Reversal of Input on damaged goods

[Shrikanth Parmarthy]

dear experts,

There are transfer of goods from plants located in Andhra Pradesh to Sales office located in Karnataka through Stock transfer by paying IGST. ITC on those goods was claimed. Some goods were found damaged on receipt at Karnataka sales office. The same goods were transferred back to plant located in AP by paying IGST so that same can be scrapped or reused. Karnataka GST officer is asking to reverse the ITC as per provisions of the act. Our contention is' as we have already paid outward tax there is no loss to GST department'. Is our view correct. Kindly provide your views in this regard.

[Sadanand Bulbule]

Your view is absolutely correct. The provisions of Section 17[5][h] of the CGST Act has no role to play in the situation explained by you. Ask the officer to explain under what provision to reverse the ITC amount?

[KASTURI SETHI]

In this scenario, reversal of ITC is not required.

Have you received any letter from the State GST Officer ? 

[Ganeshan Kalyani]

Since it is a receipt of goods at Karnataka sales office the Officer is asking for reversal of ITC. But you might have raised Tax invoice while sending back the goods to AP plant. You would have charged GST and also paid it to the government. In fact you considered it as fresh supply from Karnataka sales office. Explain the officer that effect is same in either way i.e. either you reverse the ITC or pay GST on the goods sent back.

[Shilpi Jain]

In addition to the above also note that the restriction of credit under the law is on goods that are destroyed and not damaged!

So no ITC reversal either in the sending branch or the receiving branch.

[Shrikanth Parmarthy]

Dear Experts,

Thanks for your inputs.

@kasturi sethi sir - the state officer has given notice under section 17(5)(h) of the CGST Act, 2017.

[YAGAY andSUN]

Your view is legally sound and backed by the provisions of the CGST Act, and the demand for ITC reversal by the Karnataka GST officer under Section 17(5)(h) is misplaced in this context. Section 17(5)(h) restricts input tax credit on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples, but does not apply to goods that are merely damaged and subsequently returned to the originating unit for repair, reuse, or scrapping. In your case, the goods were damaged in transit, and rather than being destroyed or disposed of without tax, they were returned through a taxable supply from the Karnataka sales office to the AP plant, with IGST paid and a proper tax invoice raised. This constitutes a supply under GST, and accordingly, the GST liability on such return movement has already been discharged. Hence, the ITC on the original stock transfer remains valid, as the returned goods have not been destroyed or written off but have been accounted for in a subsequent outward taxable supply. Moreover, there is no revenue loss to the department, as tax has been paid on both the outward and return leg of the transaction. You may ask the officer to clarify under what precise statutory authority or case precedent the ITC reversal is being demanded, as the cited section does not apply in cases of taxable returns of damaged, but not destroyed, goods. A formal representation citing this position, along with relevant documentation and invoice trail, should help resolve the matter.

[YAGAY andSUN]

[Your Company Name]

[Your Company Address][City, State, PIN Code]

Email: [Your Email Address]

Phone: [Your Contact Number]

GSTIN: [Your GSTIN]

Date: [Insert Date]

To,

The GST Officer,

[GST Office Name]

[GST Office Address]

[City, State, PIN Code]

Subject: Representation Regarding Reversal of ITC on Goods Transferred from Andhra Pradesh to Karnataka Sales Office

Dear Sir/Madam,

We, [Your Company Name], are a registered taxpayer under the Goods and Services Tax (GST) regime, bearing GSTIN [Your GSTIN]. We are writing this representation in response to the notice issued by your office under Section 17(5)(h) of the CGST Act, 2017, demanding the reversal of Input Tax Credit (ITC) on the goods transferred from our plant in Andhra Pradesh to our sales office in Karnataka.

Facts of the Matter:

1. We had transferred goods from our plant in Andhra Pradesh to our Karnataka sales office through stock transfer, paying IGST on the transaction. The ITC on these goods was duly claimed in the relevant GST returns.
2. Upon receipt at the Karnataka sales office, it was observed that some of the goods were damaged during transit. To manage the situation, the damaged goods were sent back to our Andhra Pradesh plant for either scrapping or reuse. The return of these goods was done by raising a taxable supply invoice from our Karnataka sales office to the Andhra Pradesh plant, and IGST was paid on the return transaction as per the applicable provisions.
3. It is important to note that the goods have not been destroyed or disposed of but were merely damaged during transit and returned for further processing. Therefore, the return of the goods constitutes a taxable transaction under the GST law.

Clarification Regarding ITC Reversal:

The demand for ITC reversal under Section 17(5)(h) of the CGST Act, 2017, which restricts credit on goods that are lost, stolen, destroyed, written off, or disposed of by way of gift or free samples, is not applicable to the present case. This provision applies to situations where goods are destroyed or written off, not to those that are damaged and subsequently returned to the supplier for reuse, scrapping, or repairs.

In our case, the goods were returned to the original plant, where they will either be scrapped or reused, and IGST has already been paid on this return transaction. Since there is no loss of revenue to the government and the goods have not been destroyed or disposed of in a way that would restrict ITC under Section 17(5)(h), we believe that there is no requirement to reverse the ITC previously claimed.

Request for Clarification and Resolution:

In light of the above, we kindly request your office to clarify the legal provision under which the ITC reversal is being demanded, as Section 17(5)(h) does not apply in the case of damaged goods that have been returned for further processing. We also request that the demand for ITC reversal be reconsidered and withdrawn, as it does not reflect the intent and provisions of the GST law.

We are ready to provide any further documentation or clarification, including the relevant invoices and proof of payment of tax, to assist in resolving this matter.

Conclusion:

We respectfully submit that as there is no destruction or permanent disposal of the goods, and the return transaction was conducted with proper tax invoicing and payment of IGST, there is no need for ITC reversal. We request you to kindly review the matter and take necessary action to resolve the issue in accordance with the law.

Thank you for your attention to this matter. We look forward to your prompt response.

Yours sincerely,

[Your Name]

[Your Designation]

[Your Company Name]

[Your Contact Information]

[Ganeshan Kalyani]

Sir, have the AP plant issued credit note with GST for the receipt of damaged goods? If so, then you are required to reverse the ITC. If only financial credit note then no ITC reversal is required.

[KASTURI SETHI]

Sh.Shrikanth Parmarthy,

In this scenario, the SCN issued by the department is devoid of merits.

       

[KASTURI SETHI]

Dear Sh.Shrikanth Parmarthy,

You have been forcibly dragged into litigation. Now you have to file reply to the Notice. In order to get  fair justice,  you should bring the whole matter into the notice of the jurisdictional Commissioner/Chief Commissioner.

Hopefully  the demand will be dropped by the Adjudicating Authority in the interest of principles of natural justice.

[YAGAY andSUN]

Let's continue this discussion to stimulate Expert's Brains.

Brainstorming Questions :-

1. What will happen if Damaged Goods can't be repaired?
2. How such goods will be disposed - off?
3. Whether any Environmental Friendly way has been defined if damaged goods are being disposed off?
4. What will happen to ITC in such scenarios?

[KASTURI SETHI]

M/s.Yagay and Sun,

Sirs, My views are as under :-

1. What will happen if Damaged Goods can't be repaired ?

Reply : These will be scrapped.

2. How such goods will be disposed - off ?

Reply : Nomenclature of the damaged goods is absent. Description of goods is required to reply.

3. Whether any Environmental Friendly way has been defined if damaged goods are being disposed off ?

Reply : Same as in reply to question no.2.

4. What will happen to ITC in such scenarios ?

Reply : ITC will be admissible inasmuch as tax stands paid on finished goods.

Although the questions are hypothetical, yet the same cannot be not delinked from the original query. Reason : The source of your queries is the original query.

[Sadanand Bulbule]

Dear Sir

You have given practical solutions  even to hypothetical questions. I welcome them. 

[Shrikanth Parmarthy]

Dear experts,

Thank you all for your support. We were able to convince the officer based on your inputs.

Respected yagay & sun - The draft letter to officer which you shares was very help in framing our reply to the office. Thank you

AI Summary

Goods Transfer and Tax Credit Dispute: Company Successfully Challenges Input Tax Credit Reversal Under GST Regulations A company transferred goods from Andhra Pradesh to Karnataka, claiming input tax credit. Some goods were damaged and returned to the original plant for scrapping or reuse by paying IGST. The Karnataka GST officer demanded ITC reversal under Section 17(5)(h), but forum experts argued that this provision does not apply since the goods were not destroyed and a taxable supply invoice was raised for the return. The company successfully convinced the officer using the provided legal reasoning.