2023 (8) TMI 392 - AAR - GST

Input Tax Credit - Capital goods - inward supply of motor vehicle which are used for demonstration purpose in the course of business of supply of motor vehicle and was disposed off after 2 years - HELD THAT - Sub section 5 of Section 17 of CGST Act, 2017 restricts availment of ITC on motor vehicles purchased by a tax payer even though they may be used in the course of furtherance of business. Thus, from the plain reading of the section no ITC can be claimed by the applicant or purchase of test drive vehicles even though they are used in the course of furtherance of business. The word supply as defined under Section 7 of the CGST Act, 2017 would include sale, lease, rental etc., Thus the exception is made not only for sale of motor vehicles but for the purpose of lease, rent etc., wherein there is no immediate transfer of property in goods and such motor vehicle may be capitalized in the books of the purchaser in case of an intention to lease, rent etc. - Hence 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 CGST Act, 2017. For example supply of cars for lease / rent etc., can not be made without them being capitalised in the books of such supplier. And, whether the applicant is eligible for ITC depends on occurrence of a future event i.e., either he retains the vehicle in his work shop as a replacement vehicle or sells such vehicles. (i) If the applicant is making further supply of such vehicle is eligible for the ITC claimed. (ii) 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.

Summary

Issues Involved:
1. Whether the applicant is entitled to avail the input tax credit (ITC) charged on inward supply of motor vehicles used for demonstration purposes in the course of business of supplying motor vehicles as input tax credit on capital goods.

Summary:

Issue 1: Eligibility for ITC on Motor Vehicles Used for Demonstration Purposes

The Applicant, M/s. Sai Service Pvt Limited, is an authorized car dealer engaged in the supply of automobiles and related services. The Applicant procures demo vehicles for demonstration purposes, which are capitalized as Fixed Assets in their books and used for test drives. The Applicant does not currently claim ITC on these vehicles but intends to do so in the future and will not avail the benefit under Notification No. 08/2018 - Central Tax (Rate) dated 25-January-2018 at the time of sale of such vehicles.

The Applicant's interpretation of the law relies on Section 16(1) of the CGST Act, which allows credit of input tax charged on goods or services used in the course or furtherance of business. The Applicant argues that demo vehicles are essential for sales promotion and, therefore, should be eligible for ITC.

During the personal hearing, the Applicant reiterated that they are obligated by the manufacturer to purchase demo vehicles, which are capitalized and used for a minimum of two years or 40,000 KMs. They also highlighted that they do not claim depreciation on the GST component of these vehicles.

The jurisdiction officer confirmed that no adjudication is pending on this issue. The Authority for Advance Ruling (AAR) examined the dealership norms with MSIL, which stipulate that demo vehicles must be retained for two years or 40,000 KMs and can only be sold with written approval.

Section 17(5) of the CGST Act restricts ITC on motor vehicles used for transportation of persons, but it provides exceptions for further supply of such vehicles, transportation of passengers, and imparting training on driving. The AAR noted that capitalizing the motor vehicle does not disqualify the tax paid on their purchases from ITC if there is further supply of such vehicles.

The AAR concluded that:

a. If the applicant makes further supply of such vehicles, they are eligible for the ITC claimed.

b. If the applicant retains the vehicle for their workshop as a replacement vehicle, they are not eligible for ITC, and the ITC claimed must be repaid in cash as per the amended Section 16(4) notified vide Notification No. 18/2022, Central Tax dated 28.09.2022, effective from 01.10.2022.