Levy of GST on Old & used Refurbished Car–To be levied on ‘Margin’

AAAR, Rajasthan has pronounced Ruling on 10.12.2021, in the case of Tej Kumar Jain (2022) 37 J.K.Jain’s GST & VR 168, that;

“Per Explanation (ii) to notfn No.8/2018-CT(R) dated 25.1.2018, GST is to be levied on “Margin”, in case of Old and used Refurbished Car, which shall be the difference between the Selling Price and the Purchase Price. There is no provision to include cost of refurbishment in the purchase price for calculation of margin. “Purchase Price” means only the amount paid by the applicant at the time of purchase of used Cars. In view of the clear language of the statute, the amount incurred for the refurbishment of the Car are not includible in the Purchase Price.”

Background.─The Appellant has planned business of purchase and sell of used/old cars. To make car marketable in the open market as refurbished old/used car, he will be required to incur some expenses. Purchase and related costs incurred in bringing it to refurbished condition shall be treated as a profit and loss item from the perspective of accounting and inventory of such acquired old/used refurbished car shall not be treated as fixed asset in the books of account, rather it shall be treated as an inventory/stock items and no depreciation under the provisions of Income Tax Act 1961 shall be charged in the books of account or in the Income Tax Return by the appellant. The appellant shall treat such cost of purchase and cost of refurbishment as “acquisition cost” of the inventory of the old and used refurbished car and will show it at the expense side grouped under “Purchases” in the Profit and Loss Account. Appellant does not intend to claim or avail ITC of tax charged (if any) on inward supply of motor car (i.e., acquisition) or on refurbishment cost incurred by it.

AAR, Rajasthan (2021) 36 J.K.Jain’s GST & VR 308 held that from the plain reading of Explanation (ii) to the notfn No.8/2018-CT(R) dated 25.1.2018 that it is observed that the Explanation (ii) undoubtedly clearly used the word “purchase price” not the “purchase cost” of goods. It means only the amount paid by the applicant at the time of purchase of used cars can be considered as “purchase price”, there is no provision in the said notfn to include the cost of refurbishment in the purchase price. Therefore, we find that there is no reason to include cost of refurbishment in the purchase price for calculation of margin.

Findings by AAAR.─ Before examining the contention of the appellant, it is imperative to reproduce notfn No.8/2018-CT(R) dated 25.1.2018.

In exercise of the powers conferred by S.11(1), CGST Act, 2017, the Central Govt., 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, as are given in corresponding entry in column (2), from so much tax as specified  in Sch.IV of notfn No.1/2017-CT(R), 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 represent margin of the supplier, on supply of such goods.

TABLE

Explanation.–For the purposes of this notfn,–

(i) in case of a registered person who has claimed depreciation u/s 32, Income-Tax Act, 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 supplier shall be, the difference between the selling  price and the purchase price and where such margin is negative, it shall be ignored.

This notfn shall not apply, if the supplier of such goods has availed ITC as defined in S.2(63), CGST Act 2017, CENVAT as defined in CENVAT Credit Rules, 2004 or the ITC of VAT or any other taxes paid, on such goods.

Analysis by AAAR.─The aforesaid notfn exempts the goods specified in column (3) falling under heading/Tariff Item as specified in column 2 from so much of tax as is in excess of amount calculated at the rate specified in the corresponding entry in column 4 of the table to the said notfn on the value that represent margin of the supplier on supply of such goods. As per explanation (ii), margin of supplier shall be the difference between the selling price and the purchase price.

Thus  from  the  plain  reading  of the  explanation (ii)  to  the  aforesaid notfn it is observed that the explanation (ii) undoubtedly/ clearly used the word  “purchase  price” not the “purchase  cost” of goods.  It  means  only  the amount  paid  by the applicant at the time  of purchase  of used  cars  can  be considered as “purchase price”.

The appellant has contended that there should be value of supply as per S.15(1) of the Act, in case of parties is not related and the price is the sole consideration for the supply. In this regard, it is found that the words used in explanation No. (ii) of notfn  No. 8/2018-CT(R) dated 25.1.2018 is “the value that represents the margin of supplier shall be, the difference between the selling price and the purchase price”. In this notfn No. 8/2018-CT(R) dated 25.1.2018 the value has been specially defined, therefore, value as defined In S.15(1), Act, cannot be taken for the purpose of value under this notfn .

The appellant’s main thrust is that to calculate margin, purchase cost should be treated as purchase price. We observe that our legislature has wisely used the word purchase price to calculate the margin as benefit of notfn will not be available, if the appellant has availed ITC. We find that the availment of this notfn No. 8/2018-CT(R) dated 25.1.2018 is optional. If the appellant wishes to avail ITC on the components used in the refurbishment of the old and used car, they can very well avail the same without availing benefits of the said notfn. However, if the benefit of the notfn No. 8/2018-CT(R) dated 25.1.2018 is to be availed, then the conditions for the same have to be followed.

Ruling by AAAR.─Therefore, in view of the above discussion, the AAAR held that from the plain reading of the explanation (ii) to the notfn No. 8/2018-CT(R) dated 25.1.2018, it is noticed that the explanation (ii) clearly used the word ‘purchase price’ not the ‘purchase cost’ of the goods. It means only the amount paid at the time of purchase of used and old cars can be considered as ‘purchase price’ for the purpose of this notfn.

6.10 The appellant has also placed reliance on various case laws passed by various Advance Ruling authorities. the AAAR were of the opinion that each case has to be examined individually in the backdrop of several factors.  Further, the appellant has also placed reliance of various case laws passed by courts related to other Act. The AAAR observed that there is no need to discuss the same in view of clear provisions of CGST ACT.

CA Om Prakash Jain s/o J.K.Jain, Jaipur

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