Clarification on availability of ITC in respect of warranty replacement of parts and repair services during warranty period

Circular No.: 195/07/2023-GST
Date of Circular: 17th July 2023
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 9: Levy of GST
  • Section 16: Eligibility for Input Tax Credit (ITC)
  • Section 34(2): Credit notes
  • Section 168(1): Power to issue instructions
• Definitions under CGST Act, 2017:
  • Section 2(31): Consideration
  • Section 2(93): Recipient

Summary of Clarifications Provided:

1. GST on Free Replacement or Repair under Warranty by Manufacturer:
   Where manufacturers provide free replacement of parts or repair services to customers during the warranty period without charging any consideration, no GST is payable on such supplies. This is because the value of the original supply already includes such post-sale obligations. However, if any additional amount is charged during replacement or repair, GST shall be payable on such additional consideration.
2. ITC Reversal Not Required for Free Warranty Services by Manufacturer:
   Since the warranty cost is built into the original taxable supply, any replacement parts or services provided during the warranty period do not amount to exempt supply, and hence the manufacturer is not required to reverse ITC for parts or services used for such warranty obligations.
3. Warranty Services Provided by Distributor on Behalf of Manufacturer – GST Implication:
   If a distributor replaces parts or provides services under warranty without charging the customer, no GST is payable by the distributor. However, if any additional consideration is charged to the customer, GST becomes applicable on that portion.
4. Treatment of Interactions Between Distributor and Manufacturer in Warranty Replacements:

• (a) If the distributor uses own stock or buys parts to fulfill warranty and charges the manufacturer, then GST is payable by the distributor to the manufacturer, and the manufacturer can claim ITC.
• (b) If the distributor requests the manufacturer for parts and then replaces them to the customer, and no consideration is involved, then no GST is payable and no ITC reversal is needed.
• (c) If the distributor uses previously supplied goods from the manufacturer and the manufacturer issues a credit note, then adjustment of tax liability can be made, provided the distributor reverses ITC availed on those goods.

5. Repair Services by Distributor Billed to Manufacturer:
   If a distributor provides repair services to a customer under warranty and bills the manufacturer, GST is applicable on such services. The manufacturer, as the recipient under Section 2(93), can avail ITC on such charges.
6. Extended Warranty – GST Treatment Based on Timing of Agreement:

• If extended warranty is agreed at the time of original supply, it forms part of the composite supply, and GST is paid accordingly as per the principal supply.
• If extended warranty is agreed after the original supply, it constitutes a separate contract (goods/services/composite), and GST is applicable as per the nature of the contract and by the service provider (manufacturer, distributor, or third party).

Source: Circular No.: 195/07/2023-GST