GST on Free of Cost Replacement for failed Spares

[RameshC Behera]

Hi,

We are a Subsidiary of an MNC . Our Parents company supplies Capital Goods to its customers in India. When there is any breakdown capital goods, supplied to said customers, our Parent company send us the spares free of cost paying duty, GST, Freight and clearing charges with an instruction to supply these parts as a replacement of the spares free of cost to the customer.

Please let us know the GST implication on the Free of Cost Supply made by us.

[Rajagopalan Ranganathan]

Sir,

First of all please clarify where your parent company is located? If it is located outside taxable territory (India) then the spares sent free of cost by your parent company will be subjected to customs duties levied under Customs Act, 1962 and IGST leviable under IGST Act, 2017. The IGST paid can be taken as credit and can be utilised for payment of CGST and SGST if your supply to your customer in India is intra state. If your supply to your customer in India is inter- state IGST is payable and the credit of IGST paid at the time of import of the spares can be utilised for payment of IGST.

[Ganeshan Kalyani]

GST is not applicable on free of cost supply. But the proportionate input tax credit is required to be reversed.

Assuming your parent company is in India. They have supplied you the material after paying all the taxes. In fact it was paid by you since it was charged on the invoice raised on you. Now you are supplying those material to customets as free supply. This transaction does not have consideration. Hence in my view GST is not applicable.

[Himansu Sekhar]

Free of cost goods against warranty is not chargeable to gst as in the price charged from the original equipments includes the replacement price and charged gst. If you have taken credit on such item, please reverse the same.

[RameshC Behera]

As explained in my previous post, My Parent company is located in Singapore. What ever spares sent to us is custom duty and IGST Paid.

We get the spares ( duty and GST Paid) free of cost and just have to supply these spares to the customer of our parent free of cost.

We interpret these material as FoC supply and do not offer this for GST. Is our contention correct?

[KASTURI SETHI]

Dear Querist,

I agree with your view dated 13.9.17. No reversal is required as goods in question are duty/tax paid. After payment of duty, Govt. cannot object to your free supply.

[Ganeshan Kalyani]

Since you have not taken any input tax credit , there is no question for reversal of propotionate credit. Thanks i agree with Sri Kasturi Sir 's view.

[Himansu Sekhar]

Since the goods are supplied free of cost by you under obligation of warranty, you need not pay gst. Since you have not taken credit, no need to reversal

AI Summary

Free supply under warranty: ordinarily not subject to GST, but claimed input tax credit must be reversed. Import of spares from a foreign parent attracts customs duty and IGST on import, and the IGST paid can be utilised as input tax credit against subsequent GST liabilities. Free-of-cost supply of replacement parts as a warranty obligation does not constitute a taxable supply, but if input tax credit was claimed on those goods or related inputs, the taxpayer must reverse the proportionate input tax credit; no reversal is required where no credit was taken.