Trading or Manufacturing

[CABIJENDERKUMAR BANSAL]

Dear All

My client is a LLP (Say X) and brand owner of a bumper item. It has owned some moulds related to bumper manufacturing.

Due to lower space, it has provided moulds to a sister concern (say Y) on delivery challan for manufacturing of bumpers with the following facts:

- Y itself procures raw material for the manufacture of bumpers and with that raw material produces bumpers as per specification by X and sells it to X at a reduced price to give the benefit of cost of moulds provided.

- X purchases the bumpers from Y and affixes few screws on it which are necessary to sell it further and paste its brand sticker, pack it and sells it to its customers.

Now my queries are as under:

1) Since mould owner is X and it is used by Y, who is eligible for the depreciation?

2) And what will be the nature of the business activity of the X to be shown and presented in financial statements like purchases from Y are semi-finished goods or complete trading goods or it can also be raw material purchase by any means?

3) Sale by X is of manufacturing sale or trading sale or any other term can be used like contract manufacturing?

Regards

AI Summary

Depreciation eligibility for industrial moulds: owner versus user determines tax and accounting treatment of asset use. Issue: LLP X owns moulds provided to sister Y, who procures raw material and manufactures bumpers to X's specifications and sells finished bumpers to X at a reduced price; X adds minor finishing and resells. Core tax question is depreciation eligibility-whether X or Y may claim depreciation-determined by legal ownership, actual use, control, and contractual allocation. Accounting questions concern whether purchases from Y should be recorded as raw materials, semi-finished goods, or trading stock, and whether X's subsequent sales are manufacturing sales, trading sales, or reflect contract manufacturing, guided by substance over form and risk/title allocation.