2018 (10) TMI 514 - AAR - GST

Input Tax Credit - Demo cars - 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? Held that - The capital goods which are used in the course or furtherance of business, is entitled for input tax credit. As the impugned purchase of demo car is in furtherance of business, the applicant is eligible for input tax credit. Furthermore, this activity does not come under the negative clause, as after a limited period of use as demo car, the vehicles are sold at the written down book value. The availability of input tax credit shall be subject to the provisions of Section 18(6) of the GST Act. In the case of supply of capital goods on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods determined as value of taxable supply, whichever is higher. Ruling - 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.

Summary

Issues:
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.

Analysis:
The petitioner, a motor car dealer, sought an advance ruling on the eligibility of input tax credit on motor cars purchased for demonstration purposes. The demo cars are essential for promoting sales by providing trial runs to customers. These demo cars are purchased from the principal supplier, reflected as capital assets in the books of accounts, and used for demonstration purposes for a specific period before being sold off at the written down book value, paying applicable taxes at that time.

The authorized representative of the firm argued that as per their business norms, every sales outlet is required to maintain at least three demo cars. The demo cars are purchased against tax invoices and capitalized in the books as capital assets. The duration of use for these test drive vehicles is typically two years or 40,000 kilometers, whichever is earlier.

Under Section 16(1) of the GST Act, every registered person is entitled to take credit of input tax charged on any supply of goods or services used in the course or furtherance of business. The petitioner purchases vehicles against tax invoices and pays taxes, making them eligible for input tax credit. The demo cars purchased are capitalized and used in the course or furtherance of business, meeting the definition of 'capital goods' under Section 2(19) of the Act.

The issue was examined in detail, emphasizing that the demo cars are indispensable for sales promotion and are capitalized in the books of accounts. Since the impugned purchase of demo cars is in furtherance of business, the applicant is deemed eligible for input tax credit. The activity does not fall under the negative clause of Section 17(5) as the demo cars are sold at the written down book value after a limited period of use.

The ruling issued states that input tax paid by a vehicle dealer on the purchase of a motor car used for demonstration purposes of the customer can be availed as input tax credit on capital goods and set off against output tax payable under GST. This ruling is subject to the provisions of Section 18(6) of the GST Act, which outlines the conditions for the supply of capital goods on which input tax credit has been taken.