ITC on demonstration motor vehicles allowed only if subsequently sold or supplied under Section 17(5)

The AAR held that ITC on demonstration motor vehicles depends on their ultimate use. Section 17(5) of CGST Act restricts ITC on motor vehicles despite business use. However, if vehicles are subsequently supplied (sold, leased, rented) within Section 7's definition, ITC becomes eligible as capitalization doesn't disqualify it when further supply occurs. The applicant's ITC eligibility depends on future events: if vehicles are sold/supplied, ITC is allowed; if retained as workshop replacement vehicles without further supply, ITC must be repaid per amended Section 16(4).

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Issues Involved:
1. Whether the applicant is entitled to avail the input tax credit (ITC) charged on inward supply of motor vehicles used for demonstration purposes in the course of business of supplying motor vehicles as input tax credit on capital goods.

Summary:

Issue 1: Eligibility for ITC on Motor Vehicles Used for Demonstration Purposes

The Applicant, M/s. Sai Service Pvt Limited, is an authorized car dealer engaged in the supply of automobiles and related services. The Applicant procures demo vehicles for demonstration purposes, which are capitalized as Fixed Assets in their books and used for test drives. The Applicant does not currently claim ITC on these vehicles but intends to do so in the future and will not avail the benefit under Notification No. 08/2018 - Central Tax (Rate) dated 25-January-2018 at the time of sale of such vehicles.

The Applicant's interpretation of the law relies on Section 16(1) of the CGST Act, which allows credit of input tax charged on goods or services used in the course or furtherance of business. The Applicant argues that demo vehicles are essential for sales promotion and, therefore, should be eligible for ITC.

During the personal hearing, the Applicant reiterated that they are obligated by the manufacturer to purchase demo vehicles, which are capitalized and used for a minimum of two years or 40,000 KMs. They also highlighted that they do not claim depreciation on the GST component of these vehicles.

The jurisdiction officer confirmed that no adjudication is pending on this issue. The Authority for Advance Ruling (AAR) examined the dealership norms with MSIL, which stipulate that demo vehicles must be retained for two years or 40,000 KMs and can only be sold with written approval.

Section 17(5) of the CGST Act restricts ITC on motor vehicles used for transportation of persons, but it provides exceptions for further supply of such vehicles, transportation of passengers, and imparting training on driving. The AAR noted that capitalizing the motor vehicle does not disqualify the tax paid on their purchases from ITC if there is further supply of such vehicles.

The AAR concluded that:

a. If the applicant makes further supply of such vehicles, they are eligible for the ITC claimed.

b. If the applicant retains the vehicle for their workshop as a replacement vehicle, they are not eligible for ITC, and the ITC claimed must be repaid in cash as per the amended Section 16(4) notified vide Notification No. 18/2022, Central Tax dated 28.09.2022, effective from 01.10.2022.

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