Circular No. 195/07/2023-GST dated 17.07.2023 was earlier issued clarifying the issues related to the applicability of GST and reversal of ITC concerning material supplies under warranty and extended warranty, the applicability of GST on warranty service provided at the time of supply of goods, etc. CBIC received various representations to provide clarifications on certain other related issues.
In line with the same, CBIC issued the following clarification vide circular No. 216/10/2024-GST dated 26th June 2024 in furtherance of the earlier circular.
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1. Applicability of GST and liability to reverse ITC in case of replacement of goods itself under GST
- Para No. 2 of Circular No. 195/07/2023-GST dated 17.07.2023 discusses the applicability of GST and liability to reverse ITC only in the scenario when the parts of the product are replaced under warranty.
- However, what about the situation when the complete product itself gets replaced under warranty?
- Circular No. 126 has clarified that where goods are replaced as such under warranty period, Para 2 of Circular No. 195/07/2023-GST dated 17.07.2023 shall also be applicable in such case.
- Accordingly, supply of goods under warranty can’t be considered as an exempted supply and therefore, suppliers are not required to reverse ITC with respect to such supply and also no GST is payable on the same.
2. When distributors replace goods or parts from their stock under warranty and later get these goods or parts replenished by manufacturers:
- Circular No. 195 clarifies the provisions related to GST and ITC reversal in cases where the distributor provides replacement of parts on behalf of the manufacturer.
- However, what about the cases where the distributor replaces the goods out of his stock and then raises a requisition for the same to the manufacturer?
- Upon receipt of the requisition, The manufacturer provides the said goods to the distributor through a delivery challan. The request has been made to issue clarification in respect of such a scenario.
- CBIC has clarified vide Circular No. 216/10/2024-GST dated 26th June 2024 that the following are the key points in such a scenario:
- distributor providing replacement out of his own stock;
- manufacturer replenishing the distributor for the said replacement; and
- Such replacement is made at no additional cost to the distributor.
- Circular No. 216 dated 26th June 2024 has clarified that no GST is payable on such replenishment of goods or parts. Further, no reversal of ITC is required to be made by the manufacturer in respect of the goods or the parts so replenished to the distributor.
3. GST Liability on extended warranty service taken at the time of original supply and such service is provided by a person other than supplier of the goods:
3.1 Extended warranty provided at the time of original supply
- Para No. 6 of Circular No. 195 has clarified that where an extended warranty is provided at the time of supply of goods then such supply shall be considered as composite supply (consisting of the supply of goods and warranty service) and GST shall be charged at the rate applicable on principal supply, i.e., supply of goods.
- However, where extended warranty at the time of original supply is provided by a third party then supplies being made by different suppliers can’t be considered as composite supply.
- Therefore, such supply of extended warranty shall be considered as a separate supply from the original supply of goods.
- Accordingly, GST shall be charged at the rate applicable to the supply of warranty services.
3.2 Extended warranty provided after the original supply of goods
- In cases where an extended warranty is sold after the supply of original goods then Circular No. 195 has clarified that GST on the same would be payable depending on the nature of the contract (i.e. whether the extended warranty is only for goods or services or composite supply involving goods and services).
- Accordingly, CBIC has issued the following additional clarification in this matter through Circular No. 216:
- Supply of an extended warranty is an assurance that the goods will operate free of defects during the extended warranty coverage period. In case of any defect attributable to faulty material or workmanship at the time of manufacture, the same will be repaired or replaced by the party providing warranty service.
- Whether the goods will require replacement of parts or just repair service or neither during the said extended warranty period is not known at the time of providing extended warranty service.
- Thus, an extended warranty is in the nature of conveying an “assurance” and not an actual replacement of parts or repairs.
- Accordingly, CBIC has clarified that where an extended warranty is considered as a separate supply (whether provided at the time of the original supply of goods or later on), the same shall be treated as a supply of services distinct from the original supply of goods.
- Therefore, GST shall be discharged at the applicable rate.
- GST shall be charged on extended warranty in the following manner:
- Extended warranty provided at the time of original supply: Shall be taxable as composite supply at the rate applicable on supply of goods
- Extended warranty provided after original supply or provided by a different supplier: Shall be considered as supply of service and shall be taxed at the rate applicable thereon.
4. Conclusion:
This circular has brought clarification to the facts that replacement of goods itself under warranty, i.e., without any consideration, shall not be considered as an exempted supply, and therefore, no reversal of corresponding ITC is required. Further, an extended warranty, provided at the time of supply of goods by a different supplier or extended warranty provided after the sale of goods shall be considered as a separate supply and shall be chargeable to GST at the applicable rate. This circular has indeed settled various key issues related to the taxability of warranty service and material supplied under warranty service.
