Service Tax liability on Gear Box development cost reveived from Overseas Customer

[Pradeep Jain]

Dear Sir,

1. We are in receipt of order from overseas customer for development of Prototype Gear Box (for automobile application) as per specification provided. Customer has agreed to pay Gear Box development cost say Rs. 100
2. We are also in receipt of order for supply of 10 nos. proto gear box (physical export) on chargeable basis. Say Rs. 40 for 10 nos. proto gear box.

The work involved in gear box development cost (sl. No. 1) is following:

1)      Development of tooling (temporary in nature) from vendors, so that with the help of these tooling, components can be produced for making proto gear box.

2)      Development of design and drawings of parts required for making complete gear box.

3)      There is no separate amount given in the agreement for tool cost & design & drawing. It means the charges of Rs. 100 are for both.

Now our Queries are as under:-

1-      Is there any service tax liability on charging Gear Box proto development cost as explained above at the time of invoicing?

2-      Do we need to add the said development cost for arriving at assessable value (ARE-1, export invoice etc) the time of physical export of total 10 nos. prototype gear box?

[YAGAY andSUN]

If you are getting the payment in foreign currency, then, it would be termed as export of services, no service tax is payable on such transactions.  You would have to comply with the provisions of place of provisions of services.

Yes, this development cost is required to be added in the assessable value of the prototype gear box.  Excise duty needs to be paid and from your Authorised dealer you would have to get GR Waiver form, if  no foreign remittance is received by you against this.  Further, you would also have to submit a destruction certificate from your customers stating that these goods have been destructed during conducting tests for development purpose in the Lab.

AI Summary

Export of services: payment in foreign currency can exempt service tax, but development charges count toward excise valuation. Payment in foreign currency for prototype gearbox development is treated as an export of services and is not subject to service tax if place-of-provision rules are satisfied. The development charge must be added to the assessable value of the physically exported prototypes for excise valuation, with excise duty payable. If no foreign remittance is received, obtain a GR waiver from the authorised dealer and a destruction certificate from the customer when goods are destroyed during testing.