Fire Destroyed Your Inventory? GST Input Credit Must Be Reversed, Rules Telangana AAAR

The Hon'ble Appellate Authority for Advance Ruling, Telangana in Geekay Wires Ltd., In re, AAAR. COM/03/2023, ORDER-IN-APPEAL NO. AAAR/05 OF 2025 dated February 20, 2025 held that input tax credit availed on inputs consumed in the manufacture of finished goods that were destroyed in a fire accident is required to be reversed, as Section 17(5)(h) of CGST Act, 2017 provides that input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Facts of the Case

The appellant, M/s Geekay Wires Limited, is engaged in the business of manufacture of Steel Nails and other steel products in its manufacturing unit in Telangana. The primary raw materials for manufacturing Steel Nails are Steel Wire rods, along with other inputs like Polypropylene, Copper wire, Paper tape, and packing materials such as cartons and pallets. The appellant purchases these raw materials from registered taxable persons within and outside the State of Telangana and avails GST input tax credit (ITC) on all materials purchased.

On December 17, 2022, a fire broke out in the appellant's factory premises, destroying major quantities of finished goods (Steel Nails) which became unfit to be sold as such. Consequently, these damaged finished goods were sold as scrap in the market, and the appellant paid the applicable GST on the sale of such scrap.

The appellant had claimed ITC on all raw materials and other inputs used for manufacturing steel nails in the month they were procured, as per Section 16 of CGST Act, 2017. Since the goods/inputs purchased by the appellant were used in the manufacturing of finished goods, and these finished goods became unfit for being sold as such due to the fire accident, the appellant sought an advance ruling regarding the eligibility of ITC on the raw materials consumed in the manufacture of finished goods.

The Telangana State Authority for Advance Ruling (AAR) issued Order No.15/2023 dated September 2, 2023, ruling that ITC is required to be reversed in cases where:

1. Raw materials purchased are already used in the manufacture of finished goods and the finished goods are destroyed in the fire accident completely.

2. Raw materials procured are lost in the fire accident before use in the manufacture of finished goods.

3. Destroyed finished goods can be sold as steel scrap in the open market, and output tax liability on such supply of scrap is paid.

Aggrieved by this decision, the appellant filed an appeal challenging the ruling.

Issue

Whether Input Tax Credit availed on inputs consumed in the manufacture of finished goods (Steel Nails) that were destroyed in a fire accident is required to be reversed, even when the destroyed goods were later sold as scrap on which GST was paid?

Held by the AAAR

The Hon'ble Appellate Authority for Advance Ruling, Telangana in AAAR. COM/03/2023, ORDER-IN-APPEAL NO. AAAR/05 OF 2025 held that:

The Appellate Authority carefully examined the provisions of the GST Act and found that Section 17(5)(h) clearly states that "input tax credit shall not be available in respect of the following, namely... goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples."

The Appellate Authority rejected the appellant's contention that the phrase "in respect of" used in Section 17(5)(h) indicates only 'inputs' and not 'finished goods'. The Authority emphasized that the wording of Section 17(5)(h) is simple, clear, and unambiguous, and any attempt to restrict its plain meaning cannot be accepted.

The Appellate Authority noted that Section 17(5) contains a non-obstante clause that gives it an overriding effect over the provisions of Section 16(1) & Section 18(1). Therefore, the appellant's arguments based on Section 16(1) of the CGST Act were not considered valid.

The Authority also referred to a decision of the Maharashtra Authority for Advance Ruling in General Manager Ordnance Factory Bhandara, which had distinguished between goods sent for testing and goods destroyed in natural or manmade situations. The Maharashtra AAR had held that ITC need not be reversed where goods are sent for testing but had specifically noted that goods destroyed in floods, fires, etc. would be subject to ITC reversal. This ruling actually supported the view taken by the lower authority in the present case, rather than the appellant's position.

The Appellate Authority emphasized that the reversal of ITC will arise where finished goods are lost, stolen, or destroyed, which would include destruction due to natural or manmade situations such as floods, fires, or the destruction of expired goods. The interpretation that ITC reversal applies only to inputs or capital goods themselves that are lost, stolen, or destroyed, and not to finished goods, was rejected.

Consequently, the Appellate Authority upheld the ruling of the lower Authority, confirming that input tax credit availed on inputs consumed in the manufacture of finished goods that were destroyed in the fire accident is required to be reversed, even though the destroyed goods were later sold as scrap and GST was paid on such sale.

Relevant Sections

"Section 2(59) of CGST Act, 2017" "Section 2(62) of CGST Act, 2017" "Section 2(63) of CGST Act, 2017" "Section 16(1) of CGST Act, 2017" "Section 17(5)(h) of CGST Act, 2017"

Cases Referred

1. General Manager Ordnance Factory Bhandara, In re

2. Ashok Lanka v. Rishi Dixit (2005) 5 SCC 589

3. Uco Bank v. Rajendralal (2008) 5 SCC 257

4. State of Madras v. Swastik Tobacco Factory AIR 1966 SC 1000

5. Tata Consultancy Services v. State of Andhra Pradesh

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