DIVERGENT RULINGS ON INPUT TAX CREDIT ON DEMO CARS

[Dr. Sanjiv Agarwal]

There have been few advance rulings pronounced by different states (i.e., Goa, Maharashtra, Kerala, Haryana and MP) on the issue of whether dealers can avail Input Tax Credit (ITC) on input taxes paid on demo cars used in their businesses. These are summarized below:

 Advance Rulings 

1)        IN RE: M/S. A.M. MOTORS [2018 (10) TMI 514 - AUTHORITY FOR ADVANCE RULINGS, KERALA], the assessee sought for advance ruling on whether input tax credit on the motor car purchased for demonstration purpose of the customer can be availed as credit on capital goods and set off against output tax payable under GST in the case of a motor car dealer.

 The Authority for Advance Ruling ruled that input tax paid by a vehicle dealer on the purchase of motor car used for demonstration purpose of the customer can be availed as input tax credit on capital goods and set off against output tax payable under GST. (Plain and simple interpretation of law as well as legislation intention)

 2)        IN RE: M/S. CHOWGULE INDUSTRIES PRIVATE LIMITED [2019 (7) TMI 844 - AUTHORITY FOR ADVANCE RULING, GOA];  where applicant purchased demo vehicles for promotion of sale by providing trial run to customer against tax invoices from supplier after paying taxes and capitalized purchase of such vehicles in books of account, it was held that capital goods which are used in the course or furtherance of business are entitled for Input Tax Credit, and thus, Input Tax Credit on motor vehicle purchased for demonstration purpose can be availed as Input Tax Credit on capital goods and set off against output tax payable under GST.

 Another Ruling by AAR Maharashtra in IN RE: M/S. CHOWGULE INDUSTRIES PRIVATE LIMITED [2020 (1) TMI 741 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA] was also ruled in favour.

 3)        In  IN RE: M/S. KHATWANI SALES AND SERVICES LLP [2021 (1) TMI 692 - AUTHORITY FOR ADVANCE RULING, MADHYA PRADESH ], an authorised dealer of KIA for sales and services of vehicles. The Applicant had purchased the vehicles from the supplier against tax invoices after paying tax and capitalizes the demo vehicles in the books of accounts. The applicant sought the advance ruling on the issue whether Input tax credit on the Demo vehicle purchased can be availed as the same will be capitalized in books.

 The Applicant submitted that the firm shall not claim depreciation on the tax component of Demo Vehicles which are capitalized in the books of accounts. The Department’s view was that the input tax credit on the motor vehicle purchased for demo purpose can not be availed as the same is hit by barring provisions of clause (a) of sub-section (5) of Section 17 of the CGST Act, 2017. The AAR found that not charging depreciation on the tax component is as per other relevant provisions of the GST Act, but that can not affect the applicability of provisions of Section 17(5)(a) of CGST Act, 2017 according to which the applicant is not eligible for Input tax credit on Demo Vehicles.

 It was ruled that the applicant is not eligible for Input Tax Credit on demo vehicles purchased for furtherance of business in view of barring provisions of clause (a) of sub-section (5) of Section 17 of GST Act, 2017 as they are not covered by any of the exceptions given in clause (A), (B) or (C) of Section 17(5) (a) i.e. for further supply of such vehicle, for transportation of passengers and for imparting training for driving respectively.

 In this case, the Authority appears to have failed to acknowledge the objective of GST law and intention of section 16 of CGST Act, 2017. Supply of demo cars is for furtherance of business and it is now where mentioned in law that whatever you have purchased has to be sold as a taxable supply and if it is not a supply, ITC will not be available.

 4)        In IN RE: M/S. PLATINUM MOTOCORP LLP [2019 (3) TMI 1850 - AUTHORITY FOR ADVANCE RULING, HARYANA] , the Authority has interpreted Section 17(5) and denied the availment of input tax credit to the assessee. It jointly interpreted Sections 16(1) and 17(5)(a) in a manner where their scope was exhaustive and clearly demarcated. Although it acknowledged the capitalization of demo cars in the dealers' account books, and their usage in furtherance of business, but deemed this to be immaterial in determining input tax credit as long as the requirements of Section 17(5)(a) remain unfulfilled. It observed that in light of the usage of further before supply in the statute, more weightage should be given to the former. It clarified that in case of demo cars the intention of the dealer while purchasing the vehicle was not resale, but furtherance of business. Thus, it denied the availment of input tax credit to the assessee.

 In this case, the AAR emphasized on section 17(5)(a) (A) of CGST Act, 2017 which we consider as a narrow interpretation as any of the sub-clause A, B, C can be invoked and in case of demo vehicles if A is not applicable, definitely C will be applicable . Further, one has to look at legislative intention of providing Input tax credit (ITC) and it should be allowed if all the conditions of section 16 are fulfilled.

 In this matter, it can be opined that:  

• Facts are different in above rulings. ITC on demo cars has been allowed in one ruling but denied in the others. However, on earlier occasions, ITC was ruled to be allowed in IN RE: M/S. CHOWGULE INDUSTRIES PRIVATE LIMITED [2019 (7) TMI 844 - AUTHORITY FOR ADVANCE RULING, GOA].
• The AARs took a narrow view that the Demo Vehicles are essential for promoting the sale of motor vehicles. But, that is not the condition for deciding eligibility of Input tax credit on Demo vehicles.
• With the above advance rulings, the issue becomes litigative. However, going by the interpretation of law, it may be opined that eligible taxes paid on purchase of demo cars meant for use in course of furtherance of business and which is capitalized in the books of accounts may be allowed to be set off as Input Tax Credit (ITC) under the GST law, if one or more of the conditions of 17(5)(a) are satisfied, which is a non-obstante clause.

It can be viewed that,  prima facie Input tax credit may be available in respect of motor vehicles which are further supplied as such or which are used for transportation of passengers or which are used for imparting training on driving of such vehicles.

Further, it may be noted that advance ruling are only applicable to :

(1)      Applicant

(2)      The jurisdictional officers of the applicant

(3)      Within the state

It is not applicable to any other person. It may also be noted that rulings cannot be generalized to be made applicable to other states and do not command a binding precedence. At best, they are persuasive guidelines. 

Different and divergent rulings from different states AAR’s create confusion and do not serve the desired objective. It is not known as to whether these rulings have been appealed against. If yes, any appellate rulings which has been pronounced could not be found. For such divergent rulings, Finance Act, 2020 had provided for National Appellate Authority which is not yet functional. For a possible way forward, it may be desirable to file writ petition before High Court and seek appropriate remedy.