Clarifies that natural loss during transport is not ‘supply’ under GST, but ITC reversal is still required under Section 17(5)(h)
Background: The GST Cloud Over Transit Losses
In the supply chain of industrial inputs such as liquid gases, petrochemicals, and bulk commodities, certain inherent losses—especially due to evaporation, leakage, or spoilage—are considered inevitable.
But the question is:
Are such transit losses taxable under GST?
The recent Advance Ruling by the Gujarat AAR in M/s. INOX Air Products Pvt. Ltd. (Case No. GUJ/GAAR/R/2025/10 dated 25.03.2025) has brought clarity to this important issue. The case dives into the dual implications:
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Whether GST is payable on the lost quantity, and
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Whether ITC reversal is necessary in such cases.
Factual Matrix of the Case
| Parameter | Details |
|---|---|
| Applicant | INOX Air Products Pvt. Ltd. |
| Business Activity | Manufacture & supply of cryogenic industrial gases (O₂, N₂, Ar) |
| Mode of Transport | Cryogenic tanks – subject to unavoidable evaporation |
| Nature of Loss | Loss due to physical and scientific properties of gases |
| Documentation | Delivery challan used (as per Rule 55), invoice issued for net delivery |
| Query Before AAR | (a) Is GST payable on lost quantity? (b) Is ITC reversal required? |
Key Legal Provisions in Play
| Section/Rule | Provision Summary |
|---|---|
| Section 7(1)(a) | Defines “supply” as transfer for consideration in course or furtherance of business |
| Section 16(1) | Allows ITC only when goods/services are used in taxable outward supply |
| Section 17(5)(h) | Blocks ITC on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples |
| Rule 55 of CGST Rules | Permits transport of goods under delivery challan prior to issuance of invoice |
AAR's Ruling: Deconstructed
No GST on Transit Losses Due to Inherent Nature
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Time of supply and place of supply had not occurred for the quantity that evaporated.
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No transfer of title or possession to customer → hence, no “supply” under Section 7.
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Evaporation is not a voluntary act but a scientific inevitability.
Conclusion: GST is not leviable on the quantity lost during transportation due to evaporation.
However, ITC on Lost Quantity Must Be Reversed
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The right to avail ITC is not absolute or vested; it is conditional under Section 16.
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When goods are lost before use in taxable supply, credit fails the purpose test.
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Section 17(5)(h) is unambiguous: ITC on goods “lost or destroyed” must be reversed—even if the loss is natural.
Conclusion: Although there is no outward supply, ITC reversal is mandatory under Section 17(5)(h).
Analytical Commentary: Beyond the Ruling
Interpretation of “Loss” Under Section 17(5)(h)
The word “lost” under Section 17(5)(h) does not distinguish between:
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Accidental loss (e.g., theft or mishandling), and
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Inherent or process-driven loss (e.g., evaporation or spoilage).
This ruling reaffirms that even scientific or physical loss—if it results in non-availability of goods for output supply—triggers ITC ineligibility.
Consistency With Past Rulings & Industry Practice
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The ruling aligns with decisions in:
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GAIL India Ltd. – where pipeline leakage losses were held taxable unless proven inherent.
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Jay Bee Industries (Punjab AAR) – where ITC on lost pulses during cleaning was disallowed.
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It clarifies the division of tax treatment:
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No GST on natural loss, but
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No ITC retention either.
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Impact on Invoicing & Valuation
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Since no invoice is raised on the lost quantity, there’s no value of supply to tax.
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This saves companies from unnecessarily paying GST on vanished stock.
But the cost impact still remains via ITC reversal, which must be recognized in the profitability analysis and landed cost of goods.
Strategic Takeaways for Businesses
| What You Should Do | Why |
|---|---|
| Track and quantify transit losses scientifically | To distinguish inherent loss from avoidable ones |
| Document movement with delivery challans (Rule 55 compliance) | To support claim that supply hasn’t occurred on lost quantity |
| Ensure invoice is raised only on net delivered quantity | To avoid liability for GST on evaporated volume |
| Reverse ITC under Section 17(5)(h) wherever applicable | To remain compliant and avoid future audits/litigation |
| Build in such losses into product costing and ITC reconciliation | To reflect true costs and avoid overstating working capital |
A Balanced Interpretation, But Not a Blanket Relief
The Gujarat AAR’s decision in the INOX Air Products case strikes a fair balance:
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It prevents tax leakage (by denying ITC where goods never reach the customer),
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But also protects businesses from paying GST on scientifically inevitable losses.
This ruling will be especially relevant for:
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Gas manufacturers, bulk liquid suppliers, chemical logistics companies, and
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Any business where natural transit loss is built into the supply chain.
However, since AAR rulings are applicant-specific, similar businesses are advised to file their own advance ruling or adopt this interpretation with legal review and proper documentation.
