Case Law Details
In re Jay Chemical Industries Ltd (GST AAR Gujarat)
Question- Whether the Company is required to reverse input tax credit on inputs consumed in dye intermediates (which is also a finished goods), where such goods have been destroyed in fire?
We find that in GST regime, the scope of definition of inputs, capital goods and input services is very wide and covers almost all the imaginable goods and services that are directly or indirectly used in course or furtherance of business. However, Section 17(5) of the CGST/SGST Act, 2017 prescribes a list of goods or services on which ITC is not admissible. The opening para of Section 17(5) of CGST Act, 2017 reads as follows:-
“(5) 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, namely:-
………….
…………
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; ”
The bare analysis of above section makes it clear that this section has overriding effect and it states that the ITC shall not be available in respect of goods lost, stolen, destroyed or written off.
We further note that Section 16 (1) of the CGST Act, 2017 provides that any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business.
In view of the above, we find that since the said inputs and capital goods have been used in manufacture of finished goods that have been destroyed, the same are not used in course or furtherance of business. We, therefore, hold that the Input Tax Credit taken on the inputs used in the manufacture or production of goods i.e. intermediate dye and the Input Tax Credit taken on input services used in or in relation to the manufacture or production of said goods shall be reversed.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, GUJARAT
BRIEF FACTS
M/s Jay Chemical Industries Ltd., is a company registered in the State of Gujarat, having GSTIN 24AAACJ7628J1ZG and principal place of business at Jay House, Panchvati Circle, Ambawadi, Ahmedabad-380006, Gujarat (herein after referred to as the “applicant” or the “company” for the sake of brevity) is engaged in manufacturing and marketing of dyes and dye intermediates. The Company has five manufacturing units situated at Kalamsar (Taluka-Khambhat), Vatva, Odhav, Sanand and Bharuch.
2. A fire broke out in the night of 27th June, 2020 at around 8:40 PM in the warehouse of the Khambhat Unit of the applicant. Though the exact reason of the fire is not known and Forensic Science Laboratory (FSL) report is awaited, it is estimated that raw material, intermediate/ finished goods of approx. Rs.40 Crores were destroyed.
3. It is pertinent to note that the Company manufactures Vinyl Sulphone, H Acid, M.P.D.S.A, C.P.C. Acetanilide Flakes, P.C.V.S. (herein after collectively referred to as “dye intermediates”) which itself is a finished and marketable product. However, as the Company is engaged in manufacturing of dyes and these dye intermediates act as an intermediate product in its manufacturing, the Company captively consumes such product. The dye intermediates are also sold by the Company in the market depending on the demand and pricing parameters.
4. Since dye intermediates were also destroyed in the fire, the Company hereby requests for clarification from the Advance Ruling Authority on following issue-
Question- Whether the Company is required to reverse input tax credit on inputs consumed in dye intermediates (which is also a finished goods), where such goods have been destroyed in fire?
Statement containing the applicant’s view point and submissions on issues on which the advance ruling is sought
5. Section 2 of the Gujarat Goods and Service Tax Act, 2017 (herein after referred to as ‘SGST Act’) provides for definition of various words. The relevant definitions are re-produced here for ease of reference-
Section 2(59) – “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business
Section 2(62) – “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes-
(a.) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;
Section 2(63) – “input tax credit” means the credit of input tax.
6. Section 16 of the SGST Act, provides for eligibility and conditions for taking input tax credit. As per the said section-
16. (1) “every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person”
7. On a combined reading of Section 2 and Section 16 of SGST Act, 2017, it can be construed that the definition of input tax is very wide and a registered person is entitled to take input tax credit on inputs, input service and capital goods if the same are used by him in course or furtherance of his business or the registered person has an intention to use such inputs, input service or capital goods in the course or furtherance of his business at the time of procurement of such goods/ services.
8. However, such availment of input tax credit is subject to certain restrictions laid down in Section 17(5) of the SGST Act. Relevant extract of Section 17(5) of the SGST Act,2017 is re-produced below-
(5) 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, namely: —
[(a) motor vehicle for ………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………………………………..
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
(i) Any tax paid in accordance with the provisions of sections 74, 129 and 130″
9. Thus, input tax credit shall not be available in respect of goods destroyed. The words “in respect of” restrict the scope of this section and, thus, it is pertinent to understand the meaning of words “in respect of’.
9.1 This expression was examined by the Honorable Supreme Court in the case of the State of Madras v. M/s. Swastik Tobacco Factory [AIR-1966-SC-1000]. In this case, the assessee purchased raw tobacco and converted the same into chewing tobacco. Excise duty was paid on purchase of raw tobacco. As per the applicable provisions, the assessee could claim deduction of excise duty if it was paid ‘in respect of’ the good sold by him (which in this case was chewing tobacco). The Apex Court held that Indian Tax Laws have used the expression ‘in respect of’ as synonymous with the expression ‘on’. If excise duty was paid on raw tobacco, it can be attributable only to the raw tobacco and not to chewing tobacco. It was held that no deduction of excise duty is permitted to the assessee. The copy of judicial precedent is also furnished by them.
10. Applying the same ratio in interpreting Section 17(5) of SGST Act, it can be said that input tax credit shall not be available on inputs destroyed. Once the goods (inputs) are utilized in the manufacture of finished/intermediate goods (which can be further used for manufacture of finished goods), inputs have been said to be consumed and have lost its identity and have been used in course or furtherance of business. Once the finished/intermediate goods are manufactured and subsequently get destroyed, then by no stretch of imagination it can be held that the inputs got destroyed, as what is destroyed is finished/intermediate goods and not the inputs.
11. The said section nowhere states that input tax credit in respect of inputs utilized for manufacture of finished / intermediate goods shall be reversed, if such goods get destroyed. Once the input tax credit has been availed legitimately, the applicant cannot be asked to reverse such input tax credit without any specific provision in this regard.
12. If the intention of the legislature was to reverse input tax credit on inputs contained in finished/intermediate goods, the statute would have specifically provided for such reversal. There is no provision in the SGST Act which requires reversal of credit of input tax of inputs which have been already consumed in manufacture of finished / intermediate goods which subsequently got lost, damaged or destroyed.
13. Thus, input tax credit shall not be required to be reversed on inputs contained in finished goods, since the section provides for reversal of input tax credit taken on finished goods per se (i.e. finished goods purchased for trading purpose) and not on inputs contained in finished goods.
14. Similar view was taken in the advance ruling in case of General Manager Ordnance Factory Bhandara, 2019 (26) GSTL 423, wherein the issue under consideration was whether input tax credit is to be reversed on finished goods that got destroyed during the testing. The Maharashtra Authority held that once the inputs are used in the manufacture of final products, which are then sent for testing purposes, then in such a case the said inputs cannot be considered to have been destroyed. Once inputs are used, they cease to exist and the question of such inputs being destroyed, lost or stolen, etc. will not arise. The copy of advance ruling is attached as herewith Annexure D.
15. In the instant case, the issue for consideration is with respect to reversal of input tax credit on inputs consumed in manufacturing of Vinyl Sulphone, H Acid, M.P.D.S.A, C.P.C. Acetanilide Flakes, P.C.V.S. (herein after collectively referred to as “dye intermediates”) by the Company. The Company utilizes dye intermediates manufactured by it in manufacturing of dyes and hence, the Company captively consumes dye intermediates. Further, dye intermediates manufactured by the Company are marketable and are also sold by the Company. Thus, dye intermediates manufactured by the Company are either used as intermediate products for manufacturing of dyes or are sold in the market as finished goods.
16. Considering the above, the Company is not liable to reverse input tax credit on inputs consumed in dye intermediates that was lying in stock and got destroyed on the date of fire.
17. At the time of personal hearing held through Video Conferencing on 24.09.2020, the Authorised Representative of the applicant, CA Dhaval Shah reiterated the facts as stated in the application and as mentioned herein above.
DISCUSSION & FINDINGS:
18. We have carefully gone through the facts of the case, written and oral submissions made by the applicant in their application for advance ruling as well as at the time of personal hearing and the applicable provisions of the GST Laws in this regard.
At the outset, we would like to state that the provisions of both the CGST Act and the GGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the GGST Act.
19. In this case, a moot point is to be decided regarding reversal of Input Tax Credit on inputs consumed in dye intermediates (which is also a finished goods) that was lying in stock and got destroyed in fire.
20. Few facts relevant for the present purpose, those are as follows:
(i) The applicant is engaged in manufacturing and marketing of dyes and dye intermediates (Vinyl Sulphone, H Acid, M.P.D.S.A, C.P.C. Acetanilide Flakes, P.C.V.S.). They are having five manufacturing units situated at Kalamsar (Taluka-Khambhat), Vatva, Odhav, Sanand and Bharuch.
(ii) A fire broke out in the night of 27th June, 2020 at around 8:40 PM in the warehouse of the Khambhat Unit of the applicant and raw material, intermediate/finished goods of approx. Rs.40 Crores were destroyed. Dye intermediate either they sold in the market or captive consumed in manufacture of their finished goods i.e. Dye.
21. We find that in GST regime, the scope of definition of inputs, capital goods and input services is very wide and covers almost all the imaginable goods and services that are directly or indirectly used in course or furtherance of business. However, Section 17(5) of the CGST/SGST Act, 2017 prescribes a list of goods or services on which ITC is not admissible. The opening para of Section 17(5) of CGST Act, 2017 reads as follows:-
“(5) 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, namely:-
………….
…………
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; “
The bare analysis of above section makes it clear that this section has overriding effect and it states that the ITC shall not be available in respect of goods lost, stolen, destroyed or written off.
22. We further note that Section 16 (1) of the CGST Act, 2017 provides that any registered person can avail credit of tax paid on the inward supply of goods or services or both, which is used or intended to be used in the course or furtherance of business.
23. In view of the above, we find that since the said inputs and capital goods have been used in manufacture of finished goods that have been destroyed, the same are not used in course or furtherance of business. We, therefore, hold that the Input Tax Credit taken on the inputs used in the manufacture or production of goods i.e. intermediate dye and the Input Tax Credit taken on input services used in or in relation to the manufacture or production of said goods shall be reversed.
23. In light of the foregoing, we rule as under –
RULING
Question- Whether the Company is required to reverse input tax credit on inputs consumed in dye intermediates (which is also a finished goods), where such goods have been destroyed in fire?
Answer: Answered in Affirmative.
dear sir
We are a trader. We sold the goods in the form of scrap, sold the goods for less than the cost of the goods. In this case will the input tax be refunded?