The Telangana AAR held that Input Tax Credit (ITC) is required to be reversed if raw materials purchased are used in the manufacture of finished goods which got destroyed in the fire accident.
The applicant M/s. Geekay Wires Limited is engaged in the business of manufacturer of Steel Nails and other steel products in its manufacturing unit situated at Shankarampet-R, Village, Shankarampet- R Mandal-Medak, Medak, Telangana. The raw materials for manufacturing Steel Nails are Steel Wire rod. The applicant purchases steel wire rods and draw it to required sizes and then in Nail making machine make Steel nails of different sizes. The other major inputs for manufacturing Nails are Polypropylene, Copper wire, Paper tape and packing material like cartons, pallets etc.
The applicant purchases these raw materials from the other registered taxable persons within the State and also from outside the State of Telangana and avail GST input tax credit on all the materials purchased as stated above. Output tax on Nails supplied in the course of business is regularly paid as per the provisions of the GST Act. 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.
The applicant seeks clarification with regard to eligibility of input tax credit on the raw materials purchased for manufacture of finished goods i.e. whether already claimed ITC is required to reversed or not in the following circumstances:
- When the raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the fire accident completely.
- When the raw materials procured are lost in the fire accident before use in manufacture of finished goods.
- When the destroyed finished goods can be sold as steel scrap in the open market and output tax liability on such supply of scrap is paid.
The AAR held that input tax credit to the extent of manufactured goods destroyed or inputs destroyed is not available to the applicant and the same needs to be paid back either through the credit available in the credit ledger or by cash.
“Scrap sold by the applicant is nothing but a destroyed goods therefore in the context of above discussion sale of scrap i.e., sale of destroyed goods are not eligible for input tax credit,” the AAR said.