount of post-import operations conducted in the present case to give the essential character of the compressor and the value addition done by the Applicant, the product in as imported form cannot be said to have the essential character of the finished compressor.

3.19 The product does not have the approximate shape or outline of the finished compressor: The HSN Explanatory Notes suggest that product having the approximate shape of finished product may be regarded to be the finished product in incomplete form. A perusal of the images of the product in as imported form shows that the product, comprises of a cylindrical shell that houses the components of the Short Block Sub-Assembly. From a perusal of the article in the finished form i.e. the compressor, it can be seen that only the cylindrical shell shape is similar. The shell has to be fitted with a top cap, lower cap and other internal components too. The images are reproduced below:

    Thus, it cannot be said that the product has the approximate shape or outline of the finished article. Fitment of the Short Block Sub-Assembly with other articles is required to complete the article into the finished article.

3.20 The processes to be undertaken are more than minor adjustments as scroll assembly, top cap assembly, welding, testing, etc. have to be carried out. It is submitted that mere resemblance of final product is not enough, essential character of finished article is also required. Reference in this regard is made to the Collector of Customs (Appeals)*s findings in the decision of Bajaj Auto Ltd., 1994 (72) E.L.T. 237 (Coll. Appl.). wherein it was held that mere resemblance of shape is not enough for the application of Rule 2(a). and that the essential character must be looked at i.e. whether the imported product can be used for the end-use or for the intended product with minor adjustments. Relevant portion of the decision is extracted below:

"6. It is obvious from above that the goods to be assessed on the basis of Interpretative Rule 2(a) must have attained the essential characters. The essential character is simple language would mean that goods with minor adjustment can be used for the end-use, or for the intended purpose. The essential character has to be with reference to end-use. Therefore, it means that either with minor adjustment/fitting some parts which may be bought out/purchased or imported the articles must work for the purpose, it is intended. If the article as such has only attained the shape similar to the finished article, then on the basis it cannot be argued that it has attained essential character of the finished product. The essential character is not imparted by the mere shape. The test is that the articles minor adjustments or by fitting some parts must perform the function for which it is intended. In the instant case, the casting so imported cannot be used as such in three wheelers. They cannot be fitted with some other parts and used in three wheelers. The number of process as referred to above has to be carried out. The article on importation only resemble with the finished articles. Mere resemble does not impart essential characters. The number of process are to be carried out, value addition is more than the double of the imported articles. It cannot therefore be argued that unmachined articles resembling like a finished article has attained essential character of the finished. "

    Thus, even if, arguendo, the Short Block Sub-Assembly is considered to have the approximate shape of the finished compressor, the essential character cannot be determined on the basis of the shape alone. The question then to be looked at is whether the Short Block Sub-Assembly can function for its intended purpose with minor adjustments only. As stated above, the product does not have the essential character of the finished compressor as it cannot function for its intended purpose with minor adjustments only. Therefore, the product cannot be said to be an incomplete or unfinished compressor classifiable under Tariff Item 84143000. Rather, it is merely a part of the compressor.

3.21 The product is not an unassembled or disassembled compressor: The second part of Rule 2(a) is that unassembled or disassembled articles are classifiable as the whole article. From a perusal of the HSN Explanatory Notes to the second part of Rule 2(a), the following is understood:

i. The articles are presented in unassembled form for the convenience of packing, handling or transport.

ii. The assembly of the components of unassembled articles is to be by means of fixing devices (such as screws, nuts and bolts) or by riveting or welding, i.e. only assembly operations.

iii. The components are not to be subjected to any further working operation for completion into finished state.

    The product is not in the nature of a compressor unassembled for the convenience of packing handling or transport.

3.22 Primarily it is submitted that the product is not in the nature of an unassembled compressor, as the product is a part of a compressor, which has to be fitted with many other components such as the muffler plate assembly, top cap, lower cap, scroll set, floating seal, oldham coupling etc. in India. Furthermore, these components are imported separately, or even procured locally. It is a settle principle that Rule 2(a) is applicable only when parts are presented together and not when the parts are presented separately over time. Rule 2(a) is to be applied to the goods in the *'as presented'* condition. Reference is made to the below decisions:

i. Sony India Ltd. v. Commissioner of Customs, ICD, New Delhi, 2002 (143) E.L.T. 41 I (Tri. - LB) [Maintained by the Hon'ble Supreme Court in 2008 (231) ELT 385 (SC)|

ii. Tata Motors Limited v. Commissioner of C. Ex., Jamshedpur, 2008 (222) E.L.T. 289 (Tri. - Kolkata) [Maintained by the Hon'ble Supreme Court in 2016 (337) ELT A99] Therefore, Rule 2(a) cannot be applicable to the product in question.

3.23 The product is subjected to further working operations. Numerous products/parts are added to imported product to make it complete compressor.: After import into India, the product shall be subject to further working operations which include testing, welding, assembly of various items, which is 33% of the value addition. Further, the post-importation activity also includes procurement of integral parts such as the scroll set. for fitment with the short block sub-assembly and completing into a scroll compressor. Thus, it cannot be said that mere assembly is undertaken to complete the product into a compressor. Reference is made to the Tribunal decision of M/s JH- Welltec Machines (India) Pvt. Ltd., & Others v. Commissioner of Customs (NS-I), 2023 (11) TMI 1087 - CESTAT MUMBAI. wherein it was held that when the post importation activities do not merely involve assembly of the imported goods, but involve procurement of the essential components/parts for ultimate manufacture of the finished article, Rule 2(a) is not applicable. The relevant portion of the decision is extracted below:

'12.6 In the case in hand, the imported goods were not presented by the appellant in un-assembled condition as alleged by the department for the purposes of convenience of packing or handling or transportation. Rather, the post importation activities do not merely involve assembly of the imported goods, but involved procurement of the essential components/parts for ultimate manufacture of PIMM in India, the facts of which have also been endorsed by the Chartered Engineers in their respective certificates (referred supra). The process involved for completion of the manufactured goods since, have taken place post importation of the goods in question, In our considered view, the provisions of Rule 2(a) of GIR shall not be applicable for change ii classification of the imported goods and to bring such goods under the purview of Rule 9 A ibid, for the purpose of levy of ADD thereon. "

    In light of the above decision, as the post-importation activities involve procurement and not mere assembly, the product cannot be said to be an unassembled article and Rule 2(a) cannot be applicable to classify the product as a compressor under Tariff Item 84143000.

4. Port of Import and reply from Jurisdictional Commissionerate

4.1 The applicant in their CAAR-1 indicated that they intend to import the subject goods i.e. Short Block Sub-Assembly at the jurisdiction of office of Commissioner of Customs, NS-V, JNCH, Tal-Uran, Dist: Raigad. Nhava Sheva, Maharashtra - 400 707. In terms of Provisions of the Section 28-1(1) of the Customs Act, 1962 read with the Sub-regulation No. (7) of the Regulation No. 8 of the Customs Authority for Advance Rulings Regulations, 2021, the application was forwarded to the office of Commissioner of Customs. NS-III. JNCH. Tal-Uran, Dist: Raigad, Nhava Sheva, Maharashtra - 400 707 on 23.10.2024 as indicated by the applicant at Sr. No. 13 of their CAAR-I Forms calling upon them to furnish the relevant records with comments, if any. in respect of the said application. Further reminders were also issued on 29.11.2024 and 17.12.2024, however, no reply, till date, has been received in this office.

5. Records of Personal Hearing

5.1 A personal hearing was held on 27.11.2024 at 3:00 PM in the office of the CAAR. Mumbai. Shri Srinidhi Ganeshan and Ms. Anaya Bhide, both Advocates appeared for the online hearing on behalf of the applicant and reiterated the contention of the applicant filed with the application. They contended that the subject import goods are Short Block Sub-Assembly - a Sub-Assembly of parts which are to be used in the manufacturing of 'Scroll Compressor' for refrigeration and air conditioning and merit classification under CTI 8414 90 11. They also informed that they have also effected the import of the said goods under CTI 841430 as per Suppliers Invoice which is already cleared by the Customs without any dispute. They further stated that they will provide the details of the said Bill of Entry in a Couple of days. They also submitted that the subject import goods comprise 59% of Value of the material cost and 41% value is constituted by the inputs domestically procured or inputs imported separately. They further submitted that there is issue to decide in the instant case as to whether the subject goods are parts of Compressor or can be classified as incomplete compressor. They contended that there is no other specific entry in CTH other than CTI 8414 90 11 and that these are not the compressor in disassembled form. They contended that there is no other use of the said product other than (parts of) compressor in air conditioning. They relied upon GRI (1) -Section note, primarily, Sec XVI Note 2. They submitted that Rule 2(a) in not applicable; that even if Rule 2(a) is applicable, it is not essentially compressor. In support of their view, they further relied upon the case laws as explained Supra. They submitted the Case Laws: Motor Industry, New Standard Engg, Bajaj Auto, Tata Motor, Sony India, JH Welltec etc..

    Nobody appeared from the department for the PH.

6. Additional Submissions by the Applicant

6.1 The applicant vides its email dated 10.12.2024 further submitted a synopsis capturing in brief the submissions made during the hearing on 27.11.2024. The applicant submitted and reiterated their contention filed with the application that the product i.e. Short Block Assembly will be used by the Applicant in the manufacture of its 'Scroll Compressors' for use in refrigerators and air conditioners. The additional submissions made by them are as under:

6.2.1 The present application is maintainable: A query was raised during the hearing that as the Applicant had already imported a trial shipment, whether the present application is maintainable. Thus, status of the shipment imported was sought, and information was sought as to whether any dispute was faced with customs regarding the same. As stated during the course of the Hearing, the Short Block Assembly was imported by the Applicant on trial basis under Tariff Item 84149011 vide Bill of Entry No. 3823435 dated 04.06.2024. It was submitted that the goods were cleared after being classified as parts of compressor under Tariff Item 84149011. as claimed by the Applicant. Since then no dispute has yet been raised. The question raised in the present application regarding classification of' Short Block Assembly' is not pending in the applicant's own case before any officer of customs, the Appellate Tribunal, or any Court. The Applicant has approached the Authority to gain clarity regarding the classification of the Short Block Assembly before it starts commercial production of compressor. In light of the above, it is submitted that the present application is maintainable before the Customs Authority for Advance Ruling.

6.2.2 SBA is classifiable as a part of a compressor under Tariff Item 84149011: As per Note 2 (b) to Section XVI, parts which are solely or principally suitable for use with a particular machine, are to be classified as parts under the same Heading as the particular machine. The Short Block Assembly is solely suitable for use in a compressor. The Short Block Assembly will be used for manufacturing the compressors. Therefore, on applying Note 2 (b). the imported Short Block Assembly will be classified as part of Compressor under Heading 8414.

6.2.3 Short Block Assembly cannot be classified under Tariff Item 84143000 as it is not an incomplete or unassembled compressor. Integral parts of the compressor are imported separately and procured locally, and required to be fitted onto the Short Block Assembly: In order to manufacture the Scroll Compressor, the Applicant has to fit other parts and components onto the Short Block Assembly. The list of other components that shall be imported separately or procured locally and then fitted onto the Short Block Assembly. Out of the products that shall be assembled and added in India., the Scroll Set is one of the most key components of the compressor. A scroll compressor uses two spiral shaped scrolls, one fixed and one orbiting scroll to compress gas. The orbiting scroll connected to the crankshaft rotates against the fixed scroll, which creates gas pockets between the two scrolls, and as the gas moves into the internal pockets which keep getting smaller, both its temperature and pressure are increased. Thus, the scroll set performs the crucial function of trapping and compressing the gas as it moves towards the centre of the scroll. The motion of the scroll >et spirals is extracted below:

Scroll Compressor Working

    From a perusal of the above, it can-be seen that the green circle which is the gas pocket gets gradually smaller and compresses. Thus, the scroll set is a crucial part of the scroll compressor to be manufactured by the Applicant, which does not form a part of the Short Block assembly. The functions performed by the other parts / assemblies, to be added in India are as highlighted in the Application. From a perusal of the same it is clear that the parts added are integral to the compressor and cannot function without it as they contribute to the main compression aspect and the safe functioning of the compressor. '

6.2.4 Short Block Assembly cannot be classified under Tariff Item 84143000 as significant value addition and assembly is undertaken in India to manufacture the complete compressor: The Applicant shall undertake a significant amount of value addition in India in order to complete the compressor, which amounts to 33?/o of the total cost of the services to complete the compressor. The intermediate assembly, final assembly, testing and packing operations are reflected at Para L of the Application. The post-importation operations that shall be undertaken are not simple operations that can be undertaken by any non-technical or untrained person. The assembly processes require high level of skill and technical training which will be provided by the Applicant. The operations along with the skill requirements are highlighted in document enclosed herewith as "Annexure - 3". The same is summarised below:

i. Chemical washing of parts: Requires high technical knowledge of the parameters of temperature and flow pressure.

ii. Assembly-kitting: Each component such as scroll, Oldham coupling, top cover, bottom cover, etc. has to be selected as per the model and loaded onto the fixture at the right location.

iii. Further assembly operations: Assembly along with quality checks using gauges and quality equipment. Failure to address quality issues can result in serious issues in the final compressor's performance;

iv. End cap welding: The end caps are welded on high-tech welding machines using 'MAG' technology and the entire unit is hermitically sealed. The welding requires knowledge of this technology and the machine. . ......

v. Mi-Pot text, Burst Text and leak test: Various tests and checks are done to ensure the correct quality. During these tests, the person utilises high voltage current, high pressure dry air. and electronic sensors, which requires the person to possess knowledge of various potentiometers, pressure setting devices, gauges and sensors.

vi. Dehydration & Powder Painting: This entire process is multistage & each stage needs to be critically controlled & maintained. For pre-treatment all chemical pointages, spray & purging pressures, air dryness & temperatures are required to be critically monitored & maintained. In 'dry-off zone, IR baking zones, dehydration & cooling zones right temperatures & timings are to be monitored & maintained. All these parameters are of utmost importance to ensure right quality of dehydration & painting.

vii. Oil charge, final testing and packing: The compressor oil is charged and followed by dry air. Then final testing is done on a high-tech final testing rig, which requires parameters like voltage, suction pressure, current, discharge pressure to be set and monitored. Then the compressor is finally packed.

    For performing the above-mentioned operations, the Applicant requires that any person undertaking them has basic academic qualification of assembly practices and possess knowledge of assembly tools and equipment. The Applicant shall also be giving the necessary training to these persons to undertake the assembly operations and to inspect the work with required gauges or measuring instruments. Further, Domestic value addition in India increases From 10% in year 1 of production to more than 55% eventually. Thus, substantial value addition will be carried out in India.

6.2.5 Rule 2(a) of GRI is not applicable in the present case.: Rule 2(a) of GRI deals with two aspects, i.e. classification of incomplete or unfinished articles, and classification of complete or finished articles but presented in unassembled form. It is submitted that Rule 2(a) of GRI is not applicable in the present case for the following reasons:

i. Short Block Assembly cannot function as compressor in imported form. Various components have to be added and many operations (as elaborated above) have to be carried out.

ii. Substantial operations are done in India and substantial value addition is undertaken in India. The Short Block Assembly constitutes only 59% of the total cost of materials involved in the finished Compressor. Materials worth 41% (27% imported separately + 14% procured locally) and services worth 33% are added in India to make the SBA into a Compressor. Thus, as substantial value addition is carried out in India, the SBA cannot be regarded to be Compressor in unfinished form

iii. The SBA does not have the approximate shape or outline of the finished compressor. From a perusal of the article in the finished form i.e. the compressor, it can be seen that only the cylindrical shell shape is similar. The shell has to be fitted with a top cap. lower cap and other internal components too.

iv. The SBA is not in the nature of a compressor unassembled for the convenience of packing handling or transport. It is a settle principle that Rule 2(a) is applicable only when parts are presented together and not when the parts are presented separately over time. Rule 2(a) is to be applied to the goods in the "as presented"' condition.

v. SBA is subjected to further working operations. Numerous products/parts are added to SBA to make it complete compressor. The post-importation activity also includes procurement of integral parts such as the scroll set, for fitment with the short block assembly and completing into a scroll compressor. Thus, it cannot be said that mere assembly is undertaken to complete the SBA into a compressor.

    Thus, the SBA does not have the essential character of the finished compressor and has to undergo various operations which are more than simple assembly operations. Therefore, SBA cannot be treated as akin to a complete or assembled compressor.

6.2.6 Various decisions have held that Rule 2(a) of GRI is not applicable when considerable post- importation operations or complex assembly operations are undertaken to give essential character of the finished product, and that Rule 2(a) is only applicable when all parts are presented together for assessment. In support of the above submissions, the Applicant places reliance on the following case laws:

i. Motor Industries Co. Ltd. v. Assistant Collector of Customs, 1992 (62) E.L.T. 13 (Mad.), wherein it was observed that there are no guidelines laid down for determining the essential character, and in the absence of such guidelines, no definite yardstick can be applied. The Hon'ble Court held that only those goods which require some minor adjustments can fall under the scope of Rule 2(a).

ii. New Standard Engineering Co. Limited, Bombay v. Collector of Customs, Bombay, 1986 (26) E.L.T. 419 (Tribunal) wherein it was held that the goods which required considerable post-importation operations to give the essential character cannot be classifiable in terms of Rule 2(a) as the finished article.

iii. Bajaj Auto Ltd., 1994 (72) E.L.T. 237 (Coll. Appl.), wherein it was held that mere resemblance of shape is not enough for the application of Rule 2(a). and that the essential character must be looked at i.e. whether the imported product can be used for the end-use or for the intended product with minor adjustments.

iv. M/s. Huarong Plastic Machinery India Pvt. Ltd. & Ors. v. CC, Ahmedabad, 2024 (8) TMI 409. wherein it was held that Rule 2(a) would apply only when the imported articles presented in unassembled or disassembled can be put together by means of simple fixing device or by riveting or welding. Processes of polishing, grinding, drilling, tapping, "T" slotting, scraping, wiring, painting, etc. required to be completed with the help of some mechanical/ electrical machines, and it is not in the nature of simple processes envisioned under Rule 2(a).

v.. CC (Port-Import), Chennai v. Authority of Advance Rulings, New Delhi & M/s. BMW India Pvt. Ltd., whereby the Hon'ble High Court held that Rule 2(a) of the General Interpretative Rules cannot be invoked as the assessee is not importing all the essential components of a motor vehicle, with six parts being locally sourced - until all the components of the complete article are presented together for assessment at the same point of time, Rule 2(a) cannot be invoked to classify the parts as complete article.

6.3. In light of the above submissions, the Applicant submitted that the present application is maintainable and as per the Applicant, the Short Block Assembly is correctly classifiable as a part of the compressor under Tariff Item 84149011 and not as the incomplete compressor under Tariff Item 84143000.

7. Discussions and Findings

7.1 I have considered all the materials placed before me in respect of the classification of subject goods. I have gone through the submissions made by the applicant during the personal hearing. Therefore, I proceed to pronounce a ruling on the basis of information available on record as well as existing legal framework.

7.2 The applicant has sought advance ruling in respect of the following questions:

a) Question: Whether the product in question i.e., Short Block Sub-Assembly in the present application is classifiable under Tariff Item 84149011 of the First Schedule to the Customs Tariff Act, 1975 (hereinafter referred to as 'the Tariff1)?

b) Question: Should the product in question in the present application be classifiable as a compressor in an incomplete / unassembled form under Tariff Item 84143000 of the Tariff?

c) Question: If the product mentioned above is not classifiable under the Tariff Item as mentioned above, then what would be the correct classification of the above product under the Tariff?

7.3 At the outset, I find that the issue raised at the Sr. No. 08 in the CAAR-1 form is squarely covered under Section 28H(2) of the Customs Act, 1962 being a matter related to the classification of goods.

7.4 The applicant submitted that the product i.e. Short Block Sub-assembly is a sub-assembly of Assembly and it would be used in the manufacturing of "Scroll Compressors' for use in refrigerating and air conditioning appliances.

7.5 Before deciding on the issue, let me deliberate on the legal framework prescribed in Customs Tariff Act, 1975, Chapter/Section notes along with HSN explanatory notes. Classification of goods in the Harmonized System of Nomenclature (HSN) is governed by the General Rules for the interpretations. Rule 1 of the General Rules for the Interpretation of the Import Tariff to the Customs Tariff Act, 1975 stipulate that for legal purposes, the classification of the import item shall be determined according to the terms of the headings and any relative Section or Chapter Notes.

7.6 In this case, there is no doubt that the CTH 8414 which covers "air or vacuum pumps, air or other gas compressors and fans; ventilating or recycling hoods incorporating a fan, whether or not fitted with *filters; gas light biological safety cabinets, whether or not fitted with filters " is the correct classification for the subject goods. The issue before me to decide is whether the product i.e. Short Block Sub-Assembly has the essential character of a complete or incomplete scroll compressor or not. In other words, whether to classify Short Block Sub-assembly as incomplete unit having the essential character or as the part of the scroll compressor.

7.7 Before delving into the essential character vs. parts debate, let me first examine the answers to the following questions:

i. What is Scroll compressor? What are its uses and functions?

ii. How does a Scroll compressor work?

iii. What are the various parts of Scroll compressor?

iv. Out of the above-mentioned parts, which parts are essential parts which imparts the essential character to the Scroll compressor?

7.7.1 I have gone through the product literature provided by the applicant and other open-source information about the Scroll Compressor. From the same, I gather that Scroll Compressor is type of positive displacement compressor commonly used in refrigeration and air conditioning systems to compress refrigerant gas. The scroll compressor operates using a unique mechanism involving two spiral-shaped scrolls: a stationary scroll and an orbiting scroll. Scroll compressors are important because they offer highly efficient, reliable, and quiet, making them ideal for a wide range of industrial and commercial applications. They also have a compact design and require minimal maintenance, making them cost-effective in the long run.

7.7.2 A scroll compressor actually consists of two scrolls or spirals. One scroll is moving, whereas tie second one is fixed (attached to the compressor body). The first scroll orbits (rotates) in a path defined by its mating fixed scroll. The orbiting scroll is connected to the compressor's crankshaft. As a result of the scroll's movement, gas pockets are formed between the two scrolls. At the outer part of the scrolls, the pockets suck in gas and then move towards the center of the scroll, where the compressed gas is discharged. As the gas moves into the continuously smaller internal pockets, both its temperature and pressure are increased. Thus, a desirable discharge pressure is achieved by the motion of the compressor scrolls.

7 7.3 Various parts of Scroll Compressor have been mentioned by the applicant which is reflected in the Para 2.4 to 2.8 as Category A, Category B and Category C parts and the same are tabulated below for ease of reference.

    The applicant has further stated that the product i.e. Short Block Sub-assembly comprises of parts / components mentioned as Category A. The applicant has further submitted that Category A and Category B parts would be imported from different manufacturers across the globe and Category C parts would be locally sourced.

7.7.4 Out of the above-mentioned parts in para 7.7.3, the parts which are absolutely essential for the compressor to function properly are as under:

i. Shell: houses the moving parts of the compressor and provide structural support for the bearing system and motor. (Category A product)

II. Main bearing house: reduces the friction between bearings and shafts (Category A product)

iii Stator: after the supply of power, helps in rotation of rotor and shaft assembly. (Category A product)

iv. Shaft: Rotating part of motor (Category A product)

v. Lower Bearing Assembly: ensure that the stator and rotor are set concentrically (Category A product)

VI. Scroll Set: rotate by drive transferred by crankshaft and compress the gas (Category B product)

    The other non-essential parts can be removed and their removal will not change the core functionality of the Scroll compressor however, their removal would impact the performance, efficiency and longevity of the scroll compressor.

7.8 From the above, I observed that the above six parts together form the essential character of the Scroll compressor in as much as these six essential parts / components are necessary for the scroll compressor to retain its core functionality. I further observe here that out of six parts / components, Five are category A parts and theses five (Sr. no. (i) to (v) above) are part of the product intended to be imported in form of Short Block Sub-Assembly. I also find here that the sixth component i.e. the Scroll Set is not imported with the Subject goods i.e. Short Block Sub-Assembly. From here, I observe that if the product i.e. Short Block Sub-assembly is imported with Scroll Set, it would have constituted all the essential component of the compressor falling under Tariff Item 84143000 and would rightly be classifiable as the complete Compressor in CKD/SKD condition having met the criterion set under the GRI Rule 2(a) which states as under:

"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. "

7.9 However, since the product i.e. Short Block Sub-assembly does not have the scroll set, which rotate by drive transferred by crankshaft and compress the gas, the question remains whether the product can be termed an incomplete machine and classified in the same heading as that of complete machine or it needs to be classified as parts of the machine i.e. scroll compressor in the subject matter.

7.10 First, let me examine the relevant Section notes, chapter notes and Heading / Sub-Heading text. The Section Note of Section XVI.

7.11 In a number of Judgments, Hon'ble Supreme Court has held that The HSN explanatory notes are safe guide and provide an insight into classification matters and helps in resolution of various disputes. The HSN explanatory notes for Section XVI describes 'Incomplete Machines' as under:

(IV) INCOMPLETE MACHINES
(See General Interpretative Rule 2 (a))

Throughout the Section any reference to a machine or apparatus covers not only the complete machine, but also an incomplete machine (i.e., an assembly of pans so far advanced that it already has the main essential features of the complete machine). Thus a machine lacking only a flywheel, a bed plate, calender rolls, tool holders, etc., is classified in the same heading as the machine, and not in any separate heading provided for parts. Similarly a machine or apparatus normally incorporating an electric motor (e.g., clectro-mechanical hand tools of heading 84.67) is classified in the same heading as the corresponding complete machine even if presented without that motor.

7.12 The HSN explanatory notes for 'Incomplete Machines' mentioned in Section notes of Section XVI refers to GIR 2(a) for more information. The GIR 2(a) is further explained in HSN explanatory notes as under:

RULE 2 (a)
(Incomplete or unfinished articles)

(I) The firs! part of Rule 2 (a) extends the scope of any heading which refers to a particular article tocover not only the complete article hut also that article incomplete or unfinished, provided that, as presented, it has the essential character of the complete or finished article.

(II) The provisions Of this Rule also apply to blanks unless these are specified in a particular heading. The term "blank" means an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which can only be used, other than in exceptional cases, for completion into the finished article or part (e.g., bottle preforms of plastics being intermediate products having tubular shape, with one closed end and one open end threaded to secure a screw type closure, the portion below the threaded end being intended lo be expanded to a desired si/,e and shape).
Semi-manufactures not yet haying the essential shape of the finished articles (such as generally the case with bars, discs, tubes, etc.) are not regarded as "blanks'.

(iii) In view of the scope of the headings of Sections I to VI, this part of the Rules does not normally apply lo goods of these Sections.

(IV) Several cases covered by the Rule arc cited in the General Explanatory Notes to Sections or Chapters (e.g.. Section XVI, and Chapters 61, 62. 86, 87 and 90).

RULE 2 (a)
(Articles presented unassembled or disassembled)

(V) The second pan of Rule 2 (a) provides that complete or finished articles presented unassembled or disassembled are to be classified in the same heading as the assembled article. When goods are so presented, it is usually for reasons such as requirements or convenience of packing, handling or transport.

(VI) This Rule also applies to incomplete or unfinished articles presented unassembled or disassembled provided that they are to be treated as complete or finished articles by virtue of the first pari of this Rule.

(VII) For the purposes of this Rule, "articles presented unassembled or disassembled' means
articles the components of which are to be assembled cither by means o! fixing devices
(screws, nuts, bolts, etc.) or by riveting or welding, for example, provided only assembly
operations arc involved.

No account is to be taken in that regard of the complexity of the assembly method. However, the components shall not be subjected to any further working operation for completion into the finished state.

Unassembled components of an. article which are in excess of the number required for that article when complete are to be classified separately.

(VIII) Cases covered by this Rule arc cited in the General Explanatory Notes to Sections or Chapters (e.g.. Section XVI, and Chapters 44. 86, 87 and 89).

(IX) in view of the scope of the headings of Sections 1 to VI, this part of the Rule does not normally apply to goods of these Sections.

7.13 Point VII in Explanatory notes for Rule 2(a) clearly state that welding and riveting are considered assembly operations only. It further informs that the complexity of the assembly method has no bearing on the classification as long as the components are not subject to further working operation which changes them in form, nature or composition. In the instant matter, the various pails used for assembling the Scroll compressor are not subjected to any working operation which changes them in any way. Further, testing of the product cannot be termed as manufacturing when all the parts are merely assembled for creation of final product.

7.14 Point I in Explanatory notes for Rule 2(a) states that the first part of Rule 2 (a) extends the scope of any heading which refers to a particular article to cover not only the complete article but also that article incomplete or unfinished, provided, that, as presented, it has the essential character of the complete or finished article.

7.15 From the above, I observe that as long as the product has the essential character, it can be classified in the same heading as a complete machine and not as a part. In the subject matter, as already discussed in para 7.7.4. the product i.e. Short Block Sub-Assembly is unaccompanied with a crucial component i.e. Scroll Set. The Scroll set is essential to the compressor's operation, and without it, the short block sub-assembly would not be able to function independently and would not perform compression because the basic mechanism for gas compression would be absent.

7.16 From the discussions above, I find that the Short Block Sub-Assembly includes most of the vital components. However, it does not include all components which together make the subject goods i.e. Short Block Sub-Assembly have the essential character of a scroll compressor as the Scroll set, which perform the compression function, is not part of the Short Block Sub-Assembly. Since the product i.e. Short Block Sub-Assembly lacks the essential character of a compressor, therefore, it would be classified as parts under CTSH 8414 90 and specifically under CTI 8414 90 11 as 'parts of gas compressors of a kind used in refrigerating and air conditioning appliances and machinery'. Needless to say, that if at the time of import, this Short Block Sub-Assembly is imported with Scroll Set. then it would merit classification under CTI 8414 30 00 as it would modify and upgrade the subject goods to goods having the essential character of the Scroll Compressor and would be capable of performing the compression function.

8. In light of the above facts, discussions and observations, my views on the questions raised by the applicant are as under:

a) Question: Whether the product in question i.e., Short Block Sub-Assembly in the present application is classifiable under Tariff Item 84149011 of the First Schedule to the Customs Tariff Act, 1975?

Ans. Yes, the product i.e. Short Block Sub-Assembly as detailed in the present application is classifiable under Tariff Item 84149011 of the First Schedule to the Customs Tariff Act, 1975.

b) Question: Should the product in question in the present application be classifiable as a compressor in an incomplete / unassembled form under Tariff Item 84143000 of the Tariff?

Ans. Not applicable in view of answer to the Question (a) above.

c) Question: If the product mentioned above is not classifiable under the Tariff Item as mentioned above, then what would be the correct classification of the above product under the Tariff?

Ans. Not applicable

9. I rule accordingly.

(Prabhat K. Rameshwaram)
Customs Authority for Advance Rulings.
Mumbai           
 

F. No. CAAR/CUS/APPL/132/2024-O/o Commr-CAAR-Mumbai        Dated:27-01-2025