SEC 17(5)(h), Goods and Services Tax - GST

[KANHAIYA AGRAWAL]

The fire took place in my client factory. there is loss of some raw material .

We filed the claim with the insurance company. The Insurance company admitted the amount of loss excluding the GST and we retain the goods at salvage value.

As we did not recover the GST amount from the insurance company hence we did not reverse the ITC claimed (as required under section 17(5)(h) of CGST Act.)

Is there any disobeyment of Section 17(5)(h) of CGST Act???

Posts / Replies

[Sadanand Bulbule]

Dear Sir

Admittedly ITC on goods destroyed is blocked under Section 17[5][h]. Your understanding is correct, there is failure of reversal of ITC. Your client needs to reverse such ITC with applicable amount of interest

[KASTURI SETHI]

Sh. Agrawal Ji,

What was the reason of fire ?

[Shilpi Jain]

You have mentioned that you have retained the goods at salvage value.

Does this mean that you would be selling it atleast at scrap value? If yes then these raw materials which are not destroyed but maybe damaged would not be covered under s 17(5) restriction.

You should be eligible for the credit.

[KASTURI SETHI]

(i) Here the querist has used the word, 'salvage value' . In this scenario, it is inappropriate to use the word, 'salvage value'. It is not legally correct. It is a square peg in the round hole. The querist should have used the proper word and that is , 'Salvage Loss'. What he has recovered that is 'salvage charges'.

(ii) Further, a fire rarely totally destroys the insured property. In terms of Fire Insurance Policy, it is treated/termed as ''Total Loss''

(iii) Hence, in this scenario, ITC is clearly hit by Section 17(5) (h) of CGST Act. No benefit of the residue remaining after the fire is admissible.

(iv) Thus I support the views of Sh.Sadanand Bulbule, Sir.

[Shilpi Jain]

To the extent raw material is destroyed in fire, ITC needs to be reversed.

In your query you have mentioned that SOME raw material is lost in fire.

Non-recovery of GST from insurance company would have no relevance whether you need to reverse ITC or not.

[SUSHIL BANSAL]

In my opinion , the case is not covered 17 (5)(h) as insurance claim should be taxable supply

[Sadanand Bulbule]

Dear Bansal ji

Plz revisit the query and elaborate the reasons for your opinion.

[KASTURI SETHI]

Sh.Sushil Bansal Ji,

I welcome difference of opinion. Will you please enlighten me 'HOW' not hit by Section 17(5)(h) ? My further opinion is as under:-

Not to speak of Section 17(5)(h) of CGST Act, such availment of ITC (if not reversed), does not conform to the condition of ''used or intended to be used in the course or furtherance of his business" as per Section 16(1) of CGST Act, raw material being destroyed. 'Residue' does not help at all.

The querist has used the word, 'salvage value'. It means depreciated value. No question of depreciation here.

[KASTURI SETHI]

Can the residue remaining after fire cover the whole raw material ?

[KANHAIYA AGRAWAL]

 Thanks to all, my humble submittion are as follows.

1. (Sh Kasturi Sethi ji) : Can the residue remaining after fire cover the whole raw material ?

Sir, Yes this cover the whole raw material. Due to fire the quality of raw material became low; hence the company sold out this material as scrap (after charging the GST on sale of scrap).

2. (Sh Adanand Bulbule Ji) : Your client needs to reverse such ITC with applicable amount of interest.

Sir, But my client did not receive the claim amount inclusive of GST from the insurance company. They receive only cost of material from the insurance company. Client is saying the one side we did not received the GST amount from the insurance company and again if we reverse the ITC (which already taken) there will be double loss to the company. Also share is it possible to recover the GST amount from insurance company on the ground of reverse the ITC now?

3. (Sh Kasturi Sethi ji) : What was the reason of fire ?

Sir, It was electric short circuit.

4. (Shilipi Jain Ji) : Does this mean that you would be selling it at least at scrap value? If yes then these raw materials which are not destroyed but maybe damaged would not be covered under s 17(5) restriction.

Mam, Can you please elaborate this statement considering difference between destroy and damage.

5.(Sh Kasturi Sethi ji) : Here the querist has used the word, 'salvage value' . In this scenario, it is inappropriate to use the word, 'salvage value'.

Sir, I agree with you, but I copy this word from insurance company as they use this word commonly for the things which are saleable at scrap price.

[KASTURI SETHI]

Sh.Kanhaiya Agrawal Ji,

Pl ponder over serial no.8 above though not addressed to you. I solicit your comments, it being relevant.

[Sadanand Bulbule]

Dear querist

According to my considered understanding, insurance company settles the claims of the damage or destruction of the property/assets /goods insured but not ITC, being an indirect tax. As such the party suffering the loss would not get back ITC from the insurance company. On what ground your client is expecting such reimbursement of ITC? Whether he gets it or not, he needs to reverse it.

[KASTURI SETHI]

There was provision for remission of Central Excise duty in erstwhile Rule 21 of Central Excise Rules, if duty was NOT claimed from the Insurance Company but in GST Act/Rules there is no such provision for remission of GST. Hence in GST regime, insurance and remission of GST cannot be claimed simultaneously. Insurance and remission of duty both were possible in Central Excise era but not now. There are case laws to this effect which pertain to remission of Central Excise duty. At present GST laws do not help the assessee (the victim of fire).

SUGGESTION

However, Trade and Industry Association should represent to the GST Council to either allow retention of ITC or remit the GST involved by way of making a change in the language of Section 17(5) (h) so that a person who is already victim of fire accident or natural catastrophe should not suffer more. Such change will be in public interest.

[SUSHIL BANSAL]

In the present case itc can be taken as the basic condition of itc that of "used or intended to be used" is to be seen at the time of availing the itc and at the time of availing itc the condition is fulfilled

Further reversal of itc under section 17(5)(h) is not required as goods has salvage value.

Further the insurance claim will not be taxable supply being the insurance claim is in the nature of actionable claim.

[Padmanathan Kollengode]

To the extend of goods destroyed in fire, ITC has to be reversed under section 17(5)(h). The fact that insurance company is not giving the GST amount has to be looked into, on basis of the insurance contract. It does not have any impact on section 17(5)(h).

In my opinion, retaining ITC on goods damaged in fire and later, sold as scrap may be litigious.

If "destroyed" is seen in light of "lost" or "written off", it signifies where the goods have zero value or very negligible value. Whereas, damage signifies a reduction in the marketable value, it is not per say destroyed.

However, these aspect has to be looked into based on the type of goods that are being used as raw material, how they are sold etc. Considering these facts, you must take a call based on amount involved, risk appetite of client, etc...

As far as argument with respect to 16(1) not being satisfied concerned, the words used in section 16(1) is "used or intended to be used" and "in the course or futharence of business". This has a wider connotation in my opinion and even goods which are intended to be used for manufacture shall be eligible for credit. Once after 16(1) has been satisfied, only then it can be hit by section 17(5)(h) and therefore, in my opinion, the Department cannot go back to 16(1) and say, the goods were not used in business.

[Sadanand Bulbule]

Dear all,

The TMI D-platform is open to offer opinions the way the visitors wish and such opinions do not carry any legal sanctity. But the learners expect the opinions to be nearer to the object of law. I leave it to the consciousness of all to double check before posting them since many innocent learners believe such opinions as sacrosanct. And I am one of the earnest learners. Hope my appeal is taken in the right perspective.

[KASTURI SETHI]

Both the expressions i.e. "used or intended to be used" and "in the course or furtherance of business" could not be materialized into actuality/practical shape. Both these became defunct due to fire accident. Without actual usage of inputs, the assessee fails to qualify both parameters laid down in Section 16(1).

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, There is substance in your suggestion.

The solution to the problem is that every reply should be examined/approved by the Chief Editor or TMI Management Team before display in the Discussion Forum.

[Padmanathan Kollengode]

Dear Sadanand Ji and Kasturi Ji,

I do not share the same thoughts on this for various reasons:-

1. which opinion is nearer to the "object" of law is purely subjective and can vary from person to person, officer to officer, even judge to judge.

2. I don't believe any querist or reader is naive enough to take decisions only on basis of replies in TMI or belive it to be so sacrosanct. Most of the queries do not even reveal the full facts and often replies are based on the perception of person replying, which again varies.

3. Multiple views on the subject gives variety of perspective to the querist, as to how department will make its case and also as to how to counter it.

4. lastly, I do not believe in any form of censorship in academic forums. many a times in TMI, i have given views on particular issue and on convincing counter arguments by experts, i have corrected myself as well. I belive that TMI is learning arena for those answering queries as well, if they are open to admitting that they can go wrong too.

that being said, if the previous posts were intended to me, I would be most happy to divert my time and energy to some other avenues other than TMI forum.

[Amit Agrawal]

I agree with legal reasoning given by Shri PadmanathanJi in his post at serial No. 15 above.

In my view, requirements of taking ITC under Section 16(1) remains duly fulfilled as those goods were intended to be used in the course or furtherance of the business.

I also hold a view that ITC against goods which are sufficiently damaged in fire to the extend that there is nothing left of those goods except to be sold as 'scrap', is hit by Section 17(5)(h). This is due to non obstante clause at the beginning of Section 17(5) (i.e. Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18).

@ Shri PadmanathanJi,

I also agree with for your post at serial No. 19, except last line. For last line used by you, I would suggest not to get offended by others so easily.

People who has sufficient knowledge of GST law/s and have legal maturity to deal with complex issues & contrary views can always understand where quality lies, even when they disagree with someone on a particular legal issue.

But, real experts, in my humble view, are those who always have an ability to explain their disagreement with a particular view OR for taking a particular view by giving very sound solid reasoning & legal explanation, instead with using hyperbole, putting non-relevant arguments or putting series of case-laws in their posts/s which deal with neither issue raised by the querist nor the particular legal point under debate / discussion etc.

And anyway, if somebody disagree with a particular view of yours without giving sound reasoning & legal explanation, you always got a choice to ignore those views.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

Dear Querist,

General insurance contract, generally specking & subject to specific terms of such contract, is nothing but assurance to indemnify against losses incurred (subject to defined outer limit) upon happening of pre-defined contingencies such a fire.

As someone who have extensively advised a general insurance Co. for fairly long period - both during service tax regime & gst, suffice to say that I have basic knowledge of how this industry works, including general method/s of calculating losses to be compensated etc. And, I am yet to find a policy where insurance Co. has specifically excluded compensation against loss of GST u/s 17(5)(h) in its policy terms & conditions.

You should raise supplementary claim with your general insurance Co., by pointing out that they have wrongly calculated "losses" incurred by you on account of fire by excluding GST portion. You need to point them that due to Section 17(5)(h), you are under legal obligation / compulsion to reverse ITC claimed earlier & provide proof of reversal so made. Hence, calculations of losses incurred must consider not only basic purchase price but also GST paid at the time of purchase.

With proper follow-up, I hope you get additional compensation against loss of GST from your general insurance Co. And if required, you should show them your willingness to take a legal route (and actually take it, if so needed) so to force them in fulfilling their obligations under the contract.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Ganeshan Kalyani]

When ITC is not taken at the time of purchase it becomes part of the cost of material. Then that cost becomes the value for lodging claim with insurance company. One cannot add ITC to arrive at claim value only because it has to be reversed.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

(i) You have felt the pulse.

(ii) The Insurance Companies never compensate for the tax component..Reason is given by you.

(iii) Reason is that GST is indirect tax and tax comes from the pocket of the buyer/consumer.

[Amit Agrawal]

As explained earlier, General insurance contract, generally specking & subject to specific terms of such contract, is nothing but assurance to indemnify against losses incurred (subject to defined outer limit) upon happening of pre-defined contingencies such a fire. And calculation of such "loss incurred" definitely include purchase price as well as GST (in view of Section 2(17)(h)).

If someone does not insist for such GST loss to be compensated (due to ignorance of legal rights of the insured or due to mis-application of concepts (which got nothing to do with general insurance contract) such as GST being indirect taxes to be borne by consumer or once ITC is taken, it cannot be compensated despite its reversal u/s 17(5)(h) & so on), general insurance Co. are happy to pay lesser compensation.

I have seen so-many cases where general insurance Co. compensates for such loss towards GST, specially when 'insured / client' knows his legal rights well.

What is required is the 'insured / client' stand up for his legal right and ensure that his general insurance Co. fulfils its legal obligation to compensate full loss incurred due to fire, which includes loss of GST against raw material destroyed by fire u/s 17(5)(h).

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Padmanathan Kollengode]

Recently, there was a fire mishap in one of my client's unit. When I enquired with them now, they have got the claim towards the GST on Raw Material destroyed approved it seems. Once I get the necessary documents, I can share it across.