ITC impact of FOC replacement of Imported machinery

[ROHIT GOEL]

Dear experts,

One of our client imported a machinery in Nov 2023 and paid IGST and custom duty and claimed ITC of IGST. The machine developed a critical problem due to which the manufacturer has agreed to replace the machine free of cost and now client shall have to pay IGST and custom duty again at time of import of FOC Machine.

The supplier has asked client to dispose the faulty machinery and it shall be sold at salvage value of about 10% of purchase cost. My question is whether ITC reversal would be needed to be made as per section 18(6) on balance 90%?

If not, kindly cite relevant provisions/circulars etc.

AI Summary

Input Tax Credit reversal applies when imported machinery is replaced free of cost, requiring ITC adjustment on disposal.
A taxpayer imported machinery and availed ITC of IGST. The machine was later replaced free of cost by the manufacturer, requiring a fresh import on which IGST and customs duty will be payable; the faulty machine is to be sold at salvage. The advisory states that the ITC reversal provision applies to such disposal and reversal should be made on the relevant balance, though retaining the asset for its useful life before sale was noted as a possible way to defer or avoid immediate reversal.