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ITC is not eligible for test drive vehicles when retained as replacement vehicles.

06 Sep, 2023
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Unlocking Input Tax Credit for Demo Vehicles: A Detailed Analysis

In the complex landscape of Goods and Services Tax (GST) in India, businesses often seek clarity on various aspects of the law to ensure compliance and optimize their tax positions. One such area of concern has been the eligibility of Input Tax Credit (ITC) on motor vehicles used for demonstration purposes. Recently, M/s. Sai Service Pvt. Limited, an authorized car dealer in Hyderabad, approached the authorities with a query on this matter. In this article, we delve into the details of this case and the ruling provided by the authorities.

 

The Applicant's Business and Query

  • M/s. Sai Service Pvt. Limited operates as an authorized car dealer for multiple automobile manufacturers. The company is engaged in the business of supplying automobiles, including well-known brands like Maruti Suzuki, Bajaj, KTM, and Chetak Technology Limited. Additionally, they provide services such as servicing, repair, and trade in pre-owned cars.

  • As part of their regular business operations, the applicant requires demonstration vehicles for use in showrooms. These vehicles play a crucial role in offering test drives to potential customers, allowing them to experience the vehicles firsthand. These demo cars are typically registered and are used for up to two years or until they reach 40,000 kilometers, whichever comes first. They serve as an essential tool in sales promotion activities and contribute significantly to the sales process.

  • The applicant procures these demonstration vehicles from manufacturers like Maruti Suzuki against a tax invoice. The manufacturers offer these vehicles at a discounted price based on their official policies. These vehicles are accounted for as capital goods in the applicant's books, but the applicant does not claim input tax credit (ITC) on the GST component at the time of purchase. Instead, they claim depreciation on these assets under the Income Tax Act.

  • After their use as demo vehicles, these cars are sold as second-hand vehicles to customers, depending on whether they are business-to-business (B2B) or business-to-customer (B2C) transactions. The value for tax purposes at the time of sale is determined using the margin method, as per the Notification No. 08/2018 - Central Tax (Rate) dated January 25, 2018.

  • The applicant approached the authorities with a crucial question: Are they entitled to claim ITC on the inward supply of motor vehicles used for demonstration purposes in their motor vehicle business as capital goods?

 

Understanding the Legal Framework

To address the applicant's query, we must first understand the relevant sections of the Central Goods and Services Tax Act, 2017 (CGST Act). Specifically, Section 17(5)(a) of the CGST Act places restrictions on the eligibility of ITC on motor vehicles purchased by businesses. It states that ITC shall not be available for motor vehicles for transportation of persons with an approved seating capacity of not more than thirteen persons (including the driver). However, there are exceptions to this rule, which include:

  1. Further supply of such motor vehicles.
  2. Transportation of passengers.
  3. Imparting training on driving such motor vehicles.

 

The Ruling: Unlocking ITC for Demo Vehicles

  • In their ruling, the authorities clarified the eligibility of ITC for motor vehicles used for demonstration purposes. They examined the applicant's case meticulously and referred to the exception provided in Section 17(5)(a) for "further supply of such motor vehicles."

  • The ruling highlighted that capitalizing the motor vehicles purchased for demonstration purposes does not make the tax paid on their purchases ineligible for ITC, provided there is a "further supply" of these motor vehicles as defined under Section 7 of the CGST Act. It's important to note that "further supply" includes not only sales but also lease, rent, and similar transactions.

  • In essence, this means that if the applicant further supplies these demonstration vehicles in any manner, such as selling or leasing them, they are eligible to claim the ITC. However, if they retain these vehicles in their workshop as replacement vehicles, they are not eligible for ITC. In such a case, they would be required to repay the claimed ITC in cash.

 

Conclusion: Clarity for Businesses

  • This ruling provides clarity on a crucial aspect of GST for businesses involved in the motor vehicle industry. It underscores the importance of understanding the intricate details of the law and its exceptions. Businesses must carefully evaluate their operations and tax positions to ensure compliance and maximize the benefits available under GST.

  • It's worth noting that this ruling is specific to the facts presented by M/s. Sai Service Pvt. Limited and serves as a valuable reference point for businesses facing similar scenarios. As GST regulations continue to evolve, staying informed and seeking professional guidance can help businesses navigate the complexities of the tax landscape effectively.

 

Topic-Sai Service Pvt. Limited

Court-TELANGANA-AAR

Date-01/08/2023

Team Taxonation

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