2018 (11) TMI 282 - AAR - GST

Clarification on GST Tax Rate for Marine Parts in Fishing Vessels

The Authority for Advance Rulings clarified that marine parts used in fishing vessels are taxable at a 5% GST rate under entry 252 of the 1st schedule. ... Tax rate applicable to goods used in fishing vessels - Classification of parts of fishing/floating vessels under HSN 8902 - Supply under warranty and taxability of replacement parts - Entitlement to input tax credit where input tax rate exceeds output tax rate - Refund of un-utilized input tax credit on account of higher input taxTax rate applicable to goods used in fishing vessels - Tax rate on Marine propellers, rudder set, stern tube set, propeller shaft and MS shaft for couplings when used as part of fishing vessels, factory ships and other vessels for processing or preserving fishery products. - HELD THAT: - The Authority held that goods forming part of vessels classifiable under HSN 8902 attract the specific concessional rate provided for that heading. Because HSN 8902 expressly covers fishing vessels, factory ships and similar vessels, and serial No.252 of the First Schedule specifically includes parts of goods of heading 8902, the specific 5% rate for those vessels and their parts applies. The general rate applicable to machinery parts (as per their ordinary HSN classification) does not displace the specific inclusion and concessional rate once the parts are used as part of fishing/floating vessels.The listed propellers, rudder set, stern tube set, propeller shaft and MS shaft for couplings used as part of fishing/factory/processing vessels are taxable at 5% GST.Classification of parts of fishing/floating vessels under HSN 8902 - Whether all parts of fishing/floating vessels falling under HSN 8902 are covered by Serial No.252 of the First Schedule and liable to 5% GST. - HELD THAT: - The Authority observed that HSN 8902 includes fishing vessels, factory ships and other vessels for processing or preserving fishery products, and Serial No.252 of the First Schedule expressly covers parts of goods of heading 8902. Consequently, parts of such vessels are to be treated as falling under the concessional entry and taxed accordingly, notwithstanding alternative classifications of those parts under other HSN headings.All parts of fishing/floating vessels covered by HSN 8902 are taxable at 5% under Serial No.252 of the First Schedule.Supply under warranty and taxability of replacement parts - Input tax credit reversal on warranty replacement - Whether replacement of parts during the warranty period constitutes a taxable supply and whether input tax credit must be reversed by the supplier who replaces parts under warranty. - HELD THAT: - The Authority treated warranty as a contract term where the consideration for repair or replacement is part of the original supply. When parts are provided to the customer without additional consideration pursuant to the warranty, the replacement is not a separate taxable supply because no fresh consideration is received. The value of the original supply is held to include the cost of repairs/replacements covered by warranty. Accordingly, the supplier effecting warranty replacements is not required to reverse input tax credit on the replaced parts/components.Replacement of parts under warranty is not a taxable supply and the supplier need not reverse input tax credit on parts replaced under warranty.Entitlement to input tax credit where input tax rate exceeds output tax rate - Refund of un-utilized input tax credit on account of higher input tax - Whether the manufacturer/supplier is eligible to claim input tax credit on raw materials taxed at a higher rate than the finished products, and available remedy for accumulated un-utilized credit. - HELD THAT: - The Authority affirmed that input tax paid on inputs is eligible as input tax credit provided the goods or services are used or intended to be used in the course or furtherance of business, even if the tax rate on inputs is higher than the rate on output supplies. Where such a situation leads to accumulation of un-utilized input tax credit because input tax rates exceed output tax rates, the taxpayer may claim refund of the accumulated credit in accordance with the statutory refund mechanism for un-utilized input tax credit (as recognised by the Authority).The supplier/manufacturer may avail input tax credit on higher-taxed raw materials used in manufacture of lower-rated products and may seek refund of accumulated un-utilized input tax credit as permitted by law.Final Conclusion: The Authority ruled that the specified marine components when used as parts of vessels covered by HSN 8902 are taxable at 5% GST under Serial No.252 of the First Schedule; parts supplied under warranty are not a taxable supply and no reversal of input tax credit is required for warranty replacements; and the manufacturer is entitled to claim input tax credit on higher-rated inputs and, if such credit accumulates because output is taxed at a lower rate, may seek refund of the un-utilized credit under the statutory refund regime. Issues:1. Tax rate applicable to Marine propellers, Rudder set, Stern tube set, Propellers shaft, MS shaft for couplings used in fishing vessels.2. Classification of parts of fishing (floating vessels under HSN Code 8902.3. Whether replacement of parts during warranty period constitutes a taxable supply under GST.4. Eligibility to avail input tax credit on raw materials when the manufactured products are taxed at a lower rate.Analysis:Issue 1: Tax Rate for Marine PartsThe Authority for Advance Rulings clarified that Marine propellers, Rudder set, Stern tube set, Propellers shaft, MS shaft for couplings used in fishing vessels are taxable at 5% GST rate under entry 252 of the 1st schedule. However, ambiguity existed regarding the tax rate for parts of shipping vessels since raw materials attract an 18% tax rate. The ruling emphasized the specific inclusion of parts of goods covered under HSN 8902, making the general tax rate applicable to machinery parts inapplicable if the vessels are used for fishing purposes.Issue 2: Classification of Parts under HSN Code 8902Parts of fishing or floating vessels falling under HSN Code 8902 are taxable at 5% GST under Serial No. 252 of the 1st Schedule. The ruling highlighted that the specific inclusion of parts of goods under HSN 8902 in the 1st Schedule overrides the general tax rate applicable to machinery parts under HSN 8487 when the vessels are utilized for fishing activities.Issue 3: Replacement of Parts during WarrantyThe judgment clarified that the replacement of parts during the warranty period constitutes a free supply. Warranty, defined as a written guarantee by the manufacturer to repair or replace goods within a specified period, does not attract GST when parts are provided under warranty without consideration. The consideration for 'the promise to repair or replace' is included in the value of the initial supply, absolving the supplier from reversing input tax credit on replaced parts.Issue 4: Input Tax Credit on Raw MaterialsDespite raw materials being taxed at a higher rate than the finished products, the supplier is eligible to claim input tax credit on the higher tax paid on raw materials, provided such goods or services are used in the course of business. Section 54(3) of the GST Law allows for the refund of unutilized input tax credit accumulated due to the higher tax rate on inputs compared to output supplies, except for input tax paid under IGST.In conclusion, the rulings issued by the Authority for Advance Rulings clarified the tax rates for marine parts, classification of parts under HSN Code 8902, treatment of warranty replacements, and eligibility for input tax credit on raw materials, providing detailed insights into each aspect of the applicant's queries.