Treatment of ITC in case finished goods destroyed as normal loss

Treatment of input tax credit (ITC) in case finished goods destroyed as normal loss

In this article , I have analysed the treatment of input tax credit in case finished goods of a company gets destroyed at the time of packaging, transportation etc. as normal loss of business.

There are many industries dealing with products which are prone to breakrages such as tiles, laminates, glasses etc. In such industries, at the time packaging some of the finished goods got broke/damaged and there is also no resale value and such goods. Thus, the question arises whether input credit used in mahufacturing of such goods will be available to company?

Analysis : 

Sec 17(5) of CGST Act, 2017 entails for credit reversal in case of goods destroyed, lost, stolen or written off or disposed of by way of gift or free samples.

As per general industry practice, since certain goods are prone to breakages, some goods get destroyed at the time of packing and is normal loss for the company. However, the said section does not differentiate the term ‘loss’ between normal loss and abnormal loss. Further, I have not found any advance ruling or judgement under GST on the subject matter.

Thus, lets analyse the relevant provisions under erstwhile acts to get clarity on treatment of credit there.

Treatment under Excise  Laws :

There are various judgements under erstwhile Excise laws, which allows credit of inputs got destroyed/lost during the process of manufacturing of final goods by covering the same within the ambit of  “used in the manufacturing of final goods”

Below I have mentioned some of these judgements for your reference:

• In case of Lafarge India Ltd. Vs. Commisioner of C.Ex. & ST, Bilaspur ( 2017 (48) S.T.R 466(Tri.-Del.))
• In case of Seven Star Steels Ltd. Vs. Commisioner of C.Ex. & ST, BBSR ( 2013 (30) S.T.R 532(Tri.-Kolkata))
• In case of Asahi India Safety Glass Limited Vs Union of Inida ( 2005(180) E.L.T 5 (Del.), 2015(320) E.L.T 179 (S.C.) )
• In case of Synthetic and Chemical Limited, Bareilly Vs. Deputy Collector of Central Excise, Allahabad ( 1988 (33) E.L.T. 62 (All.))

It is to be noted that all the cases mentioned above allows credit of inputs destroyed during the process of manufacturing.

However, in the instant case the goods are getting destroyed at the time of packing i.e. after the process of manufacturing.

Under Excise laws, in case final goods are destroyed/lost/damaged due to unavoidable accidents, the assessee can claim remission of duty on such goods under Rule 21 of Central Excise Rules, 2002 which states that –

“….Where it is shown to the satisfaction of the [Principal Commissioner or Commissioner, as the case may be] that goods have been lost or destroyed by natural causes or by unavoidable accident or are claimed by the manufacturer as unfit for consumption or for marketing, at any time before removal, he may remit the duty payable on such goods, subject to such conditions as may be imposed by him by order in writing….”

However, as per Rule Rule 3 (5C) of the CENVAT Credit Rules, 2004 [ Inserted vide notification No. 33/2007- CE (NT), dated 07.09.2007], “….Where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or production of said goods and the CENVAT credit taken on input services used in or in relation to the manufacture or production of said goods shall be reversed.”

Thus, in case of final goods are getting destroyed due to some unavoidable accidents, the government would remit the excise duty on the same however, the assessee still need to reverse credit of inputs used.

There are some circulars also which further clarifies that credit need to be reversed in such cases. Please find below for your reference  :

CBEC Circular No. 800/33/2004-CX. dated 1.10.2004

CBEC Circular No. 907/27/2009-CX, dated 07.12.2009

CBEC Circular No.930/20/2010-CX dated 09.07.2010 (F.No.261 /03/2009-CX.8)

Treatment under VAT Laws :

The provision for reversal of credit on goods lost/destroyed is also available under state wise VAT laws.

Below are some case laws which disallows credit of inputs used in the goods destroyed/lost due to business reasons :

• In case of Bharat Petroleum Corporation Vs State of Punjab and Another (CWP No.4583 of 2008, date of decision 05.11.2008)
• In case of M/s.Interfit Techno Products Ltd vs The Principal Secretary/Commissioner of Commercial Taxes (IN THE HIGH COURT OF JUDICATURE AT MADRAS dated 26.Nov.2014)
• Further circular No. 47/2005-06 dated 23,01,2006 as mentioned in the case of M/s Delhi Petrol dealers vs the commissioner New delhi (W.P.(C) 2921/2206 dated 10.09.2012) also supports reversal of credit in such case

Thus, from erstwhile laws, it can be inferred that credit reversal is required in case goods destroyed at the time of packaging/transportation

On the backdrop of the pre-GST law provisions and rulings, it is essential to refer and analyse the relevant provisions of the GST law.

Question 14 covered under Chapter 10 of Frequently Asked Questions on GST updated on 1 January 2018 deals with availment or otherwise of ITC on goods destroyed. The question and reply thereon is reproduced as under:

“Q 14. Sometimes goods are destroyed or lost due to various reasons? Can a person take ITC to the extent of such goods?

Ans. No, a person cannot take ITC with respect to goods lost, stolen, destroyed or written off. In addition, ITC with respect of goods given as gifts or free samples are also not allowed.

Further, refer the Circular No. 72/46/2018-GST dated 26 October 2018 that has been issued by Central Board of Indirect Taxes and Customs (CBIC) to clarify the procedure in respect of return of time expired drugs or medicines.

• Clause (d) appearing under the head “Return of time expired goods by issuing Credit Note” provides that where the time expired goods, which have been returned by the retailer/wholesaler, are destroyed by the manufacturer, such manufacturer is required to reverse the ITC attributable to the manufacture of such goods, in terms of the provisions of section 17(5)(h) of the CGST Act.

Thus, basis all of the above, in my view , if the final product is destroyed, manufacturer will be required to reverse ITC attributable to the manufacture of such goods.

Regards 

CA Vaishali Gupta