Do we need to Reverse the credit of the GST on goods which are used for free supply under warranty period?
Warranty is a type of guarantee that a manufacturer or similar party makes regarding the condition of its product. It also refers to the terms and situations in which repairs or exchanges will be made in the event that the product does not function as originally described or intended.
Various kinds of goods are sold on which manufacture provide period-based warranty means if the goods face any issue the manufacturer repairs the same at his own cost which may involve replacement of spares.
Example:
If Mobile having 1 years warranty sold by an authorised dealer faces a hardware issue within the first year, the customer has the right to get it repaired free of cost. Sale price of the mobile includes the cost of warranty as well. Dealer repairs the Mobile and replaces say ₹ 10,000 worth of Parts and raises the invoice for these Parts to the manufacturer who bears the cost.
Parts so replaced are provided to the customer free of cost because at the time of purchase, the Mobile came with 1 year of warranty.
From the Point of the dealer, whatever Parts are replaced by him he had purchased those from the manufacturer and on behalf of the manufacturer has supplied it to the customer for a consideration and hence the question of reversal of its ITC does not arise but condition is that warranty was sold to the customer along with the Mobile & Sale Price include warranty as well & All conditions mentioned in Section 16 should be satisfied by manufacturer.
Hence the question of reversal of ITC does not arise.
Section 17 (5) (h) of the CGST Act, provides that ITC will not be allowed if goods are:
a. Lost
b. Stolen
c. Destroyed
d. Written off or
e. Disposed of by way of Gift or Free Samples
Goods supplied under warranty are not covered under any of the situations outlined in the above section.
FAQs issued by the CBIC on IT and ITES, the Government has clarified issues relating to warranty supply as under:
What would be the tax liability on replacement of parts (no consideration is charged from a customer) under a warranty and whether the supplier is required to reverse the ITC?
As parts are provided to the customer without a consideration under warranty, no GST is chargeable on such replacement. The value of supply made earlier includes the charges to be incurred during the warranty period. Therefore, the supplier who has undertaken the warranty replacement is not required to reverse the input tax credit on the parts/components replaced.
An Original Equipment Manufacturer (OEM) has an obligation to provide repair services to their customers in the warranty period. This activity is outsourced by OEM to ‘D’, who bills the OEM for the services he provides to the customer. What is the tax liability of ‘D’?
D’isprovidingservicetotheOEM.GSTispayableonthevalue of any supplies made by ‘D’ to OEM i.e. in respect of bills raised by ‘D’ on the OEM.
The Coram of Sri. T.G.Venkatesh, I.R.S., Additional Commissioner /Member, and Smt. K.Latha., M.Sc., (Agri), Joint Commissioner (ST)/ Member has held that “As parts are provided to the customer without a consideration under warranty, no GST is chargeable on such replacement. The value of supply made earlier includes the charges to be incurred during the warranty period. Therefore the replacement of the goods and service rendered during the warranty period without consideration does not attract GST separately. The warranty card, issued by the applicant has a condition that during the time of repair, transportation expenses and all other expenses have to be borne by the boat owner. If such cost are incurred by the applicant on behalf of the boat owner and is combined with warranty charges, taxes are applicable. Hence in cases where warranty services are rendered exclusively without combining any other service charges or incidental expenses incurred while rendering the warranty services, only will not attract GST”.
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