Amortized value of tools provided on FOC by Component Manufacturer to Original Equipment Manufacturer not includible in value of FG under GST: AAAR of Karnataka

Categories: Advance Ruling
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Facts: M/s. Nash Industries (I) Private Limited (“the Appellant’ or Component Manufacturer or CM”) is engaged in the manufacture of sheet metal pressed components, supplying to industries like Automotive, Banking Hardware, Power Protection, Alternate Energy etc. The tools required to manufacture these components were designed and manufactured by the Appellant. Such manufactured tools were billed to the customer and the payment is received for the same but the tools were retained by the appellant for the manufacture of components. Present appeal was filed against the ruling passed by the Karnataka Authority of Advance Ruling, vide Order Number. ADRG 24/2018 dated October 25, 2018 (“the Impugned Order”) that “the amortised cost of tools which are re-supplied back to the applicant free of cost shall be added to the value of the components while calculating the value of the components supplied as per Section 15 of the CGST/KGST Act, 2017.”

Issue Involved:  Whether the value of the components manufactured and supplied by the Appellant should include the cost of the tools which are supplied by the customer free of cost and used by the Appellant in the manufacture of the components?

Appellant’s Contention of law: The appellant contended that the purchase order provided by the recipient/customer is only for the manufacture of components out of the tools supplied by the recipient at free of cost. Further, the appellant submitted that the CBIC vide Circular No.47/21/2018-GST dated June 08, 2018 has clarified the position regarding amortization of tool cost supplied free of cost by the customer, to the value of components manufactured by the component manufacturer which covered two situations which are as follows:

  1. The value of the moulds and dies owned by the original equipment manufacturer (OEM) which is provided to a component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer.
  2. The contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis-the amortised cost of such moulds/dies shall be added to the value of the components.

Held: The Hon’ble Appellate Authority for Advance Ruling of Karnataka vide its Order No. KAR/AAAR/07/2018-19 dated March 01, 2019 set aside the ruling of the AAR which took a view that the value of supply of finished goods by CM to OEM must include the amortized value of the mould provided on FOC basis, irrespective of the contractual arrangement between the parties. On considering, the terms of the contract between the parties and Circular No.47/21/2018-GST dated June 08, 2018 which clarifies that goods owned by the OEM that are provided to a component manufacturer on FOC basis do not constitute supply absent consideration and clarifies that the cost of tool is required to be added only if there is a contractual obligation cast upon the component manufacturer to provide moulds/dies but the same have been provided by the OEM on FOC basis. The Hon’ble AAAR of Karnataka gave a finding that in case where the tools are developed and manufactured by the Appellant according to the requirements of the OEM customer, then the total cost of tools is borne by OEM customer. The title of the tools is transferred too. In such a case, the value of the tools, which has already suffered tax and supplied free of cost to the Appellant, is not required to be added to the value of the components supplied by the Appellant.

Therefore, the Hon’ble AAAR of Karnataka holds that the cost of the tools supplied by the OEM customer on free of cost basis to the Appellant is not required to be added to the value of the components which are supplied by the Appellant. Finally, it was clarified that the ruling will apply to other contracts entered into by the Appellant only if the terms and conditions contained therein are the same as those contained in the contract placed before us.

Citation: [TS-110-AAAR-2019-NT]