ITC Can’t Be Availed On Test Drive Vehicle When Retained In Workshop As Replacement Vehicle: AAR

The Telangana Authority of Advance Ruling (AAR) has held that Input Tax Credit (ITC) cannot be availed on test-drive vehicles when retained in a workshop as a replacement vehicle.

The bench of S.V. Kasi Visweswara Rao and Sahil Inamdar have observed that the availability of ITC depends on the occurrence of a future event, i.e., whether he retains the vehicle in his workshop as a replacement vehicle or sells vehicles. If the vehicle is further supplied, then ITC can be claimed.

The applicant is in the business of supplying automobiles through dealerships of MSIL, Bajaj, KTM, and Chetak Technology Limited. The Applicant is also involved in providing servicing, repair, and related auxiliary services with respect to motor vehicles. It also trades in pre-owned cars.

As a part of its day-to-day business, the Applicant requires certain demo vehicles for demonstration purposes in the showrooms. Every model is registered, unlike normal vehicles. Further, this model of demo car is used for demonstration for a period of two years or 40,000 KM, whichever is earlier. The vehicles are used for providing test drives to potential customers in order for them to understand the look and feel of the vehicle.

Basically, due to the changing demands of the customers and to adhere to their requirements, this is an essential part of sales promotion activity that facilitates the sale of cars. It is also an important element for executing sales.

The applicant sought an advance ruling on the issue of whether the applicant is entitled to avail of the ITC charged on the inward supply of motor vehicles that are used for demonstration purposes in the course of business of the supply of motor vehicles as an input tax credit on capital goods.

The AAR noted that 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 the CGST Act, 2017. For example, the supply of cars for lease, rent, etc. cannot be made without them being capitalized in the books of such suppliers.

"Whether the applicant is eligible for ITC depends on the occurrence of a future event, i.e., whether he retains the vehicle in his workshop as a replacement vehicle or sells such vehicles," the AAR said.

The AAR ruled that if the applicant is making further supplies of a vehicle, they are eligible for the ITC claim.

The AAR held that if the applicant is retaining the vehicle for his workshop as a 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.

Applicant’s Name: Sai Service Pvt. Limited

Date: 01.08.2023

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