No ITC available on test drive vehicles when retained as replacement vehicles

The AAR, Telangana, in M/s. Sai Service Pvt. Limited[TSAAR order no. 13 of 2023 dated August 01, 2023] ruled that, Input Tax Credit ("ITC") cannot be availed on test-drive vehicles when retained in a workshop as a replacement vehicle.

Facts

M/s. Sai Service Pvt. Limited ("the Applicant") is a dealer of MSIL, Bajaj, KTM, & Chetak Technology Limited and trades in pre-owned cars.

The Applicant is also involved in providing servicing, repair, and related auxiliary services with respect to motor vehicles. 

As a part of its day-to-day business, the Applicant requires certain demo vehicles for demonstration purposes in the showroom and every model is registered, unlike normal vehicles. Further, the model of demo cars are used for demonstration for a period of two years or 40,000 KMs, whichever is earlier. The vehicles will be used for providing test drives to potential customers to understand the look and feel of the vehicle. Basically, due to the changing demands of the customers and to adhere to their requirements, this works as an essential part of sales promotion activity that facilitates the sale of cars. 

As per the dealership norms with Company, the Applicant is required to procure these vehicles at base model level (per fuel type) up to a maximum of two units per showroom and these demonstration vehicles are procured by the Applicant from the Company against a tax invoice. The Company provides these vehicles at a discount on the basic price of the vehicle (post-launch price in case of a new model/variant) as per the Company’s policy.

After the Applicant uses such demo vehicle, these vehicles are sold as second-hand vehicles to customers, basis the type of customer, i.e., either B2B or B2C. The Applicant further contended that, the Applicant does not avail ITC of the said demonstration vehicles during the procurement from the Company. 

At the time of sale to customers as a used motor vehicle, these vehicles are taxed in accordance with Notification No. 08/2018 - Central Tax (Rate) dated January 25, 2018 (margin scheme) wherein the value is determined on the margin method i.e., in case of registered persons who have claimed depreciation under Section 32 of the Income Tax Act on the said goods.

The Applicant intends to avail the ITC on the procurement of such vehicles used for demonstration purposes and will not be availing the benefit under the above-mentioned notification at the time of sale of such vehicles, i.e., the Applicant will pay the applicable taxes on sale value at the point of sale. 

Issue

Whether the Applicant is entitled to avail ITC of inward supply of motor vehicles that are used for demonstration purposes?

Held

The AAR, Telangana, in TSAAR order no. 13 of 2023 held as under:

• Noted that, Section 17(5) of the Central Goods and Services Tax Act, 2017 ("the CGST Act") restricts availment of ITC on motor vehicles purchased by a tax payer even though they may be used in the course of furtherance of business. However, this restriction is subjected to certain exceptions based on the purpose of usage.
• Stated that, to understand the exceptions reference is made to ‘Principles of statutory interpretation’ by Justice G.P Singh "Exception is intended to restrain the enacting clause to particular cases". Therefore, the particular case which is relevant to the present proceedings is "further supply of such motor vehicles".
• Further noted that, the word ‘supply’ as defined under Section 7 of the CGST Act which includes sale, lease, rental, etc. Thus, the exception is made not only for the sale of motor vehicles but for the purpose of lease, rent, etc., wherein there is no immediate transfer of property in goods and such motor vehicle may be capitalized in the books of the purchaser in case of an intention to lease, rent etc.
• Hence, capitalizing the motor vehicle purchased does not make the tax paid on their purchases ineligible for ITC if there is a further supply of such motor vehicles within the meaning of Section 7 of the CGST Act. 
• Opined that, whether the applicant is eligible for ITC depends on occurrence of a future even i.e., either the retains the vehicle in his work shop as a replacement vehicle or sells such vehicles.
• Eligible for claiming ITC- If the Applicant is making further supply of such vehicle.
• Not eligible for claiming ITC- if the Applicant is retaining the vehicle for his workshop as replacement vehicle as mentioned in the sales policy Company.