GST ON PATTERNS

[RV PERUMAL]

Sirs, we are casting manufacturers by Name Kumar alloys, and regularly receiving orders from Anderson Inc, Germany. While releasing purchase order, the buyer mentioned ( value is for example only changing order to order case ) that, casting value ₹ 2 lakhs and pattern cost is ₹ 10000. Then our Kumar Alloys, making the pattern from PHP patterns, Coimbatore and pay from our bank account and received the pattern bill in Kumar Alloys name and availing the ITC paid for the pattern. While sending the castings to Anderson INC, pattern is not returned physically by Kumar Alloys. Since pattern is not available physically, the Customs officials not allowing to mention about pattern in the Bill of Supply, and hence the cost of pattern is adjusted as Packing Charges in the invoice by Kumaran Alloys. This scinerio is happening for the whole year on different supplies. My question is. Is it correct?, Is there any classifications issue in future? Is the pattern is our Asset? Because we are receiving the cost of pattern from the buyer separately! What is our position if the buyer ask the pattern back since they paid cost of pattern already. Kumar Alloys is doing this regularly like this. Please clarify sir.

[Amit Agrawal]

Dear Sh RV Perumal Ji,

Essence to answer your query, to my mind, is determination of the fact that whether Anderson Inc, Germany is raising order for two items i.e. (casting as well as patterns) or only for one item (i.e. casting) wherein cost of patterns are shown separately so as to arrive at full purchase price of casting so ordered.

Without this determination from contract / PO and mutual understanding etc., I think it is difficult to answer your query.

[Vikram Bansal]

Though edible items like sugar, tea, and coffee are included in the 5% slab, milk does not attract any tax under the new GST regime. The idea behind this is to ensure that basic food items are available for everyone but instant food is kept out of this category.

Basic household items like toothpaste and hair oil, which currently attract 28% tax, will be taxed at 18% only.

Sweets will also be taxable at 5%.

Tax rates on coal have also been reduced from 11.69% to just 5% in order to relieve the pressure on power industries.

GST also gives a major push to domestic industries as they will be able to procure seamless input credit for capital goods. The make in India campaign is set to flourish after this reform.

[KASTURI SETHI]

Sh.Vikram Bansal Ji,

Your reply is for which Issue ID No. It appears that your is misplaced.

[RV PERUMAL]

Kasthuriji Please reply to my question

[KASTURI SETHI]

Sh. RV Perumal Ji,

You are required to pay GST on amortised cost of pattern. Why cost of pattern is being adjusted as packing charges ? This is incorrect. If tax is not paid on the cost of pattern, then the issue of under-valuation will arise ? Classification issue is not in picture. The buyer may take the pattern back it does not have any effect on you (Kumar Alloys) because tax on amortised cost of pattern stands paid (Presuming tax is paid).

[KASTURI SETHI]

Also read the following case laws on the subject issue:-

2018 (10) TMI 1413 - CESTAT AHMEDABAD BHAGWATI SPHEROCAST PVT. LTD. Versus COMMR. OF C. EX., AHMEDABAD-II

[Shilpi Jain]

In this case the pattern cannot be your asset. Also since the pattern is not going outside India it will not be an export and the amount that you get from the party abroad for the pattern would become liable to GST.

[Shilpi Jain]

This position may not change even if at a later point of time you would be sending the pattern abroad since the place of supply will have to be seen at the time you are raising invoice for the pattern at which time the pattern is still in India and not moved out of India

[anchit agarwal]

if your are facing any problem related to gst return filing then contact to inside tax which is the leading incometax consultant in India

[Amit Agrawal]

From the query raised, it is not clear, at-least to me, that whether contract with Anderson Inc, Germany is for two items i.e. (casting as well as patterns) or only for just one item (i.e. casting) wherein cost of patterns are shown separately so as to arrive at full purchase price of casting so ordered.

Let me try to answer the query in both scenarios:

A. Scenario No. 1: Contract with Anderson Inc, Germany is for two items i.e. (casting as well as patterns):

A1. Value of taxable supply for 'Castings' will be ₹ 2,10,000/- (i.e. including cost of patterns) u/s 15 of the CGST Act, 2017. However and as subject castings are presumably getting physically exported out of India, then, such supply will be zero-rated u/s 16 of the IGST Act, 2017. 'Value' u/s 15 will not matter much when supply is zero-rated.

A2. But, the supplier needs to pay applicable GST against 'Patterns' as same is sold to Anderson Inc, Germany but not physically exported out of India.

A3. In such a case, 'Pattern' will not be asset for the querist as same are goods owned by Anderson Inc, Germany but only physically kept with the querist.

B. Scenario No. 2 - Contract with Anderson Inc, Germany is for one i.e. casting, wherein cost of patterns are shown separately so as to arrive at full purchase price of casting so ordered:

B1. Value of taxable supply for 'Castings' will be ₹ 2,10,000/- (i.e. including cost of patterns) u/s 15 of the CGST Act, 2017. However and as subject castings are presumably getting physically exported out of India, then, such supply will be zero-rated u/s 16 of the IGST Act, 2017. 'Value' u/s 15 will not matter much when supply is zero-rated.

B2. But, as there is no supply of 'Patterns', question of paying GST there-against does not arise.

B3. In such a case, 'Pattern' will be asset for the querist as its ownership is not transferred to Anderson Inc, Germany.

On parting note:

As said earlier, essence to answer your query, to my mind, is determination of the fact that whether Anderson Inc, Germany is raising order for two items i.e. (casting as well as patterns) or only for one item (i.e. casting) wherein cost of patterns are shown separately so as to arrive at full purchase price of casting so ordered. Without this determination from contract / PO and mutual understanding etc., I think it is difficult to conclusively answer.

Above are strictly my personal views and same should not be construed as professional advice.

[Amit Agrawal]

*Addition:

Many-a-times, such patterns can be / intended to be used to manufacture castings over multiple times.

And if so, "only amortized cost per unit" against pattern charges recovered (i.e. ₹ 10,000/- divided by useful life in terms of expected castings to be manufactured) needs to be added into basic selling price in the situation explained in Para A1 (& not entire ₹ 10,000/-) so as to arrive at value u/s 15 of the CGST Act, 2017 for castings so supplied.

However and as subject castings are presumably getting physically exported out of India, then, such supply will be zero-rated u/s 16 of the IGST Act, 2017.

Hence, above additional comments (when patterns can be used over multiple time to manufacture castings) to determine 'Value' u/s 15 will not matter much when supply is zero-rated. Still, it is better to be as much clear as possible.

[Shilpi Jain]

One could also look at whether the patterns is owned by the casting manufacturer and the cost of the pattern is added to the castings that are exported.

AI Summary

GST on patterns: classification of pattern charges determines whether pattern is taxable separately or amortised into zero-rated casting value.
GST treatment turns on whether patterns are a separate supply or part of the casting supply: separate sale of patterns held in India attracts GST and is not zero-rated; where pattern charges form part of the casting price and castings are exported, include only the amortised pattern cost per unit in the castings' value and treat the castings as zero-rated. Mischaracterising pattern charges as packing charges risks under-valuation and incorrect classification. Contractual terms and ownership determine asset status and tax consequences.