Motor Vehicle – blocking is from the perspective of design or usage

This Article has been published in the Chamber's Journal Oct'20 Edition

The credits mentioned in section 17(5) of the CGST Act, 2017 are blocked and would not be eligible to the assessee even if used by him for business. All credits other than these, if used for making taxable supplies, would be eligible, provided the other conditions in the law are also satisfied. Hence it is important to understand the scope and ambit of these blocked credits to ensure that the assessee does not lose availing those credits that are otherwise not blocked. Also, at the same time, one needs to ensure that he does not avail any credit which is otherwise blocked, in which case the consequences of interest and penalty will be huge. This is important in cases where the assessee could have otherwise included the ineligible credit in his cost and recovered from his customers.

Motor vehicles related credit

In this article we would be having a closer look at the blocked credit mentioned in clause (a) of the said provision, which presently reads as under:

“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;”

It can be deduced from this provision that a vehicle which is for transportation of goods would be eligible for credit. It is only in cases of vehicles that are for transportation of persons with the stated seating capacity, the credit is blocked unless they are used for the above stated 3 purposes.

However, prior to 1^st Feb ’19 the same provision read as below:

"(a) motor vehicles and other conveyances except when they are used––

(i) for making the following taxable supplies, namely:-

(A) further supply of such vehicles or conveyances ; or

(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

As per the above provision the vehicles that are used for transportation of goods are eligible for credit. All other vehicles would be eligible for credit only if they are used for the above stated purposes.

Both the above versions of the provision seem to be almost conveying the same meaning. Then what was the need for bringing about a change in the provision? Was it only to give relaxation of credit for vehicles with seating capacity of 13 persons or more? Maybe not.

From the above, the following striking differences exist between the 2 provisions

What can be seen is that prior to the amendment, any vehicle that was used for transportation of goods, the credit would have been eligible. In case a Mercedes was used for transporting gold jewels, credit would have been eligible since it is used to transport goods i.e. jewels. Further, in the case of Srinivasa Transports 2020 40 GSTL 334, the Hyderabad Tribunal held that CENVAT credit would be eligible in respect of the vehicle as it is used for cargo handling services since it is not mentioned in the law that the vehicle has to be used exclusively for providing cargo handling services and thereby it would be sufficient even if it is partly used for it. Considering this proposition, it can be said that credit on Mercedes would be eligible as it is used for transportation of goods, though not exclusively.

However, post amendment we will have to examine if the same will apply or not. This is for the reason that the phrase reads as ‘motor vehicles for transportation….’. The word ‘used’ is missing. In such a case whether it has to be considered to be ‘used for’ or ‘meant for’.

We are all aware that while interpreting the statute no words should be added or deleted as was held in the case of Rohitash Kumar & Ors vs Om Prakash Sharma & Ors on 6 November, 2012 (SC). So, would it be right to add ‘used’ in the provision from 1^st Feb ’19, to state that the credit of Mercedes would be eligible since it is not used only for transportation of persons but is also used for transportation of goods? Maybe not.

Since there is an ambiguity, let us have a look at the provision further to see how it can be interpreted. In the provision, the following are relevant:

The restriction is not applicable to vehicles

1. Having approved seating capacity of not more than 13 persons,
2. Those that are further supplied, or
3. Those that are used for imparting training on driving such motor vehicles.

From the above clauses it can be seen that in case we interpret the word ‘for transportation of persons…’ as ‘used for transportation of persons….’ It would mean that the credit would be restricted only if the vehicle is actually used for transportation of persons (<=13 seater) and not in a case where a passenger vehicle is used for other purposes, say demo purpose, training purpose, testing, further selling, etc.

In such a case the existence of clauses ‘b’ and ‘c’ mentioned above would make no sense for the reason that, if the vehicle is intended for further supply (i.e. a dealer of motor vehicles) or is used for imparting training, then it would not be actually used by the supplier (i.e. dealer/trainer) for transporting persons to be eligible for credit?

Further, the phrase ‘approved seating capacity’ would be relevant only in case of a vehicle that is meant for transporting persons. It would not be relevant for other kinds of vehicle.

Considering the above discussion, it can be fairly concluded that in the above referred provision, the credit is blocked in case of a vehicle which is meant for transportation of persons in order to make sense out of the provision.

If that is the case then any passenger vehicle, even if used for transporting goods, credit would not be available from 1^st Feb ’19, which would have been available before this date as the provision earlier allowed credit in respect of a vehicles used for transportation of goods.

From the above discussion it can be seen that in cases where the statute is not very clear and when more than one interpretations are possible, it would be relevant to harmoniously interpret the law considering the other provisions or the intent behind the said provision.

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