InA.R. Com/04/2023 -AAR- ITC on raw materials must be reversed if finished goods are destroyed in a fire: AAR (Telangana)
Members S.V. Kasi Visweswara Rao (State Tax) & Sahil Inamdar (Central Tax) [02-09-2023]
Read Order:In Re: M/s. Geekay Wires Limited
New Delhi, September 18, 2023: The Telangana bench of the Authority for Advance Rulings has issued a ruling stating that in the event of finished goods being destroyed in a fire, input tax credit (ITC) on raw materials must be reversed.
In the present case, M/s. Geekay Wires Limited(applicant), operated a manufacturing unit producing steel nails and other steel products. They experienced a fire incident that resulted in significant damage to their finished goods, leaving them with the option to sell these goods as steel scrap. The applicant sought clarification regarding the eligibility of ITC on raw materials purchased for the manufacturing of finished goods in various scenarios.
The two-member bench of S.V. Kasi Visweswara Rao (State Tax) and Sahil Inamdar (Central Tax) cited Section 17(2) of the Central Goods and Services Tax Act, 2017, which limits ITC to input tax attributable to taxable supplies, including zero-rated supplies. It was further observed that Section 17(5)(h) specifies that ITC cannot be availed for goods lost, stolen, destroyed, written off, or disposed of as gifts or free samples.
The bench emphasized that ITC is available only when taxable supplies are made. If no taxable supplies occur, ITC is not available under Sections 17(2) and 17(5)(h). If already utilized, such credit must be repaid per Section 18(4).
Therefore, the bench ruled that in the scenario where raw materials had been used in the manufacture of finished goods that were subsequently completely destroyed in a fire accident, ITC should be reversed. Likewise, when raw materials were procured but lost in a fire accident before their utilization in the manufacturing process, ITC should also be reversed. Furthermore, when finished goods, destroyed in the accident, were sold as steel scrap in the open market, with output tax liability on the scrap supply duly paid, ITC needed to be reversed in this situation as well.
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