In a ruling issued by the Kerala Authority for Advance Ruling (AAR) under the Goods and Services Tax (GST) framework, an automobile dealership with its registered office in Ernakulam, Kerala, was held eligible to avail Input Tax Credit (ITC) on the inward supply of motor vehicles used for demonstration purposes subject to the condition that depreciation was not claimed.
The ruling, dated January 10, 2024, addressed the issue of whether demo vehicles used in the course of business could qualify for ITC under the Central Goods and Services Tax Act, 2017 (CGST Act).
The applicant, M/s. Sai Service Private Limited, headquartered in Pune, is engaged in the supply of motor cars and related services. The applicant-company filed an advance ruling application seeking clarification on whether ITC could be availed on vehicles acquired for demonstration purposes, which are capitalized as fixed assets in their accounts and used to provide test drives to potential customers.
Complete Draft Replies of GST ITC Related Notices, Click Here
These demo vehicles, which are important for sales promotion, are typically retained for two years or up to 40,000 kilometers before being sold as second-hand cars. At the time of their subsequent sale, GST is levied under Notification No. 08/2018 Central Tax (Rate) dated January 25, 2018.
The applicant submitted that these demo vehicles were used in furtherance of business and fell within the ambit of Section 16(1) of the CGST Act, 2017, which allows ITC for goods or services used in the course of business. It was submitted that these vehicles, despite being capitalized and depreciated under the Income Tax Act 1961, were intended for further supply after the demonstration period and, hence, should qualify for ITC under Section 17(5)(a)(A) of the tax legislature .
The applicant referenced multiple judicial precedents, including the Supreme Court’s decision in Commissioner of Income Tax vs Malayalam Plantations Ltd and rulings by various state AARs, to substantiate their claims. They further asserted that the restrictions under Section 17(5) did not apply as demo vehicles were not used for the “transportation of persons” but for demonstration purposes, a function aligned with furtherance of business.
Complete Draft Replies of GST ITC Related Notices, Click Here
The jurisdictional officer, as required under Section 98(1) of the CGST Act, did not submit any remarks on the application, leading to the presumption of no objections from their end.
During the personal hearing held on December 20, 2023, the applicant’s authorized representatives, Mr. Nitin Vijaivergia and Mr. Harikrishnan K.A., reiterated their submissions, emphasizing the essential nature of demo vehicles for their business operations.
After observing the case facts, in its final ruling, the AAR bench comprised of Smt. Gayathri P.G., IRS, Joint Commissioner of Central Tax, and Shri Abdul Latheef K., Joint Commissioner of State Tax noted that the primary issue in the case was the applicability of ITC for demo vehicles.
It recognized that these vehicles are indispensable for sales promotion, as potential customers often insist on test drives before making purchase decisions. The AAR acknowledged that the use of demo vehicles aligns with the provisions of Section 16(1) of the CGST Act, as they are utilized in the furtherance of business. However, the AAR clarified that the eligibility of ITC must also satisfy the overriding provisions of Section 17(5), which imposes restrictions on the credit availability for motor vehicles.
Complete Draft Replies of GST ITC Related Notices, Click Here
The AAR observed that Section 17(5) allows ITC on motor vehicles only under certain conditions, including their use for further supply, transportation of passengers, or driver training. It ruled that demo vehicles, while initially used for demonstration, do not lose their eligibility for ITC if they are subsequently sold as second-hand cars. The AAR stressed that the intention to make a further supply satisfies the provisions under Section 17(5)(a)(A), provided the applicant does not claim depreciation on the tax component of the vehicles’ cost under the tax statute.
In result, it was held that the company is entitled to avail ITC on the inward supply of demo vehicles.
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