2019 (3) TMI 1850 - AAR - GST

Limitations on Input Tax Credit for Demo Cars and Ancillary Services under GST

The ruling determined that Input Tax Credit (ITC) cannot be claimed on demo cars or ancillary services like insurance and repair & maintenance under ... Input Tax Credit - capital goods - Section 16(1) entitlement - Section 17(5)(a) exclusion for motor vehicles - further supply (resale) exception - ancillary services exclusion under Section 17(5)(ab)Input Tax Credit - capital goods - Section 16(1) entitlement - Section 17(5)(a) exclusion for motor vehicles - further supply (resale) exception - ITC on demo cars (capital goods) is not admissible and cannot be availed or set off against output tax payable under GST. - HELD THAT: - Section 16(1) ordinarily entitles a registered person to credit of input tax on goods and capital goods used or intended to be used in the course or furtherance of business. However Section 17(5)(a) is a notwithstanding clause which specifically excludes ITC in respect of motor vehicles for transportation of persons with approved seating capacity of not more than thirteen, except where they are used for specified taxable supplies including further supply of such motor vehicles. A plain and exhaustive reading of Section 17(5)(a), coupled with the prefatory 'Notwithstanding anything contained in sub section (1) of section 16', limits the scope of entitlement under Section 16(1) and makes Section 17(5)(a) determinative. The demo vehicles, though capitalized in the books and used for demonstration, are not purchased for the purpose of making the specified taxable supplies (including resale/further supply) or for transportation of passengers or imparting driving training. Therefore the statutory exception permitting ITC does not apply and ITC on purchase of demo cars is not admissible. [Paras 4]ITC paid on purchase of demo vehicles cannot be availed as input tax credit and set off against output tax payable.Input Tax Credit - ancillary services exclusion under Section 17(5)(ab) - ITC on ancillary input services (insurance, repair and maintenance) relating to the demo cars is not admissible. - HELD THAT: - Section 17(5)(ab) excludes input tax credit in respect of services of general insurance, servicing, repair and maintenance insofar as they relate to motor vehicles referred to in clause (a), subject to limited exceptions where the vehicles are used for the specified purposes or where the recipient is engaged in manufacture or supply of such insurance services. The demo vehicles are not used for the purposes specified in Section 17(5)(a) and the applicant is not within the limited recipients covered by clause (ii). Consequently the exception to the exclusion does not apply and ITC on insurance, repair and maintenance for the demo cars is not available. [Paras 4]No Input Tax Credit can be availed on ancillary services such as insurance and repair & maintenance in respect of the demo vehicles.Final Conclusion: The Authority ruled that GST paid on purchase of demo vehicles and on ancillary services relating thereto is not admissible as Input Tax Credit; prior to Notification No.2/2019 the position was likewise inadmissible in light of Sections 17(5)(a) and 17(5)(ab). Issues:1. Whether Input Tax Credit (ITC) can be availed on demo cars used for demonstration and set off against output tax payable under GST.2. Whether Input Tax Credit (ITC) can be availed on ancillary input services such as insurance and repair & maintenance in respect of demo cars.Analysis:Issue 1:The applicant argued that demo cars are essential for sales promotion and are capitalized in the books, making them eligible for ITC under Section 16(1) of the CGST Act. However, Section 17(5)(a) restricts ITC on motor vehicles unless used for specific purposes, overriding Sections 16(1) and 18(1). The ruling emphasized that ITC for demo cars is disallowed under Section 17(5)(a) despite being used for business purposes.Issue 2:Regarding ancillary input services, Section 17(5)(ab) disallows ITC on services related to motor vehicles unless used for specified purposes. The ruling found that demo cars did not meet the criteria under Section 17(5)(a) or (ab), making ITC on ancillary services ineligible. The ruling concluded that GST paid on demo cars and related services cannot be claimed as ITC or set off against output tax under GST.The Advance Ruling Authority highlighted the exhaustive and restrictive nature of Section 17(5)(a) and (ab) in limiting ITC for motor vehicles and related services. The ruling clarified that even though demo cars are essential for business operations, they do not meet the criteria specified under the relevant sections for availing ITC. The ruling emphasized that the prefix 'further supply' in Section 17(5)(a) implies resale, which was not the purpose of purchasing demo cars. Ultimately, the ruling concluded that ITC on demo cars and ancillary services is inadmissible under the GST provisions, as outlined in Section 17(5)(a) and (ab).