Input Tax Credit Admissible on Demo Vehicles Under Dealer Agency Model

1. Core Facts & Background

• The automotive retail sector predominantly functions under two operational frameworks: the traditional dealership model and the dealer-agency model.
• Under the dealer-agency structure, manufacturers sell vehicles directly to buyers while authorized dealers procure dedicated vehicles to conduct customer test drives.
• Authorized dealers capitalize these demonstration vehicles in their books, use them for a mandatory operational period, and subsequently sell them while discharging applicable taxes.
• Prior administrative guidance had treated these two operational models differently, restricting credit benefits exclusively for dealers operating under agency agreements.

2. Revenue / Department’s Action

• The department previously viewed authorized dealers in the agency format as mere marketing and facilitation service providers.
• Revenue determined that such agents were not engaged in making outward supplies of motor vehicles on their own account.
• The department concluded that demo vehicles purchased by agents were not deployed for making further taxable supplies of vehicles.
• Revenue accordingly blocked the input tax credit on demo vehicles under the statutory restrictions applicable to passenger motor vehicles.

3. Assessee’s Defense & Arguments

• The assessee and trade representatives highlighted that demo vehicles serve an identical operational and promotional purpose across both commercial models.
• It was contended that demo units are legitimately purchased against tax invoices and incur tax again upon their eventual resale at written-down value.
• The assessee argued that differentiating between the two structures created an arbitrary and discriminatory denial of credit.
• It was urged that statutory provisions referring to further supply apply broadly to similar vehicle types rather than the singular demonstration vehicle itself.

4. Final Ruling & Outcome

• The department officially withdrew its earlier restrictive interpretation that blocked credits for dealers operating under the agency model.
• It was clarified that input tax credit on demo vehicles is fully available and not blocked under the statutory credit restriction rules.
• Field formations were instructed to ensure consistent application of the law and allow demo vehicle credits uniformly across all dealership models.