In re Lear Automotive India Private Limited (GST AAR Maharashtra)
Whether amortized value of the tool received on Free of Cost (FOC basis from the customer is required to be included in the value of finished goods manufactured and supplied by the applicant to the customer?
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, MAHARASHTRA
The present application has been filed under section 97 of the Central Goods and Services Tax Act, the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and t”] by Lear Automotive India Private Limited, the applicant, seeking an advance ruling in f the following questions:
Whether amortized value of the tool received on FOC basis from the customer is required to be included in the value of finished goods manufactured and supplied by the applicant to the customer?
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 provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the “GST Act”.
02. FACTS AND CONTENTION-AS PER TILE APPLICANT
The submissions, as reproduced verbatim,could be seen thus-
Statement of relevant facts having a bearing on the question on which advance ruling is required.
1. Lear Automotive India Pvt. Ltd. (hereinafter referred to as Applicant) is having its office at E-25, 26 & 27, MIDC Bhosari, Pimpri-Chinchwad, Maharashtra – 411 026 and also having various regional offices located at various other places in India. The Applicant is engaged in the manufacture of automotive seats’, which is manufactured in its various plants located in the state of Maharashtra.
2. The present application is filed in respect of valuation of supply of automotive parts (hereinafter referred to as “final goods”), which are manufactured out of tools provided by the customers on Free of Cost (FOC) basis to manufacture the products as per their requirements.
3. The Applicant manufactures automotive seats for various customers, such as Ford Motor Private Limited, Volkswagon India Private Limited, M/s Mahindra & Mahindra Ltd, General Motors, etc. (hereinafter referred to as customers’) by using tools/moulds either provided by them or owned by them.
4. Generally, the Applicant gets the tool manufactured from third party manufacturer as per the requirements of the customer. Thereafter the property in the said tool gets transferred from third party manufacturer to the Applicant and from the Applicant to the customer. Though the property in tool gets transferred to the customer eventually, the possession remains with the Applicant and it uses the same to manufacture the products as per the requirement of the customers.
5. There are also cases where customers direct the Applicant to procure specific part from a third-party manufacturer. For manufacture of the said tool, the customers give tooling advance to the said third-party manufacturer. Thereafter, the tool is developed and invoice is raised on the customer. The third-party manufacturer manufactures parts by using above tools and supplies the said parts to the Applicant. The Applicant makes the payment to third party manufacturer for components supplied. In above scenario, the third-party manufacturer may include Tool amortization value in components supplied to the Applicant.
6. There is a further possibility that the customers provide the tools to the Applicant on FOC basis to manufacture the products as per its requirement.
7. Similarly, the Applicant also engages another component manufacturer to manufacture the products for the Applicant which are used by the Applicant for its final products and in this regard, the tooling cost is first absorbed by the Applicant and then recharged to the OEM. In such cases, the possession of the tool would remain with another component manufacturer.
8. the present application seeks to understand whether the amortized value of the tool cost needs to ded to the value of the final goods supplied to the customers under the GST laws.
9. Under the erstwhile regime of Central Excise, Rule 6 of the Central Excise Valuation Rules, 2000 required an assessee to calculate the intrinsic value of the excisable goods by including any additional consideration flowing directly or indirectly from the buyer to the assessee. In view of same, the Applicant was amortizing the value of such tools supplied/provided by the customers on FOC basis and was including the same in the assessable value of the final goods for discharging applicable Central Excise Duty.
10. However, w.e.f. 1st July 2017, Central Goods and Service Tax Act, 2017 (hereinafter referred to as “CGST Act”) has replaced the erstwhile Central Excise Regulations and does not include any pari-materia provision, similar to Rule 6 of Central Excise Valuation Rules, 2000.
11. Under the aforesaid circumstances, the Applicant seeks the present advance ruling to understand whether the amortized value of the tool cost needs to be added to the value of the final goods supplied to the customers under the GST laws.
Statement containing applicant’s interpretation of law and/or facts, as the case may be, in respect of question(s) on which advance ruling is required.
2. Question requiring advance ruling,
2.1. This advance ruling is sought to ascertain whether the amortized value of the tool cost which are provided/supplied on FOC basis by the customer needs to be added to the value of the final goods supplied to the customers under the GST laws?
3. Applicant’s Interpretation-
3.1. In order to analyse the present issue, reference is made to Section 7(1)(a) of the CGST Act, which defines the term “supply’ as under:
7. (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, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
3.2. Section 7(1) (a) of CGST Act defines the term ‘supply’ widely to include all forms of supply of goods or services or both such as sale, transfer, disposal, etc made or agreed to be made for a consideration in the course or furtherance of business.
3.3. In the present case, supply of automotive parts or final goods, which are manufactured out of the tools developed by the Applicant or the unrelated vendors at the behest of the customers, are squarely covered under the definition of supply defined under Section 7 as there is supply for a consideration, which is undertaken in the course or furtherance of business.
3.4. In so far as the valuation of the supply of final goods is concerned, the erstwhile Central Excise regime under Rule 6 of Central Excise Valuation Rules, 2000 required adoption of intrinsic value as the excise duty was levied on the activity of manufacture and whatsoever activity was contributing to the said manufacturing activity was included in the assessable value irrespective of the fact as to who owned the inputs and capital goods.
3.5. However, under CGST Act, Section 15 governs valuation of the supply, which in pertinent part provides as under:
“15. (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. (V 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 services or both; “
…. Emphasis Supplied
3.6. In terms of Section 15(1) of the CGST Act, value of taxable supply shall be the transaction value which is the price paid or payable by the recipient) provided the supplier and recipient are unrelated parties and price is the sole consideration for the supply.
3.7. Further, Section 15(2)(b) specifically states that where any amount which the supplier is liable to Pay in relation to a supply but the same is incurred by the recipient on behalf of supplier, then such value is required to be included in the transaction value.
3.8. To determine whether in the present case, value of taxable supply paid by recipient to the supplier is the ‘sole consideration, it is necessary to refer to the definition of the term ‘consideration
3.9. In this regard, the term ‘consideration has been defined under Section 2(31) of the CGST Act, to mean any payment (in money or otherwise) or monetary value of any act or forbearance which is made in respect of, in response to or for the inducement of supply. Such consideration can flow from the recipient of supply or any other person and it could be either monetary or non-monetary consideration. Further to the above, the supply and the payment of consideration thereof must have reciprocity with each other. In other words, the term ‘consideration’ means a reasonable equivalent or other valuable benefit passed on by the promisor to the promisee or by the transferor to the transferee.
3.10. Reading of the above sections indicates that the transaction value agreed between the parties is only relevant for purposes of GST. However, in terms of Section 15(2)(b) of the Act, if any amount which the supplier is liable to pay but the same has been incurred by the receiver of the supply, then the said amount has to be added while determining the transaction value.
3.11. Thus, it is a matter of commercial arrangement between the parties as to what is in the scope of both the parties. Once it is clear that a particular activity is in the scope of receiver of the supply, then there is no question of adding the value of the same for determining the transaction value. The question of addition would arise only in the cases where something was in the scope of the supplier and the same has been provided by the receiver then in such cases the amount so spent by the receiver would be added in the transaction value.
3.12. As a consequence, once the arrangement is clear from the beginning as to what is in the domain of the supplier and the receiver and both the parties are fulfilling their own obligations, then there should not be any notional addition in the transaction value for the purposes of GST
3.13. In the present case, the Applicant and its customers are not related parties. The only question which requires examination is whether price paid by the customers is the sole consideration for the supply of parts made by the Applicant. In this regard, providing of the tool which is in the domain of the receiver of the supply as per the contractual terms cannot said to be non-monetary consideration provided by the receiver of the supply to the provider of the supply since upon paying the tool development charges, the customers are not incurring any expenses, which the Applicant was liable to incur. Further, the ownership in the tool remains with the customers and the development of tool was always meant to be borne by the customers. Thus, Section 15(2)(b) of the CGST Act 2017 will not be applicable in the facts of the present case and the value of the supply of final goods should be based on transaction value as provided under Section 15(1) of the CGST Act 2017.
3.14. In addition to the above, there is no specific provision provided in the CGST Act or the Rules made thereunder to make such inclusion in the value as it existed under the erstwhile Central Excise Regulations. Unless there exists a specific provision for inclusion of free of cost supplies received from the buyer of the goods or to add the amortized value of the tool or dies provided by the receiver of the goods on FOC basis, such an addition cannot be made to the value of the taxable supply.
3.15. Reliance in this regard is placed upon the judgment of Hon’ble Supreme Court in the case of Moriroku UT India (P) Ltd vs State of U.P. [2008(224) ELT 365 (SC)], wherein the Hon’ble Supreme Court in the context of UP Sales Tax held that the price of moulds manufactured by customer so that the vendor could use the same in manufacture of final components as per the specifications of the customer, would not be includible in the assessable value of the final components sold by the vendor to the customer as the cost of the same has been incurred by the customer and not the vendor. The Hon’ble Apex Court further held that the amortization cost calculated in terms of Rule 6 of Central Excise Rules cannot be included for the purposes of taxation under Section 3 of the U.P. Sales Tax Act as there is no law or provision to that effect under the U.P Sales Tax Act. The Hon’ble Apex Court held as under in this regard:
“…. Therefore, when excise law sceks to tax the value, the concept therein cannot be bodily lifted and incorporated in Section 3 of the U.P. Trade Tax Act, 1948, which essentially deals with ascertainment of the prices-structure depending upon the negotiations between the parties. Moreover, the effect of clause (ii) of Explanation Ito Rule 6 of Excise Valuation Rules, 2000 is that where any tools or dies or moulds are supplied by the buyer free of charge or at a reduced costs for use in connection with production of the goods, the value apportioned as appropriate to such tools, moulds etc., to the extent such value has not been included in the price paid or payable, has to be treated as the money value of additional consideration flowing directly or indirectly from the buyer/customer to the assessee in relation to sale of goods being valued and aggregated accordingly For levy of excise duty, “value” is to be determined per unit of excisable goods. Tools, dies, moulds etc. have their own life span and will be used for estimated production during their useful Consequently, depending upon the expected useful life and/or expected number of units likely to be produced, value of tools, dies, moulds etc. supplied by the buyer/customer free of charge to the appellant is to be appropriately apportioned per unit of production. This is where the concept of amortisation comes in specifically in Rule 6. The amount so apportioned is required to be added to the price/transaction value as per clause (ii) of Explanation Ito Rule 6 read with Section 4(1)(b). The important thing to be noted is that this entire exercise of loading/adding to the transaction value is exclusively for determination of assessable value for central excise purposes and to fulfill the requirement of Section 4 which provides for measure for levy of excise duty. To the same effect is our judgment in the case of CoC v. Ferodo India Pvt. Ltd. vide Civil Appeal No. 8426/02 under Rule 9(1)(c) of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, which also refers to the addition of the cost of royalty payment to the transaction value. Therefore, Rule 6 of Excise Valuation Rules, 2000 creates the deeming fiction only for the purposes of Section 4(1)(b) of the 1944 Act and for laying down the measure for levy of excise duty. It provides for items which constitute additional consideration. There is no such provision in Section 3 of the 1948 Act. Therefore, one cannot borrow and automatically apply the concept of amortised cost to Section 3 of the 1948 Act.
20. Before concluding, it may be clarified, that, in the present case, moulds were manufactured by the buyer/customer so that the auto components could be manufactured by the appellant in terms of the specifications given by the buyer. Therefore, the cost of manufacture of these moulds was incurred by the buyer/customer and not by the appellant. In our judgment, we have termed the “amortisation cost” as notional in the sense that it is not the cost in the hands of the appellant. As stated above, Rule 6 of Excise Valuation Rules, 2000 refers to items of additional consideration. But for Rule 6 it was not possible for the Department under the 1944 Act to load such items to the transaction value of the final product. It is for above reasons, particularly because cost of manufacture is not incurred by the appellant but by the customer, such cost cannot be added to the price of the final product, particularly when there is no law to that effect.
21. Accordingly, we hold that the High Court had erred in holding that the amortization cost calculated in terms of Rule 6 of the excise Valuation Rules, 2000 is includible in the sale price of auto components sold by the appellant herein to its customer, Ws. Honda Siel Cars India Ltd.”
…. Emphasis Supplied
3.16. It is submitted that the current GST provisions are aligned with the VAT/Sales Tax Regulations as existed in as much as the assessable value is a transaction value agreed between the parties barring few specific instances which are not the subject matter of present case. Hence the law laid down by the Hon’ble Supreme Court in the above said case would squarely applicable in the present case.
3.17. In terms of above judgment of Hon’ble Apex Court and the applicable provisions of CGST Act and the Rules made thereunder, the amortized value of the tool should not be added to the value of the final goods as there is no specific provision under the CGST Act or rules made thereunder to that effect.
Conclusion
3.18. In view of the above discussion, it is clear that in the present case, there should not be any notional addition of the amortized value of the tool in the taxable value of the supply of final goods to the customers by the Applicant and also by its vendor to the Applicant as well.
Additional Submissions made on 18.07.2018 by the Applicant-
Under the GST regime, goods which are supplied free of cost would not form a part of the value of the supply under Section 15 of the CGST Act.
A.1. The Applicant submits that goods which are supplied free of cost (FOC) would not form a part of value of the taxable supply under the GST regime. Hence, the tools that are provided FOC to the Applicant by its customer would also not be included in the value of the supply. In this regard, reference is made to the Section 15(1) of the Central Goods & Services Tax Act, 2017 (hereinafter ferred to as “CGST Act”) which defines the value of supply as under:
“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.”
……. Emphasis supplied
A.2 A close reading of the afore-stated provision provides that the value of supply is the price which is actually paid or payable for the supply of goods or services or both between two non-related persons. Further, such price paid or payable should be the sole consideration for the value of supply. In the present fact scenario, the Applicant and its customers agree to a certain price before placing the purchase order on the Applicant and such price is the only consideration that the Applicant is entitled to receive for the goods supplied by it.
A.3 Further Section 15(2) of the CGST Act enlists the things which are to be included while calculating the value of supply. These are provided as under
“(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;
