ITC Allowed on inward supply of motor vehicles used for Demo: Kerala AAR

ITC Allowed on inward supply of motor vehicles used for demonstration purpose: Kerala AAR

Summary: The Kerala Authority for Advance Rulings (AAR), in the case of Sai Service (P.) Ltd., In re (Advance Ruling No. KER/09/2024, January 10, 2024), ruled that Input Tax Credit (ITC) can be availed on motor vehicles used as demo cars for business promotion, subject to compliance with the Central Goods and Services Tax Act, 2017 (CGST Act). Demo vehicles, used for test drives to help customers make informed purchase decisions, are considered essential for furthering business under Section 16 of the CGST Act. However, Section 17(5) imposes overriding conditions, requiring the vehicles to be used for subsequent supply to qualify for ITC. The AAR noted that demo vehicles, although initially capitalized and used for demonstration, are typically sold after limited use. Such transactions are treated as sales of used vehicles rather than new ones, ensuring eligibility for ITC under Section 17(5)(a). This view aligns with similar rulings by other state AARs, including Madhya Pradesh, Haryana, and Goa, which consistently held that demo vehicles constitute further supply, thus allowing ITC. Despite this clarity, divergent rulings on demo vehicles under the GST framework highlight the complexity of achieving uniformity in tax interpretation. The Kerala AAR’s decision reinforces that ITC is available on demo vehicles if conditions for subsequent supply are met, easing compliance for automobile dealers.

The Kerala AAR, in the case of Sai Service (P.) Ltd., In re [Advance Ruling No. KER/09/2024 dated January 10, 2024] held that where demo cars are crucial for sales promotion, since, prospective customers prefer to test drive cars before they make a decision, therefore, demo cars are put to use for furtherance of business as envisaged under Section 16 of the Central Goods and Service Tax, 2017 (“the CGST Act”). Hence, the Assessee is entitled to avail Input Tax Credit (“ITC”) on inward supply of motor vehicles which are used for demonstration purpose.

Facts:

M/s Sai Service Private Limited (“the Applicant”) was engaged in the business of supply of motor cars and services related to the same.  The Applicant used motor vehicles for demonstration purposes in the course of furtherance of business.

The Applicant filed an application for advance ruling in order to know availability of ITC on demo vehicles.

Issue:

Whether ITC on inward supply of motor vehicles which are used for demonstration purpose in the course of business of supply of motor vehicle as ITC on capital goods?

Held:

The Kerala AAR, in Advance Ruling No. KER/09/2024 dated January 10, 2024 held as under:

• Noted that, the demo vehicles in question are earmarked for demonstration purpose so that prospective customers can make an informed choice about purchasing the vehicle. Demo cars are indispensable for sales promotion since prospective customers prefer to test drive the cars before they make a decision. Hence, there was no dispute that the demo cars are put to use for furtherance of business and clears stipulations envisaged under section 16(1) of the CGST Act for availing ITC. However, Section 17(5) of the CGST Act is an overriding provision and is applicable ‘Notwithstanding anything contained in sub-section (1) of section 16‘. Therefore, complying with the conditions under section 16(1) of the CGST Act alone does not make the applicant eligible for ITC of the demo cars.
• Held that, motor cars involved in the question are eligible for ITC only if these conditions are met. Therefore, the argument that demo cars are not used for transportation of persons doesn’t make them eligible for ITC. However, we find that the applicant intents to make a further supply of such cars after the demo period. The fact that the cars were used for demo purpose doesn’t alienate the cars from its eligibility for ITC, if they are used for making further supply of the same, even if on a later date. Thus, we are of the opinion that the applicant can claim ITC on cars used for demonstration purposes, provided they are subsequently used for making supply.

Our Comments:

It is to be noted that AAR, Madhya Pradesh in Re: M/s. Khatwani Sales and Services LLP [Order No. 13/2020 dated July 23, 2020]  held that vehicles were used by assessee for providing trial run to customers and are essential part of marketing and sales promotion. Said cars although capitalized in books of account, being sold on written down value after limited use period were to be treated as a sale of used/second-hand vehicle and not as a sale of a new vehicle. Therefore, demo vehicles were not covered in the exception entry (A), entry (B) or entry (C) of sec 17(5)(a) of CGST Act and hence ITC on demo vehicles shall be available in spite of the fact that such vehicles used by applicant for furtherance of their business.

Similar view was taken by AAR, Haryana in case of Platinum Motocorp LLP [2021 (47) G.S.T.L. 198 (A.A.R. – GST – Haryana)], wherein it held that the expression ‘further supply’ connotes ‘resale’ which is not the purpose of applicant purchasing demo cars.

This ruling was upheld by AAAR, Haryana [2022 (61) G.S.T.L. 375 (App. A.A.R. – GST – Haryana)].

It is to be noted that in the case of M/s. Chowgule Industries Private Limited [2019 (27) G.S.T.L. 272 (A.A.R. – GST)] wherein it was ruled that since the demo vehicles were being used for a specified period and then sold at after paying the applicable taxes on sale value at that point of time. Therefore, it amounted as for making further supply and no time limit prescribed in the CGST Act for making such further supplies. Thus, the applicant is eligible to avail ITC.

Similar stand was taken in M/s. A.M. Motors [2018 (18) G.S.T.L. 93 (A.A.R. – GST)] where the capital goods which are used in the course or furtherance of business, is entitled for ITC and as the purchase of demo car is in the furtherance of business, the applicant is eligible for ITC. Furthermore, this activity does not come under sec 17(5) of the CGST Act, as after a limited period of use as demo car, the vehicles are sold at the written down book value.

Thus, the above rulings have allowed ITC stating that selling of demo cars amounts to further supply as enumerated under clause (A) of sec 17(5)(a) of the CGST Act.

Hence, we can say that demo vehicles or goods certainly used in the course or furtherance of business and credit is eligible to the suppliers of goods but, such divergent rulings are only creating hurdles in making GST law as Good and Simple Tax.

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