BMW Cannot Claim GST ITC On Demo Cars Or Vehicles: AAAR

In the case of M/s BMW India Pvt., the Haryana Appellate Authority of Advance Ruling (AAAR) panel, consisting of Amit Kumar Aggarwal and Anil Kumar Jain decided that the Input Tax Credit (ITC) is not permissible on demo cars/vehicles.

The applicant, M/s BMW India Pvt Ltd Gurugram, is a state-administered taxpayer registered under GST in Gurugram for operating a training centre for engineers and marketing experts, among other things. They obtain BMW branded vehicles manufactured in the Chennai plant as Interstate stock transfers on which IGST and compensation cess have been paid, and they use these vehicles for a period of approximately 12 months.

BMW has requested an advance ruling on the question of whether its business unit is entitled to the IGST Input Tax Credit (ITC) and Compensation Cess Paid on the receipt of cars (on a stock transfer basis) for use in business activities and then resale to dealers after a limited period of usage.

The Advance Ruling Authority gave in its ruling that, “In the Motor Vehicle Industry, demonstration vehicles are a vital instrument for promoting sales by providing trial runs to customers. These demo automobiles are used to demonstrate to potential buyers and then sold for the book value after paying the necessary taxes at that time.”

The AAR noted that section 17(5) of the CGST Act 2017 has explicit requirements regarding the acceptability of the input tax credit on motor vehicles for transportation of individuals up to a seating capacity of not more than 13 persons.

BMW filed an appeal against AAR’s decision, claiming that it is inconsistent with previous advanced ruling authority’ decisions that input tax credit is permissible. It further stated that the ruling is ambiguous and cryptic, and that they are eligible for input tax credit because the cars were further used for a designated taxable supply under section 17(5)(a)(i) (A).

In their appeal, the applicant also stated that the vehicles were always intended to be further supplied by the appellant after the specified use. They learned authority had failed to conform to the provisions of section 98(6) of the CGST legislation and that no time limit had been established under the CGST Act for future vehicle delivery.

The AAAR ruled in the above appeal stating that, “ if the party’s argument is accepted, then all motor vehicles, regardless of the nature of supply, will be eligible for ITC across all industries. It will no longer be a restricted clause for car dealers, but rather an open-clause for all trade and industry to take advantage of the ITC on all vehicles acquired. This has never been the intent of the parliament.”

In response to the applicant’s contention that ITC may be allowed as input if these vehicles are sold after 12 months, the AAAR noted that during the first demonstration run, the demo car loses its character as a new motor vehicle and is sold as second hand goods, which is different from a new vehicle and thus treated differently under GST law, so the demo car is not an input.

As a result, it appears that the appellant’s BMW automobiles were never obtained with the intention of simply “further supply of such motor vehicles/selling as such.” As a result, an input tax credit on these vehicles is not possible.