2022 (7) TMI 181 - AAR - GST

Car dealer entitled to input tax credit on demo vehicle purchases under section 17(5)(a)(A)

In Re: M/s. Toplink Motorcar Private Limited

The AAR, West Bengal held that a car dealer is entitled to input tax credit on demo vehicle purchases. The applicant purchased demo vehicles for test ... Availment and setting off of Input tax credit - purchases of demo vehicles - whether GST liability on sale of vehicle, spares, labour can be done by utilizing the input tax credit on purchase of demo vehicle, other expenses like repairs & maintenance, insurance etc.? - HELD THAT:- In the instant case, the demo vehicles are not used for transportation of passengers by the applicant. Merely providing test drive facility or to demonstrate the features of a vehicle to prospective buyers cannot be regarded as imparting training on driving the vehicle. It therefore appears that the applicant shall be entitled to take input tax credit on demo vehicles only when the condition laid down in section 17(5)(a)(A) gets satisfied i.e., if it is established that the purchases of such demo vehicles are made for further supply of such vehicle. The business model of the applicant delineates that the demo vehicles are initially kept by the applicant for a certain period of time as mandated by the car manufacturing company for providing test drive facility to the prospective buyers. The applicant, after receipt of the demo vehicles, capitalizes the same in his books of accounts in lieu of booking the same as stock-in-trade. ‘Capital goods’ in terms of clause (19) of section 2 of the GST Act means “goods, the value of which is capitalised in the books of accounts of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business”. It would not be out of place to mention here that the provisions of the GST Act doesn’t restrict to avail input tax credit to the extent of capitalization sans clauses (c) and (d) of sub-section (5) of section 17 of the Act ibid - the input tax credit on purchase of demo vehicles cannot be denied merely on the ground of capitalization of the vehicles in the books of accounts. It needs to be reiterated that section 17(5)(a)(A) restricts input tax credit in respect of motor vehicle for transportation of persons except when they are used for further supply of such motor vehicles. The intention of the law, as it appears from the expression ‘for further supply of such vehicles’ is to allow input tax credit in respect of taxpayers dealing with motor vehicles as they are engaged in further supply of such motor vehicles - the expression ‘such’ bears a wide connotation which does not put any restriction in respect of supply of demo vehicles. When the applicant makes purchases of the demo vehicles, such purchases are also meant for further supply. However, as per Dealership Agreement and Test Drive Car Policy, the applicant requires capitalizing the demo vehicles and has to keep such vehicle for a specific period of time. Such activities, in any manner, do not change the purpose of further supply. The standard business practice of a car dealer is to purchase vehicles including one or more demo vehicles for further supply of such vehicles. While non-demo vehicles are made available for sale immediately after the purchase, the demo vehicles are put up for sale after the demonstration/test drive period. The demo vehicles are purchased all along for further supply with the condition that they will be kept for a specific period of time - the purchase of demo vehicles and further supply of the same satisfies the condition laid down in section 17(5)(a)(A) of the GST Act. The applicant is eligible to avail input tax credit on purchases of demo vehicles which can be set off against output tax payable under GST. Issues Involved:1. Admissibility of input tax credit on purchases of demo vehicles.2. Conditions and restrictions under Section 16 and Section 17(5) of the GST Act.3. Applicability of advance rulings from other jurisdictions.Issue-wise Detailed Analysis:1. Admissibility of Input Tax Credit on Purchases of Demo Vehicles:The applicant, an authorized dealer of Hyundai Motor India Limited, uses demo vehicles for providing trial runs to customers. These vehicles are capitalized in the books of accounts. The applicant sought an advance ruling on whether the input tax credit (ITC) on the purchase of demo vehicles can be utilized against GST liability on the sale of vehicles, spares, and labor.2. Conditions and Restrictions under Section 16 and Section 17(5) of the GST Act:Section 16(1) of the GST Act allows a registered person to take ITC on supply of inputs and capital goods used in the course or furtherance of business. However, Section 17(5)(a) restricts ITC on motor vehicles used for transportation of persons, except when used for further supply, transportation of passengers, or training on driving such vehicles.The demo vehicles are used for demonstration purposes and subsequently sold. The applicant argued that these vehicles are essential for marketing and sales promotion, and thus, ITC should be available. The applicant cited several advance rulings from other jurisdictions supporting the claim that ITC on demo vehicles is allowable.3. Applicability of Advance Rulings from Other Jurisdictions:The applicant referenced advance rulings from Jharkhand, Maharashtra, and Kerala, which allowed ITC on demo vehicles under specific conditions. These rulings emphasized that demo vehicles, although capitalized, are ultimately supplied further, thus qualifying for ITC.Observations & Findings:The Authority for Advance Ruling (AAR) examined the applicant's business model and the provisions of the GST Act. It was noted that demo vehicles are initially capitalized but are ultimately supplied, fulfilling the condition of 'further supply' under Section 17(5)(a)(A). The AAR observed that the restriction on ITC for motor vehicles does not apply if the vehicles are used for further supply, even if they are capitalized and used for a specific period before being sold.The AAR concluded that the applicant's practice of capitalizing demo vehicles does not preclude the availability of ITC, as the vehicles are eventually supplied. The time duration for which the vehicles are used as demo cars does not affect the eligibility for ITC, as there is no prescribed time limit for making further supplies under the GST Act.Ruling:The applicant is eligible to avail input tax credit on purchases of demo vehicles, which can be set off against output tax payable under GST.