GST & Compensation cess on monthly lease fees of pre-owned Cars

In re Dream Road Technologies Pvt. Ltd (GST AAR Haryana)

Q1. Whether GST Rate and HSN applicable to the monthly lease fees received from customers for leasing pre-owned Cars would be determined in accordance with serial no. 17 (viia) of Notification No. 11/2017-Central Tax (Rate) dated 28- 06-2017 read with Notification No. 08/2018-Central Tax (Rate) dated 25th January 2018? If not, then what would be said GST rate and HSN so applicable on the said transaction?

A1. No, The applicable rate of tax on the supply made by the applicant is to determined in accordance with serial no. 17(vi) of Notification No. 11/2017-Central Tax (Rate) dated 28-06-2017 as amended.

Q2. Whether Compensation cess applicable to the monthly lease fees received from customers for leasing of pre-owned Cars would be determined in accordance with serial no. 42A of Notification No. 01/2017- Compensation cess (Rate) dated 28th June 2017? If not, then what about the said Compensation cess so applicable on the said transaction? 

A2. No, The applicable rate of tax is as Notification No. 01/2017-Compensation cess (Rate) dated 28th June 2017.

FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING,HARYANA

APPLICANT’S ELIGIBILITY FOR SEEKING AN ADVANCE RULING:

To file an application before the Authority of Advance Ruling, the applicant must satisfy the conditions prescribed under the Central Goods and Services Tax Act, 2017 (hereinafter referred to as CGST Act, 2017), Goods and Services Tax (Compensation to States) Act, 2017 and Haryana Goods and Services Tax Act, 2017 (hereinafter referred to as HGST Act, 2017). Since the provisions of both the Acts are parimateria, any reference to provisions of CGST Act, 2017 in this order should be construed as a reference to corresponding provisions of the HGST Act, 2017 as well. Section 97(2) of the CGST Act, 2017 prescribes that an Advance Ruling may be sought inter alia on the questions of (b) applicability of a notification issued under the provisions of this Act. (e) Determination of the liability to pay tax on any goods or services or both.

Proviso with reference to the Section 98(2) of CGST Act, 2017 states that where the questions raised in the application is already pending or decided in any proceedings in the case of the applicant under any provision of this Act, the application may be rejected by the Advance Ruling Authority after providing an opportunity of being heard to the applicant. In the present case, the applicant has undertaken in form ARA-0.1 that the issue is neither pending nor decided in any proceedings under any of the provisions of the Act. Besides the applicable fees in the case stands paid. So, he is eligible to seek an Advance Ruling under the above provisions and the case is being heard on merits.

Statement of facts as per ARA-01:-

1. M/s Dream Road Technologies Private Limited (hereinafter referred to as the “Applicant”) is a Car leasing Company with the name “PumPumPum”. The Applicant provides the private number (White Plate) of pre-owned cars on lease to the individuals.

2. The Applicant is engaged in providing pre-owned vehicles obtained from different modes of supply on operating leases to its customers.

3. The Applicant enters into different Motor Vehicle Lease Agreements (“MVLA”) with its customers depending upon the type of customer. For instance, in the case of individual customers, normal Lease Agreements shall be executed. However, for other than individual clients two agreements are entered one is Master Lease Agreements and the other is a Tri-Party Agreement.

4. The applicant raises an invoice to its customers on a predefined basis depending upon the dimension and engine capacity of cars being provided on lease.

5. The pre-owned cars as provided to the customers on lease are obtained from any one of the following three modes of su 1 :-

6. Pre-owned cars obtained from the above-mentioned modes are registered in the applicant’s name and hypothecated to Banks/NBFC.

7. The relevant clause on consideration in the MVLA is as given below:

In consideration of the usage of the Vehicle and availing of Management Services by Lessor, the Lessee shall pay a monthly Lease fee (hereinafter referred to as “Lease Fee”). The Lease Fee shall comprise of the vehicle usage charges, management charges, insurance charges, and delivery charges. It shall be an amount as reflected in the Quote /This Agreement. The value of the Monthly Lease Fee shall be specified in the Quote/ This Agreement and shall be paid by the Lessee to Lessor. The Lease Fee shall be payable by the 5th of the same month for every Billing Month (hereinafter referred to as the “Billing Month”). Billing Month will be decided based on the Lessee’s payment policies.”

Statement containing applicant’s interpretation of law and/or facts:-

1. The Applicant is engaged in the business of providing pre-owned cars on operating lease to its customers. Thus according to the Applicant leasing of second-hand motor vehicles would be taxed by virtue of Serial no. 17(viia) of Notification No. 11/2017 Central Tax (Rate) dated 28^thiune 2017 read with Notification No. 08/2018- Central

2. Under the GST regime, the taxable event is “Supply”. Thus, GST would be leviable on all the transactions which qualify as ‘Supply’, as may be applicable, except the supplies which are outside the purview of GST i.e. non-Taxable Supplies.

3. Schedule II of the CGST Act lays down the transaction to be treated as a supply of goods or services. The relevant Extracts of the same are reproduced below: –

“ACTIVITIES [OR TRANSACTIONS] TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES”

1. Transfer(a)

(a) any transfer of the title in goods is a supply of goods

(b) any transfer of right in goods or of undivided share in goods without the transfer of title thereof is a supply of services;

(c) any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed is the supply of goods.”

Thereby under GST what is important to determine whether the supply is the “supply of goods” or “supply of services” is the “Transfer of title”. In simple words, it could be said that any transfer of rights in goods without the transfer of title thereof is the supply of services or any transfer of title in goods under an agreement that stipulates that property in goods shall pass at future date is the “supply of goods”.

In light of the above, it can be said that the transaction of leasing by the applicant would be a “Supply of Services” transaction, as there is no contract at the time of lease for the transfer of title to the lessee.

4. Further, Notification No 11/2017- Central Tax (Rate) dated 28^thJune 2017 provides HSN and Tax rates for Leasing services. As per Entry No. 17 of said notification, the HSN of leasing services shall be 9973. The applicant is engaged in the business of leasing of cars and thus the transaction as stipulated would fall under serial no (viia) “Leasing or renting of goods”. The relevant portion of the said notification is reproduced below for ease of reference: –

Notification No. 11/2017-Central Tax (Rate) dated 28^th June 2017,

5. Entry (viia) states the applicable tax shall be “the same rate of central tax as applicable on supply of like goods involving the transfer of title in goods”. Technically speaking words “like goods” are nowhere defined in the said notification, thereby we fall back to Central Goods and Service Tax Rules, 2017.

Relevant extracts of Explanation (b) to Rule-35 of Central Goods and Service Tax Rules, 2017:-

“supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both”.

6. From the above discussion words “like goods” shall mean, goods that are the same in respects, including physical characteristics, quality, and reputation as the goods being valued except for minor differences that do not affect the value of goods. Thus for a business like an applicant is into the business of leasing pre-owned cars, “like goods” shall be old and used cars.

7. Applicant’s business model allows it to purchase only those cars that are available at a discount of 35% or more of the purchase value (i.e. Ex-Showroom price plus applicable taxes plus One Time Registration Charges) paid at the time of buying the same. In other words, the applicant will never purchase any car by paying a value of more than 65% of its purchase value i.e. Ex-Showroom price plus applicable taxes plus One Time Registration Charges.

8. Further according to Motor Vehicle Rules, every purchaser, purchasing a new car is required to pay registration fees to the RTO alongwith other applicable fees to get a registration certificate. However, such registration fees are not required to pay at the time of purchasing old cars since itinvolves only transfer of ownership, and thus only transfer fees shall be paid.

The relevant extract of The Motor Vehicles Act, 1988is reproduced below:

“39. Necessity for registration. —No person shall drive any motor vehicle and no owner of a motor vehicle shall cause or permit the vehicle to be driven in any public place or in any other place unless the vehicle is registered in accordance with this Chapter and the certificate of registration of the vehicle has not been suspended or canceled and the vehicle carries a registration mark displayed in the prescribed manner:

Provided that nothing in this section shall apply to a motor vehicle in possession of a dealer subject to such conditions as may be prescribed by the Central Government.”

“50. Transfer of ownership. —

Where the ownership of any motor vehicle registered under this Chapter is transferred, —

(a) the transferor shall, –

. (i) in the case of a vehicle registered within the same State, within fourteen days of the transfer, report the fact of transfer, in such form with such documents and in such manner, as may be prescribed by the Central Government to the registering authority within whose jurisdiction the transfer is to be effected and shall simultaneously send a copy of the said report to the transferee; and

(ii) in the case of a vehicle registered outside the State, within forty-five days of the transfer, forward to the registering authority referred to in sub-clause (0-

(A) the no objection certificate obtained under section 48; or

(B) in a case where no such certificate has been obtained, —

(I)the receipt obtained under sub-section (2) of section 48; or

(II) the postal acknowledgment received by the transferred if he has sent an application in this behalf by registered post acknowledgment due to the registering authority referred to in section 48, together with a declaration that he has not received any communication from such authority refusing to grant such certificate or requiring him to comply with any direction subject to which such certificate may be granted;

(b) the transferee shall, within thirty days of the transfer, report the transfer to the registering authority within whose jurisdiction he has the residence or place of business where the vehicle is normally kept, as the case may be, and shall forward the certificate of registration to that registering authority together with the prescribed fee and a copy of the report received by him from the transferor in order that particulars of the transfer of ownership may be entered in the certificate of registration.”

9. Further perusal of SBI guidelines indicates that it is charging different rates of interest on Car Loan funding in the case of old cars v/s new cars and the Interest rate for old cars is higher in comparison with the interest rate applicable to the new car. SBI auto rates chart w.e.f. 15-07-2022 is mentioned below for kind reference which also clearly differentiates between old cars and new cars. (Source: Relevant extracts from https://sbi.co.in/web/interest-rates/interest-rates/loan-schemes-interest-rates/auto-loans)

10. Further, the Company believes that it is a partner in nation-building and is assisting the exchequer in realizing the value of locked assets in the economy. The entire business model of the applicant is based around acquiring motor vehicles at a deep discount and then generating an additional flow of revenue from the same. The applicant in the said transaction is not claiming any input tax credit, however, it is paying GST on the revenue so generated. Thereby applicant is contributing additional taxes to the governmenfexchequer.

Let us see an example below:

For instance, Individual purchases a Wagon R car,a petrol fuel car having 998cc engine capacity and 3655 mm length, at INR 4,50,000/- on which GST paid at the applicable tax is 29% (28% + 1% cess) i.e. 1,30,500/- the total purchase value would be INR 5,80,500/-. The tax amounting to INR 1,30,500/-is paid to

Government on the said transaction.

Now the applicant purchases the same car after a few years from the original owner (who will not charge any GST on the same). This will break the chain of transferring input tax credit and the applicant will bear the amount of tax charged by the vendor at the time of purchase of the car. Now the applicant further leases the same car to its customers and charges GST on the lease payments.

Thereby in this model applicant is able to unlock the value of assets and generate additional tax revenues on a monthly basis for the government of India.

11. In pursuance of the above discussion and of Entry no 17 (viia) of Notification no 11/2017 “Like goods” in the instant case shall be “old and Used Cars”.

12. Notification No. 08/2018 – Central Tax (Rate) dated 25^th January 2018 notifies the rate of central tax for the sale of old and used cars. Extracts of the same are stated below:

“In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the central tax on intra-state supplies of goods, the description of which is specified in column (3) of the Table below, falling under the tariff item, sub-heading, heading or Chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), as are given in corresponding entry in column (2), from so much tax as specified in Schedule IV of Notification No. 1/201.7 -Central Tax (Rate), as is in excess of the amount calculated at the rate specified in the corresponding entry in column (4) of the said Table on the value that represents the margin of the supplier, on supply of such goods: –

Explanation —For the purposes of this notification, –

(i)in case of a registered person who has claimed depreciation under section 32 of the Income-Tax Act,1961(43 of 1961) on the said goods, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored, • and

(ii)in any other case, the value that represents the margin of the supplier shall be, the difference between the selling price and the purchase price and where such margin is negative, it shall be ignored.

2. This notification shall not apply, if the supplier of such goods has availed input tax credit as defined in clause (63) of section 2 of the Central Goods and Services Tax Act, 2017, CENVAT as defined in CENVAT Credit Rules, 2004 or the input tax credit of Value Added Tax or any other taxes paid, on such goods.”

The same notification has also been notified in Haryana Goods and Services Tax Act, 2017 through notification no. 28 ST Haryana Tax (Rate), dated 25^thJanuary2018.

13. The applicant in the instant case is engaged in the business of leasing old and used cars on operating lease and does not avail any input tax credit as defined in clause (63) of section 2 of the Central Goods and Services Tax Act, 2017, CENVAT as defined in CENVAT Credit Rules, 2004 or the input tax credit of Value Added Tax or any other taxes paid, on such “Old and used cars”.

Thus, from a conjoint reading of the above notifications, it appears that the GST rate for the sale of old and used cars shall be 18% or 12% depending upon the dimensions of the car.

14. Further, for the reasons recorded above compensation cess on leasing of old and used cars shall be levied by virtue of notification no. 01/2017- Compensation cess (Rate) dated 28^thJune 2017. The relevant extract of the same reproduce below for reference: –

15. On the said transaction of leasing of old and used cars, the applicant has not availed input tax credit as defined in clause (63) of section 2 of the Central Goods and Services Tax Act, 2017, CENVAT credit as defined in CENVAT Credit Rules, 2004, or the input tax credit of Value Added Tax or any other taxes paid on such vehicles. Thereby no Compensation Cess would be applicable to this transaction

Accordingly, in Applicant’s view, the services provided (Leasing of car) by it to customers will be charged @18% or 12% depending upon the engine capacity and other dimensions of the cars in terms of serial no. 17 (viia) of Notification no. 11/2017-Central Tax (Rate) dated 28-06-2017 read with Notification no 08/2018- Central Tax (Rate) dated 25^thJanuary 2018. Also in pursuance of notification no. 01/2017- Compensation cess (Rate) dated 28th June 2017 no Compensation Cess would be applicable to this transaction.

Questions on which Advance Ruling has been sought:-

a) Whether GST Rate and HSN applicable to the monthly lease fees received from customers for leasing pre-owned Cars would be determined in accordance with serial no. 17 (vija) of Notification No. 11/2017-Central Tax (Rate) dated 28-06­2017 read with Notification No. 08/2018-Central Tax (Rate) dated 25th January 2018? If not, then what would be said GST rate and HSN so applicable on the said transaction?

b) Whether Compensation cess applicable to the monthly lease fees received from customers for leasing of pre-owned Cars would be determined in accordance with serial no. 42A of Notification No. 01/2017- Compensation cess (Rate) dated 28th June 2017? If not, then what about the said Compensation cess so applicable on the said transaction?

PERSONAL HEARING:

Sh. Rajat, Chartered Accountant present on behalf of the applicant on 10.11.2022 and enumerated the legal and factual aspects of the matter in writing along with ARA-01.

Additional submissions of the applicant dated 09.12.2022:

The ownership document i.e. RC gets transferred to Applicant (PumPumPum). The Applicant would be the registered owner of the pre-owned vehicle at all times for all purposes including regulatory requirements under the Motor Vehicles Act, 1988. The Applicant (PumPumPum) is pre-owned car leasing  Company offering high-quality pre-owned cars. The applicant (PumPumPum) provides the private number (White Plate) of pre-owned cars on lease to the corporates and individuals. The pre-owned cars as provided to the customers on lease are obtained by the Applicant (PumPumPum) from any one of the following three modes of Supply:

The Applicant (PumPumPum) is empowering millennials with a smart car subscription model. The company provides monthly subscriptions of pre-owned cars at affordable rates. Customers share their requirements or can select a car from a pool of certified pre-owned cars. The Applicant delivers good quality assured car to the user based on the set of terms of the agreement. The customer has the option to choose the lease period which varies from 6 to 24 months to best that suit their needs. At the end of the lease term, the customer will hand over the vehicle to the Applicant. When the pre-owned vehicle becomes obsolete, the Applicant removes the said vehicle from its fleet and discharges the necessary tax liability on the sale of the old motor vehicle as per the Notification 08/2018 Central Tax(Rate) dated 25^th January 2018 in case the sale proceeding exceeds the written down value as determined in the said notification.

Comments of Proper Officer dated 15.12.2022:-

“I had discussion with representative of the tax payer on dated 06.12.2022 whereby it has been observed from the GSTR 2A for the month of June 2022 that the

taxpayer is availing input tax credit on purchase of vehicles as detailed below:-

Therefore as per point No. 2 of notification no. 08/2018 dated 25.01.2018 these sales are not applicable to this taxpayer as the taxpayer is availing input tax credit on purchase of vehicles also from above facts, it is evident that the taxpayer is purchasing new vehicles which needs further investigation. As per my observations, tax rates of new vehicles are to be applicable. Further, in respect of Part (b) of clarification sought, it is submitted that compensation cess (Rate) will also be applicable on monthly lease fee as per notification No. 01/2017 dt. 28.06.2017.”

DISCUSSION AND FINDING: 

We have gone through the facts of the case, documents on record and submissions made by the applicant besides the comments of the Proper Officer, it is observed that the applicant is engaged in the business of providing pre-owned car on operating lease to its customers. The applicant has sought the advance ruling regarding the rate of tax applicable on leasing of the pre owned motor vehicles under the provision of the GST Act? The detail as enumerated in above pages is examined by the authority minutely. After perusing all the aspects of the matter at hand i.e. the factual details as well as the legal provision applicable in the present case it can be said that the supply of leasing of the pre-owned motor vehicle is for the furtherance of business. It is apt to mention here that the purchaser/owner of motor vehicles needs to follow the provisions of the Motor Vehicles Act, 1988 along with applicable rules. And in the present matter this supply of leasing of motor vehicles falls under the scope of supply as defined in the section 7 of the CGST Act, 2017. The leasing of the pre-owned vehicle is a taxable event and the rate of tax is to be determined in accordance with serial no. 17 (VI) of notification no. 11/2017-CT(R) dated 28.06.2017 as amended which states that the tax is to be charged at ‘same rate of central tax as applicable on supply of like goods involving transfer of title in goods.’ And the applicable compensation cess is also to be determined in accordance with notification no. 1/2017-compensation cess (Rate) dated 28.06.2017. Meaning thereby that the tax rate on the leasing of the pre-owned vehicle is to be determined as on like goods. And the availment of the input tax credit by the applicant is subject to the conditions prescribed under section 17(5) of the CGST Act, 2017 read with the relevant rules. In the light of the proper officer’s comments on the issue at hand mentioned here in above, it can be said that the applicant has not submitted a clear picture on the issue of availment of ITC before the authority. The supply of leasing of the pre-owned vehicles is not covered under the notification no. 8/2018 -Central Tax (Rate) dated 25th January 2018 as this is related to the sale of old and used vehicles. This notification needs to be read with rule 35 of the CGST Rules, 2017. It shall not apply in the case of motor vehicles given on lease. In the case of transfer of right to use any goods i.e. leasing, the applicable rate of tax is same as of new vehicles under the GST Act and compensation cess also as on supply of similar goods. The authority is of opinion that the supply of leasing of pre-owned vehicles cannot be treated as leasing or renting of goods like computers, furnitures, refrigerators or air conditioners etc. And the tax rates of new vehicles are to be applicable in the present matter as per the specification of the vehicles i.e. engine capacity and size of the vehicles and mode of fuel etc. under chapter 87.

Decided accordingly.

7. Ruling: –

Note: An Appeal against this advance ruling order lies before the Haryana Appellate Authority for Advance Ruling for Goods and Service Tax Haryana Vanijya Bhawan, Plot No. 1-3, Sector 5, Panchkula-134 151 (Haryana), within 30 days from the date of service of this order.