ITC availed on inputs used in the manufacture of finished goods that subsequently got destroyed, must be reversed

The Telangana AAAR, in Geekay Wires Ltd., In re [Order-in-Appeal No. AAAR/05 of 2025, dated February 20, 2025] held that Input Tax Credit availed on raw materials and inputs used in the manufacture of finished goods which were later destroyed in a fire must be reversed on the ground that Section 17(5)(h) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) bars Input Tax Credit in respect of goods lost or destroyed, and this includes cases where raw materials and inputs were consumed in producing finished goods that are subsequently destroyed.

Facts:

M/s. Geekay Wires Ltd. (“the Applicant”) is engaged in the business of manufacturing Steel Nails and other steel products. The Applicant purchases raw materials and avails GST Input Tax Credit (“ITC”) on them. During the manufacturing process, steel scrap is also generated, which the Applicant sells in the market, and GST liability is paid/set off on the same against the GST input.

A fire broke out in the factory premises of the Applicant, and major quantities of finished goods, i.e., Steel Nails, became unfit for being sold and, hence, these damaged finished goods were sold as scrap in the market, and the GST applicable on the sale of such scrap was paid. Subsequently, the Applicant also claimed ITC on all the raw materials and other inputs used for manufacturing these damaged finished goods as per Section 16 of the CGST Act/ State Goods and Services Act, 2017 (“the SGST Act”).

Since raw materials and other inputs purchased by the Applicant were used in the manufacturing of finished goods, the finished goods became unfit for sale. The Applicant sought a ruling from the Telangana AAR, with regard to the eligibility of ITC on the raw materials consumed in the manufacture of finished goods which became unfit for being sold as such. Vide the Order (“the Impugned Order”), the Telangana AAR ruled that ITC is required to be reversed in the following cases:

• When the raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in a fire accident,
• When the raw materials procured are lost in a fire accident before being used in the manufacture of finished goods,
• When the destroyed finished goods can be sold as steel scrap in the open market, the output tax liability on such supply of scrap is paid.

Aggrieved by the Impugned Order, the Appellant filed the present appeal to AAAR.

Issue:

Whether ITC availed on inputs used in the manufacturing of finished goods that subsequently got destroyed, must be reversed?

Held:

The Telangana AAAR in the Order-in-Appeal No. AAAR/05 of 2025 held as under:

• Observed that, on a combined reading of Section 2 &Section 16 of the CGST/ SGST Act, it can be construed that the definition of input tax is very wide. A registered person is entitled to take ITC on inputs, input services and capital goods if he uses the same in course or furtherance of his business or the registered person has an intention to use such inputs, input services or capital goods in the course or furtherance of his business at the time of procurement of such goods/ services.
• Noted that, availment of ITC is subject to certain restrictions laid down in Section 17(5) of the CGST/ SGST Act. Section 17(5)(h) of the CGST/ SGST Act bars ITC in respect of goods that are lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Further, the use of a non-obstante clause makes it evident that the provisions of Section 17 (5) of the CGST/ SGST Act have an overriding effect over the provisions of Section 16 (1) & Section 18 (1)of the CGST/ SGST Act.
• Observed that, the wording of Section 17 (5) (h) of the CGST/ SGST Act is simple, clear, and unambiguous, and any averment that seeks to restrict the plain and unambiguous meaning cannot be countenanced. As such, there is no merit in the contention that the phrase “in respect of” used in Section 17 (5) (h) of the CGST/ SGST Act indicates only ‘inputs’. In this regard, reliance was placed on the case of Tata Consultancy Services v. State of Andhra Pradesh 2004 (178) E.L.T. 22.
• Relied that, in the case of General Manager Ordnance Factory Bhandara, (2019 (26) G.S.T.L. 423 (A.A.R. – GST)), where finished goods sent for testing were destroyed during testing and the Maharashtra Authority for Advance Ruling (“the Maharashtra AAR”) was of the view that in such a case where inputs are used, they cease to exist and cannot be considered to be destroyed, lost or stolen etc. The Maharashtra AAR further noted that ITC shall not be allowed in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples under Section 17 (5) (h) of the CGST Act and only a registered person is entitled to take ITC charged on any supply which are used or intended to be used in the course or furtherance of business under Section 16 of the CGST Act. Accordingly, goods, or services, or both are eligible for ITC in both scenarios, i.e., ‘when they are intended to be used’ and ‘when they are actually used’.
• Emphasized that, the Maharashtra AAR has distinguished the goods sent for testing with the goods destroyed in natural or manmade situations and has held that ITC need not be reversed where goods are sent for testing.
• Held that, the Maharashtra AAR has negated the contention that ITC need not be reversed where inputs are used in the manufacture of final products, which are destroyed in flood, fire, etc. As such, the ruling by the Maharashtra AAR does not support the case of the Appellant but rather supports the view taken by the Telangana AAR.

Our Comments:

Section 17 of the CGST Act, governs “Apportionment of credit and blocked credits” and Section 17(5)(h) of the CGST Act bars ITC on goods “lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”

In a similar judgement, the AAAR, Gujarat in Re: Jay Chemical Industries Ltd. 2021 (47) G.S.T.L. 505 held that ITC is not admissible under Section 17(5)(h) of the CGST Act when finished goods (dye intermediates) were destroyed in fire. The AAAR, Gujarat emphasized that goods destroyed cannot be considered as used in the course or furtherance of business. Since the inputs and input services were used to produce finished goods that no longer exist, the benefit of ITC cannot be retained. The overriding nature of Section 17(5) of the CGST Act prevails over general entitlement under Section 16of the CGST Act. Therefore, ITC claimed on such destroyed goods was required to be reversed.

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