1. It normally happens in the automobile sector that the automobile supplier provides certain tools & dies to various component suppliers free of cost. Such tools and dies are not in the scope of the component supplier as per the terms of the contract. Component supplier shall use such tools & dies so provided for the manufacture of various components which are sold to the automobile supplier. With this background the issue that requires analysis is whether the apportioned cost of such tools & dies are to be notionally added to the value of components supplied ? Also what kind of documentation must be done when such tools and dies are provided to the component supplier ?

2. Sec. 9(1) of the CGST Act, 2017 provides that the tax shall be payable on the value determined under Sec. 15 of the said Act. Relevant portion of the said Sec. 15 is reproduced below for ready reference:

“Sec. 15 Value of taxable supply — (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.

(2) 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;”

3. From the above reading one can observe that under sub-clause (1) the value of supply shall be the transaction value. Further transaction value is the price actually paid or payable for the supply of goods or services. Said transaction value will be accepted provided supplier and recipient are not related and price is the sole consideration for the supply.

4. Assuming that the component supplier and the automobile supplier are not related we need to only answer whether the price is the sole consideration for the supply before adopting the said price as the value of supply. In other words can it be said that price of the components is the sole consideration for the supply of such components when tools and dies are provided by the customer free of cost ?

5. Scope of supply as provided u/s 7(1)(a) of the CGST Act, 2017 includes sale made for a consideration by a person in the course or furtherance of business. Hence levy of GST is not on manufacture but on sale amongst other things. Component supplier is indeed selling the components manufactured by him. Hence valuation provision under GST has to be appreciated from the concept of “supply” as provided u/s 7 of the CGST Act, 2017 and not from the concept of “manufacture” as prevalent under the Excise Law. In this context can it be said that tools and dies provided by the customer free of cost is a consideration “for sale of such components” and hence the price paid or payable cannot be adopted as the value of supply ?

6. In the case of Moriroku UT India (P) Ltd. State of U.P [2008 (224) ELT 0365 (S.C.) issue before the Apex Court was whether the amortized cost of tools and moulds provided free of cost by the customer are required to be added to the “sale price” for the purpose of levying Sales Tax. Court held as under:

“The important thing to be noted is that “price” is the amount of consideration which a seller charges the buyer for parting with the title to the goods. It comprises of the amount which the dealer himself has to pay for the purchase of the goods, the expenditure, which he is to incur for transporting the goods from the place of purchase to the place of sale, the duties, if any, levied on the particular goods bought by him, the octroi duty, which he may have had to pay and his own margin of profit after meeting handling charges including interest on the capital invested. The cost price of the goods actually paid by him under various heads of accounts would no doubt constitute the consideration for which he would part with his title to the goods. The entire amount of consideration, including the sales tax component, which the purchaser pays, would constitute the price of goods. To this extent, there is no difficulty. The difficulty comes in when by law or by legal fiction the Department seeks to introduce a notional concept as an element of the “real price”. This is particularly important when there is no rule to that effect in the sales tax law.”

7. Court further held distinguishing the provisions of Sales Tax Law with Excise Law as under:

“On the other hand, excise duty is a levy on a taxable event of “manufacture” and it is calculated on the “value” of manufactured goods. Excise duty is not concerned with ownership or sale. The liability under the excise law is event based and irrespective of whether the goods are sold or captively consumed. Under the excise law, the liability is there even when the manufacturer is not the owner of raw material or finished goods (as in the case of job-workers). Excise duty, therefore, is independent of ownership [see Ujagar Prints (II) v. Union of India 1989 3 SCC 488]. Therefore, for sales tax purposes, what has to be taken into account is the consideration for transfer of property in goods from the seller to the buyer. For this purpose, tax is to be levied on the agreed consideration for transfer of property in the goods and in such a case cost of manufacture is irrelevant. As compared to the sales tax law, the scheme of levy of excise duty is totally different. For excise duty purposes, transfer of property in goods or ownership is irrelevant. As stated, excise duty is a duty on manufacture. The provisions relating to measure (section 4 of the 1944 act read with the excise valuation rules, 2000) aim at taking into consideration all items of costs of manufacture and all expenses which lead to value addition to be taken into account and for that purpose Rule 6 makes a deeming provision by providing for notional additions. Such deeming fictions and notional additions in excise law are totally irrelevant for sales tax purposes.”

8. One may also refer to another decision of Hon. Supreme Court in the case of Ts Tech Sun (India) Ltd. v. State of Uttar Pradesh & Ors. [2008] 15 VST 559 (SC). In this case appellant manufactured plastic automobile components as per design and specifications given. The customer supplied tools, dies, moulds, etc., free of cost to the assessee to enable it to manufacture automobile components. Hon. Supreme Court held that for sales tax purposes, what has to be taken into account is the consideration for transfer of property in goods from the seller to the buyer. For this purpose, tax is to be levied on the agreed consideration for transfer of property in the goods and in such a case cost of manufacture is irrelevant. As compared to the sales tax law, the scheme of levy of excise duty is totally different. For excise duty purposes, transfer of property in goods or ownership is irrelevant. Excise duty is a duty on manufacture. The provisions relating to measure, viz., section 4 of the Central Excise Act, 1944, read with Excise Valuation Rules, 2000, aim at taking into consideration all items of costs of manufacture and all expenses which lead to value addition to be taken into account and for that purpose rule 6 makes a deeming provision by providing for notional additions. Such deeming fictions and notional additions in excise law are totally irrelevant for sales tax purposes. Thus it held that value of free supply, even though will form part of value under excise, will not form part of taxable turnover for sales tax. Only price charged for parting with ownership of goods will for part of sale price.

9. We may also refer to the definition of “consideration” as provided u/s 2(31) of the CGST Act, 2017. Same is reproduced below:

“Sec. 2(31) “consideration” in relation to the supply of goods or services or both includes–

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:”

10. On perusal of above definition one can observe that it includes only the payment or monetary value of any act or forbearance “in respect of”, “in response to” or “for the inducement of” supply of goods or services. Provision of tools and dies free of cost by the customer is “for enabling supply of components” and cannot be said to be a consideration “in respect of”, “in response to” or “for the inducement of” supply of the components.

11. One may also refer to the decision of Apex Court in the case of Sonia Bhatia v. State of U.P AIR 1981 SC 1274 wherein it was held that the word “consideration” means the benefit accruing to the promisor. The tools and dies provided by the customer remains the property of said customer and no benefit can be said to have been accrued to the component supplier.

12. On the basis of above rulings we can conclude that it is the price paid or payable by the automobile supplier, which is the sole consideration for supply of components, is the transaction value. Same has to be accepted for the purposes of Sec. 15(1) of the CGST Act, 2017.

13. Next we have to examine whether any of the inclusions provided under Sec. 15(2) of the CGST Act, 2017 can be invoked by the department for adding the notional value of the tools and dies provided free of cost ? Only inclusion where such cost may fall is Sec. 15(2)(b) of the said Act. Said clause provides for adding the amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient and not included in the price actually paid or payable for the goods or services. Can it be said that the cost of tools and dies is in the scope of component supplier but since the same is supplied by the automobile supplier the value of the same is to be added ?

14. Such eventuality can only happen if as per the contract automobile supplier deducts the cost incurred towards the tools and dies supplied since the same was in the scope of component supplier but incurred by him. Normally the contracts for supply of components only provide that the tools & dies will be provided by the automobile supplier free of cost and hence the same is not in the scope of component supplier.

15.We may refer to the ruling in the case of N.M. Goel & Co. [1989] 72 STC 368 (SC) wherein the issue before the Apex Court was whether the value of certain goods provided by the buyer are to be included in the sale price. In this case as per the contractual terms (clause no. 10) the goods in question were to be provided by the seller. However since the buyer provided the same and was deducted from the invoice of the seller, it was held that value of same has to be included in the sale price. Again Hon. Supreme Court replying on the above judgment, held in case of Cooch Behar Contractors Association and Others [1996] 103 STC 477 (SC) that value of goods supplied by the contractee will be included in taxable turnover. In this case as well there was a clause similar to clause (10) wherein price of goods supplied by contractee were deducted from the bills or dues of the contractor. One may also refer to similar judgments in case of Rashtriya Ispat Nigam Ltd. [1998] 109 STC 425 (SC), B. Seenaiah and Co. [2001] 124 STC 248 (AP) and Karya Palak Engineer, C.P.W.D., Bikaner[2004] 136 STC 641 (SC).

16. Hence we submit that the cost of tools and dies provided by the automobile supplier will not be included even under clause (b) of Sec. 15(2) since as per contractual terms the same is not in the scope of component supplier and hence not deducted from the price paid or payable to him.

17. We may also refer to draft GST model law (June, 2017) wherein clause (b) u/s 15(2) providing for inclusion of the value of goods or services supplied free of charge or at reduced rate for use in connection with supply in question to the extent the value has not been included was omitted subsequently. Hence a clear intent of not including the value of tools and dies provided free of cost is manifested by such omission.

18. Before we part we must also address the documentation to be used by the automobile supplier while providing such tools and dies to the component supplier.

19. It is currently common belief that such tools and dies can be sent on a job-work challan. Definition of job-work as provided u/s 2(68) of the CGST Act, 2017 is reproduced below:

“(68) “job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly”

20. On perusal of above definition one can observe that it covers only activity which is done on the goods belonging to another registered person. In the case before us the component supplier is not performing any treatment or process using the tools and dies on the goods belonging to another registered person. He is in fact using such tools and dies to manufacture and sell components the ownership of which remains with him till sold. Hence in our opinion sending such tools and dies by the automobile supplier cannot be regarded as sending the same for job-work.

21. Rule 55(1)(c) of the CGST Rules, 2017 however permit transportation of goods for reasons other than by way of supply on a delivery challan. Hence such tools and dies must be sent on a delivery challan prepared for movement other than job-work. Thus the same is not required to be reported in FORM ITC-04 as it covers only job—work transactions.

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