Whether ITC is to be reversed on Inputs if Finished Goods billed but not delivered to recipient is Destroyed in Fire

[Ramesh Kumar]

Dear experts,

My query is whether ITC is required to be reversed on inputs if finished goods which were billed to customer, but were destroyed in fire accident before delivery.

In this case, the party has already billed the finished goods and consideration is received including GST. Below are the different scenarios I am seeking a clarity.

1. Goods billed but not delivered. Consideration not received. Is ITC to be reversed on inputs.

2. Goods billed, consideration received, but goods not delivered. Is ITC to be reversed on inputs.

3. Has supply happened just by raising invoice and receiving consideration, without actual delivery of goods?

4. If details of inputs used for finished goods destroyed during fire are not available, can Department raise demand on the basis of value of the finished goods or insurance claim received on those goods @18%?

Please put some light on the above issues.

[Shilpi Jain]

Has the customer accepted the invoice or subsequently credit note was issued?

If CN issued then supply has not taken place.

[Shilpi Jain]

Pls give further facts to give view to your queries.

Whether the contract is ex-works or requires delivery at customer place?

[Brijesh Verma]

Reversal of ITC in such circumstances (e.g. destruction of final product) is not dependent on 'happening or non-happening of supply'. Once final product is destroyed/lost/gifted then by virtue of 17(5), ITC shall have to be reversed. 

[KASTURI SETHI]

The query-wise reply is as under :-

1. Goods billed but not delivered. Consideration not received. Is ITC to be reversed on inputs. Reply. : Decision cannot be taken at this stage. It has to be kept pending till delivery the goods.

2. Goods billed, consideration received, but goods not delivered. Is ITC to be reversed on inputs.

Reply : The buyer's amount cannot be retained for ever. You will have to either deliver the goods or return the amount. Hence at this stage no decision.

3. Has supply happened just by raising invoice and receiving consideration, without actual delivery of goods ?

Reply : NO.

4. If details of inputs used for finished goods destroyed during fire are not available, can Department raise demand on the basis of value of the finished goods or insurance claim received on those goods @18% ?

Reply : If tax component is received from Insurance Co., then tax leviable on the finished products has to be deposited with Govt., otherwise ITC availed on the inputs contained in the finished goods (destroyed) has to be reversed. ITC so availed is clearly blocked under Section 17 (5) (h) of CGST Act.

[VENU K]

The question to be decided is whose property is it ?

The answer needs to be taken from the Sale of Goods Act 

Section 20 in The Sale Of Goods Act, 1930

20. Specific goods in a deliverable state.—

Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed.

In my opinion a decision needs to be taken in each case considering the above provision.

AI Summary

Reversal of input tax credit required when invoiced goods are destroyed; insurance tax recovery must be deposited or ITC reversed. Raising an invoice and receiving payment do not alone establish supply; a credit note can negate supply. When finished goods are destroyed, ITC attributable to inputs in those goods constitutes blocked input tax credit and must be reversed. If an insurer remits a tax component for the destroyed goods, that tax must be deposited with the government; absent such recovery, the originally claimed ITC on those inputs must be reversed.