2024 (5) TMI 37 - AAR - GST

Mercedes Benz dealer can claim input tax credit on demo cars for demonstration and sale under section 17(5)(a)(A)

West Bengal AAR ruled that a Mercedes Benz dealer acting as commercial agent can claim input tax credit on demo cars purchased for demonstration and ... Entitlement to claim input tax credit charged and paid on inward supply of car from Mercedes Benz India which are used for demonstration purpose to the potential customer interested in buying Mercedes Benz Car, commonly known as Demo cars - classification and rate of tax at the time of sale of demo car - amount received by the applicant from Mercedes Benz INDIA towards reimbursement of “Loss on Sale of Demo Car” constitute as supply or not. Admissibility of input tax credit on purchase of motor vehicles which are initially used by the applicant for demonstration purpose and thereafter supplied by him - HELD THAT:- The applicant is not engaged in trading of motor vehicles. In the case in our hand now, the applicant has entered into an agreement with MB INDIA to provide facilitation services for sale of motor vehicles where the applicant acts as a self-employed commercial agent with the responsibility of brokering the sales of vehicles on behalf of MB INDIA. Admittedly, the supply of motor vehicles to the end-customers is made by MB INDIA. The applicant maintains the stock of the demo vehicles for a specified period of time and thereafter supplies the same which may be made at a price lower than the purchase value of the said vehicle. However, the provisions of the GST Act nowhere specifies that input tax credit shall not be available in respect of any outward supplies which is made at a price lower than its procurement value - the fact that the condition of a demo vehicle at the time of its further supply has undergone some deterioration does not detract from the reality that the vehicle when supplied by the applicant has ceased to be such vehicle that was purchased. 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 restriction of input tax credit as imposed in section 17(5)(a)(A) of the GST Act is not applicable on purchase of demo vehicles which are supplied by the applicant after the specified time for providing test drive facility. Classification and rate of tax at the time of sale of demo car - HELD THAT:- Chapter 87 of the CUSTOMS TARIFF ACT, 1975 deals with ‘vehicles other than railway or tramway rolling-stock, and parts and accessories thereof’. Further, Chapter 8702 covers ‘motor vehicles for the transport of ten or more persons, including the driver’. Furthermore, Chapter 8703 covers ‘motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702), including station wagons and racing cars’ - there would be no change of classification of the demo vehicle, at the point of sale by the applicant. Rate of tax of demo car - HELD THAT:- The outward supply of demo car would attract same rate of tax of its inward supply subject to the provision of section 14 of the GST Act. Whether the amount received by the applicant from MB INDIA towards reimbursement of “Loss on Sale of Demo Car” would constitute as supply or not? - HELD THAT:- In the case at hand, the applicant has entered into an agreement with MB INDIA with a specific condition towards ‘Demo Car Loss Sharing” knowing very well that it may suffer a loss at the time of selling of demo vehicle since the vehicle would have undergone some deterioration while providing test drive facility to the prospective buyers. In other words, MB INDIA enters into the agreement with a promise to compensate where the applicant would suffer a loss on sale of demo vehicle - the applicant has entered into the agreement to tolerate the act of suffering loss for a consideration. Undisputedly, the applicant has chosen to tolerate the act for a consideration as per the agreement and has agreed to tolerate the act in the course or furtherance of the business - ‘agreeing to tolerate an act’ having SAC 999794 is classifiable under ‘Other Miscellaneous services’ and is taxable @ 18% vide serial number 35 of Notification No. 11/2017-Central Tax I(Rate) dated 28.06.2017, as amended. Issues Involved:1. Admissibility of input tax credit on the purchase of demo cars.2. Classification and rate of tax at the time of sale of demo cars.3. Taxability of the amount received as reimbursement for the loss on the sale of demo cars.Summary:Admissibility of Input Tax Credit on Purchase of Demo Cars:The applicant, an authorized agent of Mercedes Benz, sought an advance ruling on whether they are entitled to claim input tax credit (ITC) on cars purchased for demonstration purposes. The Authority observed that the applicant purchases demo cars for providing test drives, which is a business necessity. Despite the cars being used for a period before being sold, the Authority concluded that these purchases are made for further supply, thus meeting the conditions under section 17(5)(a)(A) of the GST Act. Therefore, the applicant is entitled to claim ITC on such purchases.Classification and Rate of Tax at the Time of Sale of Demo Cars:The Authority held that the classification of demo cars at the time of sale would remain under Chapter 8702 or 8703 of the Customs Tariff Act, 1975, depending on the vehicle type. The rate of tax on the outward supply of demo cars would be the same as the rate of tax on their inward supply, subject to section 14 of the GST Act.Taxability of Reimbursement for Loss on Sale of Demo Cars:The applicant also sought clarity on whether the reimbursement received from Mercedes Benz India for losses incurred on the sale of demo cars constitutes a supply. The Authority concluded that such reimbursements are considered as consideration for the supply of services under the category of 'agreeing to tolerate an act' (SAC: 999794). This service is taxable at 18% as per Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017.Ruling:1. The applicant is entitled to claim ITC on cars used for demonstration purposes and supplied further after a specified period.2. The demo cars would be classified under Chapter 8702 or 8703, and their outward supply would attract the same rate of tax as their inward supply, subject to section 14 of the GST Act.3. The reimbursement received for the loss on the sale of demo cars constitutes a supply of services under 'agreeing to tolerate an act' (SAC: 999794) and is taxable at 18%.