ITC on second havd vehicle purchase

[KALLESHAMURTHY MURTHY K.N.]

Dear Sirs,

A scrap dealer has purchased a second-hand vehicle, rebuilt and hired. It is used to supply food articles, vegetables, milk and other daily consumables. Is he eligible for ITC on the purchase of the second-hand vehicle or blocked u/s 17?

[Sadanand Bulbule]

Dear Murthy

Is such motor vehicle purchased as scrap? or a usable motor vehicle? If it is purchased as scrap, then it loses the road worthy qualities of a motor vehicle and cannot be termed as such.

However Section 17[5][a] prohibits ITC on a motor vehicle having approved seating capacity of not more than thirteen persons including driver for transportation purpose.

Admittedly the subject motor vehicle is being used for transportation of  daily needs, may be as street vendor. Now make the query more clear.

[KALLESHAMURTHY MURTHY K.N.]

Respected Sir, 

Most probably, he purchased it as scrap but rebuilt it to use in transport daily needs in street vending.

[Sadanand Bulbule]

Dear Murthy

Under the situation made out by you , I opine that he is not entitled for ITC.

[KALLESHAMURTHY MURTHY K.N.]

Dear Sir, 

Thanks very much for the clarification. My opinion is also the same. But someone told that ITC is eligible since it is purchased as scrap. 

[K.lakshmipati rao]

Assuming the said vehicle purchase is from a Registered person, for which, the GST would have suffered @ 18% as per Notification No. 8/2018 -Central Tax (Rate) New Delhi, the 25th of January 2018 i.e., IGST 18% or (SGST 9%+ CGST 9%).

Yet again, the said vehicle was rebuilt and hired,[rebuilt it to use in transport daily needs in street vending] therefore, appear to be Roadworthy and qualities of a  Motor vehicle permitted to use on Road, and hence, no longer remains as Scrap.

As per provisions of Notification No. 08/2018- Central Tax (Rate), dated 25-01-2018, which provides applicable tax rate on second hand goods, restricts the eligibility of ITC on direct and indirect expenses incurred in the business of selling second-hand Vehicles. Thus, the embedded value of GST element (if any) in the refurbishment expenditure is not eligible for ITC set-off.

However, at the time of re-sale of vehicle, the Value of supply of such second-hand goods for the purpose of GST liability would be the difference between the selling price and the purchase price, i.e., GST payable on the actual Margin earned, as per Valuation under GST Rule 32(5) of CGST Rules 2017.

[Sadanand Bulbule]

Dear Roa Sir

The querist has indirectly admitted that the subject vehicle is purchased as " scrap". As such even if it is refurbished, it remains as refurbished scrap only. The question of applying the subject Notification comes into play had it been sold as motor vehicle certified as roadworthy. Otherwise scrap continues as reusable scrap with different utility. The RTO  does not consider it as motor vehicle on the count of cancellation its registration number once it is certified as scrap. So this is my perception.

[K.lakshmipati rao]

Dear Mr.Sadanand Bulbule ji,

In case the “RTO  does not consider it as motor vehicle on the count of cancellation its registration number”, then, the “Vehicle is not authorized to put to use on Road in transport” for daily needs in street vending.

[Sadanand Bulbule]

Dear Sir

It is the chosen risk of the user and he has to face music accordingly. 

[KALLESHAMURTHY MURTHY K.N.]

Respected Sadanand Bulbule Sir,

Exactly. Other Laws come into play.

Regards

[K.lakshmipati rao]

Noted. If the user is chosen risk for unauthorized operations for his own sake, for which, Other Laws would come into play, I feel such query should not have referred to TMI (common) forum, since TMI Members are interested to share opinions on GST Law related matters for the best interest of all.

[KALLESHAMURTHY MURTHY K.N.]

Dear Expert

 k.lakshmipati rao Sir, 

The question is whether the second-hand purchase of a vehicle as scrap is eligible to avail of ITC. This is GST related matter. Other Laws come into play that cannot be ignored. Purchase of second-hand vehicle and making it used other way is advisory to the buyer and user in this Forum. 

Expecting more opinion from you.

Thanking you Sir.

[KASTURI SETHI]

Dear All,

When we talk of the term, 'scrap', the term, 'second hand vehicle' is out of picture. Notification No. 8/2018-CT (R) dated 25.01.18 does not come into play. Classification of both goods is different. Both goods fall under different headings of HSN.. Both have different functions and end-uses.

I concur with the views of Sh. Sadanand Bulbule, Sir Ji. 100 % accurate.

[K.lakshmipati rao]

Query -The question is whether the second-hand purchase of a vehicle as scrap is eligible to avail of ITC.

Ans.- If the Buyer/Recipient is Registered Dealer, dealing in purchase and sale of “Scrap Materials”, in my view, the Buyer is eligible to claim ITC in respect of GST element in the Tax Invoice with HSN Code 7204 [attract 9% SGST + 9% CGST vide Sl. No. 199 of Schedule III of Notification No. 1/2017-Central Tax (Rate) dated 28.6.2017] for the unusable vehicle scrap [fully damaged or total LOSS vehicle & unauthorized to use as Vehicle] sold by sellers like Insurance Companies or Automobile dealers or Tax Invoice issued by Registered Owner of the Vehicle or other Registered Supplier etc.,

[KASTURI SETHI]

It is humbly and  respectfully  expressed that the querist has not   drafted  the query properly and completely  at the first instance. He should have drafted the query like this, " Whether ITC is available on GST paid on manufacturing services and non-manufacturing services ?"

        If the query is incomplete and improper,  perfect reply cannot be expected. If the scenario is changed, the reply will be changed accordingly.

[K.lakshmipati rao]

Dear Mr. KASTURI SETHI ji,

True. Hope my reply is correct.

[KASTURI SETHI]

Sh. K.Lakshmipati Rao Ji,

I have not said so, especially, in the absence of full facts. Full facts are still  not known to us. Hence we are groping on the surface. 

[KASTURI SETHI]

Extract of C.B.E. & C. Flyer No. 30, dated 1-1-2018

"In case any other value is added byway of repair, refurbishing, reconditioning, etc., the same shall also be added to the value of goods and be part of the margin.

If margin scheme is opted for a transaction of second hand goods, the person selling the car to the company shall not issue any taxable invoice and the company purchasing the car shall not claim any ITC."

[K.lakshmipati rao]

Dear Mr. KASTURI SETHI ji,

I do agree that the querist has not drafted the query properly and completely at the first instance. However, I draw your attention to querist clarification at S.No.11 above.

The purpose for which the query raised, of which I understood is that, about the entitlement for claim of ITC on the Inward supplies, in below two scenarios.

1. Purchase of a vehicle as scrap and continue to be used in same form [scrap] for furtherance of business,
2. Purchase of second-hand vehicle as scrap and making it used other way.

Reply:

1. For scenario 1 above, If the Buyer/Recipient is Registered Dealer, dealing in purchase and sale of “Scrap Materials”, in my view, the Buyer is eligible to claim ITC.
2. For scenario 2 above,If the Buyer/Recipient is Registered Dealer, dealing in purchase and sale of “Used Vehicles / second-hand vehicles, and, using the Goods in the form of Vehicle [having Registration certificate issued by RTA] for furtherance of business to deploy for making it used to supply food articles, vegetables, milk and other daily consumables etc., in my view, the Buyer is not eligible for ITC set-off, as per the provisions of Notification No. 08/2018- Central Tax (Rate), dated 25-01-2018.
3. If the vehicle is not authorized by RTA to deploy on the Road- No comments to offer.

I request for your comments please.

[Sadanand Bulbule]

Dear Rao Sir

Looking at the intrinsic intent of the query, I posted my reply at beginning only which you have now validated it in your last post. Its good some precious points are recovered out of "scrap". Nothing is waste these days.

[KASTURI SETHI]

Dear Sirs,

(i) As per legal dictionary meaning of 'scrap' it means something which cannot be used for the same purpose for which it was being earlier used even after repairing or renovating the same. In commercial parlance 'scrap' is normally understood as waste.

(ii) So either we should talk of 'scrap' or we should talk of second hand vehicle (old & used). Both will not click.

(ii) Refurbishing, reconditions, repairs etc. are services but these are non-manufacturing services. These services are to be supplied on goods (whether damaged or old and used or worn-out.) and cannot be supplied on 'scrapped' goods.

AI Summary

Input Tax Credit eligibility on refurbished vehicle hinges on scrap classification versus treated motor vehicle, affecting credit entitlement. Entitlement to Input Tax Credit on purchase of a second hand vehicle bought as scrap and refurbished turns on whether the goods remain 'scrap' used in the buyer's trade (creditable if properly invoiced and the buyer is a registered scrap dealer) or have become a roadworthy second hand motor vehicle (where credit may be restricted under the rule barring credit on certain motor vehicles). Classification under HSN, invoicing, purchaser's business, and valuation/margin scheme considerations determine the GST credit outcome.