Demo cars don't qualify for input tax credit under GST as they lose new vehicle character before resale

The AAAR Haryana ruled that input tax credit cannot be availed on demo cars as they do not qualify for the "further supply" exception under GST law. Demo vehicles are first used for demonstration purposes for approximately two years, losing their new vehicle character before being sold as second-hand goods. This usage pattern differs from vehicles purchased solely for resale. The authority held that allowing ITC on demo cars would contravene Section 17(5)(g) restrictions on motor vehicles used for personal/non-business purposes. Additionally, ITC on ancillary services like insurance and maintenance for demo vehicles was also denied under Section 17(5)(ab).

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Issues:
1. Admissibility of Input Tax Credit (ITC) on demo cars for further supply under GST.
2. Admissibility of ITC on ancillary input services like insurance and repair in relation to demo cars.

Analysis:

Issue 1: Admissibility of Input Tax Credit on Demo Cars for Further Supply under GST

The Appellant, a GST-registered entity, appealed against an Advance Ruling that disallowed ITC on demo vehicles. The Appellant contended that demo cars used for business purposes should qualify as capital goods under Section 18(6) of the CGST Act 2017 and be eligible for ITC. The Advance Ruling Authority (AAR) held that GST paid on demo vehicles cannot be availed as ITC for set-off against output tax under GST. The AAR emphasized that the term "further supply" in Section 17(5)(a) should be strictly interpreted, indicating resale, which was not the primary purpose of purchasing demo cars. The Appellant argued that demo cars were essential for their business, were capitalized in their accounts, and were intended for further supply after a specified period. However, the AAR found that demo cars did not fall under the exceptions provided in Section 17(5)(ab)(i) and (ii), as they were not used for making taxable supplies or further supply of motor vehicles. The Appellant's contention that demo cars should be treated as capital goods for ITC purposes was rejected by the AAR, leading to the appeal.

Issue 2: Admissibility of ITC on Ancillary Input Services in relation to Demo Cars

The Appellant also sought clarity on whether ITC could be availed on ancillary input services, such as insurance and repair, related to demo cars. The AAR ruled that no ITC could be claimed on these services in connection with the demo vehicles. The AAR's decision was based on the restrictions outlined in Section 17(5)(ab) regarding services like insurance, servicing, repair, and maintenance concerning motor vehicles. The AAR found that the demo vehicles did not align with the purposes specified in the legislation for availing ITC on such services. The Appellant argued that as demo cars were used for business activities and were eventually sold after demonstration, ITC on ancillary services should be allowed. However, the AAR maintained its ruling, stating that the demo vehicles did not meet the criteria for ITC eligibility under the relevant provisions.

In conclusion, the Appellate Authority for Advance Ruling upheld the decision of the Advance Ruling Authority, denying the Appellant's claim for Input Tax Credit on demo cars and ancillary input services. The detailed analysis of the legislative provisions and the specific usage of demo vehicles led to the determination that these transactions did not qualify for ITC benefits under the GST framework.

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