ADVANCE RULING ON REVERSAL OF INPUT TAX CREDIT

[Mr. M. GOVINDARAJAN]

IN RE: M/S. GEEKAY WIRES LIMITED - 2023 (9) TMI 852 - AUTHORITY FOR ADVANCE RULING, TELANGANA the applicant is engaged in the business of manufacturing  of steel nails products at Telangana State.  The raw materials for manufacturing of steel nails are steel  wire rod.  The other major inputs are polypropylene, copper wire, paper tape and packing material like cartons, pallets etc.  The applicant purchases these raw materials from the other registered taxable persons within the State and from outside the Telangana State.  During the manufacturing process steel craps are also generated which the applicant sells in the market and GST for the same is paid/set off on the same against the GST input.

On 17.12.2002 a fire broke out in the factory premises.  The major quantities of finished goods are destroyed and these can be sold as a scrap in the market.  The applicant claimed the input tax credit on all the raw materials and other inputs for manufacturing of steel nails in the month in which they are procured from the registered taxable persons. 

The applicant filed an application before the Authority for Advance Ruling to seek advance ruling with regard to the eligibility of input tax credit on the raw materials purchased for manufacture of finished goods i.e. whether already claimed input tax credit is required to be reversed or not in the following circumstances-

• When the raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the fire accidence completely;
• When the raw materials procured are lost in the fire accidence before use in manufacture of finished goods;
• 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.

The applicant submitted the following before the Authority for Advance Ruling-

• The inputs and input services are not destroyed in the fire accident as already by the time of the accidence they are used in the manufacturing of finished goods and lost their identity.
• The goods destroyed 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.
• Once the goods on which the input tax credit is taken are consumed in the final product and lose their identity then input tax credit reversal cannot be demanded.
• It can be even said that the input tax credit restriction does not extend itself to inputs contained in the finished goods after being put to use.
• When inputs are properly utilized in the manufacturing of finished goods, the same cease to exist and thus, credit availed on the said input is not required to be reversed in the event of destruction of the finished goods in fire.

A personal hearing was offered to the applicant.  The Authorized representative of the applicant appeared before the Authority for Advance Ruling and put forth his arguments.

The Authority for Advance Rulings considered the submissions made by the applicant.  The Authority for Advance Ruling is of the view that the general rule of interpretation of a statute must be read as a whole in its context.  Then the intention of the Legislature is to be found out by reading the statute as a whole.  The Authority for Advance Ruling observed that 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.

The Authority for Advance Ruling analyzed the provisions of Section 17(2) of the Act. The input tax credit on the purchases made in the content of Section 17(2) has to be restricted to the taxable supply only. This section is further buttressed by Section 18(4) wherein the condition of debiting or paying back the input tax already claimed is enumerated. 

The Authority for Advance Ruling analyzed the provisions of Section 18(4).  From the said section it can be seen that once the output becomes non taxable for any reason the input tax already utilizing pertaining to corresponding inputs has to be reversed or paid back.  Under this section the reversal will apply to the input tax relatable to-

• Inputs held in stock;
• Inputs contained in semi finished or finished goods in stock;
• Capital goods.

Section 17(5) clearly mentions that input tax shall not be availed in respect of goods lost, stolen, destroyed, written off or disposed by way of gift or free samples.  Therefore this section has to be interpreted in the context of other statutory provisions i.e., section 17(2) and 18(4) and the meaning has to be discerned by the principle discussed above.  The scheme of the Act becomes clear from the combining 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 supply 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 under section 18(4).  Therefore the input tax credit to the extent of manufactured goods destroyed or inputs destroyed is not available and the same needs to be reversed.  Scrap sold by the applicant is nothing but destroyed goods and therefore the same is not eligible for input tax credit.

The Authority for Advance Ruling gave the following rules on the application of the applicant-

• When the raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the first accident completely - the input tax credit is required to be reversed.
• When the raw materials procured are lost in the first accident before use in the manufacture of finished goods - the input tax credit is required to be reversed.
• When the destroyed finished goods can be sold as steel scrap in the open market and output tax liability on such supply of scrip is paid - the input tax credit is required to be reversed.