Manufacturing tooling kits for foreign customers constitutes separate taxable supply under GST despite cost reimbursement

The AAR-Jharkhand ruled that manufacturing tooling kits per overseas customer specifications constitutes a separate taxable supply under GST. Though costs are reimbursed by foreign customers in convertible foreign exchange, this does not qualify as export since the tooling kits remain in India and are used for manufacturing forgings that are subsequently exported. The ruling clarified that only goods physically shipped outside India's territorial waters constitute export. Therefore, amounts recovered from foreign customers for tooling kit manufacturing attract CGST/SGST or IGST and do not qualify for zero-rated treatment under export provisions.

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Issues Involved:
1. Whether the manufacture of tooling kit for further manufacture of forgings is to be treated as a separate supply or incidental to the ultimate supply of forgings.
2. Whether the amount recovered from Indian customers after the manufacture of tooling kit is excisable to CGST and SGST or IGST.
3. Whether the amount recovered from foreign customers after the manufacture of tooling kit can be treated as export and thus, zero rated.

Detailed Analysis:

1. Separate Supply or Incidental to Forgings
The applicant argued that the manufacture of the tooling kit is incidental to the ultimate supply of forgings. According to Section 7 of the CGST Act, "supply" includes all forms of supply of goods or services for consideration in the course of business. The applicant contended that the tooling kit is not a standalone supply but is interlinked with the supply of forgings. They cited Section 15(2) of the CGST Act, which includes incidental expenses in the value of supply, to argue that the amount recovered for the tooling kit is an incidental expense in supplying forgings.

However, the ruling determined that the separate invoice issued to recover the agreed amount for the manufacture of the tooling kit indicates that it is a supply of goods as per Paragraph 1 of Schedule II of the Act. Thus, the manufacture of the tooling kit is treated as a separate supply and chargeable to GST.

2. Excisable to CGST and SGST or IGST
The applicant stated that the determination of whether the amount recovered attracts CGST and SGST or IGST depends on the place of supply of the forgings and the recipient's location. They referred to Section 10 of the IGST Act, which stipulates that the place of supply is where the movement of goods terminates for delivery to the recipient. They argued that if the recipient is outside Jamshedpur, it is an inter-state supply (IGST), and if within Jamshedpur, it is an intra-state supply (CGST and SGST).

The ruling clarified that Jamshedpur falls under Jharkhand State jurisdiction. Therefore, goods supplied to customers outside Jharkhand are treated as inter-state supply (IGST), and within Jharkhand as intra-state supply (CGST and SGST).

3. Export and Zero Rated
The applicant argued that the supply of forgings to foreign customers involves exporting goods, thus making the amount recovered for the tooling kit incidental to such export and zero-rated under Section 16 of the IGST Act. They cited Section 2(5) of the IGST Act, defining "export of goods" as taking goods out of India to a place outside India.

The ruling concluded that the tooling kit itself is not exported; only the forgings manufactured from it are. Since the tooling kit is not sent outside India, the amount recovered from foreign customers cannot be treated as export and hence, not zero-rated.

Conclusion:
1. The manufacture of the tooling kit for further manufacture of forgings is to be treated as a separate supply.
2. The amount recovered from Indian customers after the manufacture of the tooling kit is leviable to CGST and SGST or IGST.
3. The amount recovered from foreign customers after the manufacture of the tooling kit cannot be treated as export and thus, zero-rated.

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