Directorate General of GST Intelligence issues notices to auto ancillaries over tax evasion

Tax officials believe vendors are evading tax as value of some of these elements was not being included by the component manufacturers while calculating the excise duty.

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Excise duty is discharged by vendors on auto components so manufactured; with amortised cost of moulds being added.
Mumbai:The Directorate General of GST Intelligence (DGGSTI), intelligence arm of the indirect tax department, has issued notices to multiple ancillary manufacturers of leading auto majors, seeking information on arrangements regarding the design, drawing charges and specifications of components that are shared with vendors.

Tax officials believe vendors are evading tax as value of some of these elements was not being included by the component manufacturers while calculating the excise duty.

Automobile manufacturers generally provide the design, drawing and specifications of the moulds to be developed for making these components in a soft form.


Excise duty was discharged on the value of components including cost of moulds. However, value of some of the charges mentioned above was typically not included by the component manufacturers while calculating the excise duty.

DGGSTI issued summons to vendors of leading manufacturers Maruti Suzuki, Hyundai and Ford. “Many auto component manufacturers have received notices and now each would need to evaluate their agreement/contract with the customer (auto company) in detail to determine whether these charges were to be included for excise valuation or not," said Abhishek Jain, tax partner, EY.

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ET’s questionnaire to Maruti Suzuki, Hyundai and Ford did not elicit a response.

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The copy of the notice which ET has seen said there is an excise duty evasion inquiry. Notices are for November 2013 to June 2017 period. Legal experts said since there is no revenue leakage, the inquiry by the tax department could lead to litigation and such situations will raise IPR issues. “The rationale of the tax department looks absurd as this is revenue neutral transaction and there is no tax leakage. The problem for the vendors is that they won't be able to amortise the cost if they increase the valuation as they don't own these designs or component specifications and the auto manufacturer won't be able to sell these to them as this is more of an intellectual property issue,” said said Abhishek A Rastogi, partner at law firm Khaitan & Co.

Industry trackers said it’s a commercial issue more than a tax problem. “The auto manufacturers fear that vendors would be able to sell their own products in after sales market and lead to potential revenue loss for them,” said a person working in the tax department of an automobile manufacturer.

For instance, Hyundai or Ford, which own the IP of a product, gets a mould manufactured from a third party; the design, drawings and specifications are supplied by the auto companies themselves using CAD/CAM software. These moulds would then be given to vendors who would manufacture auto components and sell to Hyundai.

Excise duty is discharged by vendors on auto components so manufactured; with amortised cost of moulds being added. However, the value of design, drawings and specifications was not being added in value computed for excise duty by most component manufacturers. Thus, if component cost is Rs 1,000, Rs 100 is cost of the mould and Rs 50 cost of design, drawings, specifications given by the manufacturer.

The value on which most component manufacturers had been discharging excise duty was Rs 1,100 (auto component + cost of mould). However, the tax department seeks inclusion of Rs 50 in value computed for excise duty purposes.
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