2023 (9) TMI 852 - AAR - GST

Input tax credit must be reversed when raw materials and finished goods are destroyed in fire accident under sections 17(2), 17(5)(h), and 18(4)

The AAR Telangana ruled that input tax credit must be reversed when raw materials and finished goods are destroyed in a fire accident. The authority held ... Input tax credit entitlement and reversal - Non-availability of input tax credit for goods lost, stolen or destroyed - Reversal/repayment of ITC where supplies become non-taxable or inputs/finished goods are held in stock - Interpretation of statutory scheme by reading Sections 16, 17 and 18 together (ex visceribus actus) - Taxability of sale of scrap as supply of destroyed goodsInput tax credit entitlement and reversal - Non-availability of input tax credit for goods lost, stolen or destroyed - Reversal/repayment of ITC where inputs contained in finished goods are held in stock - ITC already claimed on inputs that have been consumed in manufacture where the finished goods are subsequently completely destroyed in fire - HELD THAT: - The Authority construed the GST scheme by reading the provisions regarding entitlement to credit and the restrictions thereon together (ex visceribus actus). Section 17(2) limits credit to the extent attributable to taxable supplies and Section 18(4) prescribes repayment where supplies become exempt or the option under composition is exercised, including credit attributable to inputs contained in finished goods held in stock. Section 17(5)(h) excludes credit in respect of goods lost, stolen or destroyed. Applying these provisions together, the Authority held that where finished goods are destroyed, the ITC attributable to such manufactured goods is not available and must be reversed or repaid, because the output no longer gives rise to taxable supplies and the credit attributable to destroyed goods falls within the reversal mechanism.ITC claimed earlier on inputs consumed in manufacture must be reversed where the finished goods are completely destroyed in fire.Input tax credit entitlement and reversal - Non-availability of input tax credit for goods lost, stolen or destroyed - Reversal/repayment of ITC where inputs held in stock are lost before use - ITC claimed on raw materials that are lost in the fire before being used in manufacture - HELD THAT: - The Authority noted that the statutory scheme contemplates reversal of credit attributable to inputs held in stock when taxable supplies do not materialise. Section 17(5)(h) expressly covers goods lost or destroyed. Read with the restriction under Section 17(2) and the repayment mechanism in Section 18(4), the correct legal consequence is that ITC relating to raw materials lost before use is not available and must be reversed or repaid.ITC claimed on raw materials lost in the fire before use is required to be reversed.Taxability of sale of scrap as supply of destroyed goods - Reversal/repayment of ITC where inputs/finished goods are destroyed and sold as scrap - Non-availability of ITC to the extent goods are destroyed - ITC position where destroyed finished goods are sold as scrap and output tax is paid on the sale of scrap - HELD THAT: - The Authority treated scrap as sale of destroyed goods and observed that credit is confined to situations giving rise to taxable supplies of the manufactured goods. Since the goods are destroyed and only scrap (i.e., destroyed goods) is sold, the ITC attributable to the destroyed goods is not available and must be reversed. The payment of output tax on sale of scrap does not preserve the ITC claimed on the original inputs where those inputs or finished goods are covered by the disallowance/reversal provisions.ITC is required to be reversed even if the destroyed finished goods are sold as scrap and output tax is paid on such sale.Final Conclusion: The Authority ruled that in all three scenarios-(i) finished goods consumed in manufacture and thereafter destroyed by fire, (ii) raw materials lost in fire before use, and (iii) destroyed finished goods sold as scrap with output tax paid-the input tax credit earlier availed is not available and must be reversed or repaid in accordance with the statutory scheme. Issues Involved:1. Eligibility of input tax credit (ITC) on raw materials used in the manufacture of finished goods destroyed in a fire.2. ITC eligibility when raw materials are lost in a fire before being used in manufacturing.3. ITC eligibility when destroyed finished goods are sold as scrap and output tax liability is paid.Summary of Judgment:Issue 1: Eligibility of ITC on Raw Materials Used in Manufacture of Finished Goods Destroyed in FireThe applicant sought clarification on whether ITC needs to be reversed when raw materials used in manufacturing finished goods are destroyed in a fire. The court ruled that ITC is required to be reversed. According to Section 17(5)(h) of the CGST Act, input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. The court emphasized that input tax credit is available to a taxable person only when such taxable person makes taxable supplies. When the taxable supplies are not made, input tax credit is not available under Section 17(2) and 17(5)(h). If the input tax credit is already utilized, such credit needs to be paid back as given under Section 18(4).Issue 2: ITC Eligibility When Raw Materials are Lost in Fire Before Use in ManufacturingThe applicant sought clarification on whether ITC needs to be reversed when raw materials procured are lost in a fire before being used in manufacturing. The court ruled that ITC is required to be reversed. The same statutory provisions apply, indicating that input tax credit is not available for goods that are lost or destroyed before being used in the manufacturing process.Issue 3: ITC Eligibility When Destroyed Finished Goods are Sold as ScrapThe applicant sought clarification on whether ITC needs to be reversed when destroyed finished goods are sold as steel scrap and output tax liability on such supply of scrap is paid. The court ruled that ITC is required to be reversed. The court noted that scrap sold by the applicant is nothing but destroyed goods. Therefore, in the context of the above discussion, the sale of scrap, i.e., sale of destroyed goods, is not eligible for input tax credit.Ruling:1. ITC is required to be reversed when raw materials used in the manufacture of finished goods are destroyed in a fire.2. ITC is required to be reversed when raw materials procured are lost in a fire before use in manufacturing.3. ITC is required to be reversed when destroyed finished goods are sold as steel scrap, even if output tax liability on such supply of scrap is paid.