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TMI BlogINPUT TAX CREDIT (ITC) ON DEMO CARS ALLOWED: RECENT CBIC CLARIFICATIONSX X X X Extracts X X X X X X X X Extracts X X X X ..... INPUT TAX CREDIT (ITC) ON DEMO CARS ALLOWED: RECENT CBIC CLARIFICATIONS - By: - Dr. Sanjiv Agarwal - Goods and Services Tax - GST - Dated:- 17-9-2024 - In automobile industry, O M s who manufacture the vehicles, also supply demo vehicles to automobile dealers for use in the furtherance of business. Such demo vehicles are supplied after charging GST thereon against a valid tax invoice. Though a plain reading of the law would imply that input tax credit would be available on such supplies, revenue authorites seem to be taken an opposite view under the shelter of section 17 which restricts credit in certain cases. Even there are few advance rulings for and against the same. What are Demo Cars A demonstration vehicle (or demo vehicle) is a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w vehicle (car or any other vehicle) that is driven by the dealership's salesmen, managers or executives for the purpose of demonstration, marketing, training etc. Demo vehicles are typically well maintained as they are used to illustrate the vehicles and promote sales at the dealership. In the motor vehicle industry, demonstration vehicle is an indispensable tool for promotion of sales by providing trial run of vehicle to customers. It is a business requirement that motor vehicle dealer has to acquire the demonstration vehicles from principal supplier. These purchases are generally capitalized in the books of account excluding the tax component. The demo vehicles are the vehicles which the authorised dealers for sale of motor vehicles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required to maintain at their sales outlet as per dealership norms and are used for providing trial run and for demonstrating features of the vehicle to the potential buyers. These vehicles are purchased by the authorised dealers from the vehicle manufacturers against tax invoices and are typically reflected as capital assets in books of account of the authorized dealers. As per dealership norms, these vehicles may be required to be held by the authorized dealers as demo vehicle for certain mandatory period and may, thereafter, be sold by the dealer at a written down value and applicable tax is payable at that point of time. Nature of Demo Car: A Capital Good or Input for Dealer? A demo vehicle can be either an input or a capital good . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Going by the definitions, demo vehicle may be considered as a capital asset as it is used for furtherance of business and it is not meant for retail sale to customers. If the demo car is being capitalized in books of accounts, it will be considered as capital asset. If not so, it may be considered as an input. Input Tax Credit on Demo Vehicles According to section 16(1) of the CGST Act, 2017, every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of the business. The capital goods which are used in the course or furtherance of business, may therefore, be entitled for Input Tax Credit (ITC). However, the entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement for input tax credit is subject to restrictions stipulated in section 17(5) of CGST Act, 2017 . Section 17(5) is an overriding provision as it, starts with notwithstanding . Accordingly, input tax credit shall not be available in respect of the following: Motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely: (A) further supply of such motor vehicles; or (B) transportation of passengers; or (C) imparting training on driving such motor vehicles; However, the Input Tax Credit in respect of such services shall be available where the motor vehicles, vessels or aircraft referred to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n clause (a) or clause (aa) are used for the purposes specified therein; where received by a taxable person engaged (I) in the manufacture of such motor vehicles, vessels or aircraft; or (II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him. Goods or services or both used for personal consumption From the above legal position, it can be inferred that: Section 17(5)(a) carves out an exception to the exclusion in section 17(5) i.e., input tax credit will be available if the motor vehicle is used for making the following taxable supplies: (A) further supply of such motor vehicles; or (B) transportation of passengers; or (C) imparting training on driving such motor vehicles; This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implies that input tax credit will be available if motor vehicle is used for above services. It is pertinent to note that this exception uses the phrase taxable supplies which is absent in the present case. However, in case of (A) above, the exception is further supply of such motor vehicles . The Department is taking a view that the supply is qualified by the word further and motor vehicle is qualified by the word such and therefore, both are relatable to a specific motor vehicle i.e., demo car. The above entry (A) is therefore, subject matter of interpretation and as such, one will have to look for judicial scrutiny. The other restriction i.e., goods or services or both used for personal consumption is also not applicable as the demo cars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are used for business are in the course of business. There can not be and there is no question of personal consumption by any stretch of imagination. Favorable Advance Rulings There are few advance rulings pronounced by Authority of Advance Rulings (AAR) which have taken the view that input tax credit is available on demo cars considering demo cars as capital assets, some of which are: IN RE: M/S. TOPLINK MOTORCAR PRIVATE LIMITED - 2022 (7) TMI 181 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL IN RE: M/S. A.M. MOTORS - 2018 (10) TMI 514 - AUTHORITY FOR ADVANCE RULINGS, KERALA IN RE: M/S. CHOWGULE INDUSTRIES PRIVATE LIMITED - 2019 (7) TMI 844 - AUTHORITY FOR ADVANCE RULING, GOA Adverse Advance Ruling However, in some of the advance rulings , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been ruled that input tax credit will not be available, to say: IN RE: M/S. KHATWANI SALES AND SERVICES LLP - 2021 (1) TMI 692 - AUTHORITY FOR ADVANCE RULING, MADHYA PRADESH IN RE: M/S. PLATINUM MOTOCORP LLP - 2022 (3) TMI 488 - APPELLATE AUTHORITY FOR ADVANCE RULING, HARYANA IN RE: M/S. BMW INDIA PVT. LTD. - 2022 (3) TMI 487 - APPELLATE AUTHORITY FOR ADVANCE RULING, HARYANA While it can be said that input tax credit should be allowed on demo cars treating them as capital goods and there is no specific restriction on the same if the demo cars have been capitalized, it cannot be considered to be meant for onword supply. Further, eligible taxes paid on purchase of demo cars meant for use in course of furtherance of business and which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capitalized in the books of accounts should normally be allowed to be set off as Input Tax Credit (ITC) under the GST law. CBIC Clarification Since there was no clarity on consistent interpretation of law and the industry was seeking clarity on the same for quite some time now, the 54 th GST Council meeting held on 09.09.2024 recommended to clarify on availability of ITC on demo cars to dealers. CBIC vide Circular No. 231/25/2024-GST dated 10.09.2024 has clarified that ITC on demo vehicles is allowed under section 17(5)(a) of CGST Act, 2017 . Clause (a) of Section 17(5) of CGST Act, 2017 provides that input tax credit shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than 13 persons(including the driver), except when they are used for making following taxable supplies , namely: further supply of such motor vehicles ; or transportation of passengers; or imparting training on driving such motor vehicles. Accordingly, input tax credit in respect of demo vehicles is not blocked under clause (a) of section 17(5) of CGST Act , as it is excluded from such blockage in terms of sub-clause (A) of the said clause. Where such vehicles are capitalized in the books of accounts by the authorized dealer, the said vehicle falls in the definition of capital goods under section 2(19) of CGST Act. Accordingly, availability of input tax credit on demo vehicles is not affected by way of capitalization of such vehicles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the books of account of the authorized dealers, subject to other provisions of the Act. Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the Income-tax Act, 1961 , the input tax credit on the said tax component shall not be allowed. However, there may be instances where motor vehicles are used for purposes other than for making further supply of such motor vehicles, say for transportation of its staff employees/ management etc. In such cases, input tax credit in respect of such motor vehicles would not be available. Thus, with this CBIC clarification, the confusion and doubts on input tax credit on demo cars has been put to rest. The saying of better late ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than never still holds good. - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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