🏭 Overview: AAAR Rules Against ITC on Destroyed Goods
In a decisive judgment dated February 20, 2025, the Telangana Appellate Authority for Advance Ruling (AAAR) ruled that Input Tax Credit (ITC) availed on raw materials used in manufacturing finished goods must be reversed if the goods were destroyed, even in events like fire accidents. This ruling reinforces strict compliance norms under Section 17(5)(h) of the CGST Act, 2017.
⚖️ Case Background: M/s. Geekay Wires Ltd.
Geekay Wires Ltd., a manufacturer of steel nails and other steel products, faced a fire that destroyed a significant portion of its finished goods. Although the company had claimed ITC on the raw materials used to manufacture these goods, they were ultimately sold as scrap, and GST was duly paid on this supply.
Post-incident, the company sought a ruling on whether ITC on those consumed raw materials could still be retained. The initial ruling from the Telangana Authority for Advance Ruling (AAR) denied the claim, leading to an appeal before the AAAR.
🧾 Legal Analysis by AAAR: Reversal is Mandatory
✅ Section 17(5)(h) – CGST Act
This section expressly prohibits ITC claims on goods lost, stolen, destroyed, written off, or disposed of as gifts or free samples.
🔍 Key Observations:
- The phrase “in respect of” applies not just to raw inputs, but also to finished goods made from them.
- AAAR ruled that destruction of finished goods qualifies as destruction of the inputs used to create them.
- The non-obstante clause in Section 17(5) overrides the general entitlement of ITC under Section 16.
📚 Legal Precedents Cited
Tata Consultancy Services v. State of Andhra Pradesh (2004)
Clarified the interpretation of tax statutes and emphasized the plain and unambiguous meaning of legislative terms.
Ordnance Factory Bhandara (2019)
Held that goods destroyed during testing are not “destroyed” in the legal sense, and ITC may be allowed—distinguished from accidental loss cases like fire.
Jay Chemical Industries Ltd. (Gujarat AAAR, 2021)
Affirmed that ITC must be reversed when finished goods are destroyed by fire or flood, even if input tax had been paid.
🧩 Why This Matters to Businesses
💡 Implications:
- Inventory Accuracy: Businesses must maintain real-time inventory logs for input and output reconciliation.
- Risk Assessment: Companies should factor in risk of ITC reversal when dealing with perishable or fire-prone goods.
- Claim Vigilance: Filing for ITC should consider the eventual fate of the goods – if they never make it to the market, ITC may not stand.
🧾 Practical Action Points:
- Track ITC usage closely via digital systems.
- Document damage or destruction reports meticulously.
- Consult GST practitioners on borderline or disputed cases to ensure compliance.
🛑 Conclusion: Comply or Face Legal Challenges
This ruling confirms that businesses cannot retain ITC on goods destroyed post-manufacture. The intent of use is irrelevant if the final product never reaches the market due to damage or loss. The overriding power of Section 17(5) makes it legally binding.
