In Re: M\/s. Lear Automotive India Private Limited
GST
2018 (12) TMI 766 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – 2019 (21) G. S. T. L. 204 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – AAR
Dated:- 31-7-2018
GST-ARA-19\/2018-19\/B-80
GST
SHRI B.V. BORHADE, AND SHRI PANKAJ KUMAR, MEMBER
\nPROCEEDINGS
\n(Under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
\nThe present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Lear Automotive India Private Limited, the applicant, seeking an advance ruling in respect of the following questions:
\nWhether amortized value of the tool received on FOC basis from the customer is required to be included in the value of finished goods manufactured and supplied by the applicant to the customer?
\nAt the<\/p>\n
= = = = = = = =<\/p>\n
Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n in the manufacture of automotive seats', which is manufactured in its various plants located in the state of Maharashtra. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ther component manufacturer to manufacture the products for the Applicant which are used by the Applicant for its final products and in this regard, the tooling cost is first absorbed by the Applicant and then recharged to the OEM. In such cases, the possession of the tool would remain with another component manufacturer. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 3. Applicant's Interpretation- = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n hall include = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n he said amount has to be added while determining the transaction value. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n de thereunder to make such inclusion in the value as it existed under the erstwhile Central Excise Regulations. Unless there exists a specific provision for inclusion of free of cost supplies received from the buyer of the goods or to add the amortized value of the tool or dies provided by the receiver of the goods on FOC basis, such an addition cannot be made to the value of the taxable supply. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ot been included in the price paid or payable, has to be treated as the money value of additional consideration flowing directly or indirectly from the buyer\/customer to the assessee in relation to sale of goods being valued and aggregated accordingly……. For levy of excise duty, “value” is to be determined per unit of excisable goods. Tools, dies, moulds etc. have their own life span and will be used for estimated production during their useful life. Consequently, depending upon the expected useful life and\/or expected number of units likely to be produced, value of tools, dies, moulds etc. supplied by the buyer\/customer free of charge to the appellant is to be appropriately apportioned per unit of production. This is where the concept of amortisation comes in specifically in Rule 6. The amount so apportioned is required to be added to the price\/transaction value as per clause (ii) of Explanation 1 to Rule 6 read with Section 4(1)(b). The important thing to be noted is that this en<\/p>\n = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ore concluding, it may be clarified, that, in the present case, moulds were manufactured by the buyer\/customer 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\/customer 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 customer, such cost cannot be added to the price of the final product, particularly when there is no law to that effect. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n f the above discussion, it is clear that in the present case, there should not be any notional addition of the amortized value of the tool in the taxable value of the supply of final goods to the customers by the Applicant and also by its vendor to the Applicant as well. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n upply shall include = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n the responsibility of the customer i.e. M&M to bear the cost of the tools or give the Applicant its own tools for the purpose of manufacturing products for M&M. The relevant portion of the said agreement reads as under: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n pplied = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n n FOC basis by the OEM to the component manufacturer in the course or furtherance of his business, there is no requirement for reversal of input tax credit availed on such moulds and dies by the OEM. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 15(2)(b) of the CGST Act. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n . The Applicant submits that the present transaction of customer providing the tools FOC is an industry vide practice. Goods manufactured in the auto sector are customised items as each car model has different design and features. Therefore, the tools required to manufacture such goods are provided by the customer itself to suit their own needs and specifications. The customers also intend to retain the ownership of the tools so as to be able to use the tools for future manufacturing and hence they take the responsibility of providing the tools to the Applicant. In case where the contract between the Applicant and its customer does not expressly state the responsibility, it should very well be understood under the common business standards which indicate that the customer would always take up the responsibility of bearing the cost of the tools and not the Applicant. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n the supply = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n retation of Statutes (12th Edn.) at para 33 which provides as under: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ant are not includable in the value of the goods supplied by the Applicant. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n d. v. State Of U.P reported at 2008 (224) ELT 365 = 2008 (3) TMI 513 – SUPREME COURT OF INDIA wherein the Supreme Court in context of UP Sales Tax had held that, price of moulds manufactured by customer so that vendor could use the same in manufacture of final components as per the specifications of the customer, would not be includible in the assessable value of the final components sold by the vendor to the customer as the cost of the same has been incurred by the customer and not the vendor and accordingly, the same is not includible in the absence of a specific provision providing for the same. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n further relied upon its own decision in the case of M\/s. Chhotabhai Jethabhai Patel v. UOI, (AIR 1962 SC 1006 at p. 1018) = 1961 (12) TMI 1 – SUPREME COURT OF INDIA, wherein the court held that a duty of excise is a tax levy on home produced goods of a specified Class or description, the duty being calculated according to quantity or value of the goods and which duty is levied because of the event of manufacture which gives a vital difference between excise laws and sales tax laws. This was further explained in the case of UOI v. Bombay Tyre International Ltd., (AIR 1984 SC 420) = 1983 (5) TMI 33 – SUPREME COURT OF INDIA wherein it was stated that levy of excise tax is on manufacture and sales tax arises beyond the stage of manufacture. The court also held that accounting differs from enactment to enactment; therefore, the regime under Central Excise, 1944 cannot be applied identically in the UP Trade Tax, 1948. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n dopted under the previous law cannot be relied upon for the purpose of valuation under the present law. Hence, the value of the tools supplied on FOC basis by the customer are not includable in the value of supply under the GST regime and present application of the Applicant should be decided accordingly. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n use any quality of goods and the value of such goods can vary significantly. Such a value, has no bearing on the value of services provided by the service recipient. Thus, on first principle itself, a value which is not part of the contract between the service provider and the service recipient has no relevance in the determination of the value of taxable services provided by the service provider.” = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n o not provide economic value to Eddie in return for his supply. The provision of these things in these circumstances is not consideration in connection with the supply by Eddie. There is no non-monetary consideration for Eddie's supply.(Para 91 and 92) 19. GSTR 2001\/6 goes on to explain that “If Mountain agreed in addition to provide holiday accommodation for Eddie at the Gold Coast, this would constitute non-monetary consideration. It is not something required for Eddie to supply the services to Mountain and it provides Eddie with economic value in return for his supply. Further, had Eddie incurred the costs of the transport, accommodation and meals and on-charged those expenses to Mountain as part of the cost of his services, GST is payable on this on-charge as they represent additional costs for the supply of Eddie's services.” (Para 93 and 94) = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n t have to use its own premises and equipment. The use of the premises and equipment is not consideration for Fast's supply as there is no nexus between it and the supply by Fast. It does not have an independent identity such that it provides Fast with any value in return for its services. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n pplied on FOC basis are included in the value of supply, it would lead to double taxation. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ed only on value addition thereby removing the cascading effect of taxes. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 21\/2018-GST dated 08.06.2018 issued by the CBIC. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n omer. The Applicant undertakes the design, development and the manufacture process of such seats at its own manufacturing facilities. Since the seats and other related products manufactured by the Applicant are highly customized, the Applicant procures certain tools, moulds, dies, fixtures, jigs etc. which are required for manufacturing the desired products. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n uction process and simultaneously charges the cost to the customer i.e. M&M. The relevant PO raised by the Applicant on its vendor and the invoices raised by the vendor on the Applicant are enclosed herein as Annexure 3 & 4. Also, the invoice raised by the Applicant on M&M for the sale of the said tools is enclosed as Annexure-5. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n spond to the present query, the relevant extract of the recent Circular No. 47\/21\/2018-GST dated 08.062018 issued by the CBIC is reproduced above in the given earlier submission. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n the scope of the Serial No. 1.2 of the above circular. Since the present case falls under Serial No. 1.2 of the above circular it is necessary to establish that the present transaction does not fall under the ambit of Serial No. 1.3. In this regard we submit as follows: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n -1 of the agreement dated 10.02.2016 wherein the tools as involved in the agreement are mentioned. Further, the said Annexure-1 of the aforesaid agreement also contains the Purchase order no. A003\/A6V3200094768 (attached herewith as Annexure-6). Page 2 of the above referred purchase order lays down the terms and conditions as follows: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ..Emphasis Supplied = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n nation of contract with the component manufacturer like the Applicant. Secondly, since the tools are customized to the OEM's needs, the component manufacturers do not prefer to undertake the expenses and risks associated with the development and procurement of the same as it increases its manufacturing cost significantly and the tools cannot be used for any other process\/ products other than that of the respective customer. And, the risk is also associated if the said OEM stops procuring the components manufactured by the component manufacturers due to change in design and any other reasons. Therefore, the ownership of the tools would remain with the OEMs\/ customer as that is the only viable business practice in the present transactions. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n and cement. However, PWD had agreed to supply these materials for construction and deduct their prices from the final bill of the appellant. As per Clause 10 of the Contract, all the materials supplied to the contractor remained the Government's property. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n o be covered by Sr. No. (iii) of the said Circular. Accordingly, the value of the tools should not be included in the value of supply. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n td, has applied for Advance Ruling in proforma GST ARA 01 and this office has been directed to represent the case along with relevant record on 20.06.2018 at 1100 am. Subsequently, an e-mail has been received from Advance Ruling Authority on 06.06.2018 conveying re-scheduling of the hearing in the case on 27.06.2018 at 0200 pm. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n s for supply of components made by using the moulds\/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds\/dies shall be added to the value of the components. In such cases, the OEM will be required to reverse the credit availed on such moulds\/ dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former's business.” = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n documentary evidence and value of components supplied in two cases separately. (1) Wherein tool is supplied by M & M. (2) wherein tool is itself manufactured or and arranged by components manufacturer. Jurisdictional Officer Sh. A.Y. Jadhav, Suptt. Pune I Commissionerate appeared and stated that they have already made their submissions. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n The applicant has submitted the documentary evidences which represent the transactional facts as under:- = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n requirement for reversal of input tax credit availed on such moulds and dies by the OEM. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n d the customer of the applicant. Once it is established that the obligation to provide tools on FOC basis is on the customer then the question of adding the amortised value of tools supplied by the customer does not arise. However, the situation is reverse where the obligation to use tools is on the applicant but provision for the same is made by the OEM on FOC basis. In view of this, we now examine the relevant clauses of the agreement made between applicant and Mahindra and Mahindra Ltd. on 10th February, 2016 (which is made pursuant to agreement dated 26th May 2015 (LOBA Date) for Bolero Comfort Improvement agreement to purchase components.) The relevant clauses of the agreement dated 10th February, 2016 are as under:- = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n Hold the Equipment as the agent of Mahindra and Mahindra Ltd. And not claim any right, title or interest in the Equipment to the detriment or prejudice of Mahindra and Mahindra Ltd.; = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n Equipment, M&M shall be entitled to terminate this Agreement, repossess the Equipment in any state as it may be, to retain the claim amount for such Equipment, and receive the shortfall on demand from the Vendor to make good the total quantum of damage to the Equipment less the amounts received by M&M from its insurance protection for the Equipment. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ination of this Agreement the Vendor shall forthwith return to M&M Equipment in good working order and condition. (Normal wear and tear expected), at such time and at such place as may be directed by M&M in writing. In case the Vendor fails to so return the Equipment to M&M, M&M shall without any notice, be entitled to remove & repossess the Equipment and for that purpose, enter upon nay land, building or premises where the equipment is located or is reasonably believed by M&M to be so located, and detach and dismantle the same. M&M shall not be liable for any damage which may be caused by any such detachment or removal of the Equipment and the Vendor be caused by any such detachment or removal of the Equipment and the Vendor agrees not to object or create any obstacle or resistance for the said purpose. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n same is sold to the OEM which is M&M in the present case. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n","protected":false},"excerpt":{"rendered":" In Re: M\/s. Lear Automotive India Private LimitedGST2018 (12) TMI 766 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – 2019 (21) G. S. T. L. 204 (A. A. R. – GST)AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – AARDated:- 31-7-2018GST-ARA-19\/2018-19\/B-80 GSTSHRI B.V. BORHADE, AND SHRI PANKAJ KUMAR, MEMBER PROCEEDINGS (Under section 98 of the Central Goods and Services … Continue reading “In Re: M\/s. Lear Automotive India Private Limited”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-15506","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/15506","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15506"}],"version-history":[{"count":0,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/15506\/revisions"}],"wp:attachment":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15506"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15506"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15506"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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\n2. The present application is filed in respect of valuation of supply of automotive parts (hereinafter referred to as “final goods”), which are manufactured out of tools provided by the customers on Free of Cost (FOC) basis to manufacture the products as per their requirements.
\n3. The Applicant manufactures automotive seats for various customers, such as Ford Motor Private Limited, Volkswagon India Private Limited, M\/S Mahindra & Mahindra Ltd, General Motors, etc. (hereinafter referred to as customers') by using tools\/ moulds either provided by them or owned by them.
\n4. Generally, the Applicant gets the tool manufactured from third party manufacturer as per the requirements of the customer. Thereafter the property in the said tool gets transferred from third party manufacturer to the Applicant and from the Applicant to the customer. Though the property in tool g<\/p>\n
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\n8. The present application seeks to understand whether the amortized value of the tool cost needs to be added to the value of the final goods supplied to the customers under the GST laws.
\n9. Under the erstwhile regime of Central Excise, Rule 6 of the Central Excise Valuation Rules, 2000 required an assessee to calculate the intrinsic value of the excisable goods by including any additional consideration flowing directly or indirectly from the buyer to the assessee. In view of the same, the Applicant was amortizing the value of such tools supplied\/ provided by the customers on FOC basis and was including the Same in the assessable value of the final goods for dischar<\/p>\n
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\n3.1 In order to analyse the present issue, reference is made to Section 7(1)(a) of the CGST Act, which defines the term “supply' as under:
\n7. (1) For the purposes of this Act, the expression “supply” includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
\n3.2. Section 7(1)(a) of CGST Act defines the term 'supply' widely to include all forms of supply of goods or services or both such as sale, transfer, disposal, etc made or agreed to be made for a consideration in the course or furtherance of business.
\n3.3. In the present case, supply of automotive parts or final goods, which are manufactured out of the tools developed by the Applicant or the unrelated vendors at the behest of the customers, are squarely covered under the definition of supply defined under Section 7 as <\/p>\n
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\n(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;”
\n…Emphasis Supplied
\n3.6. In terms of Section 15(1) of the CGST Act, value of taxable supply shall be the transaction value which is the price paid or payable by the recipient) provided the supplier and recipient are unrelated parties and price is the sole consideration for the supply.
\n3.7. Further, Section 15(2)(b) specifically states that where any amount which the supplier is liable to pay in relation to a supply but the same is incurred by the recipient on behalf of supplier, then such value is required to be included in the transaction value.
\n3.8. To determine whether in the present case, value of taxable supply paid by recipient to the supplier is the 'sole consideration, it is necessary to refer to the definition of the term 'considerat<\/p>\n
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\n3.11 Thus, it is a matter of commercial arrangement between the parties as to what is in the scope of both the parties. Once it is clear that a particular activity is in the scope of receiver of the supply, then there is no question of adding the value of the same for determining the transaction value. The question of addition would arise only in the cases where something was in the scope of the supplier and the same has been provided by the receiver then in such cases the amount so spent by the receiver would be added in the transaction value.
\n3.12. As a consequence, once the arrangement is clear from the beginning as to what is in the domain of the supplier and the receiver and both the parties are fulfilling their own obligations, then there should not be any notional addition in the transaction value for the purposes of GST
\n3.13. In the present case, the Applicant and its customers are not related parties. T<\/p>\n
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\n3.15. Reliance in this regard is placed upon the judgment of Hon'ble Supreme Court in the case of Moriroku UT India (P) Ltd vs State of U.P. [2008 (224) ELT 365 (SC)] = 2008 (3) TMI 513 – SUPREME COURT OF INDIA, wherein the Hon'ble Supreme Court in the context of UP Sales Tax held that the price of moulds manufactured by customer so that the vendor could use the same in manufacture of final components as per the specifications of the customer, would not be includible in the assessable value of the final components sold by the vendor to the customer as the cost of the same has been incurred by <\/p>\n
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\n21. Accordingly, we hold that the High Court had er<\/p>\n
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\nAdditional Submissions made on 18.07.2018 by the Applicant-
\nA. Under the GST regime, goods which are supplied free of cost would not form a part of the value of the supply under Section 15 of the CGST Act.
\nA.1 The Applicant submits that goods which are supplied free of cost (FOC) would not form a part of value of the taxable supply under the GST regime. Hence, the tools that are provided FOC to the Applicant by its customer would also not be included in the value of the supply. In this regard, reference is made to the Section 15(1) of the Central Goods & Services Tax Act, 2017 (hereinafter referred to as “CGST Act”) which defines the value of supply as under:
\n“The value of a supply of goods or services or both sh<\/p>\n
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\na) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
\nb) 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;
\nc) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;
\nd) interest or late fee or penalty for delayed payment of any consideration for any supply; and
\ne) subsidies directly linked to the price excluding subsidi<\/p>\n
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\n1. PROVISION OF EOUIPMENT
\nM&M hereby agrees to (pay the Toolcost for development & manufacture of toolings\/ give the vendor its own (Dies, tools, jigs, fixtures, SPMS, etc.) more particularly described in Annexure I attached hereto (hereinafter referred to as the ” Equipment”), for use by the Vendor, immediately upon the execution of this Agreement, and the Vendor hereby agrees to use the money for the Equipment for the said use.”
\nA.6 Thus, the customer has itself agreed to bear the cost of the tools and assumed the responsibility of providing the Same either through the way of providing the funds for tools or providing the tools itself.
\nA.7 In this regard, the Applicant also places reliance upon the purchase order raised by the one of the Applicant's customer i.e. <\/p>\n
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\nA.8 Reliance is also placed upon the terms and conditions of the PO raised by General Motors on the Applicant. A copy of the said PO is attached herewith as Annexure-3. Para 22 of the said PO clearly states that the tools, dies, jigs etc. that are provided by the buyer i.e. GM will remain under the ownership of GM and will be provided to the Applicant only for the limited purpose of manufacturing goods for GM.
\nA.9 The above-referred paras clearly demonstrate that it is not the liability of the Applicant to pay for such tools, rather, the customer is itself providing the said tools on “no charge basis” and incurring the cost for the same. Further, the customer even retains the ownership of the tools which indicates that there is no intention between the parties that the tools are to be procured by the Applicant as the customer itself provides the tools and retains the ownership for any future use. In any case, the Applicant submits that even if it bears the cost of the tools a<\/p>\n
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\n1.2 It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds\/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short).
\n1.3 However, if the contract between OEM and component manufacturer was for supply of components made by using the moulds\/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds\/dies shall be add<\/p>\n
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\nA.13 Therefore, it is submitted that value of goods supplied on FOC basis cannot be included in the value of the supply as per the existing provisions of CGST Act read in conjunction with the aforesaid circular.
\nThe principle of business efficacy is applicable in the present fact scenario
\nA.14 The Applicant further submits that there may be scenarios wherein the customer has raised the PO on the Applicant for supply of goods however, the said PO or the terms of agreement between the parties do not expressly state the conditions or responsibility in respect of the provision of tools. In this regard, it is submitted that as a general principle of the principle of “business efficacy” a slight deviation from the plain meaning of the language of contract would be justified so as to the intention of the parties could be justified. In the case Satya Jain v. Anish Ahmed Rushdie reported at AIR 2013 SC 434 = 2012 (12) TMI 1170 – SUPREME COURT OF INDIA the concept o<\/p>\n
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\nA.16 Further in the case of United India Insurance Company Ltd. v. Manubhai Dharmasinhbhai Gajera and Ors., reported at <\/p>\n
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\nA.18 The Applicant further submits that the contention made by the Applicant in the above submissions is further supported by the legislative history of Section 15(2)(b) of the CGST Act. In this regard, reference may be taken from the Model GST Law, 2016 (hereinafter referred as “Model GST”). Section 15(2)(b) of the Model CST was specifically worded to include the goods supplied on FOC basis in the value of supply under CST. The relevant provision under the Model GST is reproduced herein-under:
\n“15(2) The transaction value under sub section (1) shall include:
\nb) the value apportioned as appropriate of such goods and\/or services as are supplied directly or indirectly by the recipient of supply free of charge or at reduced cost for use in connection with supply of goods and\/or services being valued to the extent tltat such value has not been included in the price actually paid or payable.”
\nA.19 The Applicant submits that the above provision proposed to include the value<\/p>\n
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\n“Omissions not to be inferred-It is a corollary to the general rule of literal construction that nothing is to be added to or taken from a statute unless there are adequate grounds to justify the inference that the legislature intended something which it omitted to express. Lord Mersey said: 'It is a strong thing to read into an Act of Parliament words which are not there, and in the absence of clear necessity it is a wrong thing to do.' 'We are not entitled,' said Lords Loreburn L.C., 'to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself.' A case not provided for in a statute is not to be dealt with merely because there seems no good reason why it should have been omitted, and the omission in consequence to have been unintentional.”
\nA.21 Relying upon the above, the Applicant humbly submits that when the legislature chose to reword the provision <\/p>\n
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\nDifference between Central Excise and GST regime
\nA.24 Under the Rule 6 of the erstwhile Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (hereinafter the referred to as “erstwhile Valuation Rules”), wherein, the price was not the sole consideration for sale, the value of such goods was deemed to be aggregate of such transaction value plus amount of money value of any “additional consideration” flowing directly or indirectly from the buyer to the assessee.
\nA.25 As per the pre-GST regime where the customer supplied certain material (tools, moulds, designs, etc.) to the manufacturer for free, the value of such given free of charge was includible in the assessable value of goods as monetary value of additional consideration for payment of excise duty since the intention was to levy excise duty on intrinsic value of goods as per Section 4(1)(b) of the Central Excise Act, 1944 read<\/p>\n
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\nA.28 The facts involved in the above case were that the appellant was a manufacturer of plastic automobile components for use in the Honda Siel Cars manufactured by Honda Siel Cars Ltd. (hereinafter called the “customer”) as per designs and specifications given by it. The customer supplied tools, dies, moulds etc. (toolings) free of cost to the appellant herein to enable it to manufacture a<\/p>\n
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\nA.30 It was further held that the UP Trade Tax, 1948 is a self-contained <\/p>\n
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\nB. Tools received from the customer on FOC basis do not forma art of consideration and hence the is not includable in the value of supply under the provisions of the CGST Act.
\nB.1 Under the CGST Act, the intention is to tax the “consideration” received in respect of a supply. Section 15 of the CGST is worded in a manner that it provides for inclusion of any amount which the supplier is liable to pay\/ incur, however the same is paid by recipient. In this regard, the Applicant has already made a detailed submission in its application as to what constitutes consideration under the CGST Act.
\nB.2 In this regard, the Applicant further invites attention to the case of Commissioner of Ser<\/p>\n
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\nB.3 Therefore, it is submitted that the value of goods provided free of cost by the customer to the supplier is not required to be factorized or amortized in the value of supply.
\nB.4 Further reference is also made to Para 90 of Australian GST Ruling 2001\/6 (hereinafter referred to as “GSTR 2001\/6”) which provides that the recipient of a supply may provide or make a thing available for the supplier to use in making the supply. However, the thing does not necessarily form consideration. The example provided in GSTR 2001\/6 is reproduced below.
\n“Things used in making a supply
\nEddie Engineer<\/p>\n
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\nW. Accordingly, it can be said that supplies made by recipient which are consumed within activities undertaken for making the outp<\/p>\n
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\ndependent goods
\nPretty Paint agrees to paint the interior of Peng's offices for $10,000. Peng agrees to provide Pretty Paint with 1,000 cans of pink shimmer paint that Pretty Paint has advised will be enough to paint the offices.
\nThe paint provided by Peng is not consideration for Pretty Paint's supply. Pretty Paint's supply is the service of painting the offices. Although Pretty Paint would have charged more money if it had to also supply the paint, this is not relevant in this particular transaction.”
\nB.5 The Australian GST regime does not envisage that goods and\/or services made available by the recipient and consumed by the supplier for making a supply to the said recipient would amount to <\/p>\n
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\nC.1 Notwithstanding anything stated above, assuming without admitting if the value of goods supplied on FOC basis is included in the value of supply, then it would amount to double taxation and the same would be contrary to the very scheme of GST law. It is submitted that the very purpose of bringing the GST law into force was to avoid the malice of double taxation, In the present case, it is an established fact that the tools that are provided FOC by the customer have already suffered the incidence of tax. In this regard, the Applicant places on record the invoices raised in respect of tools wherein the applicable GST has been levied. The copy of such invoices are collectively attached herewith as Annexure-4. Therefore, once the tools have already suffered tax and there is no further value addition to the said tools, the inclusion of the value of such tools in the subsequent supply would amoun<\/p>\n
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\nProvided the present factual scenario, if the cost of goods provided on FOC basis is included in the value of supply it would lead to a cascading effect, thereby the defeating the objective of the GST legislation.
\nC.5 In light of the above, it is submitted that the value of tools is not includable in the value of the supply as determined under the GST law.
\nFurther Additional Submissions made by applicant on 07.08.2018.
\n1. Lear Automotive India Pvt. Ltd. (hereinafter referred to as 'Applicant') has filed an application before this Hon'ble Authority on 03.05.2018. The Applicant in this regard was granted an opportunity of personal hearing on 28.06.2018 wherein the Applicant through its authorized representative made submissions for the admission of the application.
\n2. Pursuant to the admission of the application made by the Applicant, an opportunity of personal hearing was granted to the Applicant on 1807.201<\/p>\n
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\nIII. Whether the price of the final products is affected in case where the tools are provided by the customer or in case where the tools are procured by the Applicant and the cost is recovered from customer.
\n4. Therefore, in light of the above queries, the Applicant submits as follows:
\nSUBMISSIONS
\nA. At the outset, the Applicant submits that goods which are supplied free of cost (FOC) would not form a part of the value of supply under Section 15 of the CGST Act. In this regard, the Applicant has already made detailed arguments vide its written submissions dated 18.07.2018 substantiating the above and therefore the same are not being repeated here for the sake of brevity.
\nB. Response to Query 1.
\nWho produced the tools as per the Annexure-I of the tooling agreement dated 10.02.2016 and also requested to produce a copy of the Agreement dated 26.05.2015 as mentioned in the above tooling agreement.
\nB.1 During the course of the heari<\/p>\n
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\nB.4 This being a highly customized product, the Applicant and its customers engage in a series of discussions and meeting to finalize the design of the products. This practice is very prevalent in the automobile industry. Hence most of the times, the minutes of the meetings captured during the discussion and circulated over the email have been relied upon for finalizing the agreements\/business transaction. Such transactions are normally undertaken between the two parties based on their trust, relationship and the commercials involved and not by entering into formal agreements at all the times.
\nB.5 In the Applicant's case, similar<\/p>\n
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\nB.7 As already explained above, the customer retains the ownership in such tools and bears the cost for commercial purposes as the same makes business sense.
\nB.8 Further, for the Serial Nos. 7 & 8 the cost is borne by the Applicant since these tools are very generic in nature and can be used in any products. The cost of these tools is negligible when compared with the other tools or the manufactured products, therefore this cost is absorbed by the Applicant and the same is consequently included in the cost of the manufactured products.
\nB.9 It is therefore submitted that in all the cases the obligation to provide tool is on the receiver of the supply and whe<\/p>\n
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\nC.2 Thus, the circular clarifies that value of usage of moulds, jigs etc. (given on FOC basis) shall not be factored or amortized in the value of supply in a situation where the contract stipulates that the recipient of supply shall supply moulds, jigs etc. which would be used by the supplier to manufacture the goods, since the said situation is not covered by Section 15(2)(b) of the CGST Act.
\nC.3 It is submitted that the case of Applicant is covered by para 1.2 of the Circular referred above and not in Para 1.3. In this regard, we draw your attention to the agreement dated 10.02.2016 between M&M and the Applicant.
\nC.4 The above agreement between M&M and the Applicant was executed between the parties for the procurement and use of tools. This agreement dated 10.02.2016 clearly states that it is the responsi<\/p>\n
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\nAccording to the agreement between the parties, the components are to be manufactured using tools belonging to the OEM\/ Customer itself and the same are not in the scope of supply of the Applicant.
\nC.6 It is submitted that wherever the tools are supplied by M&M i.e. the customer itself to the Applicant, it is undisputed that the tools are owned by the customer and the same are provided to the Applicant for the sole purpose of use in the manufacture of goods to be supplied to the said customer. Further, as soon as the production process is completed the tools are returned to the customer. In this regard, the Applicant humbly submits that wherever the customer itself has supplied the tools to the Applicant, there is no<\/p>\n
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\n“TERMS & CONDITIONS
\n1. The above toolings will be the property of Mahindra & Mahindra Ltd. In case of any unforeseen circumstances MS Mahindra & Mahindra has the right to lift the toolings from your premises.
\n2. In the above event, excise duty will be paid by you at the time of physical dispatch of the toolings.
\n3. Toolings should bear the following words inscribed on them – “Property of Mahindra & Mahindra Limited”.
\n4. You shall not hypothecate or charge or pledge or create any incumbent whatsoever on the tooling.
\n5. All the expenses incurred in maintaining above toolings in good running condition will be borne by you,
\n6. You will be responsi<\/p>\n
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\nC.10 The above-referred terms & conditions in the purchase order clearly demonstrate that the any tools if procured by the Applicant in light of the tooling agreement would be the property of M&M and the said tools can only be sold to M&M. This very fact is evidence enough that even in case wherein the customer does not provide his own tools. the tools procured from outside or developed by Applicant are the property of the customer only and this has been agreed well in advance. It is not the case that it was the responsibility of the Applicant to bring its own tool and the same has been brought by the receiver of the supply.
\nC.11 Reliance in this regard is also placed upon the Chartered engineer's certificate dated 06.04.2016 wherein it has been categorically stated that the tools procured\/ developed vide the above-referred Purchase order No. A003\/A6X\/3200094768 are being used by the Applicant and are the property of M&M. A copy of the certificate dated 06.04.201<\/p>\n
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\nC.14 The Applicant further submits that there may be scenarios wherein the customer has raised the PO on the Applicant for supply of goods however, the said PO or the terms of agreement between the parties do not expressly state the conditions or resp<\/p>\n
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\nC.16 The issue presented before the Hon'ble Supreme Court in light of the above facts was that whether there was a sale when the construction materials were supplied by PWD and whether the property in goods passed to the appellant company or it continued to remain with PWD despite the fact that they have debited the cost of the construction supplied from the final bill.
\nC.17 The Hon'ble Supreme Court upon a careful perusal of the facts and the relevant case law had held that in order for a transaction to be a taxable sale, mere passing of property in the goods is not sufficient and there should also exist a separate and distinct contract for the sale and purchase of such goods. Consequently, it was held that the materials provided b<\/p>\n
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\nD. Response to Query 3.
\nWhether the price of the final products is affected in case where the tools are provided by the customer or in case where the tools are procured by the Applicant and the cost is recovered from customer.
\nD.1 The Applicant humbly submits that in both the scenarios viz. the Applicant procures the tools and charges to the customer, and, where the customer provides the tools to the Applicant, the cost of the final products remains the same. There is no change in the price of the final products based on the mode of procurement of the tools.
\nD.2 The Applicant submits that there does not exist a scenario wherein the tools are developed\/ procured by the Applicant and the cost is borne by the Applicant itself. In all the cases, either the customer provides the tools or the Applicant procures the tools themselves, however, the cost in<\/p>\n
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\n3. In this connection, the point-wise reply on the said matter is as under:
\n4. Kind Attention is invited to the Circular No. 47\/21\/ 2018-GST issued by Commissioner (CST), CBIC, New Delhi, vide F.No. CBEC-20\/16\/03\/2017-GST dated 08.06.2018 (copy enclosed), which clarifies the issue involved in the present case, reiterated as below:
\nSl.No.
\nIssue
\nClarification
\n1
\n
\nWhether moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer is leviable to tax and whether OEMs are required to reverse input tax credit in this case?
\n1.1 Moulds and dies owned by the original equipment manufacturer (OE<\/p>\n
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\n5. Further, Assistant Commissioner (Tech), CGST, Pune I Comm'te vide their letter F.No. VGN(19)20\/P-I\/Tech\/Advance Ruling\/18-19 dated 07.06.2018 with the approval of Commissioner, CGST, Pune I Comm'te, informed that “the amortization value of tools received free of cost is required to be added in value of finished goods.”
\n04. HEARING
\nThe Preliminary hearing in the matter was held on 27.06.2018, Sh. Sandeep Sachdeva, Advocate along with Sh. Arpit Chaturvedi, Advocate and Sh. Chaitanya B<\/p>\n
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\n05. OBSERVATIONS
\nWe have perused the records on file and gone through the facts of the case and the submissions made by the applicant and the department. We find that:-
\nLear Automotive India Pvt. Ltd. (hereinafter referred to as Applicant) is registered person under the GST ACT. The Applicant is engaged in the manufacture of automotive seats which are manufactured in its various plants located in the state of Maharashtra and for various customers such as Ford Motor Private Limited Volkswagen India Private Limited, M\/s. Mahindra & Mahindra Ltd, General Motors, etc. (hereinafter referred to as customers by using tools\/moulds either provided by them o<\/p>\n
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\n * The POs of customer in the name of Applicant for tooling
\n * The relevant PO raised by the Applicant to its vendor for manufacturing of Tools.
\n * copies of agreement which represent the case and transaction,
\n * The invoices raised by the vendor in the Applicant's name for tools.
\n * The invoice raised by the Applicant in customers name for the sale of the said tools.
\nOn the basis of above, the issue to be decided in present proceeding is whether the goods which are claimed to be supplied free of cost (FOC) would form part of value of taxable supply. It is the case of applicant that the tools that are provided by the customer on FOC would not be included in the value of supply.
\nIt is worth here to mention that several representations were received by CBEC seeking clarification on issue such as 'whether moulds and dies owned by Original equipment manufacturer (OEM) that are s<\/p>\n
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\n1.2 It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds\/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short).
\n1.3 However, if the contract between OEM and component manufacturer was for supply of components made by using the moulds\/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds\/dies shall be added to the value of the components. In such cases, the OEM will be required to reverse the credit availed on suc<\/p>\n
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\n1. Provision of Equipment
\n Mahindra and Mahindra Ltd hereby agrees to (pay the Toolcost for development and manufacturer of toolings\/ give the vendor its own (Dies, tools, jigs, fixtures, SPMs, etc.) more particularly described in Annexure I attached hereto (herein<\/p>\n
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\n v) Use the equipment exclusively for the manufacturer of the Products for Mahindra and Mahindra Ltd.
\n vi) Inform Mahindra and Mahindra Ltd. in writing if any major repairs involving high technology and replacement of parts or addition of new part is required for the Equipment, prior to affecting the change. Any change will be made only on receipt of written confirmation from Mahindra and Mahindra Ltd., signed by duly authorized person. The costs incurred on making these changes or repairs will be treated separately on a case-to case basis;
\n3. Insurance
\n a) In the event of any damage to the premises where the Equipment is located or to the Equipment itself, the Vendor shall promptly give written notice thereof to Mahindra and Mahindra Ltd., take all steps to protect the Equipment, and comply<\/p>\n
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\n4. Non-Encumbrance
\n a) The Vendor shall not transfer or otherwise dispose of or purport to transfer or dispose of the Equipment or its rights or obligations or interest hereunder, by way of mortgage, charge, lien, sub-lease, sale, hypothecation, pledge, license or otherwise in any manner encumber or part with the possession on the Equipment or on any part thereof.
\n b) The Vendor shall in any event ensure by giving such notice to any third party about the ownership of Equipment belonging to M&M as may be necessary, that any such sale, mortgage, charge, demise, or other disposition as the case may be is subject to the rights of M&M, as t<\/p>\n
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\n b) The Vendor shall pay to M&M the cost and expense incurred by M&M towards repossessing the Equipment and enforcing the remedies hereunder and also towards repairs of the Equipment<\/p>\n
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\nFurther from the perusal of purchase order raised by Mahindra and Mahindra and also another customer M\/S. General Motors on the applicant and the corresponding invoices it is seen that the tools so procured by the applicant are supplied to customer like M&M and GM for which tax invoices are raised in respect of said supply of tools along with levy of applicable GST.
\nIn view of the details as above, it is clearly indicated that the tools procured by the applicant from third party vendor, are ultimately supplied to customer for which tax invoice is raised and applicable GST has been charged. Thus the absolute ownership of the tools get transferred to the OEM. However the physical possession of the tool remains with the applicant during the manufacturing process or till the time they are removed by the customer from the premises of the applicant. The tools which are supplied to M&M and GM by the applicant in this case are on p<\/p>\n
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