Whether amortized cost of tool provided by recipient includible in value of components supplied?

PJ/Case Law/2018-2019/3487

Case: M/s Nash Industries (I) Pvt. Ltd.,
Citation: 24/2018 Dt. 25-10-2018
Issue: Whether amortized cost of tool provided by recipient includible in value of components supplied?
Brief facts: M/s. Nash Industries (I) Pvt. Ltd., (called as the ‘Applicant’ hereinafter) having GSTIN number 29AADCN9558Q1ZC.,has filed an application for Advance Ruling under Section 97 of CGST Act,2017, KGST Act, 2017 & IGST Act, 2017 read with Rule 104 of CGST Rules 2017 & KGST Rules 2017. The applicant is involved in the business of manufacturing Sheet Metal Pressed Components and caters to various industries, ATM, printers etc, and is having multi-locational facilities in and aroundBangalore. Customers of the applicant provide them with the drawings of the component. However, components being manufactured by applicant require specialized tools. Therefore, applicant designs and manufactures these specialized tools and bills them to the customer. The applicant, however, retains possession of the tools for the manufacture of components.

Appellant’s contention: . The appellant contented that the earlier Central Excise Valuation Rules has similar provisions and it was held that the cost of amortization of the tool was to be added to the value of the goods removed for the purpose of payment of Excise duty. He has also submitted that he had tweeted to GST and it was replied as includible. This reply from the jurisdictional Assistant Commissioner of Central Tax asked to refer to the provisions of section 15 read with rule 27 of the CGST law. However, he stated that the customers are of the view that the amortization cost is not includible to arrive at the value for the purpose of GST unlike the erstwhile Central Excise Law. In the absence of clarity on the matter, the applicant preferred theruling.

He stated that the it appears that the valuation provisions under the CGST Law is the same as that provided in the erstwhile Central Excise Law. Therefore, the applicant is of the view that the cost of amortization is to be added to the value of the goods supplied for the purpose of payment of GST. In this regard, he referred to the decision of the Hon’ble High Court in the case of TATA Johnson Controls Automotive Ltd v/s State of Maharashtra 2017 (7) GST GSTL 271 (BOM).
He has stated that there are umpteen judgements of the Tribunal and Hon’ble Courts, wherein it is held that the moulds, tools, jigs, fixtures supplied free of cost or captively consumed are to be treated as additional money consideration to arrive at the value of excisable goods. In other words, the cost of amortization of the tools, jigs, fixtures, moulds, etc are to the added to arrive at the transaction value on which the Central Excise is paid. He has quoted section 15 of the CGST / SGST Act and rule 27 of theCGST/ SGST Rules which reads as under:

Section 15(2) - The value of supply shall include:-
(b) Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or service or both.
Section 15(4) -Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.
Rule 27 - Value of supply of goods or services where the consideration is not wholly in money
(a)be the open market value of suchsupply
(b)If the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time ofsupply.

On plain reading of section 15 of the CGST / SGST Act, it says that any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient is includible. He states that had the supplier procured it from outside, the cost of the tool would have formed part of the value of supply of the component. As per clause (b) of sub-section 2 of section 15, if the tool is provided free of cost to the supplier, the amortised cost of the tool would have formed part of the taxable supply.

The applicant submitted that the components supplied to the recipient are tailor made (or made as per the specifications of the customer) and hence are not available in the open market and so there is no open market value of such supply. In such case, recourse is to be taken to the sub-rule (b) of Rule 27 of the CGST / SGST Rules, according towhich:

Value of taxable supply = Consideration in money + Amount equivalent to consideration not in money.

He added that his customers paid the invoice value including excise duty on the amortised cost of the value of the tools under the erstwhile Central Excise Law. However, the same customers are not paying the GST amount charged on the supply of goods stating that the amortised cost of the tool is not includible under theGST.

The applicant has also referred to the following decisions:
1. TATA Johnson Controls Automotive Ltd v/s State of Maharashtra reported in 2017 (7) GSTL 271 (Bom)
2. GSTAMP Automotive India Pvt Ltd v/s Commissioner of Central Excise reported in 2017 GSTL 337 (Tri)
3.Lear Automotive India Pvt Ltd v/s Commissioner reported in 2014 ELT 65 (Tri)
Respondent’s Contention and Judgement:
The applicant gets the order for specialized components, manufactures the tools specificallyrequired for the job and invoices it to the recipients. This is the first supply. The applicant has to collect the tax as applicable on the tools and the recipient becomes the owner of suchtools.

Later the recipient gives the tool free of cost to the applicant and the applicant uses the same for the manufacture of the components.Section 7(1) of CGST Act 2017 stipulates that ‘Supply’ shall be made for a consideration. However Section 7(1)(c) specifies that the activities described in Schedule I shall be considered as ‘Supply’ even if there is no consideration involved.

In the instant case the tools are business assets in the hands of the recipient as the applicant has raised invoices towards their manufacture / supply and received the due consideration from the recipient. As the tools are supplied by the recipient to the applicant for the limited purpose of manufacture / supply of components, the activity does not amount to permanent transfer of the business asset of the recipient. Therefore, the activity of free supply of tools by the recipient to the applicant does not amount to supply as defined in Section 7 of the CGST Act2017.

Section 15 (1) of the CGST Act, value for the purpose of levy of GST shall be the transaction value carried out at an arm’s length. Further, Section 15(2) provides for the inclusion of other related amounts in determining the value of taxable supply.

In the instant case, the applicant was required to supply certain specialized components, which requires specialized tools. There tools could either be manufactured by the applicant themselves or the said tools could be procured from a third party vendor, or the tools could be supplied by the recipient free of cost.

The AAR relying on section 15(2) (b) of the CGST Act held that the cost of tools incurred by the recipient of the supply, provided free of cost to the applicant manufacturer shall from part of the value of specialized component for the purpose of levy of GST.

Decision: The amortized cost of tools which are re-supplied back to the applicant free of cost shall be added to the value of the components.
Comment: The inclusion of goods supplied free of cost in the value has been a point of dispute since inception. In the Central Excise Laws, the position was clear that the cost of goods supplied free of cost by the recipeint was added in the value of goods and this was also supported by various judicial pronouncements. Furthermore, if the goods supplied free of cost could be used for longer duration, the amortized cost of the same was to be included in the value. The amortized cost means the cost of goods divided by its useful life. However, the position under Service Tax Laws was altogether different as the Supreme Court in the case of Bhayana Builders (P) Ltd. [2018 (10) G.S.T.L 118 (S.C.)] has concluded that the goods supplied free of cost by the service recipient is not to be included in the gross amount of taxable service as no price is charged by service provider for the said goods received. Consequently, free supplies received by service provider were not required to be included in the taxable value of service provided by them. However, the situation under GST regime is similar to the position prevalent under erstwhile Central Excise Laws. Under GST regime, the provision contained in section 15(2)(b) of the CGST Act, 2017 explicitly includes any amount that the supplier is liable to pay but which has been incurred by the recipient of supply and has not been included in the price actually paid or payable for the goods or services or both. Furthermore, circular no. 47/21/2018-GST dated 8^th June 2018, has clarified that moulds and dies owned by the original equipment manufacturer which are provided to a component manufacturer (the two not being related persons or distinct persons) on FOC basis does not constitute a supply as there is no consideration involved. However, it is clarified that if the agreement requires component manufacturer to incur the costs of moulds and dies, in such situation, the amortized cost of moulds and dies needs to be included in the value of components supplied by the component manufacturer. Therefore, the terms of agreement are determinative factor while taking decision as to inclusion of the cost of materials supplied free of cost by the recipient. However, the clarification issued by the Circular was not referred by the Advance Ruling while pronouncing the decision. The Authority for advance ruling concluded that the cost of tools are required to be included in the value of components by placing reliance on the provisions contained in section 15(2)(b) of the CGST Act, 2017. Now, comes the question comes to mind is that who will be superior i.e. the circular or the judgment by Advance Ruling? Earlier also we have seen in the verdict of Apex Court in case of Dhiren Chemicals on the same issue. But this was related to circular versus Court decision. But there is no decision on circular versus Advance Ruling judgment.
Prepared by:Himanshu Bhimani

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PJ/Case Law/2018-2019/3487

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