In industries such as automobile and engineering, it is common practice where the vendors/job workers manufacture the goods such as dies and moulds for the manufacturer OEMs for use in production of components or parts. Such goods could be sent to the customers or the OEMs for approval and return. There would be instances wherein the goods would be used by the manufacturer without sending them for approval. Such customers may be within India or outside India. In such cases, it is important to understand the impact of GST.
In terms of Section 10 (1) (c) of IGST Act 2017, the place of supply of goods (other than import/ export) where the supply does not involve movement of goods by the supplier or the recipient is the ‘location of such goods at the time of the delivery’ to the recipient. Therefore, the general rule of considering the address of the customer’s location should not be applied when there is no movement of goods.
Therefore, if the customer is within the State, CGST & SGST would be applicable where supplier’s location and place of supply would be in same State. Even if the customer is outside the State, CGST & SGST are to be charged by the customer based on Section 10(1) (c) when there is no movement of goods. This would result in loss of credit to the customer.
It is relevant to understand that ‘export’ for the purpose of GST means taking the goods out of India to a place outside India. In terms of Section 11 of IGST Act 2017, place of supply of goods exported from India is location outside India. When the goods are not taken out of India, then the transaction would not be considered as ‘export’ and GST would be applicable. The place of supply would be location of goods at the time of delivery to recipient resulting in CGST & SGST liability.
A simple solution appears to be despatching the goods to the customer outside the State charging IGST and getting it back. However, many a times this would not be feasible due to transportation cost involved to transport to other State/ other country, timelines, weight of moulds and they may also be prone to damage during transportation due to which they may become useless.
The issue was also there in erstwhile VAT / sales tax laws as well. The Karnataka High court in case of IBEX Engineering Vs. State of Karnataka – 2012 held that when there is no actual movement of goods outside India, sales tax would be liable. The court also opined that the mere fact that the buyer may be outside India does not in any way detract from the transaction to be taken as a local sale as the goods can be delivered on behalf of the foreign buyer to any person available locally. Court expressed that when the assessee has received payment and the moment the goods have come into existence, the payment is with reference to the goods and so finished and the transaction gets completed and therefore, the assessee holds the goods on behalf of the buyer. Delivery can be actual or symbolic and the delivery in the instant case is definitely symbolic as once the goods have become the property of the foreign buyer and the assessee has not only held on behalf of foreign buyer but also has acted on the instructions of the buyer for by using the goods to further manufacture other goods for the use and benefit of the foreign buyer.
Recently in case of In re Dolphine Die Cast (P) Ltd (GST AAR Karnataka) – Ruling No. KAR ADRG 35/2020, it was held that in the case of manufacture of die by the applicant and invoiced to the recipient, without moving the goods, the applicant has to raise the tax invoice addressed to the foreign buyer and collect the CGST & SGST and discharge the liability.
Following are few of the possible options which professionals or taxpayers could consider mitigating the GST impact. It is important to seek professional advice before implementing as these options are yet to be tested in GST law and may need to be adopted considering the facts and circumstances.
A. Contract restructuring
Service element can be substantial in case of highly sensitive dies, moulds or tools. Designing of such goods and testing could be the major objective in most cases. Therefore, it is important to understand if the contract is for service or goods. If it is service, then the place of supply could be place of service recipient. If recipient is outside State but within India IGST can be charged which can be claimed as ITC by recipient. If recipient is outside India, the supply of service can be treated as export. If entire activity is not a service, then identification of service value and goods value can be an option to reduce the tax burden. For this purpose, the concept of composite supply should also be considered which could have impact on taxation.
B. Bill to ship to model
In terms of Section 10(1) (b), where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person, it shall be deemed that the said third person has received the goods and the place of supply of such goods would be the principal place of business of such person”. One question which could arise is whether the manufacturer of dies bill to customer and ship to his own place so that customer’s place could be treated as place of supply in case of inter-State supplies. If this is accepted, then customer would be able to take the ITC and issue job work challan on the manufacturer for such dies manufactured. Generally, shipping involves transportation. In the absence of transportation, this rationale may not be accepted.
C. Benefit of invoicing provision
A registered person who is supplying the taxable goods shall before or at the time of removal of goods for supply to recipient should issue tax invoice where the supply involves movement of goods in terms of Section 31(1) of CGST Act 2017.
Therefore, when the dies or moulds manufactured are meant for delivery to customers but after usage for manufacture of components which may be after few months or years, it can be contested that invoice is issued before removal of goods considering the location of customer as place of supply to charge GST. This may not be possible in case of exports as in terms of Rule 96A of CGST Rules 2017, the exporter has to execute a bond or letter of undertaking to pay GST with interest if the goods under export invoice are not exported within 3 months from invoice date.
D. Add amortised value in components price
Conservatively, the value of dies or moulds could be added to the pricing of components being manufactured instead of billing separately. In this scenario, as the components would get exported or cleared to customers location and place of supply would be determined accordingly. Manufacturer could also request for advance money from the customers if the investment is high. GST impact would also be not there as presently advance towards goods are not subject to GST on receipt date.
Conclusion: Considering the overall objective of the GST, Government should consider providing the benefit of zero tax even for the dies and moulds manufactured for further use in manufacture of goods for export. There are few countries who have already made such goods GST free. The Australian GST law provides exemption to jigs, patterns, templates, dies, punches, and similar machine tools used in manufacture of goods for export purpose. Similar law could help the Indian exporters to improve competitiveness.
The tax professionals could also guide the taxpayers with structuring of transactions reducing the burden considering the various possibilities within the corners of law.
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