We all know that as per Section 17(5)(h) of the CGST Act, 2017 in case any goods are destroyed the input tax credit (ITC) thereon cannot be availed or is to be reversed , if already availed. In this regard a grey area is encountered by taxpayers in case finished goods are destroyed. The question here is when raw material has already been consumed in manufacturing of finished good and if such finished good is destroyed, whether reversal of ITC availed on raw material is required.
In this regard the above issue was tested before Gujarat Authority for Advance Ruling (AAR) in the case of M/s Jay Chemical Industries Ltd wherein the AAR has held that the Input Tax Credit taken on the inputs used in the manufacture or production of goods and the ITC taken on input services used in or in relation to the manufacture or production of finished goods which were destroyed shall be reversed.
Facts of the case:
- The applicant M/s Jay Chemical Industries Ltd., is a company registered in the State of Gujarat, is
engaged in manufacturing and marketing of dyes and dye intermediates. The Company has five manufacturing units.
- A fire broke out in the night of 27th June, 2020 at around 8:40 PM in the warehouse of the Khambhat Unit of the applicant. Though the exact reason of the fire is not known and Forensic Science Laboratory (FSL) report is awaited, it is estimated that raw material, intermediate/ finished goods of approx. Rs.40 Crores were destroyed.
- The Company manufactures Vinyl Sulphone, H Acid, M.P.D.S.A, C.P.C. Acetanilide Flakes, P.C.V.S. (herein after collectively referred to as “dye intermediates”) which itself is a finished and marketable product. However, as the Company is engaged in manufacturing of dyes and these dye intermediates act as an intermediate product in its manufacturing, the Company captively consumes such product. The dye intermediates are also sold by the Company in the market depending on the demand and pricing parameters.
Issue on which Ruling was sought:
Since dye intermediates were also destroyed in the fire, the Company hereby requests for clarification from the Advance Ruling Authority on following issue:
Whether the Company is required to reverse input tax credit on inputs consumed in dye intermediates (which is also a finished goods), where such goods have been destroyed in fire?
Order of Gujarat AAR: Deliberation and Ruling
We find that in GST regime, the scope of definition of inputs, capital goods and input services is very wide and covers almost all the imaginable goods and services that are directly or indirectly used in course or furtherance of business. However, Section 17(5) of the CGST/SGST Act, 2017 prescribes a list of goods or services on which ITC is not admissible. The opening para of Section 17(5) of CGST Act, 2017 reads as follows:-
“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
……
……
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; “
The bare analysis of above section makes it clear that this section has overriding effect and it states that the ITC shall not be available in respect of goods lost, stolen, destroyed or written off.
We further note that Section 16 (1) of the CGST Act, 2017 provides that any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business.
In view of the above, the coram consisting of Sanjay Saxena and Mohit Agarwal observed that since the said inputs and capital goods have been used in manufacture of finished goods that have been destroyed, the same are not used in course or furtherance of business. Accordingly it was held that the Input Tax Credit taken on the inputs used in the manufacture or production of goods i.e. intermediate dye and the Input Tax Credit taken on input services used in or in relation to the manufacture or production of said goods shall be reversed.
Our Comments:
The moot question dealt be above ruling was as to whether ITC of raw material is required to be reversed, if finished goods are destroyed.
It is important to note that the expression ‘in respect of the following’ as used in Section 17(5) of the CGST Act restricts its scope.
The expression ‘in respect of’ was examined by the Supreme Court in the case of State of Madras v. M/s. Swastik Tobacco Factory [AIR-1966-SC-1000]. In this case, the assessee purchased raw tobacco and converted the same into chewing tobacco. Excise duty was paid on purchase of raw tobacco. As per the applicable provisions, the assessee could claim deduction of excise duty if it was paid ‘in respect of’ the good sold by him (which in this was chewing tobacco). The SC held that Indian tax laws have used the expression ‘in respect of’ as synonymous with the expression ‘on’. If excise duty was paid on raw tobacco it can be attributable only to the raw tobacco and not to chewing tobacco. It was held that no deduction of excise duty is permitted to the assessee.
Thus the as per above Apex Court’s decision the expression ‘in respect of’ will include only the goods and not the finished goods created out of such raw material. Accordingly in case of loss of finished goods, ITC reversal under Section 17(5)(h) in respect of raw material may not be required.
Further in ruling of Maharashtra AAR in case of M/s. General Manager Ordance Factory Bhandara [2019-VIL-171-AAR] it was held that the question of reversal will arise only if inputs or capital goods are themselves lost, stolen or destroyed. If finished goods are destroyed, lost or stolen, then reversal should not be required. The AAR stated that once ITC is legitimately availed , it cannot be demanded back without specific provision in this regard. there is no provision for demanding the ITC on inputs, capital goods and input services that have already been used for the manufacture of finished goods that are lost or stolen or damaged.
In this case input was used in the manufacturing of finished goods. These finished goods were sent out for testing. Few finished goods got destroyed during the testing process. The authority held that ITC is not required to be reversed under Section 17(5)(h) on finished goods that are destroyed during testing.
The instant ruling of Gujarat AAR is contrary to above position. However it is important to note that its decision is not based on Section 17(5)(h) but is rather pillared on Section 16(1) of the CGST Act, 2017 i.e. use in the course or furtherance of business. Due to application of Section 16(1), the AAR has even adjudged that ITC on services also needs to be reversed which are otherwise not covered under the ambit of Section 17(5)(h) of the CGST Act, 2017.
It is further pertinent to mention here that CBIC vide Para No. 3(B)(d) of Circular No. 72/46/2018- GST dated October 26, 2018 has clarified that where the time expired goods, which have been returned by the retailer/wholesaler, are destroyed by the manufacturer, he/she is required to reverse the ITC attributable to the manufacture of such goods, in terms of the provisions of clause (h) of subsection (5) of section 17 of the CGST Act. Thus as per said circular the ITC on raw materials need to be reversed , in case the finished goods are destroyed.
Also Read: All about reverse charge mechanism (RCM) under GST
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
