Classification of unassembled articles: from

legitimate to abusive operating structures

By: Pier Paolo Ghetti, Post-Master Customs Law, 2015

Table of contents

Table of contents ........................................................................................................ 1

Introduction and purpose of the thesis ............................................................................... 2
Classification rules and rationale........................................................................................ 3
Classification of unassembled (completely or semi knocked down) vehicles: general
Interpretative rule 2a .......................................................................................................... 5
“as presented” ................................................................................................................ 6
“essential character” ....................................................................................................... 7
Due cause or economic justification ................................................................................... 8
Conclusions ....................................................................................................................... 9

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Introduction and purpose of the thesis

The purpose of this paper is to describe the customs classification rules applicable to motor
vehicles presented to customs in a semi or completely knocked down condition, in particular
when the different parts and components of the vehicle enter the customs territory at different
times or, at the same time, but in different shipments.
In the automotive industry trade jargon, three different “presentation” categories exist, and the
products fall in these categories based on their state:

• CBU (Completely Built Up) – or in a state of finished assembly and ready for distribution and
sale, or

• CKD (Completely Knocked Down) – or comprising components which when assembled will
be a finished unit ready for sale. In other words, a ‘kit’ which in some cases provides for more
cost efficient transportation such as in shipping containers, and further often facilitates tax
advantages at the destination from reduced import values declared at Customs, or from
incentives for undertaking some local value-add processes, or

• SKD (Semi Knocked Down) – similar to CKD but the kit is not completely knocked down to
individual parts, that is, some assembly has occurred or remains, and less assembly is required
at the destination.

Essentially semi or completely knocked down (SKD/CKD) kits refer to substantially complete
articles that are broken down into individual parts (CKD) or sub-assemblies (SKD). Minor
parts, such as batteries, windscreens or tyres, may often be omitted, but once assembled a
substantially complete article would be formed. Those kits are generally considered as
unassembled articles which, after the assembly, would have the essential character of the
complete article.
Needs to be noted that SKD/CKDs can range from kits that include certain but not nearly all
parts of a motor vehicle and that still need substantial assembly and production work, to kits
that are essentially entire motor vehicles that have simply been disassembled to facilitate
transport.
The first crucial issue is whether the SKD/CKDs are to be considered for tariff classification
purposes as complete goods or a conglomeration of parts and accessories; the answer to this
question translates into the application of different customs duty rates. Typically, the complete
article (motor vehicle) attracts higher customs duty rates than the parts and accessories. See
the example in the table below:

Type of EU tariff Tariff Description Duty Rate

product code

Complete 8703 32 Other vehicles, with compression-ignition 10%

vechicle 19 internal combustion piston engine

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 (diesel or semi-diesel):

--Of a cylinder capacity exceeding 1 500 cm3

but not exceeding 2 500 cm3

– – – – Other

Intermediate 8706 00 Chassis fitted with engines, for the motor 4,5%

product 91 vehicles of headings 8701 to

8705:

– Other

– – For vehicles of heading 8703

Parts and 8708 40 – Gear boxes and parts thereof 3%

accessories 20 – – For the industrial assembly of (end-use

condition):

Vehicles of heading 8703

The second issue that might arise is how to consider the SKD/CKDs for tariff classification
purposes when the different parts are imported over a number of shipments that arrive at or
about at the same time (split consignments), or to shipments arriving at different times (multiple
shipments).

Classification rules and rationale

A correct classification procedure normally takes the following steps:

1. Analysis of the product and identification of its objective characteristics;

2. Application of the relevant classification rules and provisions;
3. Identification of the heading/subheading of the Combined Nomenclature.

With regard to the “objective characteristics of the products” this is confirmed by a consistent
European Court of Justice (ECJ) position (see, inter alia, Case C-42/99 Eru Portuguesa [2000]
ECR I-7691, paragraph 13; Case C-495/03 Intermodal Transports [2005] ECR I-8151,
paragraph 47; Case C-445/04 Possehl Erzkontor [2005] ECR I-10721, paragraph 19; and
Case C-500/04 Proxxon [2006] ECR I-1545, paragraph 21) which maintains that: “the decisive
criterion for the classification of goods for customs purposes is in general to be sought in their
objective characteristics and properties as defined in, inter alia, the wording of the relevant
tariff heading and in the section or chapter notes”.

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For what concerns the application of classification rules and provisions, those should be
distinguished in legally binding and non-legally binding.
Legally binding classification rules are the most relevant ones since the classification of
products must always be consistent with them, while non-legally binding rules provide relevant
interpretative support in the classification process (e.g. Explanatory notes of the harmonized
system, explanatory Notes of the European Union (EU) Combined Nomenclature; BTIs issued
to a person different than the holder, etc...).

Legally binding classification rules are mainly set in the EU by Council Regulation (EEC) n.
2658 of 1987, which establishes the Combined Nomenclature, Common Customs Tariff and
Integrated Tariff of the European Union (Taric), and consist in the following six General
Interpretation Rules (GIRs) which govern the classification process:

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.
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.
(b) Any reference in a heading to a material or substance shall be taken to include a
reference to mixtures or combinations of that material or substance with other materials or
substances. Any reference to goods of a given material or substance shall be taken to include
a reference to goods consisting wholly or partly of such material or substance. The
classification of goods consisting of more than one material or substance shall be according
to the principles of rule
3. When, by application of rule 2(b) or for any other reason, goods are prima facie
classifiable under two or more headings, classification shall be effected as follows:
(a) the heading which provides the most specific description shall be preferred to headings
providing a more general description. However, when two or more headings each refer to part
only of the materials or substances contained in mixed or composite goods or to part only of
the items in a set put up for retail sale, those headings are to be regarded as equally specific
in relation to those goods, even if one of them gives a more complete or precise description of
the goods;
(b) mixtures, composite goods consisting of different materials or made up of different
components, and goods put up in sets for retail sale, which cannot be classified by reference
to 3(a), shall be classified as if they consisted of the material or component which gives them
their essential character, in so far as this criterion is applicable;
(c) when goods cannot be classified by reference to 3(a) or (b), they shall be classified
under the heading which occurs last in numerical order among those which equally merit
consideration.
4. Goods which cannot be classified in accordance with the above rules shall be classified
under the heading appropriate to the goods to which they are most akin.
5. In addition to the foregoing provisions, the following rules shall apply in respect of the
goods referred to therein:
(a) camera cases, musical instrument cases, gun cases, drawing-instrument cases,
necklace cases and similar containers, specially shaped or fitted to contain a specific article or
set of articles, suitable for long-term use and presented with the articles for which they are
intended, shall be classified with such articles when of a kind normally sold therewith. This rule
does not, however, apply to containers which give the whole its essential character;

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(b) subject to the provisions of rule 5(a), packing materials and packing containers (1)
presented with the goods therein shall be classified with the goods if they are of a kind normally
used for packing such goods. However, this provision is not binding when such packing
materials or packing containers are clearly suitable for repetitive use”.
6. For legal purposes, the classification of goods in the subheadings of a heading shall
be determined according to the terms of those subheadings and any related subheading notes
and, mutatis mutandis, to the above rules, on the understanding that only subheadings at the
same level are comparable. For the purposes of this rule, the relative section and chapter
notes also apply, unless the context requires otherwise.

The above GIRs must normally be applied hierarchically, in the order they are set, and in brief
their content can be described as follows:

o GIR 1 indicates the hierarchy of application of the various rules;

o GIR 2 extends the scope of the headings including products incomplete and/or
unassembled;
o GIR 3 needs to be applied when different headings could apply to the same product
as it defines the criteria to determine the priority;
o GIR 4 (rarely) applies where an applicable heading cannot be found;
o GIR 5 defines the treatment of packaging and containers for customs classification;
o GIR 6 defines the application of the previous rules at a sub-heading level (i.e. 6
digit level).

For the purpose of this thesis GIR1 and GIR2a can be considered as crucial in the process of
determining the classification rules for unassembled articles where the parts are imported over
a number of shipments.

Classification of unassembled (completely or semi knocked down)

vehicles: general Interpretative rule 2a
It should be first noted that GIR 2 (a) can only be applied in conjunction with GIR 1.
For example a heading providing specifically for a collection of unassembled parts or an
incomplete article would prevail by application of GIR 1 because GIR 2 would not apply (that
is, because such headings or Notes …otherwise require.).
For example when applying GIR 2 (a) to sets of unassembled parts, it is important to consider
the exclusions contained in Note 2 to Section XVII, which would be applicable pursuant to GIR
1, but also the texts of headings 87.06 and 87.07 (including Note 3 to Chapter 87):

• 87.06: Chassis fitted with engines, for the motor vehicles of headings 8701 to 8705 and
• 87.07: Bodies (including cabs), for the motor vehicles of headings 8701 to 8705

The classification of unassembled components, where the headings and legal notes do not
otherwise require, is therefore governed by GIR 2 a), according to which: “Any reference in a
heading to an article shall be taken … to include a reference to that article … presented
unassembled or disassembled”.

On the other hand in GIR 2 (a) the words "and,…, according to the following provisions"
requires that all the GIRs be consulted when classifying articles. However, GIRs 3 and 4 begin
with a text that clearly makes them applicable only when GIRs 1, 2, 5 and 6 do not provide a
unique classification for the subject article. Not being introduced by such conditional text, GIR
2 must always be considered provided the headings and legal notes do not otherwise require.

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A further clarification concerning the application of GIR 2 a), is provided by the Explanatory
Notes to GIR n. 2 a) of the Harmonised System (HS). In particular, the Explanatory Notes,
which I reinforce do not have legally binding force but can be considered an aid in the technical
interpretation of the Harmonized System (HS), and as a consequence the CN, stipulate that:

• a number of different elements can be considered an “unassembled product” if intended

to be connected through mere operations of assembly (either by means such as screws, bolts,
nuts with either rivets or by welding). 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.
• the previous rule applies also to unfinished products;
• components needed to assemble the finished product can be considered unassembled
components for classifications purposes. Any components in excess must be classified
autonomously.

As regards to the difference between the first and second part of GIR 2 (a) (incomplete and
unassembled product) the first part provides for classification, as an entity, of articles presented
incomplete or unfinished, while the second part provides for classification, as an entity, of
certain collections of individual articles (commonly referred to as "parts"). The second part also
clarifies that in order to qualify for classification as an entity, the actual collection of "parts"
does not have to be sufficient to assemble a complete or finished articles, so long as the "parts"
can be assembled into an incomplete or unfinished article that has the essential character of
a complete or finished article.

In this sense, Note VII of the HS explanatory notes on GIR 2 (a) may be relevant to determining
the appropriate classification procedures for articles "presented unassembled or
disassembled" within the meaning of GIR 2(a), the components of which shall not be subjected
to any further working operation or completion into the finished state.
With regard to incomplete articles Rule 2(a) refers to incomplete or unfinished articles that, as
presented, have the essential character of the complete or finished article, whether assembled
or disassembled.

Based on the considerations above it follows that GIR 2 (a) should always be applied when all
three of the following conditions are met:

(i). the entry under consideration is presented incomplete, unfinished, unassembled or

disassembled and
(ii). as presented (or after assembly if presented unassembled) it has the essential character
of the complete or finished article, and
(iii). the heading and Legal Notes of the HS do not otherwise provide for the entry (GIR 1 would
then apply).

“as presented”

When discussing a scenario where the different parts of an unassembled article (i.e.
CKD/SKD) are imported over a number of shipments that arrive at or about at the same time
(split consignments), or to shipments arriving at different times (multiple shipments), it is critical
to define in what point in time a determination is made whether the parts of a product constitute
the complete product for tariff classification purposes.

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In particular, do the customs authorities make this determination:
1- at the point of importation (i.e. at the border);
2- at the place and time where the import declaration is filed;
3- when the different parts are received by the consignee to be assembled into a complete
product within the importing country.

World Customs Organization (WCO) position when involved in the World Trade Organization
(WTO) case “China, Measures Affecting Imports of Automobile Parts” has been that the
expression "as presented" could be understood to mean the moment at which the goods are
presented to Customs or other officials with a view to classifying the goods concerned in the
Customs tariff or in the trade statistics nomenclatures.
However, the HS is silent on this point and the HS Comittee has not considered any related
modifications to the HS.

On the question of split consignments the WCO had the view that: "the question of split
consignments and the classification of goods assembled from elements originating in or
arriving from different countries are
matters to be settled by each country in accordance with its own national regulations."
The treatment of split consignments as a single entity for purposes of Interpretative Rule 2 (a)
is therefore a matter to be handled exclusively at the discretion of each individual
administration, taking into account national laws and regulations.
This is a result of the absence of a specific provision within the HS, which leaves room for the
administrations to introduce a classification practice for unassembled parts. On the other hand,
this also means that the scope of GIR 2 (a) cannot automatically cover split consignments, as
a national provision needs to be introduced to do so.
The EU, for example, has introduced legal provisions in Section XVI (i.e., Chapters 84 and 85)
and for headings 86.08, 88.05, 89.05 and 89.07, stipulating that "The provisions of General
Rule 2 (a) are also applicable, at the request of the declarant and subject to conditions
stipulated by the competent authorities, to [machines] [goods of headings 86.08, 88.05, 89.05
and 89.07] imported in split consignments."

“essential character”

With the support of the WCO position I’ve tried to identify the relevant moment when a product
is to be considered “presented to customs” within the meaning of GIR 2 (a).
The second relevant aspect is whether certain collections of parts could be considered to have
"the essential character of the complete or finished article", in terms of GIR 2 (a). The actual
collection of "parts" does not in fact have to be sufficient to assemble a complete or finished
article, so long as the "parts" can be assembled into an incomplete or unfinished article that
has the essential character of a complete or finished article. In other words the question is
what would be the criteria to classify an CKD/SKD when not all the parts of the product/vehicle
are presented to Customs with a view of to classify the goods.

The view of the WCO on this is that The Nomenclature and Explanatory Notes are silent
regarding the meaning of this expression, although several examples are cited among the
Explanatory Notes to certain areas of the HS; a notable example is the General Explanatory
Note to Chapter 87 which states that :
An incomplete or unfinished vehicle is classified as the corresponding complete or finished
vehicle provided it has the essential character of the latter (see Interpretative Rule 2 (a)), as
for example :

(A) A motor vehicle, not yet fitted with the wheels or tyres and battery.

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(B) A motor vehicle not equipped with its engine or with its interior fittings.
(C) A bicycle without saddle and tyres.

The question at what point a collection of parts can be considered to substantially compose a
complete motor vehicle is one that must be considered on a case-by-case basis.
For what concerns chapter 87, for example, chapter note 3 comes into play, providing that:
Motor chassis fitted with cabs fall in headings 8702 to 8704, and not in heading 8706 (Chassis
fitted with engines, for the motor vehicles of headings 8701 to 8705).

Again, we can conclude saying that, specific guidance from the HS or CN Nomenclature
(legally binding) or the HS Committee (interpretative) is not available, and, as a consequence
it is with the national customs administrations to interpret these provisions or to national
legislations to introduce provisions in this area.

Due cause or economic justification

The notion of “abuse of law” has been developed by the ECJ and applied by the latter in
customs matters.
In one of the oldest cases, in Peter Cremer, the ECJ clarified that the fundamental elements
of an “abusive” conduct consist in a violation of the ratio of a given provision, only apparently
respected by the taxpayer’s behavior.
A more precise definition of the concept of "abuse of law" in customs matters, further confirmed
in some subsequent judgments (ECJ, July 21st, 2005, C-515/03 Eichsfelder Schlachtetrieb VS
Hauptzollmat Hamburg-Jonas), has been provided by the ECJ in Emsald Starke Gmbh case,
where an abusive conduct has been ascertained in the presence of:

• "objective circumstances, which show that, despite formal observance of the conditions laid
down by the Community rules, the purpose of those rules has not been achieved" (para 52);
and
• "subjective element consisting in the intention to obtain an advantage from the Community
rules by artificially creating the conditions necessary for obtaining it" (para 53).

Coming to more recent ECJ pronunciation, we should mention the well-known Halifax case. In
that decision the ECJ, dealing with a VAT issue, stated that:
“an abusive practice can be found to exist only if, first, the transactions concerned,
notwithstanding formal application of the conditions laid down by the relevant provisions of the
Sixth Directive and the national legislation transposing it, result in the accrual of a tax
advantage the grant of which would be contrary to the purpose of those provisions … Second,
it must also be apparent from a number of objective factors that the essential aim of the
transactions concerned is to obtain a tax advantage”.
The judgement concludes that: “As the Advocate General observed in point 89 of his Opinion,
the prohibition of abuse is not relevant where the economic activity carried out may have some
explanation other than the mere attainment of tax advantages” (ECJ, 21st February 2006, C-
255/02, Halifax).

It has to be noted that the principles expressed in Halifax case have been specifically
reaffirmed by the ECJ also in customs matters (see. judgement 13th March 2014, C-155/13,
Società Italiana Commercio e Servizi srl (SICES), in liquidazione).

Based on the above, a company importing components under a split consignment logistic
model should verify if this operational/logistic solution:

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A. essentially seeks to achieve a tax saving in contrast with the application of the EU customs
tariff;
B. is supported by valid and not negligible non-fiscal reason.

In the event that such splitting proves artificial and predominantly or exclusively aimed to
benefit of an undue duty rate, the operation under analysis might be challenged by the customs
authorities, as the assembled article attracts higher duty rates than the parts and accessories.

With reference to the condition set under point A), one should therefore verify if the application
of the parts/components duty rate is improper or contrary to the ratio of the customs Tariff.

As explained in the previous paragraph, the classification of components on the basis of its
individual characteristics does not appear inconsistent with the classification criteria of the
customs Tariff. Unless the different components are presented at the same point in time to
customs and these components, if assembled, would constitute a complete vehicle or an
incomplete vehicle having the essential characteristics of a complete vehicle.

As for the condition set under point B), the importer should, for example, be able to prove the
economic reasons for the split consignment. For example splitting the consignment units might
reduce the time needed to complete the unloading operations or ensure a transit time
improvement or grant some tangible costs savings on freight costs.
Such reasons may be considered appropriate and constitute the non-fiscal reason. This, of
course, provided that the importer is in the position of:
- proving, on documents basis, the existence of such non-fiscal reasons; for example, may
need to demonstrate the actual reduction of delivery times, the actual cost savings, etc.;

- that those non-fiscal reasons are "not negligible".

In brief:

• the taxpayer bears the burden of proving the existence of not negligible non-fiscal
reasons
• the existence of those circumstances need normally to be proved on a documental
base;
• organizational and management reasons can be abstractly considered suitable to
provide acceptable non-fiscal reasons;
• the taxpayer must demonstrate that those - not negligible and non-fiscal - reasons
determined the set-up of the operations under review.

Conclusions
In brief, for what concerns the classification rules held applicable to imports of components for
vehicles assembly (Chapter 87), GIR n. 2 (a) can apply if components are simultaneously
presented to customs for clearance.
The definition of the terms simultaneously presented to customs for clearance hasn’t been the
object of an official interpretation. But GIR n. 2 (a) shouldn’t be applied to split consignments
of vehicle components (Cap. 87) which are not presented to customs clearance at the same
time. This possibility is indeed not covered, in the EU, by a specific provision neither in the
Notes to the Section XVII of the customs Tariff nor in the notes to chapter 87.

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For what concerns the possibility to consider the split consignments as an abusive practice, it
should be noted that the latter should not apply to the extent that the importer is able to
demonstrate the existence of valid non-fiscal reasons, not negligible, underpinning the decision
to split the consignments.

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