Taxability on Warranty Supply made during warranty period subsequent to original supply free of cost

• PRIOR TO GST ERA :

Transaction value was defined in explanation to Section 4 of Central Excise Act 1944 as :

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(d) “transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods;

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Specific provision was inserted vide Notification No. 3/2011 C.E. (N.T.) – dated 01-03-2011  inserting the proviso to Sub Rule (5) to Rule (3) w.r.t. Removal of Inputs as such during warranty period which provided :

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(5) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9:

Provided that such payment shall not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service for providing the output service:

Provided further that such payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty for final products

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Since, supply of service during warranty is free of cost, there was no question of payment of any service tax, since there was no consideration, since any activity carried by one person for another for consideration was only covered under the definition of “Service”.

Similarly, VAT / CST was levied when transfer of property of movable goods is made against consideration and therefore neither VAT nor CST was chargeable on supply during warranty being not covered under definition of “Sale”.

To conclude, there was no tax impact either of Central Excise Duty or Service Tax or VAT/ CST on Supply during Warranty period free of cost.

As per definition and explanation inserted to the definition in CCR, 2004, input includes: “any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products.”

• POST GST ERA :

Section 7 of CGST Act 2017 provides “Meaning & Scope of Supply” defining the taxable event of supply.

In Accordance with Section 9 of CGST Act 2017, GST is leviable on supply of goods & Services and therefore definition of Goods & Services are given below :

“Goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Inclusions:

√ Every movable property

√ Actionable claim

√ Growing crops

√ Grass

√ Things attached to or forming part of the land which are agreed to be cut off before supply or under a contract of supply

Exclusions:

√ Money and securities

The definition of goods is borrowed from Sale of Goods Act, 1930 with the exception that goods under GST includes actionable claim and excludes securities whereas definition under Sale of Goods Act, 1930 includes securities and excludes actionable claims.

Goods is defined under Sale of Goods Act, 1930 as:

“goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale

“Services’’ means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Inclusions

√ Anything other than goods

√ Activities relating to the use of money

√ Transactions relating to use of money or conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination against a consideration

Exclusions

√ Money and Securities

The definition of services is wide and encompasses everything other than goods.

Section 7 clearly provides expression supply, which is reproduced below :

Section 7 : Scope of supply.

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1) For the purposes of this Act, the expression “supply” includes–

a) all forms of supply of goods or services or both such as sale, transfer, barter,exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

b) import of services for a consideration whether or not in the course or furtherance of business;

c) the activities specified in Schedule I, made or agreed to be made without a consideration; and

d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

2) Notwithstanding anything contained in sub-section (1),––

a) activities or transactions specified in Schedule III; or

b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—

a) a supply of goods and not as a supply of services; or

b) a supply of services and not as a supply of goods.

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Since Supply during warranty period is without consideration, let us examine whether it covers under Schedule I to Section 7 of CGST Act 2017 which is reproduced below:

Schedule I :

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SCHEDULE I[See section 7] ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.

2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

3. Supply of goods—

(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

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In view of the Schedule I, it can be covered under Serial number 1 of the schedule, since ITC on all the inputs and input services is availed.

However, Section 17 (5)(h) of CGST Act 2017 provides :

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Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

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Transaction Value has been mentioned in Section 15 of CGST Act 2017, which is reproduced below :

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(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(2) The value of supply shall include–––

(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;

(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 services or both;

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and

(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Explanation.––For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.

(3) The value of the supply shall not include any discount which is given––

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

(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.

(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.

Explanation.—For the purposes of this Act,––

(a) persons shall be deemed to be “related persons” if––

(i) such persons are officers or directors of one another’s businesses;

(ii) such persons are legally recognized partners in business;

(iii) such persons are employer and employee;

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;

(v) one of them directly or indirectly controls the other;

(vi) both of them are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person; or

(viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

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It is pertinent to note the following provisions of CGST Act 2017 and CGST Rules 2017 :

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31.

(1) A registered person supplying taxable goods shall, before or at the time of,—

(a) removal of goods for supply to the recipient, where the supply involves movement of goods; or

(b) delivery of goods or making available thereof to the recipient, in any other case, issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed:

Provided that the Government may, on the recommendations of the Council, by notification, specify the categories of goods or supplies in respect of which a tax invoice shall be issued, within such time and in such manner as may be prescribed.

(2) A registered person supplying taxable services shall, before or after the provision of service but within a prescribed period, issue a tax invoice, showing the description, value, tax charged thereon and such other particulars as may be prescribed:

Provided that the Government may, on the recommendations of the Council, by notification and subject to such conditions as may be mentioned therein, specify the categories of services in respect of which––

(a) any other document issued in relation to the supply shall be deemed to be a tax invoice; or

(b) tax invoice may not be issued.

(3) Notwithstanding anything contained in sub-sections (1) and (2)––

(a) a registered person may, within one month from the date of issuance of certificate of registration and in such manner as may be prescribed, issue a revised invoice against the invoice already issued during the period beginning with the effective date of registration till the date of issuance of certificate of registration to him;

(b) a registered person may not issue a tax invoice if the value of the goods or services or both supplied is less than two hundred rupees subject to such conditions and in such manner as may be prescribed;

(c) a registered person supplying exempted goods or services or both or paying tax under the provisions  of section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed:

Provided that the registered person may not issue a bill of supply if the value of the goods or services or both supplied is less than two hundred rupees subject to such conditions and in such manner as may be prescribed;

(d) a registered person shall, on receipt of advance payment with respect to any supply of goods or services or both, issue a receipt voucher or any other document, containing such particulars as may be prescribed, evidencing receipt of such payment;

(e) where, on receipt of advance payment with respect to any supply of goods or services or both the registered person issues a receipt voucher, but subsequently no supply is made and no tax invoice is issued in pursuance thereof, the said registered person may issue to the person who had made the payment, a refund voucher against such payment;

(f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

(g) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue a payment voucher at the time of making payment to the supplier.

(4) In case of continuous supply of goods, where successive statements of accounts or successive payments are involved, the invoice shall be issued before or at the time each such statement is issued or, as the case may be, each such payment is received.

(5) Subject to the provisions of clause (d) of sub-section (3), in case of continuous supply of services,––

(a) where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment;

(b) where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment;

(c) where the payment is linked to the completion of an event, the invoice shall be issued on or before the date of completion of that event.

(6) In a case where the supply of services ceases under a contract before the completion of the supply, the invoice shall be issued at the time when the supply ceases and such invoice shall be issued to the extent of the supply made before such cessation.

(7) Notwithstanding anything contained in sub-section (1), where the goods being sent or taken on approval for sale or return are removed before the supply takes place, the invoice shall be issued before or at the time of supply or six months from the date of removal, whichever is earlier.

Explanation.––For the purposes of this section, the expression “tax invoice” shall include any revised invoice issued by the supplier in respect of a supply made earlier.

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Rule 55 of CGST Rules 2017 clearly deals with the provisions when goods can be supplied without invoice

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(4) Where the goods being transported are for the purpose of supply to the recipient but the tax invoice could not be issued at the time of removal of goods for the purpose of supply, the supplier shall issue a tax invoice after delivery of goods.

(5) Where the goods are being transported in a semi knocked down or completely knocked down condition –

(a) the supplier shall issue the complete invoice before dispatch of the first consignment;

(b) the supplier shall issue a delivery challan for each of the subsequent consignments, giving reference of the invoice;

(c) each consignment shall be accompanied by copies of the corresponding delivery challan along with a duly certified copy of the invoice; and

(d) the original copy of the invoice shall be sent along with the last consignment

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In other words, if free supplies during warranty is made, it can be stated that it is covered that warranty is already included in the price of the goods which is supplied. However, inclusive part of transaction value as specified in Section 15 of CGST Act 2017 do not include the warranty in line with earlier transaction value as provided in the explanation in Section 4 of Central Excise Act 1944.

Similarly, there is no provision in CGST Act 2017 of prescribing the procedure of dispatch of such goods of which price is stated to be included in the supply of goods already supplied. But, though there is specific provision of dealing with the advances which has been received against supply. however, the supply of the goods which has been already made on which tax is already paid and such value includes the value of subsequent supply if any to be made during warranty made but such supplies not been defined in coverage of transaction value as per Section 15 of CGST Act 2017.

Moreover, Section 34 (2) of CGST Act 2017 provides that :

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Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

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In other words, all supplies effected during the year further supplies, tax invoice or debit note or credit note pertaining to such supply can be made only upto 30^th September of subsequent year.

Warranty might be more than one year of can be extended further upto 10 years for certain specified goods. Therefore, whether such free supplies made during warranty will attract tax or will be covered as already tax paid goods being covered under the price of originally supplied goods.

Unfortunately, there is no specific provision for not paying any tax on supply of goods or services without consideration during warranty period. Rather, there are specific provisions to include such supply which has been made without consideration when ITC has been taken is to be considered as taxable supply. irrespective of the fact that  the price of such supply might have been included in the price of goods already supplied.

Further there is specific provision under section 17 sub-section 5 (h) where ITC should not be availed in case of

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Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

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In other words, anything supplied free of cost or without consideration where ITC is taken will be considered as taxable supply or no ITC will be allowed on such good which are supplied without consideration. In the GST era no ITC will be allowed if payment of such supplies are not made within 180 days. No consideration / payment will be received within 180 days from the date of supply since it is FOC.

It cannot be stated that consideration of such supplies made during the warranty periods is received as advance as consideration of original supply nor it can be termed the goods has been supplied in part in terms of section 34 of CGST Act, read with CGST Rules. Any supply has to be effected either of following documents :

1. Tax invoice

2. Bill of supply

3. Receipt Voucher

4. Delivery Challan without invoice

5. Delivery Challan

Free supply during warranty where input tax credit has been availed will be treated as taxable supply and to be supplied against tax invoice or alternatively when ITC has not been availed on such supply then it will be nontaxable supply and to be supplied against bill of supply.

Alternatively if provision of earlier law is required to be followed in absence of specific provision relating to warranty in GST era, how supply can be effected without payment of GST or without availment of ITC.

The above question remain unanswered in GST era, therefore in My opinion either it has be treated as taxable supply and GST has to be paid or no ITC to be availed so as to make such supply as non-taxable supply.

Warranty is a written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary within a specified period of time. Depending upon the nature of contract, delivery model, the warranty can be catered to either the manufacturers directly or then through dealers. Warranty is a service as per definition of service provided in CGST Act, 2017.

As per CBEC FAQ Q6, Composite supply is a supply consisting of two or more taxable supplies of goods or services or both or any combination thereof, which are bundled in natural course and are supplied in conjunction with each other in the ordinary course of business and where one of which is a principal supply. For example, when a consumer buys a television set and he also gets warranty and a maintenance contract with the TV, this supply is a composite supply. In this example, supply of TV is the principal supply, warranty and maintenance service are ancillary.

Warranty is considered as a taxable supply, part of the composite supply involving supply of TV. The consideration received as part of composite supply is towards the supply of TV and “the promise to repair or replace” and not towards the supply of goods under warranty. Therefore, the supplies under warranty will be treated as supplies without consideration.

Free of cost supplies made, whether under warranty or otherwise, would qualify as supply in accordance with Schedule I of CGST Act, 2017. There is no specific exclusion to Schedule 1 point 1, and the supplies made for the purpose of warranty will be a taxable supply once ITC is availed. If the intention was to exclude such supplies under warranty, wordings similar to CCR would have been incorporated under GST.

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 CMA Ashok Nawal

Founder of Bizsolindia Services Pvt. Ltd.

Central Council Member of Institute of Cost Accountants of India

Email : nawal@bizsolindia.com