GST ITC on Demo vehicle can't be claimed if not sold further! - Logitax

GST ITC on Demo vehicle can’t be claimed if not sold further!

In the automobile industry, it is very common to have demo cars which are used for demonstration and test drive purpose. Can ITC be taken on such demo cars?

Case Details : GST ITC on Demo vehicle can't be claimed if not sold further!

What Happened Exactly :

  1. The Applicant is an authorized car dealer of MSIL for supply of four wheeler vehicles, spares and for servicing of vehicles.
  2. It is engaged in the business of supply of automobiles having dealerships of MSIL, Bajaj, KTM, & Chetak Technology Limited.
  3. It also trades in preowned cars.
  4. As a part of its day-to-day business, the Applicant requires certain demo vehicles for demonstration purpose in the showrooms.
  5. These demonstration vehicles are procured by the Applicant from MSIL against a tax invoice. MSIL provides these vehicles at a discount on the basic price of vehicle.
  6. These vehicles are capitalized in the books of accounts as Fixed Assets.
  7. The demo cars are used for demonstration and test drives for a period of two years or 40,000 KMs whichever is earlier.
  8. After its use as a demo vehicle, these vehicles are sold as second-hand vehicles to customers, basis the type of customer i.e., either B2B or B2C.
  9. Presently, the company does not avail Input Tax Credit (ITC) of the said demonstration vehicles during the procurement from MSIL.
  10. At the time of sale to customers as a used motor vehicle, these vehicles are taxed wherein value is determined on the margin method i.e. in case of registered persons who has claimed depreciation under Section 32 of the Income Tax Act, 1961 on the said goods, the value that represents the margin of the supplier shall be difference between the consideration received for the supply of such goods and the depreciated value of such goods on the date of supply.
  11. 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.
  12. Therefore, the applicant filed advance ruling application to confirm the same.

Court's Decision :

  1. Sub-section 5 of Section 17 of CGST Act, 2017 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.
  2. 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.
  3. 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.
  4. Applicant is entitled to avail the input tax credit charged on inward supply of motor vehicle which are used for demonstration purpose, if the applicant is making further supply of such vehicle.
  5. If the applicant is retaining the vehicle for his workshop as replacement vehicle as mentioned in the sales policy of MSIL, 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.28.09.2022 w.e.f. 01.10.2022 .

The information provided in this presentation does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This presentation is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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