XYZ supplied food products to Distributors which was returned back to XYZ due to expiry date over and damaged goods. On receipt of these goods, XYZ issued credit note to the distributors but had not adjusted the GST originally paid against the supply. The returned goods were destroyed by XYZ being unusable. Is XYZ required to pay GST / reverse ITC on such destroyed goods? In my view, provisions of Section 17(5)(h) will not get attracted here since GST is already paid once and the same is not adjusted also against credit note issued to the customer. Secondly, the goods destroyed is not fetching any value to XYZ. Section 17(5)(h) speaks about non – eligibility of credit on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Views of the experts please.
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XYZ is required to reverse ITC contained in the inputs used in the manufacture of finished goods (destroyed) on the ground that the subject finished goods were not used in the course or furtherance of business as required in terms of Section 16(1) of CGST Act.
Hence XYZ does not conform to the parameter laid down in Section 16(1).
Sir, thanks for your advice. But XYZ had already paid GST on these goods which are returned back. In my view, the customer would not be eligible for ITC, since he has not received the material so it is a cost to customer if net of GST credit note is passed on to him. If XYZ has passed gross credit note and not reversed the credit liability in return then it is ok since he had paid more then the input credit that needs to be reversed. In short, XYZ had no liability. Your views sir
Here I differ with you. Let us wait for views of other experts. If your view is correct, that will also enrich my knowledge. I am very keen to learn the views of other experts on this issue.
In this regards, I agree with the views expressed by our expert Shri Kasturiji Sir. The reason and interpretation can be as follows:
The XYZ supplied the goods (food product) to his distributor, but it was returned by the distributor for expiry of the date, till the goods made available to distributor against the consideration, it falls within the ambit of “Supply”. The distributor was eligible to take the ITC of the supply, as supplier has also paid tax.
When goods were returned, recipient is required to reverse ITC if availed. The supplier is required to issue credit note.
The goods received is destroyed by the XYZ, therefore, XYZ is required to reverse the ITC of the input used in goods.
The Section 16 talks of ITC to be availed on the tax charged on supply, while Section 17(5)(h) clearly says of ‘goods’ destroyed. The opening of Section 17(5) says that Notwithstanding anything contained in sub-section (1) of section 16 and sub-section(1) of section 18, input tax credit shall not be available in respect of the following,…. So when goods are returned it is “goods” lying in the stock or held in stock by XYZ and then it was destroyed. Therefore, XYZ is required to reverse the ITC of the goods destroyed. Needless to mention that 'inputs' and 'input tax credit' is defined under Section 2 of CGST Act.
The GST paid by the supplier, which was not adjusted, which can be adjusted by way of issuing credit note and thereby reducing the tax liability, can be claimed as refund of excess tax paid, if within the time limit and on fulfillment of conditions, if any.
Sh.Alkesh Jani Ji,
Wonderful understanding, interpretation and explanation by you on the issue. Really you deserve kudos for this.
Thanks Alkesh ji for your detailed and reasoned reply. However, the fact is little different which i had not specified in my query. The Customer had returned back the goods under a Tax Invoice by charging GST. However, the supplier had not claimed ITC of the same and destroyed the goods. Therefore, i still feel, whether the goods are received under a tax invoice or under a challan, since the supplier had not claimed ITC and simply destroyed the goods, no question of reversal of ITC nor any question of payment of GST.
My humble request.
Have I privilege to ask you the reasons for not disclosing full and correct facts in the query at the first instance ?
Respected Kasturi Sir,
Yes, it was my mistake and i sincerely apologize for the same.
No apology pl. Sir. I can also commit mistake.
A (seller) charged GST from B (buyer) and B issued tax invoice for return of goods charging GST. The status of GST paid on goods (manufactured goods) becomes neutral.
My question is :-
Has ITC taken on inputs contained in manufactured (destroyed) goods been utilised in the course of business or furtherance of business by the manufacturer ?
Sir, my plane view is since goods received back were simply destroyed without claiming any ITC being not marketable, no question of reversal of ITC
As per the query, why not to take credit and reverse the same in the same month under Section 17(5) of CGST Act and to follow proper procedure?
Further, Circular No. 72/2018 may please be referred. At para 3 it is clearly mentioned that “It may be noted that though this circular discusses the scenarios in relation to return of goods on account of expiry of the same, it may be applicable to such other scenarios where the goods are returned on account of reasons other than the one detailed above”.
As you have not availed ITC, reversal does not arise, but this will affect the Balance sheet Vs. Annual return. Therefore, I am of the view that proper procedure may be followed.
Respected Alkesh Sir,
I also fully agree with your views. It is always advisable to claim ITC and then reverse the same when the damaged goods are destroyed. This will help in minimizing the litigation.
Also sincere thanks for referring the relevant circular which is in line with my argument.
After the change in the initial query, the whole scenario was changed. For return of expired goods, tax invoice came into light. Had the full facts were known in the initial stage, such lengthy discussion could not have taken place. The circular covers all the aspects of the issue and clears the air.
I fully agree with ALL the views of Sh.Alkesh Jani Ji. He has worked hard on this query and very quickly.
Anyhow we learn from each reply. Such lengthy discussion is very useful for all.
Shri Kasturiji Sir,
Thanks for the words of appreciation. It means a lot to me when it comes from your side.
“Any man who is good by heart is a great man!”
― Mehmet Murat ildan
And you are a great man.
With due regards
Dear Sh.Alkesh Jani Ji,
I am overwhelmed with your affection and inspiring words. These are moral boosting words. Such expression has infused blood in me. Really I am indebted to you.