Free-Issue Material Accounting for Indian Auto Stamping Suppliers

A stamping supplier near Bawal, NCR, runs three large progressive-die lines pressing OEM body brackets and reinforcements. Every coil that arrives at the gate is free-issue — 200 metric tonnes a month of cold-rolled IS 513 grade, none of it on the supplier’s purchase ledger, none of it in the financial inventory, all of it on a memorandum ledger held in tonnes. By the time the OEM’s FI audit team arrives in mid-May for the year-end physical count, the supplier’s reconciliation needs to close the yield identity for twelve months, tie 670 tonnes of skeleton scrap to the scrap-credit notes and the Section 394 TCS register, and explain a 41-tonne adverse variance on a new dual-phase grade that the line struggled with through Q3. This is free issue material accounting auto stamping India — accounting on material the company never owned, where every gap is a recoverable.

Quick reference

Why free-issue is structurally different from a normal purchase

In stamping, steel typically runs 60-70% of a finished part’s cost. OEMs that produce hundreds of part numbers across multiple suppliers concentrate steel buying centrally to capture price scale, lock in supply from preferred mills, and standardise grade and gauge. They do this via the free-issue model: the OEM, or the steel major nominated by the OEM under a price-protected nomination (typically Tata Steel, JSW, AM/NS, SAIL, or POSCO Maharashtra for high-end grades), ships coil to the stamping supplier without charging it. The supplier presses, the supplier returns finished parts, and the supplier bills only its conversion service — pressing labour, die amortisation, consumables, energy, overhead.

That single arrangement changes the supplier’s accounting model fundamentally. Most of the input cost never touches the supplier’s P&L. The supplier’s gross margin is purely a service margin, not a material-plus-service margin. And the steel — which is the dominant asset on the shop floor by value at any given moment — is not the supplier’s, even though it is in the supplier’s custody, on the supplier’s racks, in the supplier’s WIP.

The memorandum-only ledger

Because the FI steel is not the supplier’s, it cannot enter the supplier’s books of account. The standard treatment is a memorandum-only quantity ledger maintained outside the financial trial balance, denominated in metric tonnes, structured per OEM principal, per material grade, per coil heat number:

• Opening balance per coil heat — tonnes in supplier’s custody at period start.
• Receipts — coil-wise inbound dispatches on Rule 55 / Section 143 challans from the OEM or the nominated mill, with each coil’s weight from the source mill test certificate.
• Issues to production — tonnes drawn into the press line for production, theoretically equal to (theoretical part weight × quantity dispatched) plus the skeleton-scrap fraction plus permitted process loss.
• Skeleton scrap generated — weighbridge-logged tonnes.
• Closing balance per coil — what physically remains.

None of these entries touches the financial books. The supplier’s financial P&L sees only the conversion charge billed (revenue) and the conversion costs incurred (consumables, labour, dies, overhead, energy). The supplier’s financial inventory reflects only its own purchased materials (consumables, packaging) — not the FI steel and not the WIP value carried in FI material.

There are downstream Ind AS implications worth noting. Under Ind AS 2 the supplier’s inventory excludes goods held on behalf of others, so the FI material is correctly off-balance-sheet. Under Ind AS 115 revenue is recognised on the conversion service alone, satisfying the performance obligation as the supplier presses and returns parts. Auditors testing the FI position therefore audit two things: the memorandum ledger as a stewardship control, and the supplier’s revenue recognition on the conversion service.

Schedule II GST treatment

Under Schedule II of the CGST Act, paragraph 3, “any treatment or process which is applied to another person’s goods is a supply of services”. That paragraph is the rock on which the FI GST treatment sits. The pressing performed by the stamping supplier is a treatment applied to the OEM’s goods — therefore a supply of service, not goods. The supplier raises a tax invoice for the conversion charge at 18% under HSN 9988 (manufacturing services on physical inputs owned by others), with no GST on the value of the steel. The steel value is the OEM’s; the supplier never owned it and cannot supply what it does not own.

The inbound dispatch of FI steel from the OEM (or the nominated mill on the OEM’s behalf) is a movement of goods not for supply and is correctly accompanied by a delivery challan under Rule 55 showing the OEM as consignor, the supplier as consignee, the description and quantity and (informationally) the value of the steel, but with no GST charged. The full Section 143 / Schedule II machinery for the broader free-issue and skeleton-scrap rail is set out in free-issue steel and skeleton scrap reconciliation; the present article focuses on the accounting discipline that sits underneath it.

The yield equation and per-grade tolerance bands

The substantive control on FI material is the yield identity, in tonnes:

Closing FI = Opening FI + Received − (Finished parts dispatched + Skeleton scrap + Process loss)

Every term is a weight. Finished parts dispatched are computed as theoretical part weight × dispatched quantity (or weighed at a check point). Skeleton scrap is weighbridge-logged on the way out, either to the OEM gate (return route) or to the supplier’s scrap yard (retain-and-sell route). Process loss — mill scale, oil, fines, set-up scrap below blank size, die-trial reject — is a small contracted band.

The tolerance band varies by grade because formability and trial-reject rate differ:

Yield itself depends on geometry and nesting: small deep-drawn brackets can run 55–70% yield, large flat panels 80–90%. The contract pins both the yield norm per part and the process-loss tolerance per grade — any adverse yield variance beyond the agreed band is treated as a recoverable by the OEM, valued at the FI material price, and deducted from the supplier’s conversion-charge settlement.

The financial impact is asymmetric: the supplier owns no upside on a favourable yield (it cannot keep the steel saved), but bears the full downside on an adverse yield (the missing steel is the OEM’s, and the OEM recovers).

Scrap disposition and routing

Skeleton scrap — the perforated steel lattice left after blanking — is generated at 15-35% of FI by weight depending on part geometry and nesting. Because the steel was OEM-owned, the scrap is OEM-owned by default. There are two contractually-allowed dispositions:

Route 1 — return to OEM. The skeleton scrap is moved on a delivery challan under Rule 55 from the supplier’s premises to the OEM’s nominated scrap yard or back to the OEM plant. No sale takes place — title was never with the supplier — so no Section 394 TCS applies and no GST is charged. The challan describes the goods as OEM-owned skeleton scrap being returned. The supplier’s weighbridge ticket and the OEM’s receiving weighbridge ticket must reconcile.

Route 2 — retain and sell externally. Under an agreed scrap-credit arrangement, the supplier retains the skeleton scrap and sells it to an external scrap dealer. Two consequences:

• The supplier is the legal seller of the scrap to the dealer. The sale therefore attracts Tax Collection at Source under Section 394 of the Income Tax Act 2025 — payment code 1071 — at 1% of the sale value, collected from the scrap dealer at the time of debit or receipt, whichever is earlier. The supplier remits the TCS on the prescribed monthly challan, files Form 27EQ quarterly with the dealer’s PAN, and issues Form 27D. The general framework is set out in Section 394 scrap TCS reconciliation; the legacy 206C(1) cross-reference is preserved for entries before 1 April 2026.
• The economic value of the scrap, however, is credited back to the OEM via the scrap-credit netting mechanism — because the underlying steel was the OEM’s.

Scrap-credit netting against conversion charges

When the supplier retains the skeleton scrap under Route 2, the value of that scrap is generally returned to the OEM by netting it against the supplier’s conversion-charge billing. The mechanism:

1. Compute the scrap credit — actual skeleton-scrap weight for the period × agreed scrap price per tonne per scrap category (commercial-grade CR turnings, HR offcuts, AHSS scrap, stainless scrap each priced differently).
2. Raise the conversion-charge invoice in the normal way, with GST at 18% on the conversion service under HSN 9988.
3. Apply the scrap credit — either as a separate scrap-credit note from the supplier to the OEM (treated as a sale of scrap to the OEM, with appropriate GST and not Section 394 TCS, because the OEM is the buyer), or as a netting line on the conversion invoice that reduces the amount payable.

The contract dictates the form: a separate scrap-credit invoice is cleaner for audit because it sits in the books as a distinct supply; the netting line is operationally simpler for monthly close.

Reconciliation must tie:

• the memorandum FI ledger weighbridge tonnage on the scrap-out side,
• the scrap-credit value at the agreed price,
• the conversion-invoice settlement that the OEM actually pays, and
• on Route-2 external sale, the Section 394 TCS register for the external dealer.

Any divergence between scrap weighbridge tonnage and scrap-credit value, or between scrap-credit value and OEM-accepted settlement, is the working list for the month-end close.

The OEM-initiated FI material audit

OEMs run periodic FI audits at supplier premises — typically annual physical counts with surprise mid-year checks for high-value grades. The audit team weighs or counts:

• Coil stock in the raw-material yard — every coil weighed and traced to the inbound challan and the mill heat number.
• WIP at every press line — uncoiled material between the de-coiler and the press exit, any partially-pressed stock between operations, any banked but unpressed material.
• Skeleton-scrap bunkers — weighed before disposal.
• Finished parts not yet dispatched — counted and weight-validated.

The reconciliation closes:

Closing FI per audit = Opening FI per audit + Received − (Finished parts dispatched + Scrap returned or sold + Process loss within tolerance)

Variance beyond contracted tolerance is the recoverable. The supplier’s memorandum ledger must be audit-ready at any point — not just at year-end — because surprise inspections rely on the supplier producing the ledger position on demand.

Worked example — 200 MT/month FI HR coil, 28% skeleton scrap, monthly yield reconciliation

A stamping supplier on contract with a major two-wheeler OEM receives 200 metric tonnes per month of free-issue hot-rolled IS 1079 grade-O coil (commercial quality), presses body brackets, frame sub-assemblies and small reinforcements. Contracted yield norm 72% (28% expected skeleton scrap), permitted process loss 1.8% on this HR grade.

Theoretical month flow (in tonnes):

• Opening FI balance: 12.0
• Inbound FI received on Rule 55 challan: 200.0
• Available for processing: 212.0
• Finished parts dispatched at theoretical part weight × quantity: 153.4 (72% of 213, accounting for opening)
• Skeleton scrap expected (28%): 59.6
• Process loss permitted (1.8%): 3.8
• Theoretical closing: 212.0 − 153.4 − 59.6 − 3.8 = −4.8 reconciles within the running balance with prior carry

Actual for the month:

• Finished parts dispatched (weight): 148.2
• Weighbridge skeleton scrap: 56.0
• Closing physical count: 4.5
• Implied process loss: 212.0 − 148.2 − 56.0 − 4.5 = 3.3 — within the 1.8% band on the throughput base

That month closes cleanly. The scrap-credit settlement on Route 2 retain-and-sell: 56.0 MT × agreed scrap price of ₹38,000/MT = ₹21.28 lakh scrap credit netted against the month’s conversion-charge invoice. The conversion charge itself, at a contracted ₹14.50/kg on 148,200 kg dispatched, is ₹21.49 lakh, plus 18% GST on the gross conversion (the netting follows the contract). The supplier’s external sale of the 56.0 MT to a Peenya scrap dealer at ₹39,500/MT gross attracts Section 394 TCS code 1071 at 1% on ₹22.12 lakh = ₹22,120, collected from the dealer, remitted on the next monthly TDS/TCS challan, captured in Form 27EQ at quarter-end. The economic flow: scrap-credit recovered to OEM ₹21.28 lakh; supplier’s net trading on scrap ₹0.84 lakh (gross sale minus credit returned to OEM); TCS obligation independently closed.

Now a stress test — the same supplier the following month switches half its production to a new dual-phase 590 grade (DP590) for a high-line variant, with a contracted process-loss tolerance of 2.5%. Actual process loss across the month runs 4.1% as the line teething sets in. On a throughput of 200 MT, that is a 1.6% adverse variance — 3.2 MT recoverable to the OEM at the contracted FI value of ₹72,000/MT for DP590 = ₹2.30 lakh recovery on the next conversion-charge settlement. The supplier corrects with die-tryout adjustments, runs trial coils inside the band, and absorbs the recovery as the cost of the grade transition. Each of those numbers is visible only because the memorandum FI ledger closes the yield identity at month-end — without it, the variance surfaces only at the annual audit, by which time the recovery is multiples larger.

How FI accounting ties into the wider auto stack

Free-issue accounting is the operational foundation under free-issue steel and skeleton scrap reconciliation and one rail inside the automotive component manufacturing reconciliation sub-pillar. The Section 394 TCS leg on retained scrap shares machinery with the wider manufacturing scrap TCS rail. For the ACMA framework on FI accounting, conversion-charge contracting, and supplier yield benchmarks see the Automotive Component Manufacturers Association of India (ACMA).

What automated reconciliation changes

Manual FI accounting on hundreds of coils across multiple grades and multiple OEM principals is a memorandum-ledger discipline that breaks under volume — and where the first sign of adverse yield is usually the OEM’s audit-recovery deduction at year-end. Purpose-built reconciliation software India closes the per-coil and per-grade yield identity as a structured control, ties skeleton-scrap weighbridge tonnage to scrap-credit value and to the Section 394 TCS code 1071 register, and surfaces yield variance the moment it breaches the contracted per-grade band — before it lands in the OEM’s recovery note. TransactIG carries 24+ industry presets including a configuration for free-issue memorandum ledgering, per-grade tolerance and conversion-cum-scrap-credit netting. Customer outcomes include match-rate improvement from 51% to 88%. Build is two-to-four weeks on AWS Mumbai (ISO 27001:2022). For the inbound match discipline see three-way matching software India.