'Customer is the King' is the most popular notion followed by most of the corporate to sustain in the market & also to grow their market share. Therefore, sometimes, manufacturers (corporate) are required to manufacture the goods as per the specifications of the customers i.e. customized products as per customer needs.
In few cases, manufacturers may also obtain designs from customers (suiting its business) and manufacture goods accordingly. Such designs are given by customers at free of cost and manufacturer charges amount from customers only to the extent of manufacturing activity. The implication under indirect taxes, both earlier and current tax regime, in such instance is discussed in following paragraphs.
Whether the monetary value of design charges form part of consideration?
The term 'consideration' is defined in CGST Act, 2017 which includes:
- Any payment made or to be made, in money or otherwise
- Monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services
Hence, consideration includes both monetary and non-monetary consideration received in respect of supply. Further, it specifically includes the monetary value of any act done in respect of the supply. However, the extent of applicability of the provision is questionable.
Does the provision be applied for every act done in respect of supply?
In the current scenario where designs/drawings are provided by the customer, the fact is that it is an act done by the customer in respect of the supply to be made by the manufacturer. Accordingly, the bare reading of the law may require the manufacturer to include the monetary value of such designs for paying GST.
At the same time, a view can be taken that the above provision cannot be extended to include the value of everything that is done in respect of the supply. This is so because, for the activity agreed to be performed by the manufacturer, the price charged is the sole consideration and the value of supply is not under-valued.
What is the 'Value of Supply' in such cases?
In accordance with section 15 of CGST Act, 2017, the value of supply shall include 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.
Accordingly, the amount actually incurred by the recipient is to be included in the value of supply when:
- Such amounts are liable to be paid by the supplier;
- Amount to that extent is not included in the price.
But, when can it be said that the supplier is liable to incur such expenditure? What needs to be considered to conclude that supplier is liable?
The answer could be from the scope of the work or essential nature of expenditure etc. However, it is to be noted that there are no confirmative criteria to conclude on the list of expenditure/cases where the supplier is liable or recipient is liable. The same is required to be concluded on the case to case basis and decide whether to include or not to include.
In the current context, as the supplier scope of activity is restricted to manufacturing, it can be said that supplier is not liable to incur any expenses towards design charges and the same is not required to be included in 'value of supply'. Accordingly, GST is not required to be paid to the extent of notional design charges.
However, there is every possibility that the department may demand assessee to include such charges contending that either the same forms part of consideration or the same needs to be included in the value of supply. To be conservative, GST can be collected and paid on value including such charges and can be availed as credit by the customer (provided he is registered).
Whether design charges form part of taxable value under Central Excise?
Central Excise duty is to be paid on the manufacture of dutiable goods. Further, the value of drawings/designs to be included in the value of goods in accordance with Rule 6 of Central Excise Valuation (determination of the price of excisable goods) Rules, 2000 (taking a view that price is not the sole consideration).
Hence, in earlier tax regime, there is specific inclusion w.r.t design charge and intention behind such inclusion is that i) Excise duty is to be paid on value on manufacturing activity which requires designs to be prepared before initiation of the process, and ii) The value charged by the manufacturer would certainly be higher if the designs are not provided by the customer. Further, the taxable value is undervalued to the extent of design charges in case if designs are provided by the customer and the value of the same is not included.
This analogy may not be required to be applied in GST regime as all the taxes are subsumed into GST and every supply is taxed.
Is providing designs to a manufacturer by a customer, a 'Supply' made by the customer under GST?
In accordance with section 7(1) of CGST Act, 2017, supply includes all forms of supply of goods such as sale, transfer, barter, exchange etc. for a consideration by a person in the course or furtherance of business. In the present case, as the designs are provided at free of cost, the same is not a supply.
Further, the same is not covered under schedule I (supplies without consideration) unless supplier and customer are related parties or in other specific scenarios.
In earlier tax regime (Central Excise), design charges are specifically included as Excise duty is to be paid on the value on manufacturing activity which requires designs to be prepared before initiation of the process (i.e., preparation of designs is part of the manufacturing activity).
However, in GST regime as the taxable event is 'supply' but not manufacture, the same analogy may not be required to be applied now.
Many of the manufacturers are paying GST including the monetary value of design charges as a practice from earlier tax regime. However, clarification is required in this regard as it would directly the prices and will certainly be decreased if the same is not required to be included in the taxable value.
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