GST UPDATE No 163 ON CONTRARY DECISION ON AVAILABILITY OF ITC ON DEMO CARS

Demo vehicles play an extremely important role in automobile sector as the prospective buyer often intends to take tests drive of the vehicle. Moreover, the demo vehicles are also necessary for displaying the model of the cars. Hence, it becomes essential for the dealers to purchase vehicles for demo purpose to promote sales by inducing the customers. However, since input tax credit on motor vehicles is restricted under section 17(5) of the CGST Act, 2017 with certain exceptions, there has been a lot of confusion over eligibility of ITC on such demo vehicles. Recently, an adverse decision has been pronounced by Haryana AAAR in the case of BMW INDIA PVT. LTD. as regards admissibility of ITC on demo cars. The decision imparted in this case is the point of discussion of our present update. The applicant is registered in GST at Gurugram as a state administered taxpayer for running a training center of Engineers, marketing professionals etc. The applicant get BMW branded vehicles made in Chennai plant on which IGST and Compensation Cess are paid being inter branch transfer. The vehicle is used for a limited period of 12 months. The applicant specifically mentioned in Para 11 that they are not seeking relief of “visitor cars” and “personally assigned cars”. Afterwards, the old and used vehicle are sold to company’s dealers and are capitalized in the books of accounts. The applicant submitted that as per Notification No. 08/2018-C.T. (Rate) dated 25.01.2018, GST shall be payable at concessional rate of 18% instead of 28% if ITC is not availed on supply of these old cars. The applicant raised a question as to whether he is eligible to claim ITC of IGST and Compensation Cess on receipt of cars for use in relation to business. The AAR held that the cars are capital goods for the business as per CGST Act, 2017. However, it was held that no ITC shall be available as regards to Section 17(5) of CGST Act, 2017. Therefore, petitioner filed further appeal in front of AAAR contending that ruling passed is vague and AAR has failed to consider the submissions filed by the petitioner. It was argued that ITC should not be denied as the vehicle is further used for taxable supply as per Section 17(5)(a)(i)(A) of CGST Act, 2017. The AAAR analyzed the provisions of CGST Act, 2017. It was held that as per Section 17(5)(g), ITC is restricted on motor vehicles which are for either personal or non-business use. Further, it was stated that since vehicles are not further meant for supply as such, as provided u/s 17(5)(a) of CGST Act, 2017, ITC shall be denied. It was stated that if contentions of applicant are accepted, intention behind the aforesaid entry shall fail as every assessee would be eligible to claim ITC on purchase of motor vehicles on the grounds that the said vehicle will be sold subsequently. Further, the appellant’s contention that demo cars are sold out at later stage at par with new car is factually wrong as the transaction is that of sale of old and used cars on which ITC is not available. It is well known that there are contrary decisions on various issues by the Advance Ruling which seeks to defeat the intention of the legislature to reduce ambiguity and disputes in the GST era. In this context, it is worth mentioning that the issue regarding admissibility of ITC in case of demo vehicles has been ruled in favour of the applicant in the case of A.M. MOTORS, 2018-VIL-197-AAR (KER.), CHOWGULE INDUSTRIES PRIVATE LIMITED, 2019- VIL-213-AAR (GOA), CHOWGULE INDUSTRIES PRIVATE LIMITED 2020- VIL-06-AAR (MAH.). However, an adverse view was taken in the case of M/S KHATWANI SALES AND SERVICES LLP [2021 (1) TMI 692-AAR MADHYA PRADESH]. It is worth mentioning over here that it is settled principle that although Advance Rulings are binding only on the taxpayers and the jurisdictional officer but they are often referred as they have persuasive value. Therefore, it is hoped that suitable clarification is issued in this regard so that unwarranted litigation may be avoided.

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GST UPDATE No 163 ON CONTRARY DECISION ON AVAILABILITY OF ITC ON DEMO CARS

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