By Astha Sinha, Nivedita Agarwal & Nirav Karia
The issue of inclusion or otherwise of amortised value of tools and moulds in the supplies made by contract manufacturers and job workers has once again been raked up after the advent of the GST regime. This article aims to analyse the difficulties faced by the contract manufacturing industry in this regard.
It is a common practice in the manufacturing industry to outsource a part of their manufacturing activity to third parties such as contract manufacturers/job-workers. This is cost-efficient for the manufacturers and enables them to focus on the core activities of the business. Such contract manufacturers constitute a significant sector in the Indian economy and a large part of the country’s SME is involved in the manufacturing process through this route. The original equipment manufacturers (OEM) often provide the contract manufacturers (CM) with moulds and tools to be used for the activity of manufacturing so as to maintain quality and standardise the production process. Let us first walk through the treatment of moulds and dies in the hands of the contract manufacturer in the pre-GST regime.
Position under Central Excise
Rule 6 of the Central Excise Valuation Rules, 2006 provided that in case price is not the sole consideration, the money value of the additional consideration from the buyer to the seller was also liable to be included to the value for the purpose of levy of central excise duty. It was a well settled jurisprudence that in cases where moulds and dies are given free of charge to the CM by OEM, price cannot be said to be the sole consideration for supply of goods by CM, as part of the cost of manufacturing of the finished goods supplied is borne by OEM (cost of mould) and the value of the moulds were liable to be included in the products manufactured by the CM. Thus, the amortized value of moulds, dies and jigs provided free of cost was deemed to be an “additional consideration” for the supply made by the CM in the excise regime.
Position under VAT/Sales Tax law
The Supreme Court in the case of Moriroku UT v. State of UP [2008 (224) ELT 365 (S.C.)] examined the issue of inclusion of amortised cost of tools in the sale price of auto components. The Apex Court held that sales tax was leviable on the agreed consideration for transfer of the property in goods and in such a case cost of manufacture was irrelevant. It further held that the transaction value under the excise regime aimed at taking into consideration all items of cost of manufacture and all expenses which lead to value addition and Rule 6 provided for notional value additions and such concept was not applicable in the case of sales tax. The Court held that the amortised cost of moulds was not required to be included in the sale price for the purpose of sales tax/VAT. This position of law has, however, changed with the implementation of GST.
Provisions in the GST regime
In the GST regime, GST is payable on the value of supply as determined under Section 15 of the CGST Act, 2017 which is reproduced below:
15(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
(2) The value of supply shall include —
(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;”
On a plain reading of the above, it is evident that the value of a supply shall be the transaction value. However, Section 15(2)(b) specifically provides that the value of a supply shall include any amount that is payable by the supplier but has incurred by the recipient of the supply and has not been included in the value of the supply. On a literal reading of this provision, a view can be taken that the value of moulds and dies shall be included in the value of supplies of CM only in case the OEM was liable to incur the expenses for the moulds but the same has been incurred by the CM.
A clarification in with regard to moulds and dies has also been issued by CBIC by way of Circular No. 47/21/2018–GST on 8-6-2018. Para 1.2 of this circular clarifies that the value of moulds and dies are not to be included in the value of supply by CM when the cost of the moulds and dies are not to be incurred by the CM contractually. Para 1.3 clarifies that the value of the moulds and dies are to be included in the value of supplies by CM if the contract between CM and OEM specified that CM is liable to supply moulds but the same have been supplied by the OEM.
Thus, it seems that the contractual arrangements may have to be examined to determine the inclusion of the value of moulds in the supplies of CM for the purpose of GST. Even though the above circular has provided a certain degree of clarification regarding the inclusion of amortised value of moulds in the supply of component manufacturers, an industry wide apprehension continues to exist regarding the applicability of Section 15(2)(b) in the case of moulds and dies. The confusion has also grown manifold with contrary rulings of the AAR on the said issue.
Amortized value of mould includible in all cases - AAR
As per the facts involved in an advance ruling [In Re: Nash Industries Pvt. Ltd., 2018-VIL-266-AAR], CM was responsible for manufacture of mould and he invoiced the OEM for supply of the moulds although the physical possession was retained by the CM. Subsequently, the same was used to manufacture finished goods and make supplies to OEM. The Advance Ruling Authority was of the view the value of supply of finished goods by CM to OEM must include the amortized value of the mould provided on FOC basis, irrespective of the contractual arrangement between the parties.
The Authority, while interpreting Section 15(2)(b) of the CGST Act, 2017 held that that no goods can be manufactured without a “customized mould”. Thus, the CM has to either procure the said mould from a third party or manufacture it himself. In cases where the goods are procured from a third party, the value of the same is included in the value of supply. Thus, no different position must be taken in case where the said mould is manufactured by CM, irrespective of the fact that the same has already been supplied to OEM and returned on FOC basis.
Ruling holding amortized value not includible
The Maharashtra Advance Ruling Authority placed reliance on the above stated circular and held that the amortized value of mould was not required to be included in the value of finished goods manufactured and supplied by the CM to the OEM in cases where the agreement between the parties clearly stated that the cost of mould must be incurred by the OEM [In Re: Lear Automotive India Private Limited, 2018-VIL-318-AAR]. However, the facts of this case are different as compared to the case discussed in the previous paragraphs.
It has become imperative for the contract manufacturing industry to revisit their agreements with the OEMs in light of the clarification issued by the CBEC and the rulings of the Advance Ruling Authority to safeguard themselves from any avoidable exposure and GST liability in the future.
[The first author is an Associate and the other co-authors are Senior Associate and Joint Partner respectively in Lakshmikumaran & Sridharan, Mumbai]