2018 (12) TMI 766 - AAR - GST

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 ... Transaction value - consideration - inclusion under Section 15(2)(b) - free of cost supplies (FOC) - amortised value of tools - CBIC Circular No.47/21/2018 clarification - business efficacy - double taxationTransaction value - consideration - inclusion under Section 15(2)(b) - free of cost supplies (FOC) - amortised value of tools - CBIC Circular No.47/21/2018 clarification - Whether the amortised value of tools provided on free of cost basis by the customer must be included in the value of the finished goods supplied by the applicant under the GST Act. - HELD THAT: - The Authority applied the transaction value principle: value of a supply is the price actually paid or payable, and Section 15(2)(b) requires inclusion only where an amount which the supplier is liable to pay has been borne by the recipient. On the facts, tools/moulds were owned by the OEM/customers and their cost was borne by the customers (either provided directly on FOC basis or procured by the applicant and sold to the OEM), so no amount which the supplier was liable to pay remained unpaid and borne by the recipient. The Board's clarification in CBIC Circular No.47/21/2018 treating moulds/dies supplied FOC by OEMs to component manufacturers as not constituting supply and not to be added to the component value was held applicable. The Authority also noted that where contractual obligation to provide tooling rests on the supplier but OEM nonetheless supplies tooling FOC, that is a different factual scenario (covered by para 1.3 of the Circular) and would attract inclusion; that factual situation is not present here. Reliance was placed on industry agreements, purchase orders and invoices showing ownership and tax treatment of tooling, and on analogous judicial reasoning that one cannot import excise valuation concepts into a VAT/GST transaction value regime absent specific provision. In those circumstances the amortised value of tools supplied by the customer on FOC basis is not includible in the value of the finished goods under Section 15.Amortised value of tools supplied on FOC basis by the customer is not to be included in the taxable value of the finished goods supplied by the applicant, on the facts and contractual arrangements before the Authority.Final Conclusion: The advance ruling answers the question in the negative: on the facts and contracts before the Authority, tools/moulds provided by the customer on a free of cost basis (ownership and cost borne by the customer) are not includible in the value of the finished goods supplied by the applicant under the GST law. 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.