The Hon'ble Authority for Advance Rulings, West Bengal in Landmark Cars East (P.) Ltd. v. Union of India [2024] [(AAR-West Bengal) dated April 4, 2024] held that the applicant, an authorized agent of Mercedes-Benz India, is entitled to claim input tax credit on the purchase of demo cars used for demonstration purposes and subsequently supplied after a specified time period.
Facts of the Case:
The Petitioner, Landmark Cars East (P.) Ltd., is an authorized agent of Mercedes-Benz India Pvt. Ltd. (MB India) and is responsible for facilitating the sales of Mercedes-Benz passenger vehicles, including the Mercedes-Benz EQ (Electric Cars). As per an agreement dated August 30, 2021, the Petitioner entered into with MB India, the Petitioner shall function as a self-employed commercial agent with the responsibility of brokering the sales of vehicles on behalf of MB India.
Under the terms of the agreement, MB India makes demo vehicles available to the Petitioner, which the Petitioner can purchase at a discounted price for demonstrating the vehicles to prospective customers. The Petitioner maintains the stock of these demo vehicles for a specified period of 3 to 6 months to provide trial runs and demonstrations. After this period, the Petitioner is required to sell the demo vehicles to end customers only, and not to resellers or brokers.
If the Petitioner incurs a loss at the time of selling a demo vehicle, MB India shall reimburse the Petitioner for such losses as per the agreed terms. Conversely, if the Petitioner earns a profit on the sale of demo vehicles for the financial year in which MB India has reimbursed losses, MB India can raise a claim on the Petitioner for an amount equivalent to the amount exceeding the losses for that financial year.
The Petitioner filed an application on April 4, 2024, seeking an advance ruling on three issues:
(i) whether it is entitled to claim input tax credit on the purchase of demo vehicles from MB India;
(ii) the classification and rate of tax applicable on the sale of demo vehicles; and
(iii) whether the amount received from MB India towards reimbursement of the loss on the sale of demo vehicles constitutes a supply, and if so, its classification and rate of tax.
Held by the Court:
The Hon'ble Authority for Advance Rulings, West Bengal, in the [2024] (AAR-West Bengal) held as follows:
On the issue of admissibility of input tax credit on the purchase of demo vehicles, the Authority held that the restriction of input tax credit imposed under Section 17(5)(a)(A) of the GST Act is not applicable. The Authority observed that the word "such" in the expression "further supply of such motor vehicles" relates to the vehicle only that was purchased. Since the demo vehicles are purchased for further supply with the condition that they will be kept for a specific period, the restriction does not apply, and the Petitioner is entitled to claim input tax credit on the purchase of demo vehicles.
Regarding the classification and rate of tax on the sale of demo vehicles, the Authority held that the demo vehicle would be classified under Chapter 8702 or 8703, as the case may be, and its outward supply would attract the same rate of tax as its inward supply, subject to the provisions of Section 14 of the GST Act.
On the issue of taxability of the amount received from MB India towards reimbursement of the loss on the sale of demo vehicles, the Authority held that it shall be regarded as consideration received against the supply of services of "agreeing to tolerate an act" (SAC: 9997974) and would be taxable at 18% vide serial number 35 of Notification No. 11/2017-Central Tax (Rate). The Authority observed that the Petitioner had entered into an agreement with MB India with a specific condition towards "Demo Car Loss Sharing," knowing that it may suffer a loss at the time of selling the demo vehicle. MB India's promise to compensate for such losses constitutes consideration, and the Petitioner had agreed to tolerate the act of suffering loss for this consideration in the course of furtherance of its business.
Relevant Sections:
"Section 17(5)(a)(A) of the Central Goods and Services Tax Act, 2017/West Bengal Goods and Services Tax Act, 2017"
"5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
2[(a) 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 the following taxable supplies, namely:-
(A) further supply of such motor vehicles; or"
"Section 14 of the Central Goods and Services Tax Act, 2017/West Bengal Goods and Services Tax Act, 2017"
"Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017"
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