ITC Reversal On Goods Destroyed In Flood, Fire: AAAR 

The Telangana Appellate Authority of Advance Ruling (AAAR) has upheld the AAR’s ruling by which it was held that Input Tax Credit (ITC) Reversal on goods destroyed in flood, fire, etc.

The bench of Sandeep Prakash and S.A.M. Rizvi has observed that goods destroyed would imply goods which are destroyed in various kinds of natural and manmade situations such as flood, fire, and destruction of expired goods (especially in the case of drugs). The interpretation as made out by the applicant that reversal of ITC will arise only if the inputs or capital goods are themselves lost, stolen or destroyed etc and not where the finished goods are lost, stolen or destroyed etc. is not acceptable for the simple reason that Section 16(1) contemplates both the situations ie., cases where the goods are actually used or intended to be used.

The appellant is engaged in the business of manufacture of Steel Nails and other steel products in its manufacturing unit situated at Shankarampet-R, Village, Shankarampet- R Mandal-Medak, Medak, Telangana. The primary raw material for manufacturing Steel Nails are Steel Wire rods. The appellant purchases steel wire rods which are drawn to required sizes and then nails of different sizes are manufactured in the nail making machine.

The other major inputs for manufacturing Nails are Polypropylene, Copper wire, Paper tape and packing material like cartons, pallets etc. The appellant purchases these raw materials from the other registered taxable persons within the State and also from outside the State of Telangana and avails GST input tax credit on all the materials purchased as stated above.

Output tax on Nails supplied in the course of business is paid as per the provisions of the GST Act. During the manufacturing process steel scrap is also generated which the appellant sells in the market and GST liability is paid / set off on the same against the GST input.

The appellant submitted that a fire broke out in their factory premises on 17.12.2022 and major quantities of finished goods i.e. Steel Nails became unfit for being sold as such and, hence, these damaged finished goods were sold as scrap in the market and applicable GST has been paid on the sale of such scrap.

They have claimed input tax credit (ITC) on all the raw materials a n d other inputs for manufacturing of steel nails in the month they are procured, as per Section 16 of CGST Act, 2017. Since goods/ inputs purchased by the appellant were used in the manufacturing of finished goods and the finished goods became unfit for being sold as such in the fire accident, they sought for advance ruling with regard to eligibility of ITC on the raw materials consumed in the manufacture of finished goods which became unfit for being sold as such.

The AAR held that Input Tax Credit (ITC) is required to be reversed on stocks destroyed in fire accidents completely.

The appellant has challenged the AAR’s ruling on the grounds that 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 by way of gift or free samples. As clause (h) of sub- section (5) of Section 17 of the Act, used the words "in respect of" before different type of events, as per strict interpretation of the clause, ITC shall not be available in respect of those goods only which are purchased and which are lost, stolen, destroyed, written off or disposed of by way of gift or free samples only. Appellant therefore says that such events are in relation to the inputs and not in relation to finished goods/output goods.

The AAAR held that the wording of Section 17(5)(h) of CGST Act, 2017 are simple, clear and unambiguous and any averment that seeks to restrict the plain and unambiguous meaning cannot be countenanced. As such, there is no merit in the contention of the appellant that the phrase "in respect of" used in Section 17(5)(h) indicates only 'inputs'.

Ruling Details

Applicant’s Name: M/s Geekay Wires Limited

Ruling Date: 20.02.2025

Read More: CBDT Notifies REC Ltd.’s ₹5,000 Crore Zero Coupon Bonds as Tax-Exempt Under Income Tax Act