Telangana State Authority For Advance Ruling in the case of M/s. Geekay Wires Limited has held that ITC needs to be reversed pertaining to inputs/raw material used in Finished Goods which got destroyed due to Fire and then sold as scrap.
In this article we will discuss following
Brief Facts of the Case
The applicant M/s. Geekay Wires Limited is engaged in the business of manufacturer of Steel Nails and other steel products in its manufacturing unit situated at Shankarampet-R, Village, Shankarampet- R Mandal-Medak, Medak, Telangana. The raw materials for manufacturing Steel Nails are Steel Wire rod.
It is submitted by the applicant that on 17th Dec 2022 fire broke out in the applicant's factory premises and major quantities of Finished goods as stated above are destroyed and now these finished goods can be sold only as a steel scrap in the market.
Questions Raised
The applicant seeks clarification with regard to eligibility of input tax credit on the raw materials purchased for manufacture of finished goods i.e. whether already claimed ITC is required to reversed or not in the following circumstances.
i) When the raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the fire accident completely.
ii) When the raw materials procured are lost in the fire accident before use in manufacture of finished goods.
iii) When the destroyed finished goods can be sold as steel scrap in the open market and output tax liability on such supply of scrap is paid.
Key Submissions of the Taxpayer
The applicant submitted that according to Section 17 (5) (h) of the CGST Act, input tax credit shall not be available in respect of the goods lost, stolen, destroyed, written off or disposed of way by of gift or free samples.
In the applicant's case, the goods purchased from the GST registered taxable persons are not destroyed but they are used in the manufacturing of finished goods and the finished goods are destroyed in the fire accident and these burnt finished goods can be sold only as scrap in the market and output tax liability will be paid on such supply of scrap under the GST Act.
These inputs and input services are not destroyed in the fire accident as already by the time of fire accident they are used in the manufacturing of finished goods and lost their identity. The relevant expenditure is then business expenditure.
That according to Section 17 (5) (h) of the CGST Act, input tax credit shall not be available in respect of the goods lost, stolen, destroyed, written off or disposed of way by of gift or free samples.
It is submitted that the goods destroyed in the applicant's case is finished goods and these finished goods are not procured from any registered taxable person under the Act and therefore the question of availing Input tax credit/restriction of such availed input tax credit in respect of the finished goods does not arise.
That when the finished goods are destroyed in fire accident and the destroyed finished goods are sold as scrap also input tax credit is available for the reasons mentioned above. It is also submitted that in this case, on the supply of scrap output tax liability is liable to be paid at the applicable rates under the GST Act.
Key Analysis of the Authority (Based on our interpretation)
The Hon’ble Supreme Court in an earlier case of Philips India Limited Vs Labour Court (1985) 3 SCC 103 held that it is a rule now firmly established that the intension of the legislature must be found by reading the statute as a whole. This rule referred to as “elementary rule” was followed in many national and international cases. It is spoken of construction ‘ex visceribus actus’ i.e., every part of the statute must be construed within the four corners of the Act.
In this context the legislative intent for allowing input tax credit under Section 16 has to be gathered from the conditions under which restrictions to claim the same arise under Section 17 of the CGST Act, 2017.
Section 17(2) of the CSGT Act, 2017 concludes with the clause “The amount of credit shall be restricted to so much of input tax as is attributable to the taxable supplies including zero rated supplies”. Therefore the input tax credit on the purchases made in the context of Section 17(2) has to be restricted to the taxable supplies only.
This Section is further buttressed by Section 18(4) where in the condition of debiting or paying back the input tax already claimed is clearly enumerated. The sub section is abstracted hereunder.
“(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption:
PROVIDED that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.”
It is seen from the above statute that once the output becomes non-taxable for any reason the input tax already utilized pertaining to the corresponding inputs has to be reversed or paid back.
The Section 17(5)(h) of the Act has to be interpreted in the context of other statutory provisions i.e., 17(2) and 18(4) and the meaning has to be discerned by applying the principle discussed above i.e., ‘ex visceribus actus’.
The scheme of the Act becomes clear from the combined reading of three provisions that input tax credit is available to a taxable person only when such taxable person makes taxable supplies. When the taxable supplies are not made input tax credit is not available under Section 17(2) and 17(5)(h). If the input tax credit is already utilized such credit needs to be paid back as given under Section 18(4).
Therefore the input tax credit to the extent of manufactured goods destroyed or inputs destroyed is not available to the applicant and the same needs to be paid back either through the credit available in the credit ledger or by cash.
Scrap sold by the applicant is nothing but a destroyed goods therefore in the context of above discussion sale of scrap i.e., sale of destroyed goods are not eligible for input tax credit.
Decision of the Authority
Questions
i) When the raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the fire accident completely.
ii) When the raw materials procured are lost in the fire accident before use in manufacture of finished goods.
iii) When the destroyed finished goods can be sold as steel scrap in the open market and output tax liability on such supply of scrap is paid.
Ruling
i) ITC is required to reversed
ii) ITC is required to reversed
iii) ITC is required to reversed
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Disclaimer: We did interpretation of Respected Authority Decision for purely academic purpose. In case, there is any mistake in understanding of the order, we are apologised to the Authority.