The Directorate General of Goods and Services Tax Intelligence (DGGI) sent notices to at least 17 such companies in the last 45 days alone with total tax demands of over ₹1,200 crore, said people close to the development. Officials said the amount could go up further as more notices will be sent.
“Going by the Supreme Court order in the case of M/s Westinghouse Saxby Farmer, parts used exclusively for the auto industry have to pay higher tax and there cannot be two principles of taxation for the two industries,” a senior tax official told ET.
The matter involves manufacturers of engines, horns, locks, lights, sensing devices, valves, switch panels, LCD screens used in dashboard displays, oil seals and other electronic components, among other vehicle parts.
While these manufacturers have been paying GST on the parts at lower rates, usually 18%, tax authorities have claimed that a rate of 28% is applicable since that is the GST rate applicable on ‘parts and accessories of motor vehicles’ as per the GST Law.
The component manufacturers have received demand notices for the differential amount along with interest, sources said.Several companies are now planning to challenge these notices in courts, some of these people said.The dispute in classification arises from a 2021 judgement by the Supreme Court in the case of Westinghouse Saxby Farmer, a manufacturer of relay systems used in railways signalling. The company classified the relays it manufactured as a part of railway equipment, which attracts a lower tax rate. It argued that the parts should be classified as such as they were manufactured exclusively for use in the railways.
Meanwhile, authorities sought reclassification of the product, which would result in higher taxation.
The apex court decided in Westinghouse Saxby’s favour, classifying the relays as part of the railway signalling system. While this was beneficial for the railways and aviation industries, experts had warned at that time that the fallout of the ruling will have adverse impact on the automotive industry as they will have to deal with classification disputes with the GST authorities and may face higher tax than the existing one, as Supreme Court order supersedes Central Board for Indirect Taxes and Customs (CBIC) classification.
“While the ruling was not in the favour of tax authorities in the Westinghouse Saxby case, now they are using that judgement as a precedent for other instances,” said Kulraj Ashpnani, Partner at Dhruva Advisors.
In the case of automotive parts, the tax authorities are arguing that since these parts are made exclusively to be used in vehicles, they should be classified as ‘parts and accessories of motor vehicles’ and taxed at 28%. However, manufacturers paid lower GST on these parts going by the specific classification of these goods under different heads under the GST Law.
“For indirect taxes, one of the most important principles is that specific entry prevails over general entry,” said Abhishek Rastogi, founder of law firm Rastogi Chambers. This means the specific classification of automotive parts like engines prevails over the general classification ‘parts and accessories of motor vehicles’.
Notably, the CBIC itself had issued a circular in January 2022 that said the Supreme Court’s judgement in the Westinghouse Saxby case should not be applied to wider issues.
Experts have also pointed out that since these parts are almost exclusively supplied to automakers, who get an input tax credit on them, companies paying lower tax is not affecting the government’s revenue.
“The gap between the principles of classification of components and parts of a machine adopted by the Supreme Court and the instruction issued by the CBIC is causing severe challenges for the auto industry at large,” said Saurabh Agarwal, tax partner, EY.
“While culmination of the latest events indicates that the judiciary is firm on its classification principles set out in the Westinghouse judgement, the stance by the government indicates otherwise. Even ground-level adjudicating officers also seem to be in dismay on this matter. To avoid uncertainties for the industry, it is recommended that appropriate amendments be made in law to get certainty of tax position,” he said.
Industry sources said many companies have started paying 28% GST on these parts even if they fall under lower tax brackets to avoid litigation.