Consignment Stock and Vendor-Managed Inventory Reconciliation for Indian Auto-Component Suppliers

A fastener Tier-1 supplying to Bajaj Auto’s Chakan plant opens the Monday morning VMI review at the supplier’s commercial office in Pune. The weekly consumption report came in from Bajaj’s MRP system on Sunday night. 240 SKUs at four bin locations on the Chakan shop floor. Total consumption for the week: ₹38.4 lakh. The headline reconciliation is clean — the supplier’s outbound replenishment register for the week shows ₹41.2 lakh dispatched, OEM GRN acknowledged ₹41.0 lakh, in-transit at the Bajaj inward gate ₹0.2 lakh, and bin-level closing positions are within minimum-maximum bands for 232 of 240 SKUs.

But the ageing screen tells a different story for the tail. Three SKUs — programme-specific fasteners on a model variant that Bajaj has been slowly winding down — show closing bin levels of 14, 18 and 22 units respectively with no consumption pulls in 178, 184 and 197 days. Total value of the slow-moving tail: ₹2.1 lakh against a total on-site VMI stock of ₹1.8 crore. The three SKUs are sitting in their Bajaj Chakan VMI bins, owned by the supplier, with no consumption event in sight. The 184 and 197 day SKUs have already crossed the six-month operational safe-harbour line that the supplier’s tax team uses as the deemed-supply guardrail.

This is the consignment stock VMI reconciliation auto component India problem in its slowest-moving form, and the answer drives three workstreams simultaneously: the operational decision (replenish-pause or return-to-supplier under a Rule 55 reverse leg), the GST decision (provisional deemed-supply accrual or explicit consumption acknowledgement from Bajaj), and the Ind AS 115 decision (continue to hold on the supplier’s books as inventory or recognise a write-down).

Quick reference

Consignment stock versus VMI — the ownership-and-control boundary

The two arrangements look similar from the outside but operate differently inside the OEM plant.

Consignment stock is supplier-owned stock held in an OEM-controlled store at the OEM premises. The OEM operates the consignment store like its own warehouse — issuing slips, picking from racks, signing for consumption. The OEM’s MRP system tracks the consignment store as a separate sub-warehouse. The supplier’s books carry the stock as inventory at the supplier’s cost. On each pick the OEM generates a consumption slip and a periodic (typically weekly or monthly) consumption summary is shared with the supplier. The supplier raises a Section 31 invoice on the consumption summary.

Vendor-managed inventory (VMI) is supplier-owned stock held in bins at the OEM dock or directly at the OEM production line. The supplier is responsible for replenishing the bins to maintain minimum-maximum levels — typically using OEM-shared consumption forecasts and the supplier’s own logistics. The OEM consumes from the bin as production calls. The OEM’s MRP system tracks the bin as an effective consumption point — there is no separate consignment-store layer. The supplier replenishes weekly (sometimes daily for high-velocity SKUs) under Rule 55 challan. Invoicing follows the same Section 31 logic — invoice on consumption against a weekly or monthly consumption report.

The choice between the two is operational. Consignment fits programme-specific items where the OEM wants tighter visibility and control. VMI fits commodity items at high volume where the OEM wants to push the inventory carrying cost back to the supplier without micromanaging the on-site stock.

The Section 31 invoice trigger — why dispatch is not the supply

Section 31(1) of the CGST Act ties the time of issue of the tax invoice to the time of supply. Section 12 of the CGST Act sets the time of supply for goods as the earlier of the date of dispatch and the date of issue of invoice — for an ordinary supply.

In a consignment or VMI arrangement the dispatch leg is not a supply because the underlying transaction has not transferred title to the OEM. The supplier retains ownership of the stock through dispatch, transit, and the on-site holding period. The transaction that constitutes the supply is the consumption pull at the OEM — the act of drawing from the consignment store or the VMI bin to use in the OEM’s production. At that point title transfers and Section 31 attaches. The Rule 55 delivery challan is the legal instrument that moves the goods without invoice and without GST.

The supplier therefore does not raise a GST invoice on dispatch. The supplier raises a Rule 55 challan that carries the dispatch quantity, the destination location code (consignment-store or VMI-bin) and a reference back to the underlying agreement. The supplier’s books carry the dispatched stock as supplier inventory at the destination location — an internal stock movement from “own factory” to “OEM-located VMI bin”, with no commercial recognition.

The Section 31 invoice attaches on consumption. The supplier aggregates the OEM consumption report — typically weekly across a month — and raises one or more invoices against the aggregated consumption. The invoice carries the consumption period, the SKU-level consumed quantity and the agreed unit price. The GST rate applies as it would on an ordinary supply of the SKU.

The deemed-supply risk and the operational safe-harbour threshold

Schedule I para 2 of the CGST Act, read with Section 7(1)(c), treats supply between related persons or distinct persons under Section 25 as a supply for GST purposes even without consideration. An OEM and an independent Tier-1 supplier are not related persons (no common control) and not distinct persons (separate legal entities, not different registrations of the same legal entity). Schedule I para 2 does not directly apply on its face.

The deemed-supply risk arises through a different reading. Where stock sits at the OEM premises for an extended period without consumption, with no realistic alternative disposition, and where the goods are heavily customised to the OEM such that no other buyer would commercially take them, the tax administration position over the years has been that an effective transfer has occurred regardless of the documented consignment status. The risk is highest on:

• Programme-specific items on a winding-down model variant.
• Customised parts with OEM-specific markings or part numbers.
• High-value low-velocity SKUs.

The operational safe-harbour pattern most disciplined Tier-1s adopt is a six-month ageing limit on any consignment-stock or VMI SKU at any OEM location. SKUs aged past the six-month line trigger one of three workstream responses:

• Replenishment-pause — stop further dispatches; allow existing on-site stock to consume down naturally.
• Return-to-supplier under Rule 55 reverse leg — physically return the stock to the supplier’s plant; close the on-site stock position; restart the ageing clock at the supplier.
• Explicit consumption acknowledgement from the OEM — generate a consumption event in the OEM’s MRP and trigger a Section 31 invoice immediately, closing the on-site stock position commercially.

Where none of the three is feasible — typically because the OEM cannot commit to immediate consumption, return logistics are expensive, and the model variant has not formally been discontinued — the supplier’s tax workpapers carry a provisional deemed-supply accrual on the aged SKU at the prevailing GST rate, with a reversal triggered if and when consumption eventually occurs.

Ind AS 115 revenue recognition — consumption, not dispatch

Ind AS 115 recognises revenue at the point control transfers to the customer. In a consignment or VMI arrangement the supplier retains the right to direct the use of the on-site stock until consumption. The supplier can withdraw the stock under the Rule 55 reverse leg, redirect it to another OEM if the agreement permits, or write down the value if the SKU becomes obsolete. Control has not transferred to the OEM.

The Ind AS 115 control-transfer test is therefore met at consumption — the same event that triggers the Section 31 GST invoice. The two are aligned. Revenue is recognised at the agreed unit price × consumed quantity in the period of consumption. The supplier’s books carry:

• The on-site stock as inventory at cost (Ind AS 2), allocated by location.
• The revenue recognition entry on consumption, matched with cost-of-goods-sold de-recognition.
• The gross margin per SKU per consumption event.

A slow-moving SKU aging past six months on-site triggers a different Ind AS question: is the inventory recoverable at cost? Ind AS 2 requires inventory to be carried at the lower of cost and net realisable value. A model-variant-specific fastener with no consumption velocity may need a write-down even before the GST provisional accrual fires. The two adjustments are independent but typically surface in parallel on the same SKU.

Worked example — Bajaj Chakan fastener VMI, 240 SKUs, ₹1.8 crore average on-site stock

A fastener Tier-1 in Pune operates a VMI arrangement with Bajaj Auto at Chakan. 240 SKUs in four bin locations on the Chakan shop floor. Average total on-site VMI stock value: ₹1.8 crore. Monthly consumption value through the VMI bins: ₹1.5 crore. Implied turnover rate: 0.83x monthly, or about 36-40 days of inventory days on hand.

Operating-month flow:

• Opening on-site stock: ₹1.78 crore.
• Replenishment dispatches during the month (Rule 55 challan): ₹1.52 crore.
• OEM GRN acknowledged: ₹1.51 crore (in-transit at month-end ₹0.01 crore).
• OEM consumption pulls during the month: ₹1.50 crore.
• Closing on-site stock: ₹1.78 + ₹1.51 − ₹1.50 = ₹1.79 crore.
• Monthly Section 31 invoice: ₹1.50 crore consumption × applicable GST rates per SKU.
• Ind AS 115 revenue recognition: ₹1.50 crore in the month of consumption.

Reconciliation tie-out at month-end:

The supplier’s reconciliation engine ties three views:

• Supplier’s outbound replenishment dispatches × Bajaj GRN acknowledgements = within transit-day tolerance.
• Bajaj weekly consumption report aggregated × supplier’s monthly invoicing = same value at the SKU level.
• Supplier’s on-site stock model closing balance × Bajaj’s VMI bin-level closing balance = within counting tolerance.

A break in any leg triggers a joint reconciliation review with Bajaj’s MRP and accounts-payable teams.

Deemed-supply ageing risk on the slow-moving tail:

• SKUs aged 0-90 days: 188 SKUs, ₹1.62 crore stock value.
• SKUs aged 91-180 days: 49 SKUs, ₹16.0 lakh stock value.
• SKUs aged 181+ days (past safe-harbour line): 3 SKUs, ₹2.1 lakh stock value.

The 3 aged-past SKUs are programme-specific fasteners on the model variant Bajaj is winding down. Operating decision matrix:

• Replenishment-pause: already in place. No further dispatches against these SKUs.
• Return under Rule 55 reverse leg: discussed with Bajaj; declined because the model variant has not formally been discontinued and Bajaj wants to retain the on-site stock for service-parts cover.
• Explicit consumption acknowledgement: not available — Bajaj cannot commit consumption.

Tax workpaper position: provisional deemed-supply accrual on ₹2.1 lakh at the weighted-average GST rate of 18% = ₹37,800 provisional GST accrual. Reversal contingent on consumption. The accrual is carried month-on-month while the SKUs remain aged-past.

Aggregate annual exposure on the slow-moving tail at this size of operation — typically 1-2% of total on-site stock value drifting into the aged-past bucket on average — runs to approximately ₹3-5 lakh of deemed-supply GST exposure plus the underlying Ind AS 2 net-realisable-value question on the same SKUs.

Tax overlay — TDS and TCS at the consumption event

The Section 31 invoice on consumption attracts the standard TDS-and-TCS pattern for an auto-component supply:

• TDS at the OEM end on the supply invoice. Component supplies under contract attract Section 393(1) Sl. 6(i).D(b), payment code 1024 in the IT Act 2025 framework, replacing legacy Section 194C from 1 April 2026. 1% individual/HUF, 2% company/firm. Threshold ₹30,000 per single contract, ₹1,00,000 aggregate per FY. The wider Section 393 frame is in Section 393 TDS under the new Income Tax Act.
• TCS at the supplier end where applicable. Most auto-component supplies do not attract TCS — Section 394 (1% on scrap, payment code 1071) attaches only on scrap sale. The wider payment-code stack is in TDS payment codes 1001-1092.
• Form 26AS reflection. The supplier’s Form 26AS picks up the TDS deducted at the OEM on the monthly consumption invoices. Cross-era handling for FY 2025-26 supplies that closed in FY 2026-27 is covered in Form 26AS reconciliation for auto-component suppliers.

The Rule 55 dispatch leg itself carries no TDS, no TCS and no GST — it is the consumption event that triggers the entire tax stack.

How the three-way match works in a VMI arrangement

The OEM’s three-way match on a VMI invoice runs differently from a standard component supply.

• PO leg: the blanket VMI purchase order with SKU-level pricing, minimum-maximum levels and the consumption-billing clause.
• GRN leg: the OEM’s consumption report aggregated by SKU for the invoicing period — the consumption pulls are the effective “receipt” of the goods into the OEM’s commercial inventory.
• Invoice leg: the supplier’s monthly Section 31 invoice with SKU-level consumed quantity × agreed unit price.

The three-way match is therefore PO × consumption × invoice, with the underlying Rule 55 dispatches and supplier replenishment a separate logistics-and-inventory reconciliation. A mismatch between the OEM’s consumption report and the supplier’s invoice surfaces immediately in the OEM’s accounts-payable workflow; a mismatch between the supplier’s replenishment dispatches and the OEM’s GRN acknowledgements surfaces in the supplier’s inventory reconciliation but does not directly block invoicing because the invoicing leg runs off consumption, not replenishment.

Continue reading — the auto-component reconciliation cluster

• Sub-pillar: Automotive component manufacturing reconciliation in India.
• Dispatch instrument: Rule 55 delivery challans for auto components — the legal instrument for consignment-and-VMI movement.
• Deemed-supply analytics: Section 143 deemed supply for auto components — adjacent framework on ageing of off-premises stock.
• External authority: the GST Portal — Central Board of Indirect Taxes and Customs for Section 7, Schedule I para 2, Section 31 and Rule 55.

What automated reconciliation changes

Manual handling of 240 SKUs across four VMI bins, weekly OEM consumption reports, monthly Section 31 invoicing aggregation, on-site stock ageing across six buckets, the deemed-supply safe-harbour threshold, and the Ind AS 115 control-transfer test on every consumption event is where the slow-moving tail quietly drifts into deemed-supply territory and the accounts team carries 3-4 person-weeks per month of reconciliation overhead. Purpose-built auto component reconciliation software India ingests the weekly OEM consumption report, reconciles to supplier replenishment and OEM GRN, triggers monthly Section 31 invoicing on aggregated consumption, runs the on-site stock ageing model with replenishment-pause and return-to-supplier triggers at the six-month safe-harbour line, carries the deemed-supply provisional accrual on aged SKUs, aligns Ind AS 115 revenue recognition to consumption events, and produces a board-visible consignment-and-VMI dashboard by OEM and SKU family. TransactIG carries 24+ industry presets including configurations for consignment-stock and vendor-managed inventory arrangements at OEM premises. Customer outcomes include match-rate improvement from 51% to 88% on VMI consumption reconciliation ledgers. Build is two-to-four weeks on AWS Mumbai (ISO 27001:2022). For the inbound match discipline see three-way matching software India.