2018 (12) TMI 766 - AAR - GST

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

In Re: M/s. Lear Automotive India Private Limited

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 ... Valuation - includibility - inclusion of amortized value of the tool received on FOC basis from the customer in assessable value - CBEC circular No. 47/21/2018-GST dated 08/06/2018 - Held that:- The goods owned by the OEM that are provided to a component manufacturer on FOC basis do not constitute supply as there is no consideration. The Board further clarified that the value of goods provided on FOC basis shall not be added to the value of supply of components. However, the case is different where the contractual obligation is cast upon the component manufacturer to provide moulds/ dies but the same have been supplied by OEM on FOC basis and in such cases, the amortised cost of such moulds and dies shall be added to the value of supply of component. Once it is established that the obligation to provide tools on FOC basis is on the customer then the question of adding the amortised value of tools supplied by the customer does not arise. However, the situation is reverse where the obligation to use tools is on the applicant but provision for the same is made by the OEM on FOC basis. Ruling:- The amortized value of the tool received on FOC basis from the customer is not required to be included in the value of finished goods manufactured and supplied by the applicant to the customer. 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.