ITC Credit for Raw materials sold as Scrap

[JOHN SHANNEL]

Hello friends,

We had purchased raw materials for production of Finished goods. But due to change of sale plan i could not use the raw materials and sold the same as scrap. The scrap realization is 25% of the raw material value. Can i take ITC credit for these raw materials items under my normal business transaction? Please advice.

[Sadanand Bulbule]

Dear querist

Yes, you can take proportionate ITC on the value of goods sold as scrap.

[Amit Agrawal]

If goods are NOT 'lost, stolen, destroyed, written off or disposed of by way of gift or free samples', then, there is no bar in taking ITC. And there is no legal concept of 'proportionate ITC on the value of goods sold as scrap' under GST law for given situation. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Amit Agrawal]

Moreover, there is no bar in availing ITC u/s 16(1) in given situation as subject goods were intended to be used in the course or furtherance of tax-payer's business even though same was not actually so used in the way originally intended (i.e. manufacturing). 

In this regard, attention is invited to discussion we had under Issue-ID: 118820 bearing subject-line as 'SEC 17(5)(h)', wherein I explained why the words "intended to be used" cannot mean "used" while interpreting Section 16(1).

Furthermore, Section 18(6) applied only to 'capital goods or plant and machinery' and not for inputs / raw material & Section 18(4) is applicable only when tax-payer opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt. Querist's given situation does not fall under either Section 18(4) or 18(6). 

In old / excise regime, there was specific Rule 3(5) of Cenvat Credit Rules, 2004 which required manufacturer to pay equal taxes (i.e. equal to credit taken) in situation explained by the querist. There is no such provision under GST. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Shilpi Jain]

Full credit can be availed.

[KASTURI SETHI]

Here 'scrap' has not arisen out of manufacturing process. Hence such scrap is not finished product. 

Such supply of 'scrap' (raw material)  falls in the definition of business defined under Section 2 (17) and also covered in the widest  scope /expression, "in the course of business or furtherance of business".

Hence proportionate  ITC is allowed.

In view of the above reasoning, I fully support the views of Sh.Sadanand Bulbule, Sir Ji.

[KASTURI SETHI]

This is in  continuation of my above post.

The concept of 'input removal as such' in GST regime has been dispensed away with because  it  becomes  redundant, especially, keeping in view of the larger scope of the definition of , 'business' and phrase/expression, 'in the course of business or furtherance of business'.

[Amit Agrawal]

As said in my earlier post at Sr. No. 2 above,  there is no legal concept of 'proportionate ITC on the value of goods sold as scrap' under GST law for given situation.

I have further expanded my views in my post at Sr. No. 3 above to explain why there is no legal basis under present GST law to allow only proportionate ITC in given situation. 

And no-one could point out applicable legal provisions in GST law/s & rules made there-under to explain 'legal need' to take proportionate ITC in given situation

Similar view about 'proportionate ITC' were raised during discussion under Issue-ID: 118018, bearing subject-line: GST APPLICABILTIY ON VALUE REDUCTION (ON PREV SUPPLY), wherein your attention is invited to Posts From Sr. No. 6 onwards & my views thereon (i.e. If one is selling / supplying at a loss, there is no legal requirement per se to reverse ITC against the loss). Even then, no-one could point out gst provisions to explain requirement of proportionate reversal of ITC against goods sold at loss.

I stand by my views given in July, 2022 on this TMI forum and I stand with my views even now in situation under discussion here. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Pradeep Reddy Unnathi Partners]

No bar in availing ITC, full ITC can be availed. 

[KALLESHAMURTHY MURTHY K.N.]

Dear Sirs,

The raw materials purchased were not utilised for converting to finished goods or used in trading but let the materials be scrapped. Hence it has lost its originality. So, the materials purchased did not generate output tax notionally. But the tax on the sale of scrap is payable. There would be an enrichment of ITC if ITC is availed on the entire purchase value. Therefore the eligibility for ITC falls under section 17 (1). Hence, as opined by Sri Sadanand Bulbule Sir, and Sri Kasturi Sethi Ji, ITC can be availed proportionately..

 

[KASTURI SETHI]

Sh.Murthy Ji,

I am all praise for your  hard work and expression on the issue. At the same time I like to say that  we also learn a lot from  dissent. Any disagreement on any issue  increases our knowledge.  Whenever you disagree with me on any issue, I make more efforts to reach the depth.  Thanks a lot.

[Amit Agrawal]

Dear Shri KALLESHAMURTHY MURTHY Ji,

Thanks for taking efforts to explain 'proportionate reversal of ITC' by quoting some legal provisions under GST and trying to provide some cogent 'legal reasoning' for the view taken by you.

Such efforts indeed help us to understand your legal reasoning better for taking a particular view, give our views thereon and make this 'discussion' lively, comprehensive & really meaningful for other contributors, visitors and querist/s. 

Unfortunately but with due respect for your views, I beg to differ with your legal reasoning for following reasons:

A. Everyone agrees that GST is indeed payable by the taxpayer while selling subject goods at its 'scrap value'. In other words, said goods were sold in the course or furtherance of business of the taxpayer and thereby, falls within the term 'supply' u/s 7 of the CGST Act, 2017.

B. Consequently, it becomes clear that subject goods were used by the taxpayer in the course or furtherance of his business and thereby, he becomes eligible for credit of input tax charged on subject supply of goods or services or both to him u/s 16(1) of the CGST Act, 2017.

C. As subject goods were used only for 'business' (as defined u/s 2(17) of the CGST Act, 2017) of the taxpayer & there was no other purpose, Section 17(1) does not apply. 

C1. Assuming that Section 17(1) indeed applies to given situation (though I disagree with such a proposition), even then, tax-payer needs to reverse only 5% of the ITC and not "proportionately" (i.e. 75%) in given situation (Reference: Rule 42(1)(j) of the CGST Rules, 2017). 

D. When ITC is availed as per provisions of law and when same is NOT required to reverse (even "proportionately") as per provisions of law (as no-one could point out such provisions exists under GST law requiring "proportionate" ITC reversal in given situation), then, there is no legal question of 'enrichment of ITC' to the taxpayer. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[JOHN SHANNEL]

Dear all, 

Thanks for taking time and giving your inputs. I came across this advance ruling which denies ITC on goods sold as scrap. 

2023 (9) TMI 852 - AUTHORITY FOR ADVANCE RULING, TELANGANA

Please share your suggestion. 

John Shannel

[Sadanand Bulbule]

Dear John

The facts of your case and the facts of the case determined in the subject  AAR are clearly distinguishable. In your case, there is only change in the plan of sale of goods.Whereas in the AAR, the goods are destroyed/lost and then the remaining are sold as scrap. Thus the context of both facts are altogether different.

So the ratio of subject AAR does not apply to your facts. You may go with the opinions of the experts as there is no need to reverse ITC.

[KASTURI SETHI]

With reference to the query at serial no.12, the facts are different from the cited decision of AAR.It is not applicable to the subject issue.  Any decision of AAR has only persuasive value and not precedential value. It is applicable to the applicant only and not meant for other assessees.. 

[Amit Agrawal]

Dear Querist, 

With regards to AAR ruling quoted in Post No. 12 above (i.e. 2023 (9) TMI 852 - AUTHORITY FOR ADVANCE RULING, TELANGANA IN RE: M/S. GEEKAY WIRES LIMITED), my views are as under:

A. Subject matter under discussion here (Issue Id: 119300) is "Inputs, sold at scrap value due to change in business circumstances" whereas said AAR ruling deals with "fire destroying Finished Goods". These are two materially different situation. 

B. Said AAA grossly erred in coming to the conclusion that ITC needs to be reversed by misapplying Section 17(2), 17(5)(h) & 18(4) to the given situation before them.

B2. Section 17(2) is not applicable as there is no goods involved in effecting exempt supplies. Section 17(5)(h) is not applicable because the raw material - on which ITC was taken by the tax-payer - was not destroyed by fire. Section 18(4) is not applicable because tax-payer's output supply does not get wholly exempted nor tax-payer opts for composition scheme u/s 10 because of the event of fire destroying his finished goods.

B3. If anything, from reading of said ruling, I became much more confident about my views that no reversal of ITC is required in given situation before AAR. This is because I find that Department does NOT have any strong legal grounds to deny ITC against "raw material" just because "fire destroyed finished goods manufactured using such raw material".

B4. I also find that there is no legal provision (i.e. similar to Section 18(4)) incorporated in Section 17(5) or in any rules which can demand "reversal of ITC against inputs" which are "contained in semi-finished or finished goods" when such "semi-finished or finished goods" gets destroyed by fire.

B5. Such ruling just shows why one should never take Dept's officer's views on their face value while interpreting any legal provisions / rules.

B6. No wonder why Dept. find itself on losing side - in very major number of cases - when tax-disputes reaches at tribunal or above courts.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Amit Agrawal]

Moreover, I agree with views given in post at Sr. No. 12 above by Shri Sadanand Bulbule Ji, specially his last sentence which reads as follows: "........ You may go with the opinions of the expertsas there is no need to reverse ITC."

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Amit Agrawal]

To avoid possibility of confusion / misgivings  (if any), please read my last post above as follows:

Moreover, I agree with views given in post at Sr. No. 12 above by Shri Sadanand Bulbule Ji, specially his last Para which reads as follows: "So the ratio of subject AAR does not apply to your facts. You may go with the opinions of the experts as there is no need to reverse ITC."

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Sadanand Bulbule]

Dear Amit ji

Thank you so much for your generous acknowledgement. 

[Sadanand Bulbule]

Dear all

PFA for reference in the context of subject discussion:

2024 (12) TMI 398 - MADRAS HIGH COURT - M/S. ARS STEELS AND ALLOY INTERNATIONAL PRIVATE LIMITED, REPRESENTED BY ITS DEPUTY DIRECTOR N. PRABU VERSUS THE STATE TAX OFFICER, THE DEPUTY COMMISSIONER (CT) , CHENNAI

 

[KALLESHAMURTHY MURTHY K.N.]

Dear All

Sirs,

With reference to the Judgement in Sl. No. 19 provided by Sri Sadanand Sir, It is settled as no input where no output tax is generated on the particular items. In the above issue, the goods was spoiled and output tax was collected only to the extent of 25% being scrapped. In the context of the Judgement, the taxpayer is not entitled to ITC since it was sold in a different form. However, I stick to the proportionate entitlement of ITC. 

Thanks to all. 

AI Summary

Input tax credit eligibility on raw materials sold as scrap depends on business use and absence of statutory reversal rules. The discussion concludes that ITC is generally available on raw materials sold as scrap where the inputs were acquired in the course or furtherance of business and not lost or destroyed, because sale of scrap constitutes a supply generating output tax and nothing in the GST provisions expressly mandates proportionate denial of ITC in that factual scenario; however, divergent views invoke earlier excise rules, certain advance rulings, or factual distinctions (such as destruction of finished goods) that may lead to different conclusions.