In re Precision Camshafts Limited (GST AAAR Maharashtra)
The moot issues before us are as to whether activity of appellant is an intermediary service as held by the MAAR or as contended by the appellant, an activity of design and development of patterns/tools used for manufacturing of camshafts, for a overseas customer is a composite supply where the principal supply is supply of services.
As per submission made by appellant, it is appellant who prepares the drawing and designs of tool / pattern and also check feasibility of its manufacturing. The techno commercial offer is being made by the appellant to overseas OEM / Machinist. Overseas OEM / Machinist releases the purchase order, for specific number of units of tools, after approval of techno commercial offer. The appellant undertakes in-house drawing, design, modelling, simulation and documentation for manufacture of the tools. Whereas, it hires third party vendor for machining (manufacturing) the tool as per specification provided by the appellant. The third party vendors charge for the manufacture of tools, which is paid by the appellant. The third party vendor delivers the tool to appellant, of which appellant further raises supply invoice to overseas OEMs / Machinist specifying therein the description of goods (tools), quantity, rate per unit, etc. However, as industry practice in this sector appellant keeps such tools with it for further use in manufacture of camshaft.
The invoice raised by the appellant also exhibits that the tools of specific designs as per the specifications of overseas customer are supplied to them. Thus, form perusal of the purchase order placed by the overseas customers and supply invoice raised by appellant, it is clear that dominant intention of overseas customer is to get the supply of manufactured pattern/tools from the appellant as per specification provided by them.
From the facts of the case, it is clear that the appellant is making such supply of tools on his own against the consideration which is price for tools and hence, there is no issue of receiving commission from overseas customers. Appellant is not facilitating any supply between overseas entity and third party vendor. The impugned transaction is supply of goods i.e. tools from appellant to customer on principal to principal basis. Considering these facts of and definition of “intermediary” provided under section 2(13) of the IGST Act, 2017, it is very much clear that appellant is not an “intermediary”. Hence, the findings of the MAAR that the impugned activity is an intermediary service is erroneous and not acceptable.
The appellant first manufactures the tool as per the requirements and specification given by the customer. This tool is retained by the appellant and used for the manufacture and supply of camshafts. The appellant raises the tax invoice for this tool in the name of overseas customer in convertible foreign exchange though the tool is not physically exported to the customer. The ownership of the tools remains with the overseas customers. Thus, it is amply clear that impugned transaction between appellant and overseas customer is of supply of goods i.e. pattern/tool of specified specifications.
The similar issue in case of IBEX Engineering Pvt Ltd vs. State of Karnataka has been decided by Hon’ble High Court of Karnataka [Sales Tax Appeal 91 of 2009 Order dated 9-2-2012], where appellant manufactured Moulds as per the order of overseas customers and received the payment labelled as “Tool Development Charges” from its foreign associate for manufacturing of Moulds. As like present case, the Moulds never moved out of the factory and used for manufacture of engineering parts which are subsequently exported to the overseas customer. The High Court held the impugned transaction as a sale of goods i.e. Moulds and is exigible to VAT.
On careful perusal of the definition of the term “composite supply” and the essential conditions enumerated in the definition, it is seen that the composite supply comprising two or more taxable supplies of goods or services or both, or any combination thereof should be made by a taxable person to a recipient. However, in the instant case, considering the facts of the case, it is amply clear that impugned transaction between appellant and overseas customer is of supply of goods i.e. pattern/tool of specified specifications. Hence, contentions of the appellant that impugned transaction is composite supply where the principal supply is supply of services is not valid. In view of the above discussion, we hold that the impugned transaction is supply of goods i.e. pattern/tool of specified specifications.
FULL TEXT OF ORDER OF APPELLATE AUTHORITY OF ADVANCE RULING MAHARASHTRA
1. 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 such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.
2. The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “CGST Act” and “MGST Act”] by M/s. Precision Camshafts Limited, situated at D-5, D-6, D-7, D-7/1, MIDC, Chincholi, Solapur -413 255. (“hereinafter referred to as “Appellant or PCL”) against the Advance Ruling No GST-ARA-22/2020-21/B-36 dated 29.03.2022, pronounced by the Maharashtra Authority for Advance Ruling (hereinafter referred to as “MAAR”).
Also Read Order:- GST on design & development of patterns used for manufacturing of camshafts for Overseas Customers
BRIEF FACTS OF THE CASE
3.1 Precision Camshafts Limited (the ‘Appellant’ or ‘PCL’) is engaged in the business of manufacturing camshafts. Camshafts are a rotating shaft mounted in a 4-stroke engine. The Appellant sells these manufactured camshafts 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”)
3.2 The camshaft is used for manufacturing engines and contributes in controlling engine power, emissions and fuel consumption. The camshafts are critical components as a small amount of error or misalignment will either result in leakage of fuel through the exhaust route or insufficient power stroke. So, each camshaft is unique and made as per precise specification of respective engine.
Transaction details
3.3 The OEMs/ Machinists place orders for manufacturing camshafts on Appellant, which are physically sent outside India. Since such supplies qualify as export of goods under Goods and Services Tax (“GST”) laws, the same qualify to be a zero-rated supply. The Appellant at present is availing the benefit of such zero rating by exporting the said camshafts after duly complying with the procedural compliances such submitting Letter of Undertaking. The Appellant has filed refund applications for seeking refund of the GST paid on its procurements and the same has been granted by the tax authorities.
3.4 Given that each camshaft is being manufactured for use in a specific model of a vehicle, it is integral that the camshaft conforms to the specifications of the said model. Accordingly for the purpose of manufacture of the camshafts, Appellant needs patterns and tools to manufacture camshafts according to the specifications of the OEMs/ Machinists.
The supply of the patterns and tools to Appellant for manufacture of camshafts is the obligation of the overseas OEMs/ Machinists. However, for operational efficiency and logistic convenience, it is standard industry practice that the tools are made in India and supplied to the manufacturers (such as the Appellant).
3.5 The Appellant themselves undertake the designing and process planning for development of tools, which constitutes for the majority of supply. However, the Appellant hires third party vendor for machining the tools as per the specification provided by the Appellant. Machining is a process in which a metal is cut to a desired shape and size by a controlled material- removal process. The Appellant thereafter pays the third-party vendor for performing desired services.
3.6 Accordingly, the OEMs/Machinist outsource the following tasks to the Appellant:-
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
Step wise process flow
3.7 A step wise process flow of the end to end activity, undertaken by the Appellant us as under:-
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