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)

In Re: M/s. Geekay Wires Limited,

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 ... Reversal of Input Tax Credit - raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the fire accident completely - raw materials procured are lost in the fire accident before use in manufacture of finished goods - destroyed finished goods can be sold as steel scrap in the open market and output tax liability on such supply of scrap is paid - HELD THAT:- The statutory provision of the Act has to be interpreted in the context of other statutory provisions i.e., 17(2) and 18(4) and the meaning has to be discerned by applying the principle discussed above i.e., ‘ex visceribus actus’. The scheme of the Act becomes clear from the combined reading of three provisions 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). Therefore 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 - 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. 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.