Finally today’s clarification on No ITC reversal on warranty supplies validates my personal view penned down almost four year back. Here is the text of the relevant para from today’s circular;
“Query – Whether in such cases, the manufacturer is required to reverse the input tax credit in respect of such replacement of parts or supply of repair services as part of warranty, in respect of which no additional consideration is charged from the customer?
Reply – In such cases, the value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and / or repair services to be incurred during the warranty period. Therefore, these supplies cannot be considered as exempt supply and accordingly, the manufacturer, who provides replacement of parts and /or repair services to the customer during the warranty period, is not required to reverse the input tax credit in respect of the said replacement parts or on the repair services provided.”
The impact of the above clarification is huge. However, the clarification is not something which is entirely strange. One can trace its genetic from the proviso to section 17(5(b)(i) which is more or less on similar lines.
Reference –
No GST reversal on expired stocks for Pharma / FMCG sector?
(written 4 years back)
Industries like FMCG/ Pharma may be incurring huge GST costs w.r.t. the return of expired goods by their distributors. The GST charged by distributors is not available as ITC qua restrictions u/s 17(5)(h).
What if the industry based on their past experiences factor in the cost of such expired goods in the product cost?
Will ITC be allowed on the ground that the above cost is included in the product value at which GST is paid?
Can’t we draw the analogy from the treatment given to ‘warranties’ under the excise regime where the goods cleared under warranty were not subject to excise duty on the premise that such cost is already part of the final product.
Reference should also be given to below rulings –
“We held that the view taken by the Officer that the future replacement of the parts in pursuance of the warranty have to be regarded as “sales”, the price for which was already paid and on which sales tax was already levied & collected, and that they were not liable to further sales tax, is correct” – Delhi HC
“Appellants were under obligation to free repair their products during the warranty period. Since the warranty obligation already forms part of the sales price, cenvat is allowed on such expenses” – CESTAT Ahmedabad.
Share this content: