2025 (4) TMI 228 - AAR - GST

Levy of GST on goods lost in transit - value of supply for the purpose of payment of GST - requirement to reverse ITC in terms of section 17 (5) (h) of the CGST Act 2017 - basis of reversal of ITC. Levy of GST on goods lost in transit - HELD THAT - It is evident that there is no supply of the said goods by the applicant to its customer more so since the loss is before the goods are handed over to the customer. Even on the parameters of place of supply and the time of supply since the loss occurs prior to both the place of supply and the time of supply in this peculiar situation we hold that there is no supply as far as transit loss is concerned - there are merit in the claim of the applicant that they are not liable to pay GST on the transit loss of the gas. Reversal of ITC - HELD THAT - The provisions of section 17 (5) (h) states that ITC is not eligible on goods lost stolen destroyed written off or disposed off by way of gift or free samples. The goods is lost/destroyed during the course of transit. It is not a manufacturing loss. Section 16 of the CGST Act 2017 clearly states that a registered person shall be entitled to avail ITC charged on any supply of goods or services or both which are used/intended to be used in the course or furtherance of business. In this case as far as the goods lost during the course of transit is concerned it cannot be said that the inputs involved involved in the goods manufactured subsequently lost in transit have been used in the course of furtherance of business as we have already held above that there is no supply involved as far as the transit loss is concerned. This renders the credit availed on the inputs used in the goods lost in transit to fail the vesting condition attached to the validity of the credit taken under section 16 (1) being proper end use of the inputs. Credit is not a vested right at the time of receipt of inputs but can only be availed on satisfying all vesting conditions including its participation in a taxable outward supply. This not being the case we find that the applicant is hit by blocked credit as per section 17 (5) ibid. Conclusion - i) No GST is payable on the goods lost in transit. ii) Question of value of supply for the purpose of payment of GST as no GST payable. iii) The applicant is not eligible for the ITC in respect of inputs used in the goods lost in transit hence is required to reverse the ITC in terms of section 17 (5) (h) of the CGST Act 2017. iv) The applicant is required to reverse the ITC involved in the inputs used in the outward supply which was lost in transit in terms of section 17 (5) (h) read with section 16 of the CGST Act 2017.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(i) Whether GST is payable on goods lost in transit.

(ii) If GST is payable, what should be the value of supply for the purpose of payment of GST.

(iii) If GST is not payable, whether the applicant is required to reverse the Input Tax Credit (ITC) in terms of section 17 (5) (h) of the CGST Act, 2017.

(iv) If the applicant is required to reverse ITC in terms of section 17 (5) (h) of the CGST Act, on what basis should the applicant be required to reverse.

ISSUE-WISE DETAILED ANALYSIS

Issue (i): Whether GST is payable on goods lost in transit

Relevant legal framework and precedents:

The relevant provisions include Section 7 of the CGST Act, 2017, which defines "supply" as including all forms of supply of goods or services made for a consideration in the course of business. Furthermore, Section 10 of the IGST Act, 2017, determines the place of supply as the location where the movement of goods terminates.

Court's interpretation and reasoning:

The Court noted that GST is levied on the "supply" of goods or services. The transit loss occurs during transportation before the supply is completed, as the goods are not yet delivered to the customer. Therefore, the transit loss does not constitute a supply under Section 7 of the CGST Act.

Key evidence and findings:

The applicant provided documentation, including delivery challans and tax invoices, showing that the loss occurs during transit and before the issuance of a tax invoice. The applicant also submitted a Chartered Accountant's certificate confirming the accounting treatment of transit losses.

Application of law to facts:

The transit loss occurs before the goods are delivered to the customer, thus falling outside the scope of "supply" as defined under the CGST Act. The Court concluded that GST is not applicable on goods lost in transit.

Treatment of competing arguments:

The applicant argued that there is no supply of goods lost in transit, supported by precedents from previous rulings. The Court agreed with this interpretation, finding no supply in the case of transit loss.

Conclusions:

The Court held that GST is not payable on goods lost in transit.

Issue (iii): If GST is not payable, whether the applicant is required to reverse the ITC in terms of section 17 (5) (h) of the CGST Act, 2017

Relevant legal framework and precedents:

Section 17 (5) (h) of the CGST Act, 2017, specifies that ITC is not available for goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

Court's interpretation and reasoning:

The Court reasoned that since the goods are lost during transit and not supplied, the inputs used in manufacturing these goods do not contribute to a taxable outward supply. Therefore, ITC is not permissible for these inputs.

Key evidence and findings:

The applicant's accounting practices and documentation indicated that the transit loss is accounted for as a financial cost, with no separate recovery from customers.

Application of law to facts:

The inputs used in the lost goods do not meet the conditions for ITC under Section 16 of the CGST Act, as they do not contribute to a taxable supply.

Treatment of competing arguments:

The applicant argued that ITC should not be reversed as the loss is not akin to those specified under Section 17 (5) (h). However, the Court found that the conditions for ITC were not satisfied due to the absence of a taxable supply.

Conclusions:

The Court held that the applicant is required to reverse the ITC for inputs used in goods lost in transit.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"It is evident that there is no supply of the said goods by the applicant to its customer more so since the loss is before the goods are handed over to the customer."

Core principles established:

The judgment establishes that GST is not applicable on goods lost in transit as they do not constitute a supply under the CGST Act. Furthermore, ITC must be reversed for inputs used in goods lost in transit, as they do not contribute to a taxable supply.

Final determinations on each issue:

(i) No GST is payable on goods lost in transit.

(ii) Not applicable, as GST is not payable.

(iii) The applicant is required to reverse the ITC for inputs used in goods lost in transit.

(iv) The applicant must reverse the ITC based on the inputs used in the outward supply lost in transit, in accordance with Section 17 (5) (h) and Section 16 of the CGST Act, 2017.