As G. F. Stanlake states in his book ‘Introductory Economics’, a person who spends his or her time performing one relatively simple task becomes extremely proficient at that particular operation. It is true that constant repetition leads to great dexterity and efficiency.
The most interesting feature of an economic activity in modern times is the fact that in most cases, a manufacturer never makes a complete product on his own. The activity of outsourcing a part of the production is referred to as job work in trade parlance, wherein the principal sends inputs and / or capital goods to the job worker for undertaking certain treatment or process on such goods.
One of the most common transactions in cases of job work is provision of moulds and dies, jigs and fixtures or tools by the principal to the job worker for use in the job work activity. In this regard, we would like to analyse whether the job worker is required to include the amortised value of mould in the job work charges for the purpose of discharging GST.
The provisions relating to value of taxable supply are covered under Section 15 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’, for brevity). Section 15(1) inter alia provides that the ‘price actually paid or payable’ shall be the value of supply if such price is the sole consideration for that supply.
Unlike Central Excise law, GST law does not specifically provide for treatment of value of moulds, etc., as ‘additional consideration’. Section 2(31) of CGST Act provides meaning for the term ‘consideration’ in relation to the supply of goods or services or both to include:
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government.
The definition of consideration in clause (a) includes:
- Any payment made or to be made in money or otherwise,
- In respect of, in response to, or for the inducement of the supply,
- Whether by the recipient or by any other person.
The definition of consideration in clause (b) relates to additional consideration flowing from the recipient to the supplier in the form of services and hence the same has no relevance here.
It may be construed that the consideration need not necessarily be paid to the supplier to determine the value of supply under GST law. In a scenario where the mould is handed over by the principal to job worker, the value thereof cannot be regarded as ‘payment’ made by principal to job worker, otherwise than in ‘money’.
Also, a payment takes the colour of consideration only when it is made in respect of, in response to or for the inducement of supply. The fact that mould is used by job worker for manufacture of finished goods for the principal, cannot lead to an inference that the same represents payment in respect of, in response to or for inducement of supply.
The argument that provision of mould by principal to job worker cannot be regarded as an inducement, motivation or obligation, can be appreciated by identifying the scope of supply in a job work transaction. For example, if the principal provides the raw materials as well as mould to job worker for manufacture of finished goods, the job worker is only obliged to supply services and not goods. Even though the job worker cannot carry out the activity without the mould, neither the value of materials nor the cost of moulds, can be regarded as ‘consideration’ for supply.
Reference can be made to the decision of Supreme Court in the case of Moriroku UT India Private Limited v. State of U.P. & Ors, dated 3-3-2008 [MANU/SC/7350/2008] under the provisions of the U.P. Trade Tax Act, 1948, where it was held that amortization cost of tooling supplied by the principal free of cost to the vendor to enable it to manufacture automobile components is not includible in the sale price of the component. The relevant extract of the judgement is as follows:
“Before concluding, it may be clarified, that, in the present case, moulds were manufactured by the buyer/principal so that the auto components could be manufactured by the appellant in terms of the specifications given by the buyer. Therefore, the cost of manufacture of these moulds was incurred by the buyer/principal and not by the appellant.In our judgment, we have termed the "amortisation cost" as notional in the sense that it is not the cost in the hands of the appellant. As stated above, Rule 6 of Excise Valuation Rules, 2000 refers to items of additional consideration. But for Rule 6 it was not possible for the Department under the 1944 Act to load such items to the transaction value of the final product.It is for above reasons, particularly because cost of manufacture is not incurred by the appellant but by the principal, such cost cannot be added to the price of the final product, particularly when there is no law to that effect.”
From the above decision and analysis, it can be inferred that amortised value of moulds supplied by principal to job worker is not required to be included in the value of conversion charges for the purpose of discharging GST, in the absence of a specific statutory provision to that effect.
CBIC has recently issued Circular No. 38/12/2018, dated 26-3-2018 wherein it is clarified that the value of services would be determined in terms of Section 15 of the CGST Act and would include not only the service charges but also the value of any goods or services used by job worker for supplying the job work services, if the same is recovered from the principal. It is therefore clear that the question of additional consideration comes into picture only when the same is recovered from the principal.
The circular thereafter specifically addresses the issue of value of job work services when moulds and dies, jigs and fixtures or tools are provided by the principal to the job worker and used by the latter for providing job work services. It is clarified in the said circular that in terms of Section 15 of the CGST Act, any amount that the supplier is liable to pay in relation to the supply but which has been incurred by the recipient will form part of value for that particular supply, provided it has not been included in the price for such supply and accordingly, the value of moulds and dies, jigs and fixtures or tools needs to be included in the value of job work services if its value has not been factored in the price for the supply of such services by the job worker.
It may be noted that while on one hand the circular provides that the value of only those goods or services, which are recovered from the principal, are required to be included in the value of taxable supply; on the other hand, it says that the value of moulds, etc. must be included in the value of job work services if their value has not been factored in the price for the supply of such services by the job worker, thereby indicating an apparent contradiction.
The view in the second part of the circular may be relevant only in a scenario where the job worker places order for supply of mould to a vendor for use of such mould in his job work and the consideration for supply of such mould is paid by the principal on behalf of the job worker. In such case, it can be said that the value of job work services is suppressed to the tune of additional consideration flowing from the principal to the job worker, through the vendor.
In our view, mere provision of mould by principal to job worker cannot be regarded as additional consideration. Therefore, the amortized value of mould is not required to be included in the value of job work charges. However, the recent circular seems to adopt contradictory position, indirectly requiring the amortised value of mould to be included in the value of job work charges for discharging GST on job work services.
In view of the above inconsistency drawn from joint reading of Section 15 and the circular, non-inclusion of the amortized value of mould in the job work charges by job worker may be prone to litigation. In all fairness, CBIC should come out with a clarification quickly and demonstrate to the trade and industry that they sincerely intend to have a Good and Simple Tax.
[The authors are Principal Associate and Associate, respectively, in GST Practice in Lakshmikumaran & Sridharan, Bangalore]