No ITC on Demo vehicles purchased even though in the course of business

The Hon’ble AAR Madhya Pradesh in M/s. Khatwani Sales and Services LLP [Order No. 13/2020 dated July 23, 2020] held that since the demo vehicles do not comply to any of the conditions prescribed in Clause (A), (B) and (C) of Section 17(5)(a) of the Central Goods and Service Tax Act, 2017 ('CGST Act'), therefore no Input Tax Credit ('ITC') can be claimed on the demo vehicles purchased by the authorized dealer of KIA.

Facts

M/s. Khatwani Sales and Services LLP ('Applicant') are authorized dealer of KIA for sales and services of vehicles. The Applicant purchases the vehicles from the supplier against tax invoices after paying tax and capitalizes the demo vehicles in the books of accounts.

Applicants contentions

• The demo vehicles are used for imparting training about the features of the car andtraining on driving such vehicles to the prospective buyer and same would be used for test drive of the similar vehicle model which will generate taxable revenue and helps in furtherance of business raising sales of the vehicles.
• That ITC should be allowed as it satisfies the criteria mentioned in Clause A of Section 17(5)(a) of the CGST Act, as demo vehicles are used for furtherance of business by increasing the salesof similar vehicles and of Clause C of Section 17(5)(a) ibid as demo vehicles are used for imparting training about the features of the car, training on driving such vehicles to the prospective buyer and used for test drive after which sales can be generated easily.
• The Applicant cited the following advance rulings which endorses the view that ITC is allowed on capital goods being demo cars:
• M/s. A.M. Motors (AAR Kerala) [Order No. KER/10/28 dated September 26, 2018]
• M/s. Chowgule Industries Private Limited (AAR Goa) [Order No. GOA/GAAR/07 of 2018-19/4796 dated March 29, 2019]
• M/s. Chowgule Industries Private Limited (AAR Maharashtra) [Advance Ruling No. GST-ARA-18/2019-20/B-121 decided on December 26, 2019]
• That the vehicles used for demo purpose are sold in subsequent year at Written Down Value (WDV). It was also submitted that they will abide with the provisions of Section 18(6) of CGST Act at the time of sale of the demo vehicles. It was declared that they will not claim depreciation on tax component of the capitalized demo vehicles.

Issue

Whether ITC is available to the Applicant on purchase of demo vehicles?

Held

The Hon’ble AAR Madhya Pradesh in Case No. 02/2020 Order No. 13/2020 order dated July 23, 2020 has held that:

• As per Section 17(5)(a) of the CGST Act, ITC shall be available in respect of motor vehicles which are further supplied as such, used for transportation of passengers or which are used for imparting training of driving of such vehicles.
• It cannot be said that the demo vehiclesis for further supply by subsequent sale of demo vehicle after one or two years. The sale of demo vehiclein the subsequent year on which depreciation has been charged is to be treated as a sale of used second-hand vehicle andnot sale of a new vehicle.
• Found that, demo vehicles used for demo andtrial to the customers are not covered in the exception of Section 17(5)(a) of the CGST Act:
• Clause (A) i.e. for further supply of such vehicle as such.
• Clause (B) i.e. for transportation of passengers.
• Clause (C) i.e. for imparting training on driving of such vehicles.

Hence, though the Demo vehicles are for furtherance of business of the Applicant but they are not eligible for ITC in view of provisions of Section 17(5)(a) of CGST Act.

• Further, the eligibility of ITC on demo vehicles cannot be decided on the basis of their capitalization or payment of GST at the time of their sale in the subsequent year.
• Held that, there is clear provision in law for admissibility of ITC on motor vehicles in any of the three conditions prescribed in Clause (A), (B) and(C) of Section 17(5)(a) ofthe CGST Act. Since the Applicant does not qualifies any of the above conditions hence, he is not eligible for ITC on demo vehicles in view of provisions of Section 17(5)(a) ibid.

Our comments

It is to be noted that in the cases M/s. Chowgule Industries Private Limited (AAR Maharashtra) (supra) wherein it was ruled that sincethe 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. Chowgule Industries Private Limited (AAR Goa) andM/s. A.M. Motors (AAR Kerala) (supra) tohold that 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 Section 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 Section 17(5)(a) of the CGST Act.

Hence, we are of the view 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.

Relevant Provisions

Section 17(5)(a) of the CGST Act

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

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:-

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;'