In auto component and engineering industries, manufacturing moulds and dies, for producing final components or parts sold to original equipment manufacturers (OEMs), are common. In normal parlance, the component manufacturer has an in-house design and engineering team for development of customised moulds and dies. Notably, the ownership of such moulds and dies are transferred to the OEMs, while the possession remains with the component manufacturer. The component manufacturer charges an upfront tool development cost from its customer.
The OEMs are required to pay for the final component ordered along with the cost of developing specialised moulds and dies required to manufacture those components. For this purpose, two separate invoices are raised, i.e., one for the upfront tool development charge and the other for final component.
Understanding the issue and legal provision thereon
The industry stakeholders, including component manufacturers and OEMs are in dilemma of whether to consider the upfront tool development charge recovered by component manufacturer from its customer as supply of services or supply of goods. The issue arises when the captioned transaction is considered as supply of goods due to reasons explained ahead.
As per Section 10(1)(c) of IGST Act 2017, the place of supply of goods (other than import/export), where the supply does not involve movement of goods by the supplier or the recipient, is the 'location of such goods at the time of the delivery' to the recipient. Therefore, even in case the recipient is located outside the state, Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) are to be charged by the customer based on Section 10(1)(c), when there is no movement of goods. This would result in loss of credit to the customer.
Further, as per Section 2(5) of IGST Act, 'export of goods' with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India. Therefore, in case the recipient is located outside India, the transaction would not be considered as 'export' since the goods are not taken out of India and consequently, the supplier needs to discharge appropriate Goods and Services Tax (GST) on the same. Such embargo gives rise to some formidable situations where the supply is ultimately consumed in the destination location, however, tax relief is not accrued owing to rigid definitions.
IBEX Engineering (P.) Ltd. v. state of Karnataka (High Court)
Moulds are manufactured by IBEX for further manufacturing a product, which was exported to the foreign buyer. The manufacture of moulds was claimed as an export sale by IBEX, for which it had received payment in advance, called as tool development charges. The moulds were never actually exported, but remained with the dealer (i.e., IBEX).
The Karnataka High Court (HC) observed that, "The moment the goods have come into existence, the payment received by the assessee would be considered to be with reference to the goods so finished and once, the transaction gets completed, the assessee holds the goods on behalf of the buyer. Further, there is no dispute that the goods never moved out of the assessee's premises and therefore, never crossed the customs frontiers of India. Therefore, the transaction cannot be considered as export sale. If the export part does not take place, only the sale part remains and if there is a sale, it therefore cannot escape the liability for taxation under Value-Added Tax (VAT) Act, unless it is an inter-state sale or export sale. The mere fact that the buyer may be outside India does not in any way detract from the transaction to be taken as a local sale"
Dolphin Die Cast (P.) Ltd. In re  116 taxmann.com 746/81 GST 479 (AAR - KARNATAKA) The applicant manufactures the die as per the requirement and specifications given by the foreign buyer and also manufactures and exports the aluminum and zinc die castings to the foreign buyer by retaining the die with them till the completion of the export order or completion of die life. However, the applicant raised the tax invoice for this die immediately after the manufacture in the name of overseas customer in foreign currency for receipt of payment, though the die not physically moved out of India to the place outside India.
It was held that in the case of die manufacturing by the applicant without moving the goods and invoice raised in the name of the recipient, the applicant has to raise the tax invoice addressed to the foreign buyer and discharge CGST and SGST.
In the case of component sale to the OEMs outside the state within India, the industry practices delivering moulds and dies to the customer location first and then transporting them back on a job/work-basis, thereby treating the moulds and dies as 'goods' and charging GST on the same. In this case, since the transaction involves movement of goods, the place of supply would be location of recipient and consequently, IGST would be charged. Therefore, the loss of credit is avoided in such cases.
On the other hand, in case of overseas customer sales, since transporting the tools back and forth would involve a huge amount of transportation cost, the industry treats such supply as supply of design and engineering 'services' without charging any GST on the same, considering it as exports of services.
Taking in account the impugned transaction as supply of goods, in the case of sales to domestic OEMs and supply of services in the case of sales to foreign OEMs, a detailed analysis and structuring of arrangement is required to ensure consistency in both the cases.
In case of moulds and dies sales to domestic OEMs, the practice adopted by the industry is revenue neutral, since the OEM is eligible to take the Input Tax Credit (ITC) of GST discharged on such moulds and dies. However, in case of supply to foreign OEMs, since the moulds and dies are never taken outside India, therefore, the supplies of moulds and dies may not qualify as exports under Section 2(5) ibid. Consequently, the component manufacturers would be required to discharge tax on such supplies, thereby increasing their cost of exports and making themselves globally uncompetitive. Considering the overall objective of the GST and importance of earning foreign exchange for India, the government should consider providing the benefit of zero tax, even for the dies and moulds manufactured for further use in manufacturing of final components meant for export. There are few countries who have already made such goods GST-free. In the United Kingdom VAT Act, 1994, unlike Indian GST, the scope of zero-rated supplies is not limited to exports and provides zero rating of moulds and dies to an extent that they are used for exporting components outside UK. Similarly, the Australian and New Zealand GST laws provide exemption to jigs, patterns, templates, dies, punches and similar machine tools used in the manufacture of goods for export purposes. To conclude, it is important for the government to acknowledge the broader sense of zero rating and thus, similar law could help the Indian exporters to improve competitiveness.
The entities facing such issue may consider revisiting their contracts in such a way to mitigate the GST impact, thereby reducing the overall tax burden. Needless to mention, the industry should consult tax professionals seeking their expert advice to provide tax optimum solution within the corners of law.