In re Precision Camshafts Limited (GST AAR Maharashtra)
Question: – Whether the activity of design and development of patterns used for manufacturing of camshafts, for a customer is a composite supply, the principal supply being supply of services?
Answer :- The activity of design and development of patterns used for manufacturing of camshafts, for a customer is a supply of service in the form of intermediary services.
Read AAAR Order: GST on designing and development of tools for the overseas OEMs/Machinist
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, MAHARASHTRA
PROCEEDINGS
(Under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
The present application has been filed under Section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act” respectively ] by M/s. Precision Camshafts Limited, the applicant, seeking an advance ruling in respect of the following question.-
Whether the activity of design and development of patterns used for manufacturing of camshafts, for a customer is a composite supply, the principal supply being supply of services?
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression ‘GST Act’ would mean CGST Act and MGST Act.
2. FACTS AND CONTENTION – AS PER THE APPLICANT FACTS:
The submissions made by M/s Precision Camshafts Limited, the Applicant, are as under:-
2.1 The applicant manufactures camshafts and sells the same to domestic as well as overseas customers. The overseas customers may be original equipment manufacturers (“OEM’s”) and use the camshafts for manufacturing engines such as Ford, General Motors do Brasil LTDA etc. or maybe machinist such as Musashi who would further supply the same to OEMs (“Machinist”).
2.2 The camshaft controls engine power, emissions and fuel consumption and are critical components of engines. The present advance ruling is being filed by the Applicant, in relation to transactions with the overseas OEMs/ Machinists.
2.3 The OEMs / Machinists place orders for camshafts on PCL, which are sent outside India. Since such supplies qualify as export of goods under GST Laws, therefore, the same qualify to be a zero-rated supply. Applicant at present is availing the benefit of such zero rating by exporting the said camshafts after submitting appropriate Letter of Undertaking and without payment of GST.
2.4 Given that each camshaft is being manufactured for use in a model of a vehicle, it is integral that the camshaft conforms to the specifications of the said model. The camshafts are critical in controlling the various aspects of an engine. Accordingly, for the purpose of manufacture of the camshafts, applicant needs patterns and tools according to the specifications of the OEMs/Machinists, the supply of which is the obligation of the overseas OEMs/ Machinists.
2.5 for operational efficiency and logistics issues, it is industry practice that the said tools are made in India. The OEMs/Machinist outsource the following tasks to the Applicant:-
(a) Assistance in designing and process planning for the manufacture of the tools.
(b) Identify and appoint a third party vendor to manufacture such tools as per the approved specifications.
(c) Coordinate with such third party vendors for manufacture of tools as per the approved specifications
The Applicant charges a fee for the same from the OEMs / Machinists.
2.6 . A detailed step wise process flow of the end to end activity, undertaken by the Applicant is as under:-
> OEM/ Machinist sends a request for quotation to the Applicant’s marketing team;
> The marketing team hands over the drawing to the Applicant’s cross functional team who have thorough knowledge of camshaft manufacturing and workability of a design;
> The cross functional team conducts a feasibility study on the design and a feasibility report is prepared to analyze if there is any abnormal requirement of OEM/Machinist in the drawing provided;
> Once the cross functional team, declares the drawing to be feasible for the manufacture of camshaft, marketing team prepares and shares the techno-commercial offer with the OEM/ Machinist;
> After submission of the techno-commercial offer, detailed discussions take place between the Applicant and OEM/Machinist Once, and techno commercial agreements are executed and the OEM/Machinist releases the purchase order (PO) for tooling, purchase of prototype etc.
> Post raising of such PO, the Applicant undertakes the manufacturing process, planning and development of the camshaft. Applicant’s scope of work also includes contract review for OEM/Machinist specific requirements and tooling procurements;
> Thereafter, the tooling procurement and internal validation is undertaken by the Applicant. In this regard, the following activities are undertaken by the Applicant:-
– Tool designing – Applicant’s development and tooling team prepares the required tooling design/drawings /sketches etc.
– Tool Procurement – The tooling design data along with purchase requisition is forwarded to the purchase department for further procurement process;
– Purchase team works with the third party approved vendor/s for manufacturing of the tools as per the tooling design;
– Once the tools are manufactured, the tools are thoroughly inspected to confirm if all tools are as per the specifications. Once these are found to be as per specifications, the Applicant conducts a physical internal validation by manufacturing camshafts and confirms if the camshaft is as per the data / specifications shared by OEMs / Machinists In the request for quotation.
– After successful internal validation, the Applicant, starts working on manufacturing of the prototype / pilot lot of camshafts in accordance with the PO released by OEMs/Machinists and ships it to them.
– Based on the approval obtained from the OEM/Machinist, applicant starts manufacturing prototypes and ships it to OEMs / Machinists for testing purposes. Once the OEM/Machinist approves the lot, PCL raises tooling invoice.
– Based on the approval of the prototypes, PCL starts manufacturing and supplies serial production camshafts according to customer’s weekly / fortnightly / monthly schedule.
2.7 As mentioned above, the Applicant assists the OEMs / Machinists to create a prototype on the basis the broad specifications provided by the OEMs / Machinists. The OEMs /Machinists raise a separate PO for such activity performed by the Applicant in this regard. Applicant charges a fee for the same.
2.8 . The PO is raised in addition to and separate from the PO that is being raised on the Applicant for supply of camshafts. Therefore, in essence the overseas OEMs / Machinists place two orders on PCL – (i) for supply of camshafts; and (ii) for assistance in designing and development of patterns and tools to manufacture the camshafts.
2.9 Applicant, on instructions of the OEMs / Machinists and on the basis of the specifications agreed between the OEM / Machinist identifies and engages a third party Indian manufacturer to manufacture the pattern and tools. Using such patterns and tools, the Applicant manufacturers a camshaft prototype, which is sent to the overseas OEM / machinist for confirmation of design. Once this prototype is confirmed, the same is used for manufacturing the camshaft.
2.10 Once the sample camshaft is approved, PCL raises its invoice for the assistance in design and development charges of patterns and tools on the overseas OEM/Machinist.
2.11 The overseas OEMs/Machinists pays consideration for assistance in manufacturing process planning (including designing and development of prototype) in foreign currency. The ownership of tools lie with the OEMs/ Machinists and can only be used to manufacture the goods of the OEMs/Machinists who are the owner of such tools.
2.12 It is relevant to note that contractually, an OEM/Machinist is bound to provide tools to the applicant. Applicant does not possess any technical capability to manufacture patterns and tools but has the technical expertise to develop examine and analyse the feasibility of a design, manufacturing process planning for tools which are critical to the manufacturing process.
2.13 Therefore, applicant in the present case, have two output activities (a) Supply of finished goods i.e. camshafts and (b) assistance in designing and development of patterns and tools used for manufacture of camshaft.
2.14 With respect to “Assistance in design and development of patterns used for manufacture of camshaft”, the applicant is engaged in a composite supply of the following:-
a. Understanding the designs/drawing of patterns and tools used for manufacture of camshafts.
b. Identifying third party who can manufacture the pattern and tools as per the design/drawings.
c. Explaining and closely working with third party manufacturer to develop the patterns and tools to manufacture prototype /serial production camshafts.
d. Engaging the third party manufacturers for supply of tools.
e. Overall assistance to overseas OEMs / machinist in relation to provision of tools to applicant itself.
B. APPLICANT’S INTERPRETATION OF LAW APPLICANT’S SUBMISSION FOR QUESTION:
2.15 With the introduction of the GST laws, Applicant has reassessed the classification of Subject Transaction. In Applicant’s view, the Subject Transaction is a composite supply with the principal supply being supply of services as reasoned in subsequent paragraphs.
2.16 As per Section 7 of the CGST Act, 2017, the term supply includes all forms of supply of goods or services or both by way of sale, transfer, barter, lease etc. The phrase ‘goods and services’ are defined under Section 2(52) and 2(102) respectively of the CGST Act.
2.17 As per Section 2(30) of the CGST Act, a composite supply is a supply where:-
(a) The supply consists of two or more taxable supply of goods or services or both;
(b) These shall be supplied in conjunction with each other and are naturally bundled;
(c) One of the supply shall be a principal supply
Further, as per Section 8 of the CGST Act, in cases of composite supply, the classification of the transaction and the applicable rate of tax is to be determined as per principal supply.
2.18 The term ‘principal supply’ is defined under Section 2(90) of the CGST Act as : “Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary”
2.19 In the present case the OEM customers expect that the Applicant would assist in manufacturing process planning based on the specifications received from the OEM and appoint a third party vendor to manufacture the tools. Such tools and patterns would not be available separately. The elements are normally advertised as a package which would be available for a single price.
2.20 In the present case, admittedly the provision of tools to PCL for manufacture of camshafts is the responsibility of the overseas OEM. In this regard applicant mentions that engaging vendors for manufacture and supply of camshafts, is an REP process followed by most industry players. Therefore, all the above supply constitute a composite supply on part of applicant. Further, the principal supply in such composite supply is that of services for manufacture of fully functional camshaft. This is because on the basis of the skillset involved in designing and drawings of patterns that the tools are manufactured. Further the ownership of tools always remain with the overseas OEM and the Applicant has no rights to use the same for other customers. Also after the life span of the tools, the same would be scrapped by the Applicant.
2.21 Additionally, value of the activity performed by the Applicant, is driven by the assistance rendered in respect of manufacturing process planning and not the value of material used for manufacture of the tools per se also indicates towards the fact that the principal supply is the assistance involved in designs and drawings and development of prototype on the basis of which the entire efficiency of camshafts depends. Below mentioned data is reproduced on an illustrative basis:
