As we all know that procurement of vehicles for demo is common practice in the automobile dealers industry, since the said vehicles are used for promotional purpose including test drive etc. in order to attract buyers, However, unlike purchase of other vehicles, the intention or objective behind the purchase of demo vehicles is not to sell the same but instead it is mainly to use it for the various business promotion / marketing purposes. Needless to say, that once the above purpose is achieved i.e. usage for approximately two years or about 40,000 Kms, the dealer would eventually sell such demo vehicle in the open market at its current market value.
Since the inception of GST, the issue of eligibility of credit on demo vehicles has been a matter of dispute, which mainly stems from the fact that credit in respect if the motor vehicles is available only when it is used for making the further supply of such motor vehicles.
While one may doubt this restriction on the premise that all the vehicles including Demo vehicles would be eventually sold and also since the demo vehicles are used for business promotion, thereby having a clear nexus with the outward supply and therefore the restriction of availing credit placed in section 17(5) must not be applicable to the automobile dealers.
However, there is another view being expressed that if the Demo vehicles are expensed off instead of capitalizing the same, then the credit becomes admissible. While reserving our view on this proposition, reference can be placed on the advance ruling issued in this regard as under:
In Chowgule Industries (P.) Ltd. (2019) 107 taxmann.in 293 (AAR, Goa), it was held that
- Demo vehicles are used for promotion of sale by providing trial run to customer and therefore it can be considered as a capital asset as per section 2(19) of the CGST Act, 2017 which states that “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
- Further the Authority of Advance ruling held that these demo vehicles are an essential part of marketing and sales promotion to facilitate supply of cars and therefore ITC on the same could also be availed as it is used for furtherance of business which is also in line with section 16(1) of the CGST Act, 2017, which states that every registered person shall be 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.
- Further, ITC on the same is also not restricted under Sec 17(5)(a) of CGST Act, 2017 which allows ITC on Motor vehicles if it is used for further supply of such vehicles or conveyances and demo vehicles are used by dealers to train the prospective buyers about the features of the car and how to use them and is also used for driving including the test drives.
Although, the view rendered in above referred advance ruling is in favour of the aseesee that the credit in respect of the demo vehicles should be available to the automobile dealers even if the same is capitalized in the books of accounts. However, one must note that this view would be highly disputable and litigative in as much as that the motor vehicles are used for marketing/ promotional purposes in many other industries i.e. they are used for sales & marketing personnel for travel in the course of promotional activities which also has a direct nexus with the outward supply in other industry as well.
Further, the wordings employed in section 17(5) does not give any such relaxation as to availability of credit if the vehicle is used for marketing/ selling purpose or if it has any direct nexus with the outward supply. Therefore, the ruling expressed in the above referred AAR seems to have been given beyond the literal interpretation of the statutory provisions of the act.
Caution to be placed if any person wishes to apply the ratio of this advance ruling for their business, as it is a settled principle that the AAR holds a binding precedent only on the person who has obtained the same and the department can very well take a contrary view.
One may surely argue that the motor vehicle is eventually supplied and therefore the condition that the vehicle must be used for providing the further outward supply is fulfilled and on this premise the credit must not be denied. On this count, it must be noted that if such a liberal interpretation is given to this statement, then each business where an assessee purchases the motor vehicle would sell the same after using for some time and therefore why only automobile dealers industry, the credit on motor vehicle should be eligible for all the industries.
One must refer to an important doctrine of ’Sententia Legis’ which would mean the ‘mens’ or ‘intention’ i.e. a statute must be construed or read according to the intent or the objective for which it is brought. In other words, the interpretation must be given effect based on the text and the context where the text is the texture and it is the context which gives the colour or meaning to the basis of interpretation.
It is to be noted that the entry of placing restriction on motor vehicles is in the context of blocking the credit on motor vehicles with an intent to deny such credits. Further, the interpretation of its restriction on the similarly placed wordings in the erstwhile Cenvat credit rules, 2004 has a settled view on non-availability of cenvat credit on the motor vehicles unless when it was intended to be sold.
It must also be noted that merely changing the accounting methodology and expensing the cost of such vehicles instead of capitalizing the same would not change the position of the law as long as the main intention of procurement was not for sale.
Apart from the above legal interpretations on eligibility or otherwise of credit, one must note that practically either ways the situation remains more or less the same as the assessee who has not availed the credit can have an option to pay taxes pay tax on the margin treating it as a used car. The same query was also discussed in the FAQ’s issued by CBIC related to supply of old and used cars.
“…Whether a car dealer can avail the concessional rate benefit for demo cars?
Ans: The Demo car is used for the purpose of test drive and sold at a later date. It could be considered as “used/old car”. Therefore, the dealer can avail the rate benefits which are applicable for the supply of old and used cars, subject to conditions mentioned therein…”
Before Parting…
Therefore, considering the above propositions it can be concluded that Demo Vehicles can be termed as “Used Vehicles” and hence a benefit of Concessional rates i.e. margin scheme can be availed. However, it is important to note that in order to avail the concessional rate benefits i.e. margin scheme on sale of Demo car, it is necessary that ITC has not been availed on the same at the time of purchase. From the above, one may surely take a considered view of opting a route of paying taxes on the margin scheme (which is more or less same as an impact) instead of inviting litigation in the guise of such unreasoned rulings, this is more so when we know the ‘just and wisdom’ of the authorities issuing these “advanced” rulings, and thus it is ok to be “penny wise than being a pound foolish” or else the monetization made out of claim of the credits may soon have to be “Demo”netized.
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