1. Introduction
Across various industries such as Pharmaceuticals, Restaurants, Bakeries, and FMCG, the issue of unsold stock of expired products is a prevalent concern. Manufacturers often bear the cost of these expired goods, which are subsequently returned through the supply chain by distributors or retailers. Often, these expired goods are either destroyed or written off in the books of accounts.
This action may trigger the requirement for Input Tax Credit (ITC) reversal under Section 17(5)(h) of the CGST Act for the manufacturer. However, there exists uncertainty regarding whether ITC should be reversed on ‘inputs’ when finished products are destroyed.
This ambiguity extends to situations where time-expired goods are returned throughout the supply chain by stockists, wholesalers, or retailers to the manufacturer.
In this article, we explore the understanding of Section 17(5)(h) concerning time-expired goods, along with the ambiguities surrounding the reversal of ITC in such cases.
2. Relevant Legal Provisions
Section 17(5)(h) of the CGST Act provides that notwithstanding anything contained in Section 16(1) and Section 18(1) of the CGST Act, ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Accordingly, as per the above provision, ITC would be restricted concerning inputs where goods have been destroyed and written off.
2.1. Whether time expired goods fall within the scope of clause (h)?
Interpretation of the term ‘written-off’
Although the GST law does not define the term ‘written off’. As per the MerriamWebster dictionary, write-off means an elimination of an item from the books of account. As per the Cambridge Dictionary write something off means to decide that a particular thing will not be useful, important, or successful. Hence, it covers within its scope, writing off the goods in any manner.
Interpretation of the term ‘destroyed’
The meaning of the term ‘destroyed’ is not defined under the GST law. As per the Merriam-Webster dictionary, destroyed means to ruin the structure, organic existence, or condition of. Further, as per the Cambridge Dictionary, ‘destroyed’ means to damage something so badly it cannot be used.
Therefore, considering the above interpretations, when time-expired goods are returned to the manufacturer and subsequently destroyed or scrapped, resulting in a write-off in the books of accounts, this scenario falls within the scope of the aforementioned clause.
2.2. No need for ITC reversal on ‘inputs’ where finished goods are expired
One cannot directly conclude from the GST provisions on whether ITC reversal is required even on ‘inputs’ where finished products are destroyed or written off.
Referring to the wording of clause (h), which states that “input tax credit shall not be available ‘in respect of’ the goods lost, stolen, destroyed, written off ….”, it is unclear whether the expression ‘ITC in respect of goods’ can be interpreted to restrict ITC in respect of inputs used in the finished goods.
One school of thought is that once the goods (inputs), on which credit is taken, are consumed in the manufacturing process and are converted in the final product, they lose their identity. Hence, the ITC reversal on such inputs cannot be demanded. Thus, ITC restriction does not extend to inputs contained in the finished goods after being put to use.
The above interpretation is also followed in a case before the Maharashtra AAR1 where inputs were used in the manufacturing of finished goods which were sent out for testing and few of such finished goods got destroyed during the testing process, it was held that no ITC is required to be reversed on finished goods that are destroyed during testing. The AAR observed that inputs are actually used in the manufacture of final goods which are then sent for testing and thus, it cannot be said that the said inputs are destroyed.
Interpretation of ‘in respect of’
While analysing the term ‘in respect of’, the Hon’ble Supreme Court (‘SC’) held2 that in Indian tax laws the expression ‘in respect of’ is synonymous of expression ‘on’. In this case, the assessee purchased raw tobacco and converted it by a manufacturing process into chewing tobacco. Excise duty was paid on purchase of raw tobacco. As per the applicable provisions, the turnover was determined after the deduction of excise duty paid ‘in respect of’ the good sold by him. The assessee argued that the expression ‘in respect of’ should be given a very wide connotation and the duty paid on procurement of raw material for manufacturing tobacco products should be allowed as a deduction. The Apex Court held that no deduction of excise duty is permitted to the assessee. Hence, the expression in the given case was read as excise duty paid ‘on’ goods sold and thus deduction of excise duty paid on procurement was not allowed.
In light of the above discussion, ‘in respect of’ should be interpreted as ‘on’, suggesting that the requirement of ITC reversal arises only concerning goods that are actually destroyed and written off. In other words, the provision does not mandate the reversal of ITC concerning inputs used in the manufacture of finished goods that are scrapped and destroyed.
However, despite the relevance of the above discussion, contradictory interpretations are followed in rulings and CBIC clarifications.
1 General Manager Ordnance Factory Bhandara, In re [2019] 106 taxmann.com 246 (AAR - Maharashtra)
2 Swasthik Tobacco Factory [1966] taxmann.com 5 (SC)
