2018 (10) TMI 514 - AAR - GST

Demo cars for sales promotion eligible for GST input tax credit on capital goods

The ruling determined that input tax credit on a motor car purchased for demonstration purposes by a motor car dealer can be availed as credit on capital ... Input tax credit - capital goods - use in the course or furtherance of business - disallowance under Section 17(5) regarding motor vehicles - treatment of subsequent supply and adjustment under Section 18(6)Input tax credit - capital goods - use in the course or furtherance of business - disallowance under Section 17(5) regarding motor vehicles - treatment of subsequent supply and adjustment under Section 18(6) - Input tax credit on motor cars purchased and capitalised as demonstration vehicles by a motor car dealer is admissible as credit on capital goods and may be set off against output tax payable under GST. - HELD THAT: - The Authority applied the entitlement under the general input tax credit provision to purchases of demo vehicles that are acquired against tax invoices and capitalised in the books. The definition of capital goods embraces goods whose value is capitalised and which are used or intended to be used in the course or furtherance of business; demo cars used for promoting sales fall within that description. The negative provision disallowing credit on motor vehicles does not apply where the vehicles are used to make taxable supplies - including further supply of the vehicle - and the demo cars are sold after a limited period at written down book value, with GST paid on that sale. Consequently the embargo in the negative clause is inapplicable on the facts. The Authority also noted that availability of credit is subject to the adjustment mechanism on subsequent supply of capital goods under the provision governing reversal or payment on transfer; any input tax credit taken will be subject to the computation and payment required on disposal of the capital goods under that mechanism.Credit is admissible for demo cars capitalised in the books and used in the course or furtherance of business, subject to applicable adjustment on later supply.Final Conclusion: The Authority ruled that a motor car dealer may avail input tax credit on motor cars purchased and capitalised as demonstration vehicles and set off such credit against output tax, subject to the adjustment/payment obligations on subsequent supply of those capital goods. Issues:Whether input tax credit on the motor car purchased for demonstration purpose of the customer can be availed as credit on capital goods and set off against output tax payable under GST in the case of a motor car dealer.Analysis:The petitioner, a motor car dealer, sought an advance ruling on the eligibility of input tax credit on motor cars purchased for demonstration purposes. The demo cars are essential for promoting sales by providing trial runs to customers. These demo cars are purchased from the principal supplier, reflected as capital assets in the books of accounts, and used for demonstration purposes for a specific period before being sold off at the written down book value, paying applicable taxes at that time.The authorized representative of the firm argued that as per their business norms, every sales outlet is required to maintain at least three demo cars. The demo cars are purchased against tax invoices and capitalized in the books as capital assets. The duration of use for these test drive vehicles is typically two years or 40,000 kilometers, whichever is earlier.Under Section 16(1) of the GST Act, every registered person is entitled to take credit of input tax charged on any supply of goods or services used in the course or furtherance of business. The petitioner purchases vehicles against tax invoices and pays taxes, making them eligible for input tax credit. The demo cars purchased are capitalized and used in the course or furtherance of business, meeting the definition of 'capital goods' under Section 2(19) of the Act.The issue was examined in detail, emphasizing that the demo cars are indispensable for sales promotion and are capitalized in the books of accounts. Since the impugned purchase of demo cars is in furtherance of business, the applicant is deemed eligible for input tax credit. The activity does not fall under the negative clause of Section 17(5) as the demo cars are sold at the written down book value after a limited period of use.The ruling issued states that input tax paid by a vehicle dealer on the purchase of a motor car used for demonstration purposes of the customer can be availed as input tax credit on capital goods and set off against output tax payable under GST. This ruling is subject to the provisions of Section 18(6) of the GST Act, which outlines the conditions for the supply of capital goods on which input tax credit has been taken.