The Telangana Authority for Advance Rulings (TAAR) in the case of M/s. Sai Service Pvt. Ltd. vide No.- A.R. Com/24/2022 TSAAR Order No. 13/2023 dated 01.08.2023, held that input tax credit charged on inward supply of motor vehicle which are used for demonstration purpose in the course of business of supply of motor vehicle would be entitled as input tax credit only when the applicant is making further supply of such vehicle. Also, ITC cannot be availed on test-drive vehicles when retained in a workshop as a replacement vehicle.
In the present case, the Applicant is engaged in the business of supply of automobiles. Further, the Applicant is also involved in providing servicing, repair, related auxiliary services with respect to motor vehicles. It also trades in preowned cars. For the purpose of business, certain demo vehicles for demonstration purposes are used in the showrooms. These vehicles are used for providing test drives to its potential customers, in order for them to understand the look and feel of the vehicle.
The Applicant sought advance ruling, as to whether they are entitled to avail the input tax credit charged on inward supply of motor vehicle which are used for demonstration purpose in the course of business of supply of motor vehicle as input tax credit on capital goods. It is submitted that the applicant has capitalized such motor vehicles in their books of account as demo vehicles.
The TAAR noted the provisions of Section 17(5) of the CGST Act, 2017, according to which, it is a general rule that the purchase of motor vehicles for transportation of persons is not eligible to claim Input Tax Credit(ITC) by such purchaser. However. The aforesaid also provides certain exception to this rule. The Exception relevant to the present proceedings is “further supply of such motor vehicles”.
The word ‘supply’ as defined under Section 7 of the CGST Act, 2017 would include sale, lease, rental etc., Thus the exception is made not only for 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.,
Therefore, 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 CGST Act, 2017. For example supply of cars for lease / rent etc., can not be made without them being capitalised in the books of such supplier.
Further, the TAAR observed that the availability of ITC depends on the occurrence of a future event, i.e., whether he retains the vehicle in his workshop as a replacement vehicle or sells such vehicles.
Accordingly, the TAAR in this case held as under:
- If the applicant is making further supply of such vehicle is eligible for the ITC claimed
- If the applicant is retaining the vehicle for his workshop as replacement vehicle as mentioned in the sales policy of vendor, he shall not be eligible for ITC as there is no further supply at his hands. Therefore, the ITC claimed by him has to be repaid in cash in view of the amended section 16(4) notified vide notification No. 18/2022, Central Tax dt.2 8.09.2022 w.e.f: 01.10.2022.
