AAR Allows ITC on Repairs, Refurbishment, Common Expenses and Capital Goods for Second-Hand Vehicle Dealers

The applicant is in the business of buying and selling second-hand motor vehicles and deals mainly in used luxury cars procured from both registered and unregistered persons. Small processing activities such as repair, refitting and replacement of spare parts are done to enhance the resale value of the vehicles, without changing their essential character before resale. The applicant proposed special valuation under Rule 32(5) of the CGST Rules for outward supplies, whereby GST would be discharged only on the margin, provided no input tax credit on the purchase of such used vehicles is taken.

Thereafter, the applicant also experiences some of the ordinary expenditures that include showroom rentals, telephone expenses, advertisement expenses, and professional fees. He also acquires capital goods, which include machinery for the workshop, office equipment, computer systems, and demonstration vehicles. The applicant approached the Authority.

Issue Before Authority: Whether, in view of Notification No. 8/2018–Central Tax (Rate) dated 25 January 2018 and Rule 32(5) of the CGST Rules, input tax credit is admissible on inward supplies relating to repairs, refurbishment, spare parts, common business expenses and capital goods, excluding the purchase of old or used motor vehicles.

Authority’s Decision: The Authority held that Notification No. 8/2018–Central Tax (Rate) restricts the availment of input tax credit only in respect of the purchase of old or used motor vehicles on which the benefit of margin-based taxation is claimed. The restriction does not extend to other inward supplies such as spare parts, repairs, refurbishment services, rent, advertising, professional services or capital goods used in the course or furtherance of business.

It was further held that Rule 32(5) is a valuation provision and does not render supplies with nil or negative margin as exempt supplies. Such transactions continue to be taxable supplies with a taxable value of zero and therefore do not attract reversal of common input tax credit under Rule 42 or Rule 43. Thus, input tax credit on direct expenses, common business inputs and capital goods is admissible, subject to fulfilment of the conditions prescribed under Sections 16 to 21 of the CGST Act and Rules 36 to 45 of the CGST Rules.

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