Services provided during Warranty/Extended Warranty period-clarifications issued on various issues- question remained in relation to taxability in regard to extended warranty

[JOYDEB BHATTACHARYA]

It is a common trade practice that the original manufacturers of machineries and equipment or consumer durables offer warranty for the goods supplied by them. During the warranty period, the manufactures are liable to repair the equipment/machineries sold by them in case of any defect. If the defect is not repairable, then the manufacturer is liable to replace the goods sold by them. The Repairing or replacement of goods shall be free of charge and the manufacturer shall not charge any consideration for the services rendered by them during the warranty period.

Sometimes the manufacturer extends the warranty of their products upon charging a consideration from the customers. Such extended warranty contract shall be entered either at the time of sale of product or at a later date before expiry of the warranty contract as per the wish of the customer.

In many cases, the manufacturer engages its distributors/franchisees or service agents to provide services to their customers/buyers on behalf of the company. As no separate consideration is charged from the customers, following issues cropped up across the industry in respect of the following:

1. Whether GST Needs to be paid in respect of such replacement of parts or product, as the case may be, during the warranty period, either by the manufacturer or by their distributors or service agents.                                                                                                                                                     
2. Whether Input Tax Credit needs to be reversed in respect of such replacement of product or replacement of parts during the warranty period as no additional consideration is charged from the customers.
3. In case of service is provided by the distributor/service agents/franchisees on behalf of the manufacturer, whether, the distributor/franchisee is liable to pay GST on the service charges received by them from the manufacturer.

The aforesaid questions in this regard are answered/clarified by CBIC in circular no 195/07/2023-GST dated 17^th July, 2023 and a recent circular bearing reference no. 216/10/2024-GST dated 26^th June, 2024. Both the circulars follows the same principles for analysing different situations, the only difference between the two is that the first one did not envisage a situation where the entire product is getting replaced during the warranty period which the later one has clarified. Upon reading both the circulars, following principles may be drawn for different situations:

Scenario	Tax on Outward Supply	Availability of ITC
Manufacturer replaces certain parts/ entire goods as such for providing repair service free of cost during the warranty period	No GST is payable by the manufacturer as at the time original supply possible cost was already included in Sale Price on which GST was already discharged by the manufacturer.	ITC availed on such parts/goods are not required to be reversed
Distributor replaces parts or goods as such under warranty and gets the stock replenished from the manufacturer	No GST is payable by the manufacturer at the time of replenishment of stock.	ITC availed on such parts/goods are not required to be reversed
Distributor replaces parts or goods as such during the warranty period after purchasing such parts/goods from a third party. In turn the dealer/distributor raises an invoice on the manufacturer for the reimbursement.	GST is payable by the distributor when such distributor raises an invoice on the manufacturer.	The manufacturer is eligible to avail ITC on the invoice raised by the distributor.
Distributor provides repair service on behalf of the manufacturer and raises an invoice on the manufacturer	GST is payable by the distributor when such distributor raises an invoice on the manufacturer.	The manufacturer is eligible to avail ITC on the invoice raised by the distributor

Apart from the above, the recent circular 216/10/2024-GST dated 26^th June,2024 also provides certain clarifications in relation to taxability of extended warranty offered by the manufacturer to the ultimate consumers upon collecting a separate consideration for the same. Taxability of extended warranty can be summarised as follows under various situations envisaged by the aforesaid circular.

Scenario	Tax Treatment	Rate of Tax
Extended warranty service provided by the manufacturer at the time of sale of goods	Will be treated as composite supply of goods and services where goods is the principal supply	Since goods is the principal supply the, rate of tax applicable to goods will be charged on the taxable value of extended warranty also
Extended warranty service provided by a third party (other than the manufacturer) at the time of sale of goods or afterwards	Since the supplier of goods and the supplier of services are different, the same cannot be treated as composite supply. Supply of extended warranty will be treated as a separate supply of assurance service.	Rate of tax as applicable on assurance service.
Extended warranty service provided by the manufacturer after the sale of goods (say before the expiry of the warranty)	Will be treated as supply of assurance service	Rate of tax as applicable on assurance service.

As is evident from the above the recent circular 216/10/2024-GST dated 26^th June,2024 has treated the extended warranty provided by the manufacturer at the time of supply of goods as Composite Supply and therefore, the rate applicable on the Principal Supply shall be applied. The definition of Composite Supply is provided in Section 8 which specifies that a composite supply shall consists of two of more taxable supplies one of which is a principal supply that as naturally bundled and supplied in conjunction to each other in the normal course of business. In case of extended warranty, in most of the situations it is optional to the consumer and if opted, for the same separate consideration is charged by the supplier. Further, Extended Warranty can be opted by the consumer later on and if so, separate consideration would be charged by the manufacturer. Therefore, extended warranty is not an integral part of the main supply which is supply of Machine/Equipment. Extended Warranty, per se is an Assurance Service and is in no way linked with Sale of Goods and therefore, should not be considered as Naturally Bundled.

Further, CBIC should consider the fact that if the tax rate on any product is 28%, then based upon the clarification, the same  would be applicable on the consideration for extended warranty also which ultimately will create burden upon the final consumer. The basic question which may raise dispute in future is that whether consideration charged for extended warranty service can be said to be naturally bundled when the customer has the option to avail or not to avail the extended warranty service. Extended Warranty shall be treated as a separate assurance service which can be availed by the customer at the time of purchasing a product or afterwards within a specified time line. GST Laws itself permits that two or more kinds of supplies can be billed together and the rate applicable to each goods/services can be applied where the consideration is different for each individual product/service.

So, according to the author, the aforesaid circular 216/10/2024-GST dated 26^th June,2024 may invite litigation may be in respect of extended warranty matter or on other issues wherein the analogy taken by the CBIC in the said circular may be referred. If the intention of the Government to avoid litigation CBIC shall take corrective action in this regard.