ITC on inputs used in manufacturing of cakes and pastries which subsequently expired is not admissible and required to be reversed

Facts: The applicant are engaged in the business of manufacturing & distribution of cakes & pastries items. The applicant send cakes & pastries to the distributors to keep them in display to fascinate consumer. The cakes & pastries are of perishable nature and cannot be preserved for longer period and on regular interval all cakes & pastries kept in display have to be compulsorily replaced after expiry of said bakery item. The applicant submits that display assists them to achieve the objectives of continuing to conduct the business of manufacturing and selling cakes & pastries in future also.
The applicant submitted that there is no free/sample supply of extra cakes & pastries to distributors. Such extra cakes & pastries are supplied with tax invoice which means that supply of goods is taxable supply. When such extra cakes & pastry expired and return back to the applicant ,assessee issues credit note for the same. Hence, there is no free/sample supply of goods by the taxpayer as per Section 17(5)(h) of the CGST Act, 2017.

Issue: Whether or not there is requirement for reversal of input tax credit on goods used as raw material in manufacturing of expired cakes & pastries that were kept in display for use in course or furtherance of business.

AAR Findings: The AAR drew attention to the ‘non obstante sub-section’ – Section 17(5) of the CGST/SGST Act, 2017 stipulating ‘Blocked Credit’. Section 17(5)(h) of CGST Act, 2017 which reads as follows :-

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely :-
xx xx xx
xx xx xx

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

This non obstante sub-section overrides the operation of Section 16 and Section 18 of CGST Act provisions contrary to this sub-section and thereby blocks ITC admissibility contrary to the said sub-section. We find that subject goods being destroyed are covered under this non obstante clause (h) of Section 17(5) of CGST Act.

Further, Government Circular No. 72/46/2018-GST, dated 26-10-2018 issued vide F. No. CBEC/20/16/ 04/2018- GST has clarified the procedure in respect of return of time expired drugs or medicines-Reg. Relevant Para’s of said Circular are enumerated as follows :

“3B(d) Further, where the time expired goods, which have been returned by the retailer/wholesaler, are destroyed by the manufacturer, he/she is required to reverse the ITC attributable to the manufacture of such goods, in terms of the provisions of clause (h) of sub-section (5) of section 17 of the CGST Act.

It may be noted that though this circular discusses the scenarios in relation to return of goods on account of expiry of the same, it may be applicable to such other scenarios where the goods are returned on account of reasons other than the one detailed above.”

Held: The AAR held that subject matter is covered under Section 17(5)(h) of CGST Act and thereby ITC on inputs used in manufacturing expired cakes & pastries is not admissible and required to be reversed. 

To read the complete judgment 2021 Taxo.online 1414