No Tax On Drawings And Designs: Tribunal’s Verdict Spurs Celebration Among Automotive Industry Vendors

In a resounding victory for vendors of the automotive industry, The Principal Bench of Customs, Excise & Service Tax Appellate Tribunal New Delhi, recently in the decision pronounced on 13.03.2024 (Final Order No.’s. 55140-55337/2024) in the case of Denso India Private limited and others held the following:

"50. The inevitable conclusion, therefore, that follows from the aforesaid discussion is that the notional cost of drawings and designs supplied free of cost by Maruti to the vendors cannot be included in the assessable value of the parts and components manufactured by vendors and cleared to Maruti for the purpose of payment of central excise duty"

The decision, clearly, is a win for the huge network of vendors in automotive industry, and particularly sends ripples of relief to around 200 vendors, in whose favour, the said decision has been pronounced.

To fully appreciate the implications and significance of the ruling, it is essential to delve into the background, key arguments, and the findings of the decision. 

Background - Legal Provisions and Facts

In the automotive industry, the practice of providing specifications (commonly referred to as “drawings and designs”) to the vendors is a widespread and commonplace occurrence. The Research and Development team of Maruti, after shortlisting the vendors, share the drawings and designs of the desired part or components through the web-based software with all the potential vendors without charging any amount. Thereafter, based on technical evaluation and the provision of quotation for the part by the vendors, the vendors are selected. 

The department maintained the stance that the cost of the drawings and designs supplied by Maruti to the vendors free of cost should be included in the assessable value of the final products manufactured by the vendors in terms of Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 read with Rule 11. 

Against this backdrop, the matter brought before the Tribunal was whether the notional cost of drawings and designs supplied free of cost by Maruti to the vendors should be included in the assessable value of parts or components manufactured by vendors and cleared to Maruti for the purpose of payment of central excise duty.

Key Highlights of the Decision 

Drawings and Designs were supplied prior to the sale

The revenue authority was vehemently arguing in favour of the stance that the value of drawings and designs (which was computed on the basis of lump-sum royalty paid by Maruti to Suzuki Motor Corporation) is the additional consideration flowing from Maruti to vendors since the vendors could not manufacture the parts without these drawings and designs. 

Against the above argument, the appellant effectively presented their case before the Tribunal, persuasively arguing the following: 

•Under Rule 6, the value of four categories of goods and services specified therein is treated as the amount of money value of additional consideration to get added in the assessable value of goods. The elements of Explanation 1 thereto can be dissected as under: 

1.Specified goods and services must be supplied directly or indirectly by the buyer.

2.Such supplies must be made free of charge or at reduced cost.

3.Such supplies must be made for use in connection with the production and sale of goods.

4.The addition in the assessable value must be made to the extent that the value of such goods and services has not been included in the price actually paid or payable; and

5.The goods or services in question must fall within any of the four clauses, i.e., (i) to (iv), mentioned in Explanation 1.

•The drawings and designs were supplied by Maruti at the time of identification and short listing of the vendors for supply of parts or components of a particular model of vehicles. It was argued that anything which is supplied by the buyer to the manufacturer much before even identifying the potential manufacturer as the supplier can never be treated as an additional consideration for sale. Since the vendors have only provided the goods after the letter of intent was signed and no drawings and designs were provided by Maruti post the same, the same cannot be termed as additional consideration for sale of goods.

•The Tribunal took note of the fact that the purpose behind Rule 6 is to levy excise duty on all those expenses which are incurred by a buyer on behalf of the seller-manufacturer and relieve the seller-manufacturer from incurring such expenses. It covers drawings which are used in the production of such goods and those designs which are necessary to produce such goods. 

•The parts were manufactured with the help of detailed drawings and not the drawings and designs given by Maruti which were only in the nature of layout and dimensions.

•The Tribunal rejected the argument of the revenue that the vendors could not have manufactured the parts or component without reference to the specification drawings supplied to them by Maruti free of cost. It was noted that the drawings and designs were required to participate in the tender process. The fact that the vendors were paying huge royalty to their group companies for preparing detailed designs was itself evident of the fact that the drawings and designs supplied by the Maruti were not sufficient for the manufacture of parts and components. 

•The reliance was also placed on the decisions pronounced under the Indian Customs Act 1962 and the Guidelines of Customs Valuation – Commentary on the GATT Customs Valuation Code by Saul L. Sherman and Hinrich Glashoff since under the GATT Agreement as also the 2007 Customs Valuation Rules, the specified goods and services are informally known as ‘assists’, the value of which is includable in the assessable value of imported goods. In support of its position, the appellant relied upon the commentary which states that the value of detail specifications, including various dimensions noted on a drawing of the machine, which merely provide the requirement of the buyer and inform the manufacturer of the specifications of what is being ordered, cannot be said to be dutiable ‘assists’ under clause (iv) of article 8.1(b) of the GATT Agreement

After carefully considering the arguments presented by both the parties, the Tribunal ultimately held in favour of appellant stating that the notional cost of drawings and designs supplied free of cost by Maruti to the vendors cannot be included in the assessable value of the parts and components manufactured by vendors and cleared to Maruti for the purpose of payment of central excise duty.

Distinguishing Other Decisions: 

The decisions cited by the revenue authorities such as TATA Motors and Avtec Ltd were scrutinized by the Tribunal and it was emphasized that the facts at hand were distinct rendering the precedents relied upon by the revenue authority inapplicable. The Tribunal observed that these decisions dealt with cases of drawings supplied by the motor vehicle manufacturers to the manufacturers of parts and components free of cost, but the designs were supplied after the sale agreement was executed and the manufacturer used the same for producing the components. Since the specifications were not provided at the stage of tender process, it was held that the decisions invoked by revenue authority could not be extrapolated to the current scenario. 

Any Implications under GST law?

One must also consider its potential relevance and applicability of the decision within the GST framework since the GST law also incorporates a similar provision under Section 15(2)(b) wherein 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’ is added in the value of supplies undertaken by the supplier.

The authors are of the view that a parallel can be drawn between the Tribunal’s decision and the GST provisions. The Tribunal’s assertion that the goods provided by the recipient must be for production or sale of goods mirrors the principle underlying GST, wherein the goods provided by the recipient must be used for supply. Therefore, the decision would serve as a guiding light for assesses seeking clarity and direction in navigating the complexities of GST, highlighting the importance of jurisprudence in shaping interpretations and application of tax laws. 

Conclusion

The decision is a much-needed beacon of hope for the vendors of automotive industry, which has grappled with uncertainty in recent times. Though the proceedings against approximately 500 vendors is pending on the same issue, the instant favourable decision decided in an appeal by around 200 vendors will not only provide immediate respite to these vendors but will also give a palpable sense of relief to other vendors as well. 

To sum up, such decisions are warmly embraced by industry, as they not only address immediate concerns but also pave way for clarity and consistency in tax matters, including under the GST regime.