The Telangana Advance Ruling Authority (AAR) has ruled that car dealers are not eligible for Input Tax Credit (ITC) in respect of the inward supply of demo vehicles.
M/s. Sai Service Pvt. Limited, the applicant is a private limited company, is registered under Central Goods and Services Tax Act, 2017 (CGST Act) and an authorized car dealer for MSIL for the supply of four-wheeler vehicles, spares and servicing of vehicles.
The Applicant is engaged in the business of supply of automobiles having dealerships of MSIL, Bajaj, KTM, & Chetak Technology Limited. The Applicant is also involved in providing servicing, repair, and related auxiliary services concerning motor vehicles. It also trades in pre-owned cars.
As a part of its day-to-day business, the Applicant used a model of demo cars for demonstration for a period of two years or 40,000 KMs whichever is earlier. These vehicles are used for providing test drives to potential customers, so they understand the look and feel of the vehicle.
Basically, due to the changing demands of the customers and to adhere to their requirements, this works as an essential part of sales promotion activity with facilitates the sale of cars. It is also an important element for executing sales.
As per dealership norms with MSIL, the Applicant is required to procure these vehicles at the base model level (per fuel type) up to a maximum of two units per showroom. MSIL provides these vehicles at a discount on the basic price of the vehicle (post-launch price in case of a new model/variant) as per the MSIL policy. These vehicles are capitalized in the books of accounts as Fixed Assets and claimed depreciation on the same under the Income Tax Act.
As per the MSIL policy, these vehicles are allowed to be used as a demo vehicle for a period of two years or up to its usage of 40,000 KMs whichever is earlier. After its use as a demo vehicle, these vehicles are sold as second-hand vehicles to customers, basis the type of customer i.e., either B2B or B2C.
It was observed that capitalizing the motor vehicle purchased does not make the tax paid on their purchases ineligible for ITC if there is a further supply of such motor vehicles within the meaning of Section 7 of the CGST Act, 2017.
A two-member coram comprising Sri S.V. Kasi Visweswara Rao, Additional Commissioner (State Tax) and Sri Sahil Inamdar, Additional Commissioner IRS (Central Tax) has held that “If the applicant is making further supply of such vehicle is eligible for the ITC claimed. “
Further ruled that “if the applicant is retaining the vehicle for his workshop as replacement vehicle as mentioned in the sales policy of MSIL, he shall not be eligible for ITC as there is no further supply at his hands. Therefore, the ITC claimed by him has to be repaid in cash in view of the amended section 16(4) notified vide notification No. 18/2022, Central Tax dt.28.09.2022 w.e.f: 01.10.2022.”
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