It is very common for the vehicle dealers to keep a demo vehicle for providing trial run to their customers. The moot issue that arises in regard to demo vehicles is whether such dealers can avail the input tax credit (ITC) in respect of GST paid on purchase of such demo vehicles.
In regard to admissibility of input tax credit, Section 17(5) (a) of the CGST Act, 2017 is relevant which mandates that input tax credit (ITC) is not available in respect of motor vehicles for transportation of passengers having approved seating capacity of not more than 13 persons (including drivers). However if such motor vehicle is inter alia used for further supply of such vehicles, ITC would be admissable.
In regard to admissibility of ITC on demo vehicles Maharashtra Authority of Advance Ruling (AAR) in the case of M/s Chowgule Industries Private Limited had adjudged that ITC can be availed on demo vehicles.
However in complete reversal of above ruling, Madhya Pradesh Authority of Advance Ruling (AAR) has recently in the case of M/s Khatwani Sale and Service LLP has held that no Input Tax Credit (ITC) is available on demo vehicles.
Facts of the case:
- The applicant, M/s Khatwani Sale and Service LLP is an authorised dealer of KIA for sales & services of vehicles.
- The Applicant has purchased the vehicles from the supplier against tax invoices after paying tax and capitalizes the demo vehicles in the books of accounts.
- The Applicant has submitted that the firm will not claim depreciation on the tax component of Demo Vehicles which are capitalized in the books of accounts. Further the applicant will abide with the provisions of Section 18(6) of the CGST Act at the time of sale of demo vehicle.
Issue on which Ruling was obtained:
The applicant has desired advance ruling on whether Input tax credit on the Demo vehicle purchased can be availed as the same will be capitalized in books.
The applicant is of the view that demo vehicles used in course or furtherance of business may be entitled to input tax credit.
However the Department is of the view that input tax credit on the motor vehicle purchased for demo purpose cannot be availed as same is hit by barring provisions of clause (a) of sub-section (5) of section 17 of the CGST Act, 2017.
Order of Madhya Pradesh AAR: Deliberation and Ruling
- A reading of Section 17(5)(a) of the CGST Act indicates that input tax credit shall 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.
- By subsequent sale of demo vehicle after one or two year, it can not be said that the demo vehicle is for further supply. The sale in the subsequent year of Demo vehicle on which depreciation has been charged is to be treated as a sale of used / second hand vehicle , and not sale of a new vehicle.
- We find that the demo vehicles used for demo and trial to the customers are not covered in the exception Clause (A) i.e. for further supply of such vehicle or in Clause (B) i.e. for transportation of passengers, or in Clause (C) i.e. for imparting training for driving.
- Hence though the demo vehicles are for furtherance of business of the applicant, even then they are not eligible for input tax credit in view of provisions of Section 17(5)(a) of the CGST Act.
- 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 the CGST Act, according to which the applicant is not eligible for Input tax credit on Demo Vehicles.
In view of above deliberations, the coram consisting of Manoj Kumar Choubey and Virendra Kumar Jain 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) of the CGST Act, 2017.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
