ITC Restrictions Under Section 17(5)(h) of CGST Act: Key Clarifications and Contradictory Judgments

deepak K Gujrati | Last updated: 23 January 2025

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This article delves into the complexities of Input Tax Credit (ITC) restrictions under Section 17(5)(h) of the CGST Act, particularly concerning goods lost, stolen, destroyed, written off, or disposed of as gifts or free samples. It highlights recent judgments and circulars, including Circular No. 92/11/2019-GST, and discusses contradictory rulings from appellate authorities. The piece clarifies the ITC availability for various scenarios like 'Buy 1 Get 1 Free' offers, discounts, and secondary discounts, while also addressing situations where ITC is not admissible, such as for goods lost in fire or used in marketing events.

UPDATE 17(5)(h) of the CGST Act

GOODS LOST, STOLEN, DESTROYED, WRITTEN OFF OR DISPOSED OF BY WAY OF GIFT OR FREE SAMPLES; After issuance of circular no 92/11/2019-GST, a large number of judgements and also contradictory by AAAR and AAR requires further clarification by the CBIC.

ITC Restrictions CGST Act Section 17(5)(h): Clarifications

S. No	Nature Of Supply	Whether ITC Available	Whether A Supply Under GST	Remarks
1	Free Samples And Gift	No	No	Covered by Circular No 92/11/2019-GST dated 07-03-2019. Also supported by following judgements: GRB Dairy Foods Private Limited [TS (DB)-GST- [AAAR (TN)-2022-227]. Tamil Nadu. Sanofi India Limited [TS-1328-AAAR (MAH)-2019-GSTa]. Maharashtra. Biostadt India Limited [TS-911-AAR-2018-NT]. Maharashtra. Surfa Coats (India) Pvt. Ltd. [TS-807-AAR-2019-NT]. Karnataka. Divergent view taken in the case of Orient Cement Limited TS(DB)-GST-AAR(TEL)-2023-951 AAR holds that the transaction is one of supply of goods to his dealers in exchange for consideration which is the "monitory value of the "act" of attaining a level of business indicted in the incentive scheme" and that Applicant is inducing his dealers/ stockiest to attain a particular level of business as a consideration for the goods to be supplied by him; Date of judgement 30-09-2023
2	Buy 1 Get 1 Free Offer	Yes	Yes	It May Be a Composite Supply or Mixed Supply. Covered by Circular No 92/11/2019-GST dated07-03-2019
3	Discounts Including "Buy More Save More" Offers	Yes	Yes	Such Discounts Are Sometimes Shown On the Invoice Itself or Maybe a Part of Terms of an Agreement. Such Discounts Are Passed On by The Supplier Through Credit Note. Covered by Circular No 92/11/2019-GST dated07-03-2019
4	Secondary Discounts	Yes	Yes	Credit Note is issued for price difference. It Will Be Simply Financial Transaction. Covered by Circular No 92/11/2019-GST dated 07-03-2019
5	Finished Goods Lost In Fire Accident, Steel Scrap Sold In Open Market	No	No	Geekay Wires Limited TS(DB)-GST-AAR(TEL)-2023-857 ITC required To Be reversed On Inputs.
6	Allows ITC When Consideration Paid By Way Of Book Adjustment/ Setting-Off Book Debts	Yes	Yes	Senco Gold Limited Ts (Db)-Gst-Aar(Wb)-2019-472
7	ITC On Goods Supplied In Marketing Events	No	No	BMW India Private Limited TS(DB)-GST-AAR(Har)-2019-745 Ineligible
8	ITC- Reversal On Inputs For Inherent Loss During Manufacturing Process 'Misconceived'; Blocked Credit Provision Inapplicable	yes	Yes	ARS Steels And Alloy International Private Limited Vs. State Tax Officer TS(DB)-GST-HC(Mad)-2021-346
9	ITC On Inputs Consumed In Expired Cakes & Pastries Not Admissible;	No	No	Kanayalal Pahilajrai Balwani TS(DB)-GST-AAR (Guj)-2021-554 Requires Reversal
10	Denies ITC On Branch-Ho Inter-State Supplies Where Consideration Netted Off	No	No	Sanghvi Movers Limited. TS(DB)-GST-AAR(TN)-2019-549
11	No ITC Available For Construction Of Marriage Hall Used In Furtherance Of 'Renting' Business	No	No	Sree Varalakshmi Mahaal LLP. TS(DB)-GST-AAR(TN)-2019-247
12	Disallows ITC On Free Gifts/Trips Distributed To Dealers	No	No	Surfa Coats (India) Private Limited TS(DB)-GST-AAR(KAR)-2019-668

FAQ :

Section 17(5)(h) of the CGST Act covers restrictions on Input Tax Credit (ITC) for goods that are lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

Generally, ITC is not available for free samples and gifts, as confirmed by Circular No. 92/11/2019-GST and several judicial pronouncements.

For 'Buy 1 Get 1 Free' offers, ITC is available, and the transaction may be considered a composite or mixed supply, as covered by Circular No. 92/11/2019-GST.

Discounts, including 'Buy More Save More' and secondary discounts, generally allow for ITC. These are often reflected on invoices or through credit notes, and are covered by Circular No. 92/11/2019-GST.

ITC is not admissible for finished goods lost in a fire accident or for steel scrap sold in the open market, requiring reversal of ITC on inputs used.

The denial of ITC on inputs consumed in expired cakes and pastries is not admissible, and reversal is required. However, the blocking of credit provisions is considered inapplicable for inherent loss during manufacturing.