ITC not allowable on expired cakes and pastries and needs to be reversed

The Gujarat Authority for Advance Ruling (GAAR) has ruled that Input Tax Credit (ITC) is not allowable on goods used to manufacture cakes and pastries that have expired. These expired items, even if initially supplied to distributors with a tax invoice, must have their associated ITC reversed. The GAAR considers the act of discarding these expired goods as destruction, similar to how expired drugs are treated.

In M/s. KANAYALAL PAHILAJRAI BALWANI, (SIDARTH FOODS) [ADVANCE RULING GUJ/GAAR/R/16/2021 dated June 30, 2021], M/s. Kanayalal Pahilajrai Balwani ("the Applicant") has sought an advance ruling on, whether or not there is requirement for reversal of input tax credit ("ITC") 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.

In this case, the Applicant has been engaged in the business of manufacturing & distributing cakes & pastries items. The Applicant sends cakes & pastries to the distributors to keep them on display to fascinate consumers. The cakes & pastries are of perishable nature and cannot be preserved for a longer period and on regular intervals, all cakes & pastries kept in the display have to be compulsorily replaced after the 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 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. Moreover the Applicant clarified the mode of disposal of expired cakes and pastries, to which the applicant submitted that they throw away the expired one.

The Hon’ble Gujarat Authority for Advance Ruling ("the GAAR") given the ruling in the light of the provision of circularNo. 72/46/2018-GST dated October 26, 2018 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 in terms of Section 17(5)(h) of the CGST Act ("CGST Act").."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."

The GAAR noted the facts 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 similar 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 expired drugs.

RULING

The GAAR hold that subject matter is covered under section 17(5)(h) ("CGST Act") "ITC on inputs used in manufacturing expired cakes and pastries is not admissible and required to be reversed."