In re Prime Products (Tarun Madhukant Desai HUF) (GST AAR Maharashtra)
The Maharashtra Authority for Advance Ruling held that input tax credit (ITC) attributable to batt
The Maharashtra Authority for Advance Ruling held that input tax credit (ITC) attributable to batteries and cells damaged by flooding must be reversed under Section 17(5)(h) of the Central Goods and Services Tax Act, 2017, to the extent of the reduction in their value, notwithstanding that the goods remained physically available and could subsequently be sold at reduced prices. The Authority rejected the contention of M/s Prime Products that reversal was unnecessary because the goods had neither been completely destroyed nor disposed of or written off. It distinguished ordinary market-driven reductions in inventory value from substantial physical damage caused by an extraordinary event such as flooding. The Authority further held that receipt of insurance compensation did not eliminate the obligation to reverse ITC, although the compensation itself did not constitute consideration for a taxable outward supply. The reversal was required in the tax period in which the loss was known or recognised, whichever was earlier, rather than necessarily upon settlement of the insurance claim.
The applicant, M/s Prime Products, was engaged in trading lead-acid batteries, nickel cells and battery packs classified under HSN 8507. It purchased goods from domestic suppliers and through imports, paying GST at 28% and availing the corresponding ITC. On 18 July 2021, severe flooding affected its warehouse at Chichpada, Sativli, Vasai (East), Maharashtra. The premises were inundated with approximately four feet of water, damaging batteries and cells stored in the warehouse. The applicant stated that stock worth approximately Rs. 2.55 crore, excluding GST, was affected, including goods worth approximately Rs. 1.25 crore that were submerged in dirty floodwater. The damage included dislodging of stacked battery boxes, corrosion of terminals, possible entry of contaminated water into battery casings, deterioration of battery plates and electrolytes, and damage to packing cartons. The applicant nevertheless maintained that the batteries and cells remained physically identifiable and marketable, although at substantially reduced prices.
The applicant had obtained insurance coverage from Oriental Insurance Company Limited and lodged a claim of Rs. 1,63,03,720, excluding GST, for reduction in the value of the affected stock. Bhattavadekar Insurance Surveyors & Loss Assessors Pvt. Ltd., appointed by the insurer, submitted an assessment report dated 12 January 2022. The surveyor considered the reduced stock value, salvage value and related adjustments, and the insurer offered Rs. 74,58,282 without considering GST or ITC reversal. The GST component of Rs. 34,39,798 was not admitted because the insurer considered that reversal of ITC was unnecessary where the goods had not been completely destroyed or converted into scrap. The applicant consequently sought an advance ruling on whether ITC reversal was required and, if so, the amount and relevant tax period.
The applicant contended that Section 17(5)(h) of the CGST Act restricts ITC only in respect of goods that are lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. According to the applicant, none of these circumstances applied because the batteries and cells continued to exist, remained in its possession and could still be sold under the same HSN classification. It argued that the reduction in market value resulting from flooding did not amount to complete destruction or writing off of the goods. The applicant distinguished a reduction in the carrying value of inventory from the elimination of inventory itself. Referring to Accounting Standard 2 on valuation of inventories, it submitted that inventory may be written down to its net realisable value without being written off. Accordingly, it maintained that an accounting adjustment reflecting reduced realisable value did not automatically trigger Section 17(5)(h).
The applicant also submitted that the insurance proceeds represented compensation arising from a contractual insurance arrangement and not consideration for any supply of goods or services to the insurer. It argued that an insurance claim settlement was a financial transaction and did not constitute a taxable supply under Section 7 of the CGST Act. Since the goods continued to be sold as batteries and cells with GST charged at 28%, the applicant asserted that the original ITC remained connected with taxable outward supplies. It therefore requested confirmation that no reversal was required and that the insurance compensation did not independently attract GST.
The jurisdictional officer opposed the applicant’s interpretation and maintained that ITC attributable to the flood-damaged goods was required to be reversed under Section 17(5)(h). The officer submitted that the goods had suffered damage resulting in loss of commercial value and that the corresponding credit was consequently restricted. It was further contended that reversal should be proportionate to the reduction in the value of the affected goods.
The Authority examined the language and purpose of Section 17(5)(h), which provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. It considered whether substantial damage to inventory caused by flooding could fall within the expression “goods lost” or the concept of goods being written off, notwithstanding their continued physical existence. The Authority rejected a strictly literal interpretation limiting the provision to cases of complete physical destruction or disappearance of goods. It reasoned that goods may suffer substantial commercial loss when their intended utility and market value are materially impaired by an extraordinary event such as a flood, fire or accident.
The Authority observed that the applicant had acknowledged significant physical damage, reduction in market value and receipt of insurance compensation for the loss. Although the batteries and cells remained available for sale, they could no longer be used or sold in the same manner or at the value originally contemplated. The Authority regarded the damage as a specific and identifiable commercial loss rather than an ordinary reduction in selling price arising from market conditions. It also referred to commercial and accounting treatment of inventory impairment and concluded that a substantial diminution in value arising from physical damage could attract the restriction under Section 17(5)(h). The Authority therefore did not accept the applicant’s contention that the continued existence and subsequent sale of the goods necessarily preserved the entire ITC originally availed.
On the insurance aspect, the Authority held that compensation received for damaged inventory was not consideration for goods or services supplied by the applicant to the insurance company. The payment arose from the insurance contract and represented monetary compensation for the insured loss. The Authority referred to the treatment of actionable claims under Schedule III of the CGST Act and concluded that the insurance proceeds themselves did not attract GST. However, it distinguished the taxability of insurance compensation from the eligibility of ITC on damaged inventory. It held that the recovery of compensation did not restore the commercial value of the damaged goods for the purpose of retaining ITC or remove the restriction arising under Section 17(5)(h).
Regarding the extent of reversal, the Authority held that ITC attributable to the reduction in value of the damaged batteries and cells was required to be reversed. The ruling did not prescribe a separately quantified rupee amount of ITC reversal. Instead, it directed reversal to the extent of the reduction in the value of the affected inputs. On timing, the Authority observed that the relevant event was the occurrence or recognition of the loss. Where ITC had already been availed and the subsequent event rendered it ineligible, reversal was required when the event occurred or became known to the taxpayer. The Authority accordingly held that reversal must be made in the returns for the tax period in which the loss was known or recognised, whichever was earlier, and not necessarily on the date of insurance claim settlement.
In its final ruling, the Maharashtra AAR answered both questions against the applicant on ITC eligibility. It held that ITC attributable to batteries and cells damaged by flooding or inundation was required to be reversed under Section 17(5)(h) of the CGST Act to the extent of the reduction in their value. It further held that the reversal must be made in the relevant tax period when the loss was known or recognised. The ruling therefore treats substantial flood-related physical damage and the resulting commercial impairment of inventory as sufficient grounds for proportionate ITC reversal, even where the goods remain physically available and are subsequently sold at reduced prices. The insurance compensation was not itself treated as a taxable outward supply, but it did not affect the separate obligation to reverse ineligible ITC.
Cases Discussed
No judicial precedents were expressly cited or discussed in the advance ruling. The Authority decided the matter principally by interpreting Section 17(5)(h), Section 7 and Schedule III of the CGST Act, 2017. The applicant also referred to Accounting Standard 2 concerning valuation of inventories. No additional judicial decisions have been introduced.
eries and cells damaged by flooding must be reversed under Section 17(5)(h) of the Central Goods and Services Tax Act, 2017, to the extent of the reduction in their value, notwithstanding that the goods remained physically available and could subsequently be sold at reduced prices. The Authority rejected the contention of M/s Prime Products that reversal was unnecessary because the goods had neither been completely destroyed nor disposed of or written off. It distinguished ordinary market-driven reductions in inventory value from substantial physical damage caused by an extraordinary event such as flooding. The Authority further held that receipt of insurance compensation did not eliminate the obligation to reverse ITC, although the compensation itself did not constitute consideration for a taxable outward supply. The reversal was required in the tax period in which the loss was known or recognised, whichever was earlier, rather than necessarily upon settlement of the insurance claim.
The applicant, M/s Prime Products, was engaged in trading lead-acid batteries, nickel cells and battery packs classified under HSN 8507. It purchased goods from domestic suppliers and through imports, paying GST at 28% and availing the corresponding ITC. On 18 July 2021, severe flooding affected its warehouse at Chichpada, Sativli, Vasai (East), Maharashtra. The premises were inundated with approximately four feet of water, damaging batteries and cells stored in the warehouse. The applicant stated that stock worth approximately Rs. 2.55 crore, excluding GST, was affected, including goods worth approximately Rs. 1.25 crore that were submerged in dirty floodwater. The damage included dislodging of stacked battery boxes, corrosion of terminals, possible entry of contaminated water into battery casings, deterioration of battery plates and electrolytes, and damage to packing cartons. The applicant nevertheless maintained that the batteries and cells remained physically identifiable and marketable, although at substantially reduced prices.
The applicant had obtained insurance coverage from Oriental Insurance Company Limited and lodged a claim of Rs. 1,63,03,720, excluding GST, for reduction in the value of the affected stock. Bhattavadekar Insurance Surveyors & Loss Assessors Pvt. Ltd., appointed by the insurer, submitted an assessment report dated 12 January 2022. The surveyor considered the reduced stock value, salvage value and related adjustments, and the insurer offered Rs. 74,58,282 without considering GST or ITC reversal. The GST component of Rs. 34,39,798 was not admitted because the insurer considered that reversal of ITC was unnecessary where the goods had not been completely destroyed or converted into scrap. The applicant consequently sought an advance ruling on whether ITC reversal was required and, if so, the amount and relevant tax period.
The applicant contended that Section 17(5)(h) of the CGST Act restricts ITC only in respect of goods that are lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. According to the applicant, none of these circumstances applied because the batteries and cells continued to exist, remained in its possession and could still be sold under the same HSN classification. It argued that the reduction in market value resulting from flooding did not amount to complete destruction or writing off of the goods. The applicant distinguished a reduction in the carrying value of inventory from the elimination of inventory itself. Referring to Accounting Standard 2 on valuation of inventories, it submitted that inventory may be written down to its net realisable value without being written off. Accordingly, it maintained that an accounting adjustment reflecting reduced realisable value did not automatically trigger Section 17(5)(h).
The applicant also submitted that the insurance proceeds represented compensation arising from a contractual insurance arrangement and not consideration for any supply of goods or services to the insurer. It argued that an insurance claim settlement was a financial transaction and did not constitute a taxable supply under Section 7 of the CGST Act. Since the goods continued to be sold as batteries and cells with GST charged at 28%, the applicant asserted that the original ITC remained connected with taxable outward supplies. It therefore requested confirmation that no reversal was required and that the insurance compensation did not independently attract GST.
The jurisdictional officer opposed the applicant’s interpretation and maintained that ITC attributable to the flood-damaged goods was required to be reversed under Section 17(5)(h). The officer submitted that the goods had suffered damage resulting in loss of commercial value and that the corresponding credit was consequently restricted. It was further contended that reversal should be proportionate to the reduction in the value of the affected goods.
The Authority examined the language and purpose of Section 17(5)(h), which provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. It considered whether substantial damage to inventory caused by flooding could fall within the expression “goods lost” or the concept of goods being written off, notwithstanding their continued physical existence. The Authority rejected a strictly literal interpretation limiting the provision to cases of complete physical destruction or disappearance of goods. It reasoned that goods may suffer substantial commercial loss when their intended utility and market value are materially impaired by an extraordinary event such as a flood, fire or accident.
The Authority observed that the applicant had acknowledged significant physical damage, reduction in market value and receipt of insurance compensation for the loss. Although the batteries and cells remained available for sale, they could no longer be used or sold in the same manner or at the value originally contemplated. The Authority regarded the damage as a specific and identifiable commercial loss rather than an ordinary reduction in selling price arising from market conditions. It also referred to commercial and accounting treatment of inventory impairment and concluded that a substantial diminution in value arising from physical damage could attract the restriction under Section 17(5)(h). The Authority therefore did not accept the applicant’s contention that the continued existence and subsequent sale of the goods necessarily preserved the entire ITC originally availed.
On the insurance aspect, the Authority held that compensation received for damaged inventory was not consideration for goods or services supplied by the applicant to the insurance company. The payment arose from the insurance contract and represented monetary compensation for the insured loss. The Authority referred to the treatment of actionable claims under Schedule III of the CGST Act and concluded that the insurance proceeds themselves did not attract GST. However, it distinguished the taxability of insurance compensation from the eligibility of ITC on damaged inventory. It held that the recovery of compensation did not restore the commercial value of the damaged goods for the purpose of retaining ITC or remove the restriction arising under Section 17(5)(h).
Regarding the extent of reversal, the Authority held that ITC attributable to the reduction in value of the damaged batteries and cells was required to be reversed. The ruling did not prescribe a separately quantified rupee amount of ITC reversal. Instead, it directed reversal to the extent of the reduction in the value of the affected inputs. On timing, the Authority observed that the relevant event was the occurrence or recognition of the loss. Where ITC had already been availed and the subsequent event rendered it ineligible, reversal was required when the event occurred or became known to the taxpayer. The Authority accordingly held that reversal must be made in the returns for the tax period in which the loss was known or recognised, whichever was earlier, and not necessarily on the date of insurance claim settlement.
In its final ruling, the Maharashtra AAR answered both questions against the applicant on ITC eligibility. It held that ITC attributable to batteries and cells damaged by flooding or inundation was required to be reversed under Section 17(5)(h) of the CGST Act to the extent of the reduction in their value. It further held that the reversal must be made in the relevant tax period when the loss was known or recognised. The ruling therefore treats substantial flood-related physical damage and the resulting commercial impairment of inventory as sufficient grounds for proportionate ITC reversal, even where the goods remain physically available and are subsequently sold at reduced prices. The insurance compensation was not itself treated as a taxable outward supply, but it did not affect the separate obligation to reverse ineligible ITC.
Cases Discussed
No judicial precedents were expressly cited or discussed in the advance ruling. The Authority decided the matter principally by interpreting Section 17(5)(h), Section 7 and Schedule III of the CGST Act, 2017. The applicant also referred to Accounting Standard 2 concerning valuation of inventories. No additional judicial decisions have been introduced.
