West Bengal Authority Rules In Favour Of Car Dealers' Tax Benefits
When carmakers compensate dealerships for the loss incurred on the sale of demo cars, it's subject to 18% GST, says Authority.
The Authority for Advance Ruling in West Bengal recently made a decision that benefits carmakers and dealers, allowing them to claim input tax credit on the purchase of demo vehicles.
The authority further ruled that when carmakers compensate dealerships for the loss incurred on the sale of demo cars, this compensation is subject to an 18% Goods and Services Tax, rather than the higher rate of 28% plus cess.
It was observed that since the car dealerships buy these cars at full price from the manufacturer and offer discounts, they face a loss. The manufacturer reimburses this loss. The reimbursement is seen as tolerating the dealership's loss and is considered a service taxed at 18% GST instead of the higher rate.
Landmark Cars wanted clarification on whether they could claim input tax credit on cars used for demonstrations and, if so, what tax rate applies when selling such cars. Additionally, they wanted to know whether reimbursements received from Mercedes-Benz for losses on demo car sales are considered taxable supplies and, if so, what tax rate applies.
Landmark Cars Ltd. entered into an agreement with Mercedes-Benz India, allowing them to acquire demo vehicles for demonstration purposes.
The agreement outlined various terms, including the sale of demo vehicles at a discount, ownership of the vehicles by Landmark Cars, restrictions on usage for demonstration purposes only, and provisions for reimbursement by Mercedes-Benz for losses incurred on demo car sales.
The company argued before the authority that they should be allowed to claim input tax credit on demo cars purchased from Mercedes-Benz India.
It explained that the demo cars are bought at a discounted price, with GST properly paid during the transactions. When it sells the cars, it removes them from their inventory and records the entire sale proceeds. Currently, it claims ITC on demo car purchases in the tax returns but reverses it due to legal confusion.
When Landmark Cars eventually sells the demo cars, it treats them as used vehicles.
It argued that, as an authorised dealer, its procurement of demo vehicles is in the course of furthering its business activities. It explained that, as per a provision of the GST Act, registered persons may claim ITC on goods used in business.
However, another provision of the Act, which restricts ITC on motor vehicles, doesn't apply to it because it intends to resell the demo cars promptly and because demo cars are necessary for its business operations, the company further explained.
Landmark Cars explained that when a loss occurs upon selling a demo car, MB India reimburses this loss to Landmark Cars. Therefore, Landmark Cars issues a tax invoice with GST to recover the loss amount from MB India.
However, the company argued that this transaction should be considered part of the main supply, and MB India should issue a credit note accordingly. This is because the initial invoicing for the demo car is based on agreed pricing, and subsequent transactions, including loss reimbursement, are inherently linked to the sale of the demo car.
