Goods and Services Tax (GST) has been introduced in India on July 1, 2017 replacing central excise duty on manufacture of goods, service tax leviable on taxable services and VAT on sale goods. However, inspite of having been in force for about 5 years, GST law is yet to be stabilise on account of obvious constraints of managing Federal and State Governments relationship in terms of the Constitution of India and multiplicity of decision making authorities.

The author proposes to write a series of articles to cover various challenges faced by the industry and in this article covering issue of availability of input tax credit (ITC) on Demo Cars used by car dealers across the Country, and on ancillary services used in relation thereto.

Before delving on the issue let us take a look at legal provisions.

Section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act) provide for eligibility and conditions, for taking ITC of tax paid on goods and services used in the course or furtherance of business by a registered person, which are - such person is possession of tax invoice; has received goods or services or both; tax charged by supplier thereof has actually paid tax to the Government and has filed returns. Section 16(3) of the CGST Act also provide that ITC of tax component on capital goods is not available where registered person has claimed depreciation on such tax component under Section 32 of the Income Tax Act, 1961. The term 'capital goods' is defined under Section 2(19) of the CGST Act as goods value of which has been captialised in books and accounts of person claiming ITC and which are intended to be used in the course or furtherance of business. Further, Section 17(5) of the CGST Act provide that ITC on specified motor vehicles is not available except interalia where the same are used for making taxable supply namely, further supply of such motor vehicles. On the basis of mischief created by Section 17(5) of the CGST Act, GST authorities are denying ITC of tax paid on Demo Cars. Additionally, Section 18(6) of the CGST Act provide that in case of supply of capital goods on which ITC has been availed, registered person shall pay an amount equal to ITC availed thereon after reducing the same in terms of Rule 44(6) of the of the Central Goods and Services Tax Rules, 2017 or tax payable on transaction value, whichever is higher.

Chapter XVII of the CGST Act cover provisions of advance ruling to reduce dispute of taxpayers with the authorities, which interalia provide – Advance Ruling Authority (Authority) constituted either under the CGST Act or such State or Union Territory (UT) GST Act shall be deemed to be the Authority for such State of UT; a registered person may obtaining advance ruling including on admissibility of ITC; on being aggrieved by ruling of the Authority an appeal can be filed before the Appellate Authority at first stage and in case of conflicting rulings given by the Appellate Authority of two or more States or UTs an appeal can be filed before the National Appellate Authority (yet to be constituted) at the second stage; and ruling pronounced by the Authority and the Appellate Authority shall be binding only on the applicant and his jurisdictional officer. On account of constitution of separate Authority and the Appellate Authority in each State and UT, conflicting rulings have been pronounced by them on the same issue forcing taxpayer to seek remedy before the Courts.

Demo Cars are used by car dealers for demonstration of various features of each model of car and give a feel of drive comfort to a potential buyer, which is necessary for the business of selling cars. Demo Cars are capitalised in books of accounts of car dealers and are sold as second hand cars to buyers generally within a period of two years of purchase on payment of tax on transaction value. However, on account of mischief of Section 17(5)(a) of the CGST Act, the authorities are not only denying ITC of tax paid on Demo Cars but also on ancillary services used in relation thereto like insurance, maintenance, etc. to car dealers. Hence, to avoid disputes and have certainty of the issue many car dealers have sought advance rulings from the jurisdictional Authority or filed appeal at the first stage before the Appellate Authority, which are discussed hereinafter.

The Authority of Kerala in the case of AM Motors², the Authority of Goa in the case of Chowgule Industries Private Limited³ and the Authority of Maharashtra in the case of Chowgule Industries Private Limited⁴ has held that Demo Cars are capital goods and an indispensable tool for promotion of sale of cars by dealers and ITC of tax paid thereon is available to car dealers. However, the Authority of Haryana in the case of Platinum Motorcorp LLP⁵ and the Authority for Madhya Pradesh in the case of Khatwani Sales and Services LLP⁶ has held that ITC of tax paid on Demo Cars is not available to car dealers on the finding that though Demo Cars are capitalised in books and accounts of car dealers, sale of the same is to be treated as second hand vehicle and not new and both being different, are not covered by exception clause (A) of Section 17(5)(a) of the CGST Act.

As already extracted above Section 16(1) of the CGST Act provide for eligibility of a registered person to take ITC of tax paid on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. Thus, intention of legislature is clear to allow ITC of tax paid on any inward supply intended to be used in the course or furtherance of business of a registered person. The terms 'intended', 'in the course or furtherance of business' used in Section 16(1) of the CGST Act are words of great significance and due regards is to be given to the same.

The words 'used or intended to be used' means either used or intended to be used for the stated purpose of in the course or furtherance of business. Thus, actual use or intention to use in the course or furtherance of business is sufficient to allow ITC of tax paid on such goods so long as other conditions for availing ITC are complied with. In relation to an issue of eligibility to exemption from duty to raw naphtha intended to be used in the manufacture of fertilizer, the Supreme Court in decision in the case of Steel Authority of India Limited⁷ has held 'it is important to note that the exemption notification required proof that the raw naphtha was "intended for use" in the manufacture of fertiliser and not that the raw naphtha was used in the manufacture of fertiliser. Due emphasis has to be given to the clear language of the first condition of the exemption notification and its effect cannot be nullified by an interpretation placed on the second condition. Both conditions must be so read as to give full effect to the clear language of the first condition intended for use".

As regards the words 'in the course or furtherance of business', it interesting to note clarification given by the CBIC⁸ in Frequently Asked Questions dated March 31, 2017 to educate taxpayers on proposed introduction of GST, which reads:

"Q9. What do you mean by "supply made in the course or furtherance of business"?

Ans. "Business" is defined under Section 2(17) include any trade, commerce, manufacture, profession, vocation etc. whether or not undertaken for a pecuniary benefit. Business also includes any activity or transaction which is incidental or ancillary to the aforementioned listed activities. In addition, any activity undertaken by the Central Govt. or a State Govt. or any local authority in which they are engaged as public authority shall also be construed as business. From the above, it may be noted that any activity undertaken included in the definition for furtherance or promoting of a business could constitute a supply under GST law.

Q10. An individual buys a car for personal use and after a year sells it to a car dealer. Will thetransaction be a supply in terms of CGST/SGST Act? Give reasons for the answer.

Ans. No, because supply is not made by the individual in the course or furtherance of business. Further, no input tax credit was admissible on such car at the time of its acquisition as it was meant for non-business use."

Thus, the CBIC itself is clarifying that business also include any activity or transaction which is incidental or ancillary to listed activity will fall under the definition of supply. The same principle will apply for the purpose of eligibility to ITC of tax paid on inward supply.

Further, literal meaning to the term furtherance is advancement or promotion of business. The term in the course or furtherance of business are of wide amplitude and not of restrictive meaning. Hence, any activity which promotes or advances business of a registered persons will be included therein and ITC of tax paid on such goods or services will be available.

In the case of Demo Cars, the same are used for giving demonstration and feel of car to a prospective buyer before actual sale of cars and hence is essential to business of a car dealer. As per trade practice, without giving demonstration to a prospective buyer, business of a car dealer will suffer immensely.

As already extracted above Section 17(5)(a)(A) of the CGST Act carves out an exception to mischief of denying ITC on motor vehicles with the use of words 'further supply of such motor vehicle', which means that motor vehicles are used for supply of such motor vehicles. Maxwell 12th Edition at page 30 has clarified that the word 'such' occurring in a section must be read as referring back to the preceeding provision.

In this regard it is apt to make a refence to finding of the Authority in the case of Platinum Motorcorp 'Demo Vehicles in respect of which the Question about admissibility of ITC has been raised for Advance Ruling, have been used for the purpose of demonstration before the prospective customers. Then they are sold like second hand goods. The law provides for ITC in case of "further Supply" of said vehicles . But here, first the vehicles are purchased, then they are diverted and used for Demonstration of 2 years or so, and in the first demonstration run it loses the character of the new vehicle and demo vehicles is sold akin to second hand goods and which is different from new Vehicle and accordingly treated differently under GST law. Thus it cannot be said that the demo vehicle is for further supply of such motor vehicles'. This very restricted and specific provision has been provided in law for Motor Vehicles. The purpose and intent of the law is thus very clear. Thus by allowing the ITC this way will be ultra vires the basic provisions of 'further supply of such motor vehicles'.

The Authority in above ruling has taken a very narrow view of the purpose, object and language of the CGST Act particularly of Section 17(5)(a)(A) thereof. New or second hand vehicle is a vehicle and on sale thereof by a business entity is liable to tax under the CGST Act under the same HS Code and at the same rate of tax, and the only difference being the transaction value. Further, finding of the Authority that 'it cannot be said that the demo vehicle is for further supply of such motor vehicles' is also contrary to the facts, as right from the moment of purchase of Demo Cars intention of car dealer is use the same for some time, may be for a year or two, for demonstration purpose and then sell to a customer on payment of tax at appropriate rate. Hence, ruling of the Authority in Platinum Motorcorp and Khatwani Sales may not stand scrutiny of higher judicial foras.

Further, in any view of the matter and notwithstanding mischief of Section 17(5)(a)(A) of the CGST Act and on harmonious construction thereof, on sale of Demo Cars, car dealer is statutorily required to discharge tax on sale thereon at transaction value, and meets all the ingredients of Section 16 thereof including intention of use Demo Car for furtherance of business for availing ITC; and since Demo Cars are capitalised in books of accounts of car dealers, ITC of tax paid thereon is available in terms of Section 18(6) thereof. The Supreme Court in decision in the case of British Airways PLC9 has held – 'the well-known principle of harmonious construction is that effect shall be given to all the provisions and for that any provision of the statute should be construed with reference to the other provisions so as to make it workable. A particular provision cannot be picked up and interpreted to defeat another provision made in that behalf under the statute. It is the duty of the court to make such construction of a statute which shall suppress the mischief and advance the remedy. While interpreting a statute the courts are required to keep in mind the consequences which are likely to flow upon the intended interpretation'. Thus, provisions of the CGST Act are to be read and interpreted harmoniously to give effect to each and every provision thereof and on such construction tax paid on purchase of Demo Cars and ancillary services used in relation thereto is available to car dealers.

It is high time that the CBIC take a pragmatic view on the issue and in the spirit of Statement and Objects of GST of intention to remove cascading effect of taxes and provide for a common national market for goods and services issue clarification. Till this is done taxpayers will continue to suffer and pay high cost of litigation and objective of migration to GST is also defeated.