The Authority for Advance Rulings, Telangana in the case of M/S. LANDMARK CARS EAST PRIVATE LIMITED vide  Case Number WBAAR 26 of 2023, Order number 01/WBAAR/2024-25 dated 04.04.2024, has held that the restriction of input tax credit as imposed in section 17(5)(a)(A) of the GST Act is not applicable on purchase of demo vehicles which are supplied by the applicant after the specified time for providing test drive facility. The outward supply of demo car would attract same rate of tax of its inward supply. Also, the amount received by the applicant towards reimbursement of “Loss on Sale of Demo Car” would constitute as supply, as the same is considered as supply of services  “agreeing to tolerate the act” of suffering loss, and regarded as consideration chargeable  @ 18% vide serial number 35 of Notification No. 11/2017-Central Tax I(Rate) dated 28.06.2017, as amended.

Facts of the case;- The Applicant is an authorised agent of Mercedes Benz (MB) for supply of cars, related spare parts and is also engaged in providing various services such as repairs, warranties, roadside assistance and servicing. It is responsible for facilitating the sales of Mercedes-Benz passenger vehicles, including the Mercedes-Benz EQ (Electric Cars).  The primary objective is to facilitate and support MB INDIA's direct sales to end-customers.

Issue:-  Whether the ITC charged and paid on inward supply of Demo cars, used for demonstration purpose to the potential customer interested in buying is eligible. 

Also, Whether amount received towards reimbursement of “Loss on Sale of Demo Car” constitute as supply.

Submissions of the Applicant:-  The Applicant submitted that they purchases demo vehicles to provide facilitation services to MB INDIA and such purchases are made in the course or furtherance of business. The applicant is therefore entitled to take credit of input tax on purchase of demo vehicles in terms of Section 16 of the CGST Act, 2017. 

The Applicant contended that though he has entered into an agreement to carry out the responsibility of brokering the sales of vehicles as an agent for which he receives commission from the principal, purchases of vehicles from its principal for providing demonstration/ test drive facility to the prospective buyers are made in its own account whereby rights of title to and ownership of the Demo vehicles vest with the applicant. The applicant, after receipt of the demo vehicles, records the same as purchase of inventory (Stock in Trade) in its books of accounts and when the cars are sold, they are removed from the inventory and entire sale proceeds are accounted for in Sales account.

Held: The AAR, Telangana ruled as held:

Admissibility of input tax credit on purchase of motor vehicles which are initially used by the applicant for demonstration purpose and thereafter supplied by him.

The AAR observed that the applicant maintains the stock of the demo vehicles for a specified period of time and thereafter supplies the same which may be made at a price lower than the purchase value of the said vehicle.  The provisions of the GST Act nowhere specifies that input tax credit shall not be available in respect of any outward supplies which is made at a price lower than its procurement value.

Further, the AAR observed provisions of Section 17(5)(a)(A), which restricts input tax credit in respect of motor vehicles, with a specific seating capacity, for transportation of persons except when they are used for further supply of such motor vehicles. It was noted that the word ‘such’ as used in the expression ‘further supply of such vehicles’ relates to the vehicle only that was purchased. The AAR opined that  the fact that the condition of a demo vehicle at the time of its further supply has undergone some deterioration does not detract from the reality that the vehicle when supplied by the applicant has ceased to be such vehicle that was purchased. The demo vehicles are purchased all along for further supply with the condition that they will be kept for a specific period of time. 

Therefore, restriction of input tax credit as imposed in section 17(5)(a)(A) of the GST Act is not applicable on purchase of demo vehicles which are supplied by the applicant after the specified time for providing test drive facility. Also, with regard to rate of tax of demo car, it was held that the outward supply of demo car would attract same rate of tax of its inward supply.

Amount received towards reimbursement of “Loss on Sale of Demo Car” would constitute as supply or not:

The AAR observed that in this case, the applicant has entered into an agreement with MB INDIA with a specific condition towards ‘Demo Car Loss Sharing” knowing very well that it may suffer a loss at the time of selling of demo vehicle since the vehicle would have undergone some deterioration while providing test drive facility to the prospective buyers. This compensation is paid as a result of the contract and therefore would qualify to be a ‘consideration’. 

The AAR ruled that the applicant has entered into the agreement to tolerate the act of suffering loss for a consideration. Undisputedly, the applicant has chosen to tolerate the act for a consideration as per the agreement and has agreed to tolerate the act in the course or furtherance of the business. Therefore, it is held that the applicant receives consideration in the form of compensation from MB INDIA against supply of services of agreeing to tolerate the act of suffering loss, and regarded as consideration chargeable  @ 18% vide serial number 35 of Notification No. 11/2017-Central Tax I(Rate) dated 28.06.2017, as amended.