New Delhi, September 9
Cakes and pastries’ whose shelf life have expired and therefore returned to the manufacturer by a bakery or any retailer will not be eligible for input tax credit (ITC) as regards the ingredients used in their preparation, Gujarat’s Authority for Advance Ruling (GAAR) has ruled.
Put simply, GAAR has said that the manufacturers of such perished or expired cakes should reverse any ITC that they may have availed on the inputs/ingredients used in the manufacturing of such cakes.
The applicant, Kanayalal Pahilajrai Balwani, Sidharth Foods, sought an advance ruling on whether or not there is requirement for reversal of ITC on goods used as raw material in manufacturing of the expired cakes and pastries that were kept in display for use in course or furtherance of business.
2018 circular
Comparing the situation with return of expired drugs and giving its ruling, GAAR used the provision of 2018 circular which prescribed “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.”
The circular has also mentioned that though it 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 other reasons.”
Sidharth Foods manufactures and distribute items such as cakes and pastries. Some of these are given to distributor for display. Since these are perishable in nature, so such food items are replaced after some time. The applicant clarified that these are neither free nor sample and these are supplied to distributor with tax invoice. Also, post expiry when these are returned back to the applicant, assesses issue credit notes for that.
GAAR noted the fact that the all the expired cakes and pastries are thrown post their shelf life. “We hold the act of throwing away expired cakes and pastries is akin to destroying the expired food products, for the applicant destroys by throwing them away,” it said, while holding this scenario is similar to treatment of expiry drugs.
Accordingly, it said, “ITC on inputs used in manufacturing expired cakes and pastries is not admissible and required to be reversed.”
Experts’ views
Prateek Bansal, Associate Partner (Tax & Custom) at While & Brief, a law firm said, that in the present case of Siddharth Foods, while ITC was legally admissible when the cakes/pastries were first sent for display on payment of GST, the said outward taxable supply got reversed eventually upon return of expired cakes/pastries, and hence, no GST got ultimately deposited to the government exchequer in respect of these goods.
The ruling, thus, reinforces the legal position to restrict ITC pertaining to outward supplies in respect of which no GST is paid or liable to be paid.
“For the purpose of reversal of ITC, subject to commercial viability, the manufacturers may consider maintaining separate inventory of raw materials to be used for manufacture of perishable goods and to be supplied to keep in display for consumers. Besides providing ease of compliance, this will mitigate any valuation related issues in relation to proportionate reversal of ITC,” he said.