ITC on Expenses Related To Motor Vehicle – When ITC on Motor Vehicle is Not Available

1. Many view the changed world with the same old lenses. This results in a distorted view of the new reality. Same holds good while interpreting the provisions of GST law.

2. In the pre-GST era, CENVAT credit for expenses like insurance or repair and maintenance in respect of motor vehicle which was not capital goods was not admissible. This was because definition of input service under Rule 2(l) of CENVAT Credit Rules, 2004 specifically excluded the same. Same is reproduced below for ready reference:

“(l) “input service” means,—

————

but excludes

(BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by—

(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or

(b) an insurance company in respect of a motor vehicle insured or reinsured by such person”

3. Hence in the pre-GST era CENVAT credit in respect of expenses incurred in relation to a motor car used by let us say Director of the Company for the purpose of business was not admissible. Whether the same position will continue or not in the GST era ? Let us analyze.

4. 16(1) of the Central Goods & Services Tax (“CGST”) Act, 2017 provides that every registered person is entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business. Sec. 17(5) of the said Act however blocks availability of input tax credit on certain goods or services. Sec. 17(5)(a) is relevant for our discussion and hence reproduced below:

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(a) motor vehicles and other conveyances except when they are used –

(i) for making the following taxable supplies, namely:—

(A) further supply of such vehicles or conveyances; or

(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;”

5. We are assuming that the motor vehicle in respect of which expenses have been incurred is not covered by any of the exclusions. This is because if the motor vehicle is covered by any of the exclusions (e.g. used for transportation of goods) and hence input tax credit in respect of such motor vehicle is admissible, there is no question of non-admissibility of input tax credit in respect of expenses related to such vehicle. Hence we shall be discussing the case where motor vehicle (e.g. car used by Director) is not admissible for input tax credit and expenses like insurance or repairs and maintenance have been incurred on such vehicle. Whether input tax credit of GST charged on such expenses can be claimed ?

6. Close reading of Sec. 17(5)(a) of the CGST Act, 2017 suggests that input tax credit “in respect of” motor vehicle is barred. Whether the phrase “in respect of” will also include expenses related to such motor vehicle ?

7. In context of laws other than taxation the phrase “in respect of” has been given widest meaning. As an example, Apex Court in the case of Union of India v. Vijay Chand Jain [1977] AIR 1302 (SC) has held that the words “in respect of” admit of a wide connotation and means “being connected with”. Similarly in the case of Tularam Relumlal v. State of Bombay [1954] AIR 496 (SC), Apex Court held that the words “in respect of” in their widest meaning means “relating to” or “with reference to”. Whether the same wide meaning will be attributable to the phrase appearing u/s 17(5)(a) ?

8. Answer seems to be no. The interpretation of the term ‘in respect of’ fell before the Apex court in the case of State of Madras vs M/s. Swastik Tobacco Factory [1966] AIR 1000 (SC). Case was with respect to taxation law. In this case the respondent had purchased raw tobacco and converted the same into chewing tobacco. Respondent had paid excise duty on purchase of raw tobacco. While ascertaining the turnover of sales of chewing tobacco for sales tax, respondent had claimed deduction of excise duty paid on purchase of raw tobacco under Rule 5(1)(i) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. Said rule is reproduced below for ready reference:

“Rule 5. (1) The tax or taxes under section 3 or 5 or 5A or the notification or notifications under section 6(1) shall be levied on the net turnover of the dealers. In determining the net turnover the amounts specified in the following clauses shall, subject to the condition specified therein, be deducted from the gross turnover of a dealer:

(i) the excise duty, if any, paid by the dealer to the Central Government in respect of the goods sold by him.

9. Question before the Hon. Supreme Court was whether the words ‘in respect of goods sold’ shall include the raw material used in manufacture of goods sold by the dealer. It was argued by the respondent that the words ‘in respect of’ meant ‘attributable’ and, therefore, the argument proceeded that the excise duty paid on the raw tobacco though it was not paid on the goods sold by the respondent was attributable to the said goods sold. Numerous English decisions were also cited to argue that the words ‘in respect of’ should be read widely. Reference was made to the decision of the House of Lords in the case of Inland Revenue Commissioners v. Courts & Co. in the context of payment of estate duty wherein the words ‘in respect of’ appearing in S. 5(2) of the Finance Act, 1894 (57 & 58 Vict. c. 30) was construed as implying some imprecise kind of nexus between the property and the estate duty. Another decision of the House of Lords in Asher v. Seaford Court Estates Ltd. was also referred wherein while construing the provisions of S. 2(3) of Increase of Rent and Mortgage Interest (Restrictions) Act, 1920 it was held that the expression ‘in respect of’ must be read as equivalent to ‘attributable to’. It was also submitted that the Privy Council in the case of Bicber Ltd. v. Commissioner of Income-tax [1962] 3 All ER 294 observed that the said words ‘in respect of’ could mean more than ‘consisting of’ or ‘namely’.

10. Supreme Court however held as under:

“6. Learned counsel for the respondent cited some English decisions in support of his contention that the expression “in respect of the goods” was very wide and that it took in the raw material out of which the goods were made.

7. The House of Lords in Inland Revenue Commissioners v. Coutts & Co.,2 in the context of payment of estate duty, construed the words “in respect of in section 5(2) of the finance act, 1894 (57 & 58 vict, c. 30) and observed that the phrase denoted some imprecise kind of nexus between the property and the estate duty. The House of Lord in Asher v. Seaford Court Estates Ltd. LR 1950 AC 608 in construing the provisions of section 2, sub-section (3) of increase of rent and mortgage interest (restrictions) act, 1920 (10 & 11 geo. 5, c. 17), held that the expression “in respect of” must be read as equivalent to “attributable”. The Privy Council in Bicher Ltd. v. CIT 1962 3 All ER 294 observed that the said words could mean more than “consisting of” or “namely”.

8. It is not necessary to refer to other decisions. It may be accepted that the said expression received a wide interpretation, having regard to the object of the provisions and the setting in which the said words appeared. On the other hand, Indian tax laws use the expression “in respect of” as synonymous with the expression “on”: see article 288 of the constitution of India; section 3 of the Indian income tax act, 1922; sections 3(2) and 3(5), second proviso, of the madras general sales tax act, 1939; section 3(1-a) of the central excise and salt act, 1944; and section 9 of the Kerala sales tax act. We should not be understood to have construed the said provisions, but only have referred to them to state the legislative practice. Consistent with the said practice, rule 5(l)(i) of the rules uses the same expression. When the said Rule says “excise duty paid in respect of the goods”, the excise duty referred to is the excise duty paid under Section 3(1), read with the Schedule, of the Central Excises and Salt Act, 1944 (1 of 1944). Under the said section, read with the Schedule, excise duty is levied on the goods described in the Schedule. Therefore, when rule 5(1)(i) of the rules refers to the duty paid in respect of the goods to the Central Government, it necessarily refers to the duty paid on the goods mentioned in the Schedule. As the duty exempted from the gross turnover is the duty so paid under the Central Act, read with the Schedule, the expression “in respect of” in the context can only mean excise duty paid on goods. In our view, the expression “in respect of the goods” in rule 5(1)(i) of the rules means only “on the goods”.

11. Apex Court thus observed that the phrase “in respect of” although of a wide import has been used in the context of tax laws in India as synonymous with the expression “on”. Hence wide meaning cannot be accorded to the said phrase and has to be understood in a limited sense for the word “on”. Whether the same reasoning will hold good under GST ?

12. Phrase “in respect of” appears 112 times in the CGST Act, 2017. Following prominent provisions may be referred as examples:

Sec. 9(4): The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Explanation to Sec. 11: For the purposes of this section, where an exemption in respect of any goods or services or both from the whole or part of the tax leviable thereon has been granted absolutely, the registered person supplying such goods or services or both shall not collect the tax, in excess of the effective rate, on such supply of goods or services or both.

Sec. 12(3) or Sec. 13(3): In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely:—

Sec. 14: Notwithstanding anything contained in section 12 or section 13, the time of supply, where there is a change in the rate of tax in respect of goods or services or both, shall be determined in the following manner, namely:––

Sec. 15(3): The value of the supply shall not include any discount which is given–– (a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

Sec. 16(2): Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

Sec. 16(4): A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

13. As one can observe from the above referred provisions that the phrase “in respect of” even under CGST Act, 2017 has been used as an alternative for the expression “on”. This is a common feature of drafting of Indian taxation laws. Hence the ratio of the Supreme Court decision will squarely apply while interpreting the phrase “in respect of” as appearing u/s 17(5)(a) of the CGST Act, 2017. Same has to be considered synonymous with word “on”.

14. Once we conclude that only input tax credit “on” motor vehicle is debarred we have no hesitation in concluding that input tax credit on expenses relating to motor vehicle will be allowed.

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6 responses to “All about ITC on Expenses Related to Motor Vehicle”

  1. Sanjay saini says:

    I have purchased a Tata tipper for transportation of boulder (stone)at road construction site. I have a work contract with the company for transportation and loading of boulders at site and rates in work contract are inclusive of GST. So can I claim ITC on Tata tipper I have purchased?

  2. CA Nitin Goel says:

    Hello Sir,

    There is an exception in section 17 which says that ITC shall be allowed in case vehicle is used for transportation of goods. In what sense is this written:
    – does it necessarily has to be a business of transportation;
    or ITC also allowed to a trader (eg wholesaler ) who is using vehicle (truck or tempo) to deliver his own goods.

  3. Tarunkumar D Trivedi says:

    Whether ITC for repair maintenance, insurance etc can be claimed in case of car used by partnership firm or proprietary concern or can be claimed in case of companies only?

  4. Abhaydesai says:

    Services like insurance or repairs & maintenance are not “on” motor vehicle but are “in relation to” motor vehicle. See Rule 2(l)(BA) of CCR, 2004. Further when you see the exceptions (e.g. “further supply of such vehicles or conveyances”) it becomes apparent that only purchase is covered). Going by your logic insurance companies will never be able to take ITC from re-insurance companies which is not the intention.

  5. Vishakha Kejriwal says:

    Input tax as defined under Section 2(62) of the CSGT Act includes tax on inward supply of both goods and services. Hence when Section 17(5)(a) states that input tax shall not bellowed on motor vehicles even input services on vehicles would be debarred.

    • Abhaydesai says:

      Services like insurance or repairs & maintenance are not “on” motor vehicle but are “in relation to” motor vehicle. See Rule 2(l)(BA) of CCR, 2004. Further when you see the exceptions (e.g. “further supply of such vehicles or conveyances”) it becomes apparent that only purchase is covered). Going by your logic insurance companies will never be able to take ITC from re-insurance companies which is not the intention.

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