Supply of Car for Demonstration- Its Classification, taxability, applicable rate & ITC Provision

[Ashish Mittal]

Background:                                 

Goods & Service Tax (in short “GST”) introduced in year 2017 enacted the law with similar provisions for sale of old or new car. Thereby implementing heavy tax burden on the same with applying Cess over and above the highest slab rate of 28%. Later in beginning of year 2018 statue were relaxed in regards to used car.

Now issue arose in respect to classification of car i.e. whether supply is of old/used car or would tantamount to supply of new car. In this compilation an attempt is made to oversee the different aspects for Supply of Car for Demonstration purpose- regarding the applicability of various provisions, rate of tax etc.

Facts of the case                         

1. Mr. X is a manufacturer, who manufacture car for supply to the dealers. In juncture he also supplied vehicles of different models for demonstration or test drive purpose to its car dealers say Mr. Y.
2. Mr. Y is an authorised car dealer, dealing in first hand cars, had acquired a car for demonstration or test drive & had applied for registration of the aforesaid car.
3. Mr. Y later on intends to sale the car to one of his customer who is willing to purchase the same car acquired for demonstration or test drive, post test drive.

Query:

1. The aforesaid car being registered with the authorities in name of Mr. Y for demonstration or test drive, which later on intended to be sold to a prospective customer. Whether such sale by Mr. Y tantamount to sale of old car & used vehicle? (i.e. its classification & taxability)
2. Whether Mr. Y can apply concessional rate as mentioned in Notification 8/2018 Central Tax (Rate) dated 25 Jan 2018, which has provided a uniform rates of 12%/18% on used & old vehicles. (i.e. rate of tax applicable post reduction of rate on used vehicles & ITC related provisions)

ANALYSIS AND REPLY TO QUERY

Having a glimpse over the facts of the case, Mr. Y is basically an authorised car dealer who by virtue of its agency, sale car to the ultimate customer. Further in general trade practice as well as for the sake of increasing the customer base dealer usually have one car of each model for demonstration & trail run purpose for the customers. The query rose above can be analysed and accordingly following interpretations can be made in this respect:

1. Whether such sale by Mr. Y tantamount to sale of old car & used vehicle? 
   1. At the outset, in terms of Section 7 read with Section 9 of Central GST Act’ 2017, the said transaction is supply & taxable under GST law as per the taxable value determined under Section 15 of CGST Act’ 2017 & at a rate of tax as prescribed by the Central Government in this regards. GST law do not provide an inference regarding whether the same is old or new car.
   2. Now putting reliance on the facts of the case, the dealer of the car has taken registration of the motor vehicle in his name which was used by him for demo & trail run for its customer which was later on transferred to its customer. So by virtue of registration taken the first owner of the vehicles becomes the dealer himself.
   3. Now on account of sale to customer the vehicle registration got transferred to customer which made the car used vehicles thereby attracting the provisions of old & used vehicle.
   4. The dealer at the time of registration and purchase would have booked the vehicle as fixed asset in its books of accounts irrespective of the fact that whether ITC of the same has been claimed or not. (Same in dealt in second part)
   5. Since GST act is silent, now for the sake of legal support, reference need to be taken from Motor Vehicles Act, 1988 (herein after referred as “the act”) read with Motor Vehicles Rules, 1989 wherein in Section 39 of the act read with Rule 41, which states that no person shall drive any motor vehicle in public place without certificate of registration as mentioned as defined in Section 2(4) of the said act.
   6. Further certain relaxation is given to the dealer of car with regards to obtaining registration certificate of the car in the proviso to Section 39 of the act, which has been further clarified with various instances in Rule 41 amongst them clause (c) of the said rule is reinstated herewith for ready reference

“R.41 (c) for a reasonable trial or demonstration by or for the benefit of a prospective purchaser and for proceeding to or returning from the place where such person intends to keep it;”

1. 7. Now based on above extract of the rule, the act read with rule has empowered car dealer and gave them the opportunity of keeping a car for demo or trail run for its customer without certificate of registration.
   8. Thus, the act has given dealer ample space for their furtherance of business. So once the vehicle is registered under the name of dealer it would become its fixed asset, now it’s the call of the dealer to dispose of the same in short or long spam of time but the same would be considered to be old or used vehicle.
   9. Without prejudice to supra mentioned legal provisions & analysis of facts, inference need to place on judgement of Hon’ble Delhi High Court passed in erstwhile VAT laws, in matters of “Triumph Motors (A Unit of Khushi Traders (P.) Ltd.) Vs. Commissioner of Value Added Tax-VAT APPEAL NO. 1 OF 2016 dated 2^nd May 2017” [2017 (8) TMI 299 - DELHI HIGH COURT] wherein it was held that “where assessee, a trader dealing in cars, purchased a car and did not avail input tax credit on purchase of said car; and, later it sold said car after using it as demo car for several months, sale of car was exempt from tax under section 6(3) under DVAT Act 2004 ”
   10. In the said judgement Hon’ble High Court has clearly mentioned car for demo purpose used and sold later would construed to be cover under section 6(3) of DVAT Act’ 2004 which states that “Section 6 (3) Where a dealer sells capital goods which he has used since the time of purchase exclusively for purposes other than making non-taxed sale of goods, and has not claimed a tax credit in respect of such capital goods under section 9, the sale of such capital goods shall be exempt from tax”
   11. It is clearly evident on combined reading of the judgement, provisions of DVAT Act that car used for demo purpose is old or used vehicle on which no tax shall be levied subject to fulfilment of the condition mentioned in Section 6(3) of DVAT’ 2004 & no ITC taken on the same.
   12. The instant case also infer the same grounds, but with different governing provisions in relation to its taxability.  
   13. Thus based on above facts, legal provision and judicial pronouncement, it can be said that the instant supply shall be classified as sale of old and used vehicles and accordingly the taxability shall be determined in respect of the same.

 

2. Whether Mr. Y can apply concessional rate as mentioned in Notification 8/2018 Central Tax (Rate) dated 25 Jan 2018
   1. GST rate in case of old and used car was same as applicable on new car up to 25/01/2018. It has gone into drastic changes, following are rates as per notification no. 01/2017 Central Tax (Rate) up to 25/01/2018 and rates after 25/01/2018, which are reduced through the notification no. 08/2018 Central Tax (Rate).

Category of car (Based on notification no.01/2017 & 08/2018) – CT (R)	GST rate up to 25/01/2018	GST rate from 25/01/2018 (with conditions)
Petrol Vehicles with more than 1200cc engine capacity & 4000mm length (HSN 8703)	28%	18%
Diesel Vehicles with more than 1500cc engine capacity & 4000mm length (HSN 8703)	28%	18%
SUVs (including utility vehicles) with more than 1500cc engine capacity (HSN 8703)	28%	18%
Vehicles other than those mentioned above, including other vehicles under chapter 87	28%/18%/12%*	12%

1. 2. Conditions for claiming such rates & exemptions:
      1. Where depreciation claimed under Income tax, margin shall be calculated as consideration received (-) depreciated value of goods as on date of supply. Here, it is important to note, that although Income Tax required depreciation to be calculated on the asset block, the rate is required to be applied for the specific motor vehicle, upto the date the supply.
      2. The credits under GST or erstwhile laws have not been claimed. (GST, VAT, ED, ST)

0. 3. Now based on above extract of the notification Mr. Y can apply concessional rate of tax as defined in the above notification effective from 25^th Jan 2018 only if No ITC has been claimed by him under GST Law or erstwhile laws and no depreciation is claimed under the Income Tax Act’ 1961.
   4. Two Instances can be drawn from the instant notification and facts of the case:
      1. If Mr. Y had claimed ITC of the said motor vehicle: In the first case, Mr. Y cannot apply the concessional rate of tax under above notification, but he would be allowed to take the ITC of the said purchase, which has also been affirmed in two advance rulings: (Although advance ruling is applicable on the applicant only who sought to have applied for it but the grounds of the same can be a basis for applying in cases with similar facts)
1. “Authority for Advance Rulings, Maharashtra in matters of IN RE: M/S. CHOWGULE INDUSTRIES PRIVATE LIMITED., Order No. GST-ARA-18/2019-20/B-121 dated 26 December, 2019” [2020 (1) TMI 741 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA]
2. “Authority for Advance Rulings, Kerala in matters of IN RE: M/S. A.M. MOTORS.., Order No. KER(10) OF 2018 dated 26 September, 2018” [2018 (10) TMI 514 - AUTHORITY FOR ADVANCE RULINGS, KERALA]

“Wherein it was held in both case that “Applicant, an authorized dealer of motor vehicles, is entitled to avail input tax credit charged on inward supply of motor vehicle which are used for demonstration purpose in course of business of supply of motor vehicle as input tax credit on capital goods and same can be utilized for payment of output tax payable under Act”

1. 1. 2. If Mr. Y had not claimed ITC of the said motor vehicle: In this case Mr. Y would charge tax as per Notification 08/2018 Central Tax (Rate) dated 25^th Jan 2018 claiming the benefit of concessional rate of tax.

Conclusion

On the quotient of above discussion and analysis of the facts, circumstances and situation of the given present case, the above transaction would tantamount to supply of old or used vehicle and tax to charges as per Notification 08/2018 Central Tax (Rate) dated 25th Jan 2018 if No ITC of the car in question is taken.

(The author of this article can be reached on his email id- [email protected] or contact no. - +91-9582532845)