………………………….

Clarification in respect of GST liability and input tax credit (ITC) availability in cases involving Warranty/ Extended Warranty

Act: Central Goods & Service Tax Act, 2017

Circular No. 216/10/2024-GST

Date: 26th June 2024

 

Background: Original Equipment Manufacturer (OEM) or supplier generally offer warranty on goods or services supplied by them to customers. During the warranty period, replacement of goods or services are supplied to customers free of cost and as such no separate consideration is being charged at the time of free replacement.

The Central Board of Indirect Taxes and Customs has in its circular no. 195/07/2023-GST dated 17th July 2023

given certain clarifications in reference to various representations received from the trade and industry.

In furtherance of circular no. 195/07/2023, the board has issued circular no. 216/10/2024-GST for certain additional clarifications in response to the representations received from the trade.

The details of the clarifications on various issues related with the free replacement of goods or services under warranty are as follows:

 

Fact 1: OEM offers warranty for the goods supplied by him to the customer and provides replacement of parts and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services.

 

Query 1: Whether GST would be payable on such replacement of parts or supply of repair services, without any consideration from the customer, as part of warranty?

 

Clarification:

  1. The value of original supply of goods (provided along with warranty) by the OEM to the customer includes the likely cost of replacement of parts / goods as such and / or repair services to be incurred during the warranty period, on which tax would have already been paid at the time of original supply of goods.
  2. As such, where the OEM provides replacement of parts / goods as such and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services, no further GST is chargeable on such replacement of parts and/ or repair service during warranty period.
  3. However, if any additional consideration is charged by the OEM from the customer, either for replacement of any part / goods as such or for any service, then GST will be payable on such supply with respect to such additional consideration.

Example:

  1. ABC Ltd (OEM) sells a Washing Machine to Mr. X (Customer) on 1st Sep 2023. The washing machine has a warranty period of 1 year. Any manufacturing defect or operational problem in the washing machine within 1 year of purchase will be covered under warranty.
  2. On 16th December 2023, Mr. X has reported a defect in the Washing Machine to ABC Ltd (OEM) by raising a compliant to its customer care cell.
  3. ABC Ltd’s service executive visits to Mr. X to check the defect and confirm the manufacturing defect in the machine.
  4. Service Executive replaces an internal part of the Washing Machine free of cost. No consideration is being taken from Mr. X for following:
    • Free replacement of part
    • Service executive visit and service charge to repair the machine.

GST Applicability on free replacement of part by Service Executive: No GST is chargeable on such replacement of parts / goods as such and/or repair service during warranty period.

 

Query 2: Whether in such cases, the OEM is required to reverse the input tax credit in respect of such replacement of parts/ goods as such and/ or supply of repair services as part of warranty, in respect of which no additional consideration is charged from the customer

 

Clarification:

  1. In such cases, the value of original supply of goods (provided along with warranty) by the OEM to the customer includes the likely cost of replacement of parts/ goods as such and/ or repair services to be incurred during the warranty period.
  2. Therefore, these supplies cannot be considered as exempt supply and accordingly, the OEM, 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.

Example:

In the above example, ABC Ltd (OEM) is not required to reverse the Input Tax Credit (ITC) it has availed in respect of parts supplied free of cost to Mr. X under warranty.

 

Treatment of ITC in respect of parts or services supplied free of cost under warranty: ITC in respect of parts or services supplied free of cost under warranty is not required to be reversed by OEM.

 

Fact 2: OEM offers warranty for the goods supplied by him to the customer through its authorized distributors. Free replacement of parts and/ or repair services to the customer is provided by the distributors on behalf of OEM during the warranty period, without separately charging any consideration at the time of such replacement/ repair services.

 

Query 3: Whether GST would be payable on replacement of parts/ goods as such and/ or repair services provided by a distributor without any consideration from the customer, as part of warranty on behalf of the manufacturer?

Clarification:

  1. No GST would be payable by the distributor on the said activity of providing replacement of parts/ goods as such and/ or repair services to the customer as no consideration is being charged by the distributor from the customer.
  2. However, if any additional consideration is charged by the distributor from the customer, either for replacement of any part or for any service, then GST will be payable on such supply with respect to such additional consideration.

 

GST Applicability on free replacement of part by Service Executive by distributor on behalf of OEM: No GST is chargeable on such replacement of parts and repair service during warranty period.

 

Query 4: Whether any supply is involved between the distributor and the OEM and whether the distributor would be required to reverse the input tax credit in respect of such replacement of parts/ goods as such?

 

Clarification:

Case A: Distributor replaces the parts to the customer under warranty either by using his stock or by purchasing from a third party and charges the consideration for the parts so replaced from the OEM, by issuance of a tax invoice, for the said supply made by him to the OEM.

In such a case, GST would be payable by the distributor on the said supply by him to the OEM and the OEM would be entitled to avail the input tax credit of the same, subject to other conditions of CGST Act. In such case, no reversal of input tax credit by the distributor is required in respect of the same.

Case B: Distributor raises a requisition to the OEM for the parts to be replaced by him under warranty and the OEM then provides the said parts to the distributor for the purpose of such replacement to the customer as part of warranty.

In such a case, no GST is payable on such replacement of parts by the OEM. Further, no reversal of ITC is required to be made by the OEM in respect of the parts so replaced by the distributor under warranty.

In cases where distributor replaces the part / goods as such out of his own stock and OEM later on replenishes the stock of replaced part / goods of the distributor, no GST will be payable on such replenishment or parts or goods as such by OEM, and no reversal of ITC is required to be made by OEM in respect of such replenishment of parts or goods.

Case C: Distributor replaces the parts to the customer under warranty out of the supply already received by him from the OEM and the OEM issues a credit note in respect of the parts so replaced subject to provisions of sub-section (2) of section 34 of the CGST Act. Accordingly, the tax liability may be adjusted by the OEM, subject to the condition that the said distributor has reversed the ITC availed against the parts so replaced.

 

Query 5: Where the distributor provides repair service, in addition to replacement of parts or otherwise, to the customer without any consideration, as part of warranty, on behalf of the OEM but charges the OEM for such repair services either by way of issue of tax invoice or a debit note, whether GST would be payable on such activity by the distributor?

 

Clarification:

GST would be payable on such provision of service by the distributor to the OEM and the OEM would be entitled to avail the input tax credit of the same, subject to other conditions of CGST Act, as there is a supply of service by distributor and OEM is the recipient of such service.

 

Query 6: In cases where OEM offers extended warranty to the customers which can be availed at the time of original supply or just before the expiry of the standard warranty period. Whether GST would be payable in both the cases?

 

Clarification:

Case A: If a customer enters into an agreement of extended warranty with the OEM at the time of original supply of goods and such extended warranty is provided by the OEM itself, then the consideration for such extended warranty becomes part of the value of the composite supply, the principal supply being the supply of goods, and GST would be payable accordingly.

Case B: If a customer enters into an agreement of extended warranty wherein the goods are sold by the dealer and extended warranty is provided by OEM or any other third party, then the consideration for such extended warranty is to be treated as a separate supply from the original supply of goods. Such supply shall be taxable as supply of services.

Case C: In case where a consumer enters into an agreement of extended warranty at any time after the original supply, then the same shall be treated as a supply of services distinct from the original supply of goods and the supplier of the said extended warranty shall be liable to discharge GST liability applicable on such supply of services.

For more details refer Circulars by Central Board of Indirect Taxes and Customs:

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

To stay updated Subscribe to our newsletter today

Explore other Legal updates on the 1-Comply and follow us on LinkedIn to stay updated 

Schedule A Demo