The Telangana Authority of Advance Ruling (AAR) has ruled that Input Tax Credit (ITC) is required to be reversed on stocks destroyed in fire accidents completely.
The bench of S.V. Kasi Visweswara Rao and Sahil Inamdar have observed that ITC is required to reverse when the raw materials procured are lost in the fire ITC is required to reverse accidents before use in manufacture of finished goods.
The applicant M/s. Geekay Wires Limited is engaged in the business of manufacturer of Steel Nails and other steel products in its manufacturing unit situated at Shankarampet-R, Village, Shankarampet- R Mandal-Medak, Medak, Telangana. The raw materials for manufacturing Steel Nails are Steel Wire rod.
The applicant purchases steel wire rods and draw it to required sizes and then in Nail making machine make Steel nails of different sizes. The other major inputs for manufacturing Nails are Polypropylene, Copper wire, Paper tape and packing material like cartons, pallets etc.
The applicant purchases these raw materials from the other registered taxable persons within the State and also from outside the State of Telangana and avail GST input tax credit on all the materials purchased as stated above. Output tax on Nails supplied in the course of business is regularly paid as per the provisions of the GST Act.
During the manufacturing process steel scrap is also generated which the applicant sells in the market and GST liability is paid / set off on the same against the GST input.
The applicant submitted that according to Section 17 (5) (h) of the CGST Act, input tax credit shall not be available in respect of the goods lost, stolen, destroyed, written off or disposed of way by of gift or free samples. In the applicant’s case, the goods purchased from the GST registered taxable persons are not destroyed but they are used in the manufacturing of finished goods and the finished goods are destroyed in the fire accident and these burnt finished goods can be sold only as scrap in the market and output tax liability will be paid on such supply of scrap under the GST Act.
The applicant sought the advance ruling on the eligibility of input tax credit on the raw materials purchased for manufacture of finished goods i.e. whether already claimed ITC is required to reversed or not in the various circumstances.
Firstly, when the raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the fire accident completely
Secondly, when the raw materials procured are lost in the fire accident before use in manufacture of finished goods.
Thirdly, when the destroyed finished goods can be sold as steel scrap in the open market and output tax liability on such supply of scrap is paid.
The AAR held that Section 17(2) of the CSGT Act, 2017 concludes with the clause “The amount of credit shall be restricted to so much of input tax as is attributable to the taxable supplies including zero rated supplies”.
Therefore, the AAR held that the input tax credit on the purchases made in the context of Section 17(2) has to be restricted to the taxable supplies only. This Section is further buttressed by Section 18(4) where in the condition of debiting or paying back the input tax already claimed is clearly enumerated.
The AAR held that Section 17(5)(h) clearly mentions that input tax shall not be availed in respect of “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”.
The AAR noted that the input tax credit to the extent of manufactured goods destroyed or inputs destroyed is not available to the applicant and the same needs to be paid back either through the credit available in the credit ledger or by cash.
The AAR ruled that Scrap sold by the applicant is nothing but a destroyed goods therefore in the context of above discussion sale of scrap i.e., sale of destroyed goods are not eligible for input tax credit.
Case Details
Applicant’s Name: Geekay Wires
Date: 02.09.2023
