Tools received on FOC basis not part of finished goods value under GST Act

The final ruling in the case determined that the amortized value of tools received on a Free of Cost (FOC) basis from the customer is not required to be included in the value of the finished goods manufactured and supplied by the applicant to the customer. This decision was based on the interpretation that such tools provided on an FOC basis do not constitute consideration under the Central Goods and Services Tax Act, 2017. The authority's analysis of the contractual obligations and ownership of the tools supported this conclusion, aligning with the department's contention and ultimately ruling against including the amortized value in the final product's value.

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Issues Involved:
1. Whether the amortized value of the tool received on Free of Cost (FOC) basis from the customer is required to be included in the value of finished goods manufactured and supplied by the applicant to the customer.

Detailed Analysis:

Background and Facts:
- Applicant's Business: The applicant, Lear Automotive India Pvt. Ltd., manufactures automotive seats using tools provided by customers on a Free of Cost (FOC) basis.
- Customer Interaction: The applicant receives tools either directly from customers or procures them from third-party manufacturers, with the costs being eventually borne by the customers.
- Legal Context: Under the previous Central Excise regime, the intrinsic value of excisable goods included the amortized value of tools provided by customers. However, the Central Goods and Services Tax Act, 2017 (CGST Act) does not include a similar provision.

Applicant's Interpretation:
- Section 7 and 15 of the CGST Act: The applicant argues that the value of taxable supply should be the transaction value, which is the price actually paid or payable. They assert that the tools provided by the customer do not constitute consideration under Section 15(2)(b) of the CGST Act.
- Supreme Court Precedent: The applicant cites the Supreme Court judgment in Moriroku UT India (P) Ltd vs State of U.P., which held that the cost of tools provided by the customer should not be included in the assessable value of the final product under the U.P. Sales Tax Act.
- Circular No. 47/21/2018-GST: The applicant references a CBIC circular clarifying that the value of moulds and dies provided by the OEM on an FOC basis should not be added to the value of the supply.

Department's Contention:
- Circular Clarification: The department refers to Circular No. 47/21/2018-GST, which states that tools provided on an FOC basis do not constitute a supply as there is no consideration involved. Therefore, the value of such tools should not be included in the value of the supply.

Authority's Observations:
- Contractual Obligations: The authority examines the contractual terms between the applicant and the customer (e.g., Mahindra & Mahindra Ltd.), which indicate that the customer is responsible for the cost of the tools.
- Ownership and Supply: The tools are supplied to the customer on payment of GST and then provided to the applicant on an FOC basis for manufacturing purposes. The ownership of the tools remains with the customer.
- Section 15(2) Analysis: The authority concludes that the transaction is not covered by Section 15(2) of the CGST Act, as the tools are provided by the customer and not incurred by the recipient.

Conclusion:
- Final Ruling: The amortized value of the tools received on an FOC basis from the customer is not required to be included in the value of the finished goods manufactured and supplied by the applicant to the customer.

Order:
- Decision: The question is answered in the negative, meaning the amortized value of the tools provided on an FOC basis should not be included in the value of the finished goods supplied by the applicant.

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