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. ... Rate of tax - Marine propellers, Rudder set, Stern tube set, Propellers shaft, MS shaft for couplings - classification of parts of fishing - replacement of parts during warranty period constitute supply under GST or not - input tax credit on purchase of raw materials. Rate of tax - Marine propellers, Rudder set, Stern tube set, Propellers shaft, MS shaft for couplings - Held that:- As per case of SRI. DHARSAK. V.P. AND SARASWATHI METAL INDUSTRIES [2018 (7) TMI 142 - AUTHORITY FOR ADVANCE RULING, KERALA] ruling issued that commodities such as Marine Propellers, rudder set, stern tube set, propeller shaft and MS shaft for couplings used as a part of fishing /floating vessels would come under entry 252 of 1st schedule and taxable @5% GST. However there is no clarity on the tax rate applicable to the parts shipping vessels as the raw materials attract 18% tax. Classification of parts of fishing - Held that:- As there is specific inclusion of parts of goods covered under HSN 8902, under 15t Schedule, the general tax rate applicable to machinery parts vide HSN 8487 has no applicability, if the vessels are used for fishing purpose. Whether replacement of parts during warranty period constitute supply under GST or not? - Held that:- The replacement of parts during warranty period is a free supply. Warranty is a written guarantee, issued to the purchaser of goods by its manufacturer, promising to repair or replace it if necessary within a specified period of time. If the goods are supplied with warranty, the consideration received as part of supply includes the consideration for “the promise to repair or replace”. Since the parts are provided to a customer without consideration under warranty no GST is chargeable on such replacement. Input tax credit on purchase of raw materials - Held that:- Even though the raw materials consumed are attracting higher tax rate than the finished products or parts, input tax paid is eligible to avail as input tax credit subject to a condition that such goods or services or both are used or intended to be used in the course or furtherance of his business - As per Section 54 (3) of the GST Law, where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies, un-utilized input tax credit at the end of any tax period can be claimed as refund except input tax paid under IGST. Ruling:- The tax rate of Marine propellers, Rudder set, Stern tube set, Propellers shaft, MS shaft for couplings used as part of fishing vessels, factory ships and other vessels for processing or preserving fishery products are taxable @5% GST. All parts of fishing / floating vessels come under the HSN Code 8902 are taxable @5% under Serial No.252 of 1st Schedule. 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.