OCTOBER 30, 2024

By Vijay Kumar

SAI Service Private Limited, Goa, is in the business of sale of automobiles having a dealership of various automobile brands. The company also provides servicing, repair, and related auxiliary services with respect to motor vehicles.

They had a doubt:

Whether they are entitled to avail the Input Tax charged on inward supply of motor vehicles which are used for demonstration purpose in the course of business of supply of motor vehicle as input tax credit on capital goods.

Generally, when you have such doubts, you have three options:

1. Don't avail the credit and be happy;

2. Avail the credit and face consequences - Show Cause Notice, hearing, adjudication, demand, interest, penalty, appeals and so on;

3. Ask the Authority for Advance Ruling (AAR)and get an unfavourable order which is binding on you, against which you can of course appeal to the Appellate Authority for Advance Ruling (AAAR) -2024-TIOL-02-AAAR-GST.

In simpler terms,

1. You can beat yourself;

2. You can ask the GST Department to beat you;

3. You can carry a cane to the AAR and ask it to beat you with it.

In this case, the taxpayer chose to apply to the AAR for an Advance Ruling. Maybe it was emboldened by the fact that in an earlier case of Chowgule Industries - 2019-TIOL-225-AAR-GST, the Goa Authority for Advance Ruling (AAR) by an order dated 26 03 2019, ruled,

The Input Tax Credit on the Motor Vehicle purchased for demonstration purpose can be availed as Input Tax Credit on Capital Goods and set off against output tax payable under GST.

After all there is precedence. But in this case, the taxpayer was in for a big disappointment. In spite of its earlier ruling, this Bench of the AAR ruled that: (Goa Advance Ruling No. GOA/GAAR/04 of 2022-23) - 2024-TIOL-24-AAR-GST

The Applicant is NOT 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. As by capitalising the motor car it is treated as asset for use in the business and therefore such motor car cannot be said to held for further supply.

Our automobile dealer appealed to the Goa Appellate Authority for Advance Ruling (AAAR). It was submitted before the Appellate Authority (AAAR) that:

1. The Authority for Advance Ruling failed to consider the submissions wherein the Appellant relied on Advance Ruling pronounced by the Goa Authority for Advance Ruling in the case of M/s Chowgule Industries Private Limited, of March 2019 - 2019-TIOL-225-AAR-GST, wherein the authority held in favour of the applicant that the input tax credit on the motor vehicle purchased for demonstration purpose can be availed as input tax credit on capital goods and set off against output tax payable under GST.

2. The said order has attained finality as the tax authorities have not preferred an appeal against the same before the Appellate Authority for Advance Ruling.

3. Both the cases were similar. In both the cases, demo vehicles were procured by the companies from the supplier on payment of taxes, and subsequently capitalized as fixed assets in their respective books of accounts. These demo vehicles are indispensable tools for promotion of sale as they are used for providing test drives to the customers.

4. The AAR has disregarded the principle that its rulings are binding in subsequent cases that involve the same question of law or fact.

5. It is imperative for legal discipline to remove uncertainty around taxpayers, and for this reason, the AAR is bound by its earlier ruling unless there is a change in law or facts, and it cannot overrule its earlier ruling without even considering the submission.

Is the AAR bound by its own decision? What happens if Members are transferred and new Members inducted? Are they bound by the decision of their predecessors? Even if the same Bench continues are they bound by previous decisions?

There used to be a reviewing authority who would give two contradictory orders on the same issue in respect of two parties and then use any of the two as precedent in subsequent cases, as it suited his satisfaction.

The Appellate Authority for Advance Ruling (AAAR) in GST is a very high authority consisting of two topmost officers of the rank of Chief Commissioners. In this case, the high authority observed:

1. A favourable ruling in case of M/s. Chowgule Industries Pvt. Ltd. was delivered by AAR Bench consisting of ex members.

2. Further with respect to favourable ruling in case of M/s Chowgule Industries, we note that as per section 103(1) the advance ruling pronounced by the authority shall be binding only on the applicant who had sought it in respect of any matter listed in section 97(2). Therefore, the said ruling shall not be applicable by De Facto in case of the present taxpayer.

3. Thus, we note that in the matter of allowing the ITC on demo car there are divergent views given by AAR authorities across the country.

The Appellate Authority for Advance Ruling upheld the ruling passed by the AAR and ordered on 15 04 2024:

The Applicant is NOT entitled to avail the Input Tax Credit charged on inward supply of motor vehicles which are used for demonstration purpose in the course of business of supply of motor vehicle as input tax credit on capital goods. As by capitalising the motor car it is treated as asset for use in the business and therefore such motor car cannot be said to be held for further supply.

While there is no appeal against the orders of the Appellate Authority for Advance Ruling, there can still be a writ petition in the High Court. And that is what exactly what our car dealer did. He drove his car, nay case to the High Court at Goa. While they were experts in selling and servicing all kinds of wheeled wonders, the GST drive must have been a new experience.

So, we have different Authorities for Advance Ruling giving different Rulings and the Goa Appellate Authority declaring that the Ruling of an authority consisting of two members is not binding on the same authority with two other members.

While this matter was pending in the high Court, the CBIC - Board came up with a detailed clarification on the issue in Circular No. 231/25/2024-GST, dated 10th September 2024. The good Board clarified on the doubts:

1. Availability of input tax credit on demo vehicles,

2. Availability of input tax credit on demo vehicles in cases where such vehicles are capitalized in the books of account by the authorized dealers.

Board observed:

The demo vehicles are the vehicles which the authorised dealers for sale of motor vehicles are required to maintain at their sales outlet as per dealership norms and are used for providing trial run and for demonstrating features of the vehicle to the potential buyers. These vehicles are purchased by the authorised dealers from the vehicle manufacturers against tax invoices and are typically reflected as capital assets in books of account of the authorized dealers. As per dealership norms, these vehicles may be required to be held by the authorized dealers as demo vehicle for certain mandatory period and may, thereafter, be sold by the dealer at a written down value and applicable tax is payable at that point of time.

In order to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby clarifies the above issues:

1. input tax credit in respect of demo vehicles is not blocked under clause (a) "of section 17(5) of CGST Act, as it is excluded from such blockage in terms of sub-clause (A) of the said clause.

2. Accordingly, availability of input tax credit on demo vehicles is not affected by way of capitalization of such vehicles in the books of account of the authorized dealers, subject to other provisions of the Act.

Now, we have a Ruling from the Authority for Advance Ruling confirmed by the Appellate Authority for Advance Ruling and a clarification from the Board. Which one would have more legal weight?

The Goa Bench of the Bombay High Court answered this question last week in the writ petition filed by our car dealer. The High Court observed, (WRIT PETITION NO.622 OF 2024) - 2024-TIOL-1860-HC-MUM-GST

Post the impugned order, the Central Board of Indirect Taxes and Customs GST Policy Wing, Department of Revenue, Ministry of Finance, Government of India, has issued a circular dated 10.09.2024 on the subject of clarification on availability of input tax credit in respect of demo vehicles. This circular dated 10.09.2024, therefore, will prevail over the impugned order. There is no dispute that the petitioner would be entitled for benefit of the input tax credit on demo vehicles in terms of the said circular dated 10.09.2024.

What will happen in cases where the Authority for Advance Ruling have given rulings against the taxpayers and the taxpayers have not approached the High Courts? Will they get the benefit of the circular by the benign Board?

Remember GST is good and simple - until it isn't!

Until next week