1. Many times a customer located outside India places an order on an Indian manufacturer to supply certain components. For manufacture of these components Indian supplier is required to incur certain costs for designing the tools. Said cost is recovered from the customer as “tool development charges”. Property of the said tools remains with the Indian supplier. With this background issue for present article is whether the Indian supplier can claim the benefit of zero-rating which is available for exports in respect of tool development charges ?
2. Sec. 16(1) of the IGST Act, 2017 provides that export of goods amongst other things shall be a zero-rated supply. Relevant portion is reproduced below:
“16. (1) “zero rated supply” means any of the following supplies of goods or services or both, namely:––
(a) export of goodsor services or both; or …………….”
3. Export of goods as defined u/s 2(5) of the IGST Act, 2017 means taking goods out of India to a place outside India. It is an undisputed fact that the Indian supplier will only export the components which will be manufactured from the tools. Hence the tools in respect of which development charges are received will never be sent outside India. Can it thus be said that the benefit of zero-rating will not be available in respect of tool development charges ? Can it not be said that tool development charges are part of the sale price of components exported and hence the benefit of zero-rating should be made available ?
4. First question to answer is whether the recovery of “tool development charges” is a separate supply or is it a part of supply of manufactured components ? This is because place of supply then will be accordingly determined.
5. Scope of supply covered u/s 7 of the CGST Act, 2017 clearly includes sale of goods for a consideration amongst other things. Sec. 9(1) of the said Act provides that tax shall be levied on the value determined u/s 15 of the said Act. Relevant portion of Sec. 15 is reproduced below:
“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 —
(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services”
6. As seen from the above provisions, value of supply shall be the transaction value when price is the sole consideration of supply and recipient is not related. Sec. 15(2)(c) however provides that value of supply shall include all incidental expenses charged by the supplier for anything done “in respect of” supply at the time of or before delivery of goods or supply of services. Can it thus be said that the tool development charges are in respect of supply of components and the same is clearly incurred before the delivery of components and hence the same will be included in the value of components which are exported and thus benefit of zero-rating will be available ?
7. Before we answer this question it is worthwhile to consider the decision of Hon. Bombay High Court in the case of a reference application of Tata Johnson Controls Automotive Limited v. State of Maharashtra (Sales Tax Reference No. 42 & 43 of 2009). In this case the applicant had incurred expenses on designing the moulds to be used exclusively for manufacturing components (viz. seating system) for a customer. Applicant had recovered the cost of designing the moulds from its customers. Contention of the department was that the same will form part of the “sale price” of the components sold by the applicant and hence will be subjected to sales tax. Definition of sale price as provided u/s 2(29) of the Bombay Sales Tax Act, 1959 is reproduced below:
“Sale Price means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for any thing done by the dealer in respect of goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.”
8. Court perused the above referred definition and held as under:
“The aggregation of consideration for the transfer of the product would in normal parlance constitutes sale price. All the payments should be made pursuant to the contract of sale. The total amount of consideration for purchase of goods would include the price strictly so called and also other amounts which are payable by the purchaser or which represent the expenses required for completing the sale as the supplier would ordinarily include all of them in the price at which he would sale his goods. It is clear that in the present case, the sale price is not statutorily fixed but it is a part of contract between the parties. The prima dona consideration would be the total price paid by the purchaser for acquisition of the product under sale. The contract will have to be examined. The payment of designing and tool cost is necessary concomitant of the final sale price of the seating system. The amount of money which goes from the pocket of the vendee to the pocket of the vendor as a consideration for passing of the property in the goods is the “sale price”. It is the amount but for the payment of which the vendor would not transmit his title of the goods in favour of the vendee. The applicant / seller would not deliver / sale the seating system without recovering the cost of designing and moulds required for manufacture of seating system. The cost paid towards designing and tooling is a part of the same series of transaction of sale of seating system. The sale cannot be segregated. It is also not the case that the said tools are provided by the customer / buyer. The design and tools are prepared by the applicant to enable the applicant / vendor to manufacture seating systems. The development charges for design and tooling and price of seating system is artificially being segregated to avoid payment of sales tax. Without payment of designing and tooling cost, the applicant would not part with the seating system. The definition of “purchase price” will have to be read in conjunction with the “sale price”.
The development charges for the mould is agreed to be charged and paid as a part of the contract of supply of seating system. The development charges for designing and tool have inescapable bearing on the delivery of the seating system and, therefore, they will have to be held as part of the sale price of the seating system.”
9. It was thus held that if such development charges of the moulds are part of the contract of supply of components and such moulds are for exclusive use, development charges will tantamount to the consideration for passing the property of the components and hence will be part of “sale price” of the components.
10. Ratio of said decision shall squarely apply under GST also in view of Sec. 15(2)(c) of the CGST Act, 2017. Hence the terms of the contract will really determine whether the tool development charges will form part of value of supply of the components or not. If yes, benefit of zero-rating is clearly available even if the tools are not taken outside India.