CONFUSION OR INPUT TAX CREDIT (ITC) ON DEMO CARS

[Dr. Sanjiv Agarwal]

It is typical of automobile business that O & M’s to manufacture the vehicles, also supply demo vehicles to automobile dealers for use in the furtherance of business. Such demo vehicles are supplied after charging GST thereon against a valid tax invoice. Though a plain reading of the law would imply that input tax credit would be available on such supplies, revenue authorities seem to be taken an opposite view under the shelter of section 17 which restricts credit in certain cases. Even there are few advance rulings for and against the same.

In this article, we discuss the supply and use of demo vehicles and resultant input tax credit of the same.

What is Demo Cars

A demonstration vehicle (or demo vehicle) is a new vehicle (car or any other vehicle) that is driven by the dealership's salesmen, managers or executives for the purpose of demonstration, marketing, training etc. Demo vehicles are typically well maintained as they are used to illustrate the vehicles and promote sales at the dealership. In the motor vehicle industry, demonstration vehicle is an indispensable tool for promotion of sales by providing trial run of vehicle to customers. It is a business requirement that motor vehicle dealer has to acquire the demonstration vehicles from principal supplier. These purchases are generally capitalized in the books of account excluding the tax component.

Nature of demo car: a capital good or input for dealer?

A demo vehicle can be either an ‘input’ or a ‘capital good’. Going by the definitions, demo vehicle may be considered as a capital asset as it is used for furtherance of business and it is not meant for retail sale to customers. If the demo car is being capitalized in books of accounts, it will be considered as capital asset. If not so, it may be considered as an input.

Input tax credit on demo vehicles

According to section 16(1) of the CGST Act, 2017,  every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of the business. The capital goods which are used in the course or furtherance of business, may therefore, be entitled for Input Tax Credit (ITC). However, the entitlement for input tax credit is subject to restrictions stipulated in section 17(5) of CGST Act, 2017.

Section 17(5) is an overriding provision as it, starts with ‘notwithstanding’. Accordingly, input tax credit shall not be available in respect of the following:

1. Motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

However, the input tax credit in respect of such services shall be available—

1. where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;
2. where received by a taxable person engaged—

(I)     in the manufacture of such motor vehicles, vessels or aircraft; or

(II)    in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him.

2. Goods or services or both used for personal consumption

From the above legal position, it can be inferred that:

1. Section 17(5)(a) carves out an exception to the exclusion in section 17(5) i.e., input tax credit will be available if the motor vehicle is used for making the following taxable supplies:

 (A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

This implies that input tax credit will be available if motor vehicle is used for above services. It is pertinent to note that this exception uses the phrase ‘taxable supplies’ which is absent in the present case.

However, in case of (A) above, the exception is ‘further supply of such motor vehicles’. The Department is taking a view that the ‘supply’ is qualified by the word ‘further’ and ‘motor vehicle’ is qualified by the word ‘such’ and therefore, both are relatable to a specific motor vehicle i.e., demo car. The above entry (A) is therefore, subject matter of interpretation and as such, one will have to look for judicial scrutiny.

The other restriction i.e., “goods or services or both used for personal consumption” is also not applicable as the demo cars are used for business are in the course of business. There can not be and there is no question of personal consumption by any stretch of imagination.

Favorable Advance Rulings

There are few advance rulings pronounced by Authority of Advance Rulings (AAR) which have taken the view that input tax credit is available on demo cars considering demo cars as capital assets, viz,

• IN RE: M/S. TOPLINK MOTORCAR PRIVATE LIMITED - 2022 (7) TMI 181 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL
• IN RE: M/S. A.M. MOTORS - 2018 (10) TMI 514 - AUTHORITY FOR ADVANCE RULINGS, KERALA
• IN RE: M/S. CHOWGULE INDUSTRIES PRIVATE LIMITED - 2019 (7) TMI 844 - AUTHORITY FOR ADVANCE RULING, GOA

Adverse Advance Ruling

In following cases, it has been ruled that input tax credit will not be available:

• IN RE: M/S. KHATWANI SALES AND SERVICES LLP - 2021 (1) TMI 692 - AUTHORITY FOR ADVANCE RULING, MADHYA PRADESH
• IN RE: M/S. PLATINUM MOTOCORP LLP - 2022 (3) TMI 488 - APPELLATE AUTHORITY FOR ADVANCE RULING, HARYANA
• IN RE: M/S. BMW INDIA PVT. LTD. - 2022 (3) TMI 487 - APPELLATE AUTHORITY FOR ADVANCE RULING, HARYANA

Concluding Remarks

It can be said that input tax credit should be allowed on demo cars treating them as capital goods and there is no specific restriction on the same if the demo cars have been capitalized, it cannot be considered to be meant for further supply.

It can be further said that eligible taxes paid on purchase of demo cars meant for use in course of furtherance of business and which are capitalized in the books of accounts should normally be allowed to be set off as Input Tax Credit (ITC) under the GST law.

Since there is no clarity on consistent interpretation of law, it would be desirable for the taxpayers to test the waters in their state by way of advance ruling or take a calculated risk depending upon the quantum of input tax involved and striking a tradeoff between the additional tax liability / interest / penalty and the benefit arising out of input tax credit. It is also desirable for the CBIC to clarify the same.