ITC on Demo Vehicles

Demo vehicles are the vehicles that are usually purchased by the dealers from the manufacturers of the vehicles for the purpose of providing trial run and for demonstrating features of the vehicle to their customers/buyers. Firstly, the manufacture of the vehicle sells the vehicle to their dealers against tax invoice and the dealers use such vehicles for demonstration purpose and thereafter sold such vehicles by paying applicable tax at that point of time. In this respect there is one common question that generally arises is that whether such dealer would be eligible for claim the Input Tax Credit on inward supply of motor vehicles which are used for demonstration purpose in the course of business of supply of motor vehicle. In this article we are going to analyse the provisions of GST in this regard.

Under CGST Act 2017 there are section 16 & 17 and relevant rules which cover the provisions  relating to input tax credit. Section 16 contains the eligibility and conditions for taking ITC, as per section 16(1) of CGST Act 2017 the input tax credit would be available in respect of any supply of goods or services or both which are used or intended to be used in the course or furtherance of business. Further section 16(2) contains the conditions for availing ITC.  Similarly, section 17 contains the provisions relating to apportionment of credit and blocked credit.

As per section 17(5)(a) of CGST Act 2017, the input tax credit would not be available in respect of 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;
(A) further supply of such motor vehicles; or
(B) transportation of passengers; or
(C) imparting training on driving such motor vehicles;

Accordingly, from the above it is clear that the ITC is blocked in respect of motor vehicles having seating capacity of not more than 13 persons used for transportation of persons, subject to above three exceptions.

In respect of ITC of demo vehicles purchased by dealer from the manufacturer, as the demo vehicles are used by authorised dealers to provide trial run and to demonstrate features of the vehicle to their buyers, hence it is clear that demo vehicles cannot be said to be used by the authorised dealer for providing taxable supply of transportation of passengers or imparting training on driving such motor vehicles. Therefore, demo vehicles are not covered in the exclusions specified in sub-clauses (B) and (C) of clause (a) of section 17(5) of CGST Act.

Accordingly, for availability of ITC in respect of demo vehicles, we have to check whether or not the demo vehicles in question can be said to be used for making "further supply of such motor vehicles", as specified in the sub-clause (A) of the clause (a) of section 17(5) of CGST Act.

In this regard it is important to note that the main purpose of demo vehicle is to show the features and specifications of the vehicle and to use such vehicles for the purpose of test drive by the customer. In other words, the demo vehicles would be used to attract the attention of the customer by showing them the features of vehicle. In other words such demo vehicles have a direct nexus with the sale of new vehicles by the dealer.  If the customer likes the feature & specification of vehicle which has been used for the purpose of demonstration, only then he will buy that type of vehicle. Hence such demo vehicles would be used for promoting the sale of that types of vehicles. Accordingly, they can be considered to be used by the dealer for making further supply of such motor vehicles and it would be covered under sub-clause (A) of the clause (a) of section 17(5) of CGST Act and input tax credit would be available on the same.

On the similar issue the West Bengal Authority for advance ruling in case of M/s. Landmark Cars East Private Limited [2024(04)LCX0119(AAR)] also held that the applicant is entitled to claim ITC charged and paid on inward supply of car which are used for demonstration purpose.

Similarly, the Kerala Authority for advance ruling in case of M/s. Sai Service Pvt. Limited [2024(01)LCX0518(AAR)] also held that applicant are entitled to avail ITC on inward supply of motor vehicles which are used for demonstration purpose.

Moreover, the 54th GST council meeting which was held on 9th September 2024 has also addressed the same issue regarding availability of Input Tax Credit on demo vehicles by the dealers of the vehicle manufacturers. In the said meeting it was recommended that to remove ambiguity and legal disputes the clarifications would be given through issuance of circulars. Accordingly, in view of the recommendations of 54th GST council meeting, the CBIC has issued a Circular No. 231/25/2024 on the same matter, wherein it was clarified that as demo vehicles are used by authorized dealers to provide trial run and to demonstrate features of the vehicle to potential buyers, it helps the potential buyers to make a decision to purchase a particular kind of motor vehicle. Therefore, as demo vehicles promote sale of similar type of motor vehicles, they can be considered to be used by the dealer for making "further supply of such motor vehicles".  Accordingly, 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.

In the said circular it was also clarified that if such vehicles are capitalized in the books of accounts by the authorized dealer, the availability of ITC would be subject to provisions of section 16(3) of CGST Act 2017, which states that where the registered person has claimed depreciation on the tax component of the cost of capital goods, the input tax credit on the said tax component shall not be allowed.

It was further mentioned that in case demo vehicle, which is capitalized, is subsequently sold by the authorized dealer, the authorized dealer shall have to pay an amount or tax as per provisions of section 18(6) of CGST Act 2017. Which states that in case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher.

Thus from the above detailed discussion we can reach the following conclusion;

Conclusion: The ITC would be eligible on demo vehicles purchased by the dealer from the manufacturing company.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.