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Auto stamping suppliers press OEM-owned free-issue steel coil into parts; the FI steel is memorandum-only and never enters purchase books, the supplier bills only the conversion charge under the Section 143 / Schedule II job-work model, and 15-35% of every coil leaves as skeleton scrap that is also OEM-owned — so the yield equation (FI steel in = finished parts + skeleton scrap + process loss in tonnes), the scrap-credit netting against conversion charges, the Section 394 scrap TCS at 1% on external sale, and the periodic FI material audit form a control set that generic ERP does not close and where any unexplained FI shortfall is a recoverable from the supplier.
Maintain a memorandum FI quantity ledger in tonnes per OEM principal and grade; receive FI steel on a Section 143 challan with the one-year return clock; bill GST only on conversion charge (Schedule II service); close the yield identity closing = opening + received - (parts dispatched + skeleton scrap + process loss) within an agreed yield tolerance; value skeleton scrap at the agreed price and net the scrap credit against conversion; on external scrap sale collect Section 394 TCS at 1% code 1071; flag yield variance beyond tolerance as an OEM recoverable.
FI material master in metric tonnes by OEM principal, steel grade and coil; Section 143 inbound challan series with one-year clock; per-part theoretical yield and process-loss tolerance; conversion-charge rate card; agreed scrap price per tonne and scrap-credit netting rule; Section 394 code 1071 TCS for external scrap buyers; monthly/quarterly FI reconciliation statement format and annual physical-count schedule.
A periodic FI reconciliation statement per OEM principal closing the tonnes-in-equals-parts-plus-scrap-plus-loss identity, yield variance against tolerance flagged as recoverable where breached, skeleton-scrap tonnage tied to scrap-credit value and netted against the conversion invoice, Section 394 TCS reconciled on external scrap sales, and a memorandum FI balance that reconciles to physical stock at the annual count.
A stamping supplier in Pune presses body panels and brackets for two OEMs entirely on free-issue steel — the supplier never buys the steel; the OEM ships it in. At the April close the plant manager and the finance controller stare at the same gap: the OEM’s free-issue material statement says 200 metric tonnes of coil were issued in the month, the production system says 138 tonnes went out as finished parts, the scrap yard weighbridge logged 54 tonnes of skeleton scrap — and 8 tonnes are unaccounted. Because the steel is OEM-owned, that 8-tonne gap is not an inventory note; it is a recoverable the OEM will deduct. This is free issue steel skeleton scrap reconciliation auto India in practice — a quantity reconciliation, in tonnes, where the supplier carries the loss on material it never owned.
Quick reference
| Concept | Scheme / standard | Regulator / body | GST or tax treatment |
|---|---|---|---|
| Free-issue (FI) steel | Job-work under Section 143 CGST Act | CBIC / GST portal | No GST on FI; supplier owns no value |
| Conversion charge | Service under Schedule II CGST Act | CBIC | GST on conversion charge only |
| FI inbound movement | Delivery challan, Section 143, 1-year clock | CBIC | Memorandum-only in supplier books |
| Skeleton / engineering scrap | OEM-owned by default | Commercial (ACMA-aligned) | Returned, or sold under scrap credit |
| External scrap sale TCS | Section 394, payment code 1071 | Income Tax portal | TCS at 1% on sale value |
The free-issue material model
In stamping and pressing, steel is the dominant cost — often 60-70% of the finished-part value. To control that cost and capture steel-buying scale, OEMs frequently supply the steel coil free-issue (FI): the OEM, or a steel major such as Tata Steel or JSW nominated by the OEM under a price-protected nomination, ships coil to the stamping supplier at no charge. The supplier presses it into parts and returns finished components, billing only its conversion charge — the pressing labour, die amortisation, consumables and overhead — not the steel value.
The accounting consequence is fundamental: FI steel never enters the supplier’s purchase books. It is held memorandum-only, tracked in a quantity ledger denominated in metric tonnes, because legal ownership stays with the OEM throughout. The supplier’s reconciliation is therefore a quantity reconciliation — tonnes in versus parts and scrap out — not a value reconciliation. And because the supplier owns no value but bears custody, any unexplained shortfall is a recoverable, not a write-down.
GST treatment: Section 143 and Schedule II
The free-issue arrangement is job-work. Under Section 143 of the CGST Act, the OEM (principal) dispatches FI steel to the stamping supplier (job-worker) on a delivery challan without charging GST, provided the inputs return as finished parts within one year. The supplier charges GST only on its conversion charge — never on the steel value — because Schedule II of the CGST Act classifies any treatment or process applied to another person’s goods as a supply of service. The pressing is that service. The steel itself, being free-issue and processed-and-returned within the statutory window, attracts no GST in the supplier’s hands.
This is the same Section 143 machinery covered for the multi-tier case in the Tier-2 sub-vendor job-work reconciliation article — here the supplier is itself the job-worker receiving FI inputs, and must track the one-year return clock on inbound FI challans so the OEM’s ITC-04 position stays clean.
The yield equation and skeleton scrap
Stamping is subtractive: blanks are punched from a coil or sheet, leaving a perforated steel lattice — the skeleton scrap (also called engineering scrap or web scrap). Yields run 65-85% depending on part geometry and nesting efficiency, so 15-35% of the FI steel by weight leaves as skeleton scrap. The core control is the yield equation, in tonnes:
FI steel received = finished parts dispatched + skeleton scrap + process loss
Every term is a weight. Finished parts are weighed (or computed from theoretical part weight × quantity dispatched). Skeleton scrap is weighbridge-logged. Process loss — mill scale, oil, fines, set-up reject — is a small permitted band, typically well under 2%. The reconciliation closes only when the equation balances within tolerance. A break beyond the process-loss tolerance is the OEM’s recoverable, because the missing steel was theirs.
Critically, because the steel was OEM-owned, the skeleton scrap is OEM-owned too by default. The supplier cannot simply book it as its own waste. It is either returned to the OEM on a delivery challan, or — far more commonly — retained and sold by the supplier under an agreed scrap-credit arrangement.
Scrap-credit netting against conversion charges
When the OEM lets the supplier retain and sell the skeleton scrap, the value of that scrap is generally credited back to the OEM, since the OEM owned the underlying steel. The mechanism is scrap-credit netting:
- The supplier raises its conversion-charge invoice (with GST on the conversion service).
- It values the actual skeleton-scrap weight at the agreed scrap price per tonne.
- It either deducts that scrap credit from the conversion invoice or issues a separate scrap-credit note to the OEM.
The net conversion charge — conversion minus scrap credit — is what the OEM pays. Reconciliation must tie the generated skeleton-scrap tonnage to the scrap-credit value at the agreed price, confirm the netting flows correctly through the conversion invoice, and ensure the Section 394 TCS leg on any external scrap sale is independently closed.
Section 394 scrap TCS on external sale
When the supplier sells the retained skeleton scrap to an external scrap dealer, the sale 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 buyer. The supplier remits the TCS on the monthly challan, files Form 27EQ quarterly with each buyer’s PAN, and issues Form 27D. This is the same machinery detailed in Section 394 scrap TCS reconciliation. The subtlety unique to free-issue is that the economic benefit of the scrap flows back to the OEM via the scrap credit, while the TCS obligation on the external sale sits with the supplier as legal seller — two parties, two flows, one weighbridge ticket that must reconcile to both.
For sellers near the Section 394 threshold versus the Section 393(1)(k) purchase-TDS boundary, the threshold-determiner tool below resolves which provision bites.
Section 393(1)(k) vs 394 threshold determiner
Resolve whether a scrap or material transaction falls under purchase-of-goods TDS or scrap TCS, and at what threshold.
Open the threshold determiner →Worked example — 200 MT/month FI steel, 28% skeleton scrap
A stamping supplier receives 200 metric tonnes of free-issue cold-rolled coil per month from one OEM, presses body brackets and reinforcements, runs a theoretical yield of 72% (28% skeleton scrap), and a permitted process loss of 1.5%:
- FI steel received: 200.0 MT (memorandum-only; on a Section 143 challan)
- Finished parts dispatched (theoretical at 72% yield): 144.0 MT
- Skeleton scrap expected (28%): 56.0 MT
- Process loss permitted (1.5%): 3.0 MT
- Theoretical balance: 144.0 + 56.0 = 200.0 MT against 200.0 in, with 3.0 MT loss absorbed in the yield band
Actual for the month: parts dispatched 138.0 MT, weighbridge skeleton scrap 54.0 MT, leaving 8.0 MT unaccounted against a 3.0 MT permitted loss — a 5.0 MT adverse yield variance. At an FI steel value of, say, ₹62,000 per tonne, that is a ₹3.1 lakh OEM recoverable to investigate before the FI statement closes: it resolves into 2.2 MT of unlogged off-cuts that bypassed the weighbridge, 1.6 MT of die-trial reject not booked, and 1.2 MT of genuine process loss above band on a new high-tensile grade. On the scrap side, the 54.0 MT skeleton scrap valued at the agreed ₹38,000/MT scrap price yields a ₹20.52 lakh scrap credit netted against the month’s conversion charge; the external sale of that scrap to the dealer carries Section 394 TCS at 1% on the sale value.
How free-issue ties into the wider auto stack
Free-issue and skeleton-scrap reconciliation is one rail in the automotive component manufacturing reconciliation sub-pillar and the manufacturing pillar guide. Suppliers who also hold finished stock inside the OEM run a parallel consignment / VMI reconciliation. For the ACMA framework on free-issue accounting, conversion-charge contracting and yield benchmarks, see the Automotive Component Manufacturers Association of India (ACMA).
What automated reconciliation changes
Manual FI reconciliation is a tonne-by-tonne spreadsheet exercise reconciling weighbridge tickets, the OEM’s FI statement, production output and scrap-credit notes — where an adverse yield variance surfaces only after the OEM has already deducted it. Purpose-built reconciliation software India closes the yield identity as a structured control, ties skeleton-scrap weight to scrap credit and to the Section 394 TCS leg, and surfaces variance the moment it breaches tolerance. TransactIG carries 24+ industry presets including a configuration for free-issue yield and conversion-charge 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.