Gst Impact On Replacement Of Parts Or Services By Distributor On Behalf Of Manufacturer During Warranty

Circular No. 195/07/2023-GST dated 17th July, 2023 provides clarifications regarding several aspects related to the replacement of parts or services provided by a distributor on behalf of the manufacturer during the warranty period. Let's delve into each of these clarifications and discuss them in detail.

Issue -1:

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

Clarification :

No Consideration, No GST : There may be instances where a distributor of a company provides replacement of parts and/ or repair services to the customer as part of warranty on behalf of the manufacturer and no separate consideration is charged by such distributor in respect of the said replacement and/ or repair services from the customer.

In such cases, as no consideration is being charged by the distributor from the customer, no GST would be payable by the distributor on the said activity of providing replacement of parts and/ or repair services to the customer.

GST Liability when Distributor Charges Additional Consideration for Warranty Services : 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.

Example :

Original Sale of Laptop: Rs. 60,000 (inclusive of the likely warranty-related service cost).

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The distributor provides warranty repair services and replacement parts during the warranty period without charging the customer any additional consideration.

No GST is applicable on the repair services or replacement parts provided by the distributor because no extra fee is charged from the customer.

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Suppose in the same situation, the distributor provides repair services and replacement parts during the warranty period but charges the customer Rs.2000 as a service fee for the on-site service. Then, GST would be applicable on the Rs.2000 charged by the distributor because it represents a separate consideration for the service provided.

Issue-2:

In the above scenario where the distributor provides replacement of parts to the customer as part of warranty on behalf of the manufacturer, whether any supply is involved between the distributor and the manufacturer and whether the distributor would be required to reverse the input tax credit in respect of such replacement of parts?

Clarification:

(a) There may be cases where the distributor replaces the part(s) to the customer under warranty either by using his stock or by purchasing from a third party and charges the consideration for the part(s) so replaced from the manufacturer, by issuance of a tax invoice, for the said supply made by him to the manufacturer. In such a case, GST would be payable by the distributor on the said supply by him to the manufacturer and the manufacturer 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.

Example :

"ABC Electronics" is a renowned manufacturer of electronic devices, specializing in smartphones. They distribute their products to various authorized distributors across the country.
Let's say XYZ Distributors replaced a defective smartphone screen valued at ₹1,000, and the applicable GST rate is 18%.
XYZ Distributors issue a tax invoice to ABC Electronics for ₹1,180 (including ₹1,000 for the part and ₹180 as GST).

ABC Electronics can claim ₹180 as input tax credit (ITC) for the GST paid.

So, GST would be payable on recovery of cost of repair by distributor and manufacturer would be entitled to avail ITC on the same.

(b) There may be cases where the distributor raises a requisition to the manufacturer for the part(s) to be replaced by him under warranty and the manufacturer then provides the said part(s) to the distributor for the purpose of such replacement to the customer as part of warranty. In such a case, where the manufacturer is providing such part(s) to the distributor for replacement to the customer during the warranty period, without separately charging any consideration at the time of such replacement, no GST is payable on such replacement of parts by the manufacturer. Further, no reversal of ITC is required to be made by the manufacturer in respect of the parts so replaced by the distributor under warranty.

Example :

Let's consider a scenario involving a manufacturer (M) and a distributor (D) of electronic devices:

• A customer (C) purchases a smartphone from the distributor (D).
• The smartphone comes with a one-year warranty provided by the manufacturer (M).
• Within the warranty period, the customer (C) experiences a malfunction in the phone's battery.
• The customer contacts the distributor (D) and requests a replacement battery, as it falls under the warranty.
• The distributor (D) raises a requisition to the manufacturer (M) for a replacement battery.
• The manufacturer (M) provides the replacement battery to the distributor (D) without charging any additional fee for the part itself since it's covered under warranty.

In this situation:

• The manufacturer (M) provides the replacement part (battery) to the distributor (D) for free, as part of the warranty service.
• No separate GST is payable by the manufacturer (M) at the time of providing the replacement battery, as it is considered a warranty service and not a sale.
• The distributor (D) replaces the battery for the customer (C) without charging any additional consideration, and no GST is applicable to this replacement service.
• Importantly, there is no need for the manufacturer (M) to reverse any Input Tax Credit (ITC) in respect of the replacement battery provided under warranty.

(c) There may be cases where the distributor replaces the part(s) to the customer under warranty out of the supply already received by him from the manufacturer and the manufacturer 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 manufacturer, subject to the condition that the said distributor has reversed the ITC availed against the parts so replaced.

Example :

Imagine a situation involving a manufacturer (M), a distributor (D), and a customer (C) in the context of air conditioning units:

• The distributor (D) procures a batch of air conditioning units from the manufacturer (M) with the intention of selling them.
• These air conditioning units come with a one-year warranty provided by the manufacturer (M).
• Within the warranty period, a customer (C) encounters an issue with their air conditioning unit, specifically with the compressor, which is a covered component under warranty.
• The distributor (D) decides to resolve the issue by using a replacement compressor from their existing inventory, originally purchased from the manufacturer (M).
• After successfully replacing the compressor for the customer (C), the distributor (D) duly informs the manufacturer (M) about the replacement and provides all necessary documentation, including details of the credit note for the value of the compressor issued by the manufacturer (M).
• The manufacturer (M) promptly issues a credit note to the distributor (D) for the value of the replaced compressor within the time limit of section 34(2) of the CGST Act.

In this scenario:

• The distributor (D) efficiently resolves the customer's issue by using a replacement compressor from their stock, which was originally procured from the manufacturer (M).
• The manufacturer (M) follows the necessary procedures by issuing a credit note to the distributor (D) for the value of the replaced compressor.
• The manufacturer (M) may adjusts their tax liability based on the credit note issued. However, it's important that the credit note is issued within the timeframe specified in section 34(2) of the CGST Act. Furthermore, the distributor (D) must have reverse the Input Tax Credit (ITC) initially claimed for the replaced component.

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