Are designs furnished to vehicle-components makers dutiable?

Tax authorities have issued numerous display-cause notices (SCNs) to car-aspect manufacturers (ACM) lately, looking to get better extra excise duty on designs or drawings supplied by automobile groups to the ACMs for the manufacturing and manufacturing vehicle components. Industry practice: Automobile organizations commonly enter into licensing agreements with their overseas parent agency for the licensing of a whole variety of intellectual assets rights, designs, drawings, and technical know-how with recognize the numerous components and components of car manufacturing and vehicle businesses in India pay royalties to the overseas parent businesses as agreed below the licensing agreements. Designs and drawings are supplied to ACMs as a separate transaction for the cause of manufacturing the elements, which are then provided to car companies for incorporation into vehicles.
The tax department issued SCNs to various ACMs across the united states of America, alleging that the ACMs, in collusion with vehicle agencies, evaded excise duty via now not adding the fee of designs or drawings to the very last additives synthetic. The designs and drawings made available are alleged to be further attention and, for that reason, at risk of excise responsibility.


Legal function: Section 4 of the Central Excise Act, 1944 (CEA), prescribes that if the client and vendor are not associated, and the price is the sole consideration, then excise duty calculation shall be based on the transaction value. However, section four(1)(b) states that otherwise, the obligation will be determined according to the rules. Therefore, strong reliance is placed using the department on rule 6 of Central Excise (Determination of Price of Excisable Goods) Rules, 2000 (rules), where the cost of designs and drawings and blueprints are delivered to the attention in situations in which charge is not the sole consideration.

Unexpectedly, the branch has introduced this up after introducing the goods and services tax (GST). The exercise of not together with the value of designs and drawings inside the final attention is a many-year-old industry practice. However, under the GST policies, the automobile enterprise cannot get any credit for incremental excise duties paid by ACM.

Key arguments that may be followed through the ACM areas beneath:

The provision of designs and drawings is a condition of settlement and no longer extra attention. The designs and drawings supplied to ACMs are given because their miles are essential to manufacturing vehicle components according to the specs of the carmaker. They don’t shape any additional attention for the ACMs. A distinction ought to be made between a technical drawing and an easy drawing or specification. A specification does now not form part of the consideration for rule 6. However, it should be remembered that the courts have generally set a totally excessive bar for drawings or designs to prevent rule 6 by using the qualification as a specification. The Customs Excise and Service Tax Appellate Tribunal (CESTAT), in the case of Commissioner of Central Excise v Tata Motors (2009), went to the quantity of arguing that drawings no longer capable of being converted to textual form cannot be easy drawings. There isn’t any method prescribed for the determination of the fee of designs or drawings. The values followed inside the SCNs are based totally on the royalty paid with the aid of the car producers to the overseas discern agency, which has “scant nexus” with the transaction among ACMs and vehicle producers. Such a technique is completely incorrect, arbitrary, and extortionate.

Effectiveness of writ petitions: Numerous writs have been filed hard to initiate investigations under pre-GST taxes after the implementation of GST. However, the courts have always rejected such attempts, and it does no longer appear to be a prudent and sound felony method anymore. Nonetheless, considering the situation in its entirety, specifically the timing of such SCNs, an opportunity writ petition will be issued searching for instructions that the authorities have recourse to segment 11C of CEA. Section 11C states that if there is an industry exercise of treating a transaction specifically, the government has the electricity to issue an exemption to validate such exercise. This method seems to be worth exploring before the excessive courts, extra so whilst the government has issued notifications beneath segment 11C on diverse different issues and transactions after GST as nicely.

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