It is very common for the vehicle dealers to keep a demo vehicle for providing trial run to their customers. If we talk about GST treatment of such vehicles two questions emerge viz admissibility of input tax credit on such demo vehicles and treatment at the time of sale of such vehicles after a period of 2-3 years.
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 determining the admissibility of ITC on demo vehicles as well as treatment at the time of sale of such vehicles, we can refer to the ruling of Maharashtra Authority of Advance Ruling (AAR) on the application filed by M/s Chowgule Industries Private Limited. The AAR vide Order No. GST-ARA-18-2019-20/B-121, in this case had adjudged that Input Tax Credit can be availed on inward supply of Motor Vehicle which are used for Demonstration purpose. Further the AAR adjudged that at time of sale of vehicle GST is to be paid as per value determined under Section 18(6) of the CGST Act, 2017.
Facts of the Case
M/s Chowgule Industries Private Limited, the Applicant is a Private Limited Company, is registered under CGST Act, 2017 in the State of Maharashtra and also in other State. The Applicant is an authorized dealer tor Maruti Suzuki India Limited for supply of motor vehicles and spares and for servicing as also for some other commercial vehicle manufacturers.
The Applicant has made purchases of motor vehicles against tax invoice which are reflecting in the books of accounts of the Applicant as capital goods. The vehicles are used as demo cars for providing trial run to customers to understand the features of the vehicle. This is an essential part of marketing and sales promotion to facilitate supply of cars.
As per the dealership norms with Maruti Suzuki India Limited, the applicant is required to maintain at least one Demo vehicle of each model per location, The Applicant purchases these Demo vehicles against tax invoice. The said Demo vehicles are capital goods accounted under Fixed Assets of the Company excluding GST component. The applicant has not claimed depreciation on the tax component of the said demo cars nor claimed as business expenditure u/s 37 of the Income Tax Act.
Every model of demo cars are used for demonstration for a limited period. They are generally replaced every two years or 40,000 Kms whichever is earlier. Secondly, the vehicle model keep on changing due to competition in the market and changing demands of the customers. The customers always demands for brand new model of cars for test Drive. Hence, it become mandatory for the Applicant to buy new Demo vehicle on launch of new model of vehicle. The Demo vehicles are sold after paying the applicable taxes on sale value at that point of time.
Question of which ruling was sought
Whether the applicant is entitled to avail Input tax credit charged on inward supply of Motor Vehicle which are used for Demonstration purpose in the course of business of supply of Motor Vehicle as input tax credit on capital goods and whether the same can be utilised for payment of output tax payable under this Act.?
Highlights and Ruling by order of Maharashtra AAR
- The Demo Vehicles are an important and essential requirement for marketing and promoting the sale of motor vehicles. Thus we find that these Demo Vehicles are being used to further their business i.e. sale of motor vehicles and further. the purchases of such Demo Vehicles are capitalized in their books of accounts.
- Section 16(1) of the CGST Act,2017 does not make any distinction between capital goods and other goods for allowing credit of ITC. Hence, ITC in respect of capital goods, is available and can be taken, since ITC credit for capital goods is in parity with other goods. However, the credit is available subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49 of the CGST Act.
- The Demo cars in the subject case fulfill the definition of capital goods, are received under a Tax Invoice and are used or intended to be used in the course or furtherance of business i.e. sale of motor vehicles.
- Since the applicant will be making further supplies of the Demo vehicles, and there is no time limit prescribed in the GST Act for making such further supplies, we are of the opinion that they will be eligible to avail ITC in the subject case and Section 17(5) would not be attracted.
Maharashtra AAR in view of above adjudged that ITC in respect of demo vehicles can be availed by the applicant.
Further in regard to question as to whether the ITC availed on demo vehicles can be utilized for payment of output tax payable under this Act, the AAR adjudged that can be utilised for payment of output tax payable under this Act. It further stated that the manner of utilization of ITC is provided as per provisions of Section 49 of the CGST Act.
The AAR in its order also decided that as per Section 18(6) of the CGST Act, 2017, upon supply of demo vehicle the applicant shall pay an amount equal to the ITC taken on the said Demo Vehicles reduced by such percentage points as may be prescribed or the tax on the transaction value of such Demo Vehicles, whichever is higher.
For ready reference of our readers the order of Maharashtra AAR is given below:
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