Excise duty on drawings and designs for manufacture of automotive components

The component manufacturers receive computer-aided drawings / designs with varying degree of specifications (‘drawings and designs’) from automobile manufacturers. The component manufacturers are required to manufacture automotive components based on these drawings and designs. High value tools and dies used in manufacture of automotive components are forged based on the specifications of these drawings and designs.

The component manufacturers supplied these automotive components to automobile manufacturers on payment of excise duty. The assessable value for these automotive components was computed as aggregate of the transaction value (sale price) and amortised value of tools and dies received on free-of-cost (‘FOC’) basis. Notably, no value was ascribed to the drawings and designs received on FOC basis.

In 2019, the revenue issued show cause notices (‘SCNs’) to hundreds of component manufacturers (‘OEMs’) for Maruti Suzuki India Limited (‘MSIL’). These SCNs sought to raise demand of excise duty on the value of drawings and designs received by component manufacturers from MSIL by treating the same as additional consideration. The issues raised in these SCNs are briefly captured hereinbelow:

1. The Central Excise Act, 1944 (‘Excise Act’) provides for adoption of transaction value as assessable value only where the price is sole consideration. The drawings and designs received by component manufacturers from MSIL on FOC basis, formed additional consideration for manufacture and supply of automotive components. Therefore, the value of these drawings and designs was required to be included in the assessable value of final products in terms of Rule 6 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (‘Excise Valuation Rules’);
2. In the case of CCE v. Tata Motors, 2009 (237) ELT 147 (Tri-Kol.), the Customs, Excise and Service Tax Appellate Tribunal (‘Appellate Tribunal’) had upheld the inclusion of cost of drawings and designs, supplied by Tata Motors to its component manufacturers on FOC basis, in the assessable value of components for determination of excise duty liability; and
3. The royalty paid by MSIL to Suzuki Motor Corporation, Japan was used for procurement of such drawings and designs. These royalties were liable to be reckoned for computing the value of drawings and designs.

This is to apprise you that the SCNs are being adjudicated wherein the Adjudicating Authority is confirming the demand of excise duty in principle, but setting aside a good portion (roughly 85 per cent. to 90 per cent.) of the demand on the ground of portion of royalty that can be attributed to such drawings and designs. The royalty amount paid by MSIL is for the entire gamut of know-how and trademark, and not merely for the drawings and designs. The department has been providing relief in respect of quantum of demand by reckoning only a portion of the royalty towards these drawings and designs.?