...

No Reversal of ITC on Inputs lost in Manufacturing Process

No Reversal of ITC on Inputs lost in Manufacturing Process

Held by Hon’ble High Court of Judicature at Madras in the matter of 

M/s.ARS Steels & Alloy International Pvt. Ltd., Vs The State Tax Officer (W.P.No.2885 of 2021)

In the given case, the petitioner was engaged in manufacturing MS Billets and Ingots. Due to the inherent nature of the manufacturing process, a portion of input losses during the manufacturing process. The Respondent reversed ITC corresponding to such lost Input under Section 17(5)(h) of CGST Act on account of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. The petitioner contended that scenarios given under Section 17(5)(h) are for such losses which are quantifiable in nature and also involve external factors or compulsion. However, loss in the manufacturing process is inherent in nature. 

Hon’ble High Court relied on the case of  Rupa & Co. Ltd. V. Cestat, Chennai (2015 (324) ELT 295) wherein it was held that some amount of consumption of the input was inevitable in the manufacturing process. 

Therefore, ITC should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product. Therefore, Hon’ble High Court held that loss due to inherent nature of manufacturing process is not covered under Section 17(5)(h) of CGST Act, 2017 and impugned order is liable to be set aside.

Detailed discussion is carried out as follows:

1. Brief facts of the case:

  • The petitioners are engaged in manufacturing of MS Billets and Ingots. MS scrap is an input which is used to manufacture billets and Ingots and such Billets and Ingots become input for the manufacture of TMT/CTD Bars.
  • As per inherent nature of the manufacturing process, a portion of Input losses during manufacturing process.
  • The respondent issued an impugned order to reverse a portion of ITC claimed by the Petitioners with respect to inputs lost under section 17(5)(h) of CGST Act, 2017.
  • Therefore, petitioner filed a petition before Hon’ble High Court of Madras challenging Impugned order.

2. Relevant Legal Extracts

  • Provisions for eligibility of ITC and reversal were also provided Tamil Nadu Value Added Tax Act, 2006 (“TNVAT Act”). Section 19 of TNVAT Act provided for various situations for grant and reversal of ITC.
  • Inclining with provisions of Section 19, similar provisions are also incorporated under Section 17 of CGST Act, 2017.
  • Section 17(1) to (4) provides for cases where assessee is entitled to claim ITC. Whereas, Section 17(5) provides for scenarios where ITC is not admissible.
  • Relevant extract of Section 17(5)(h) is as follows:

“Section 17: Apportionment of credit and blocked credits 

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely: 

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”

3. Submission made by The Petitioner:

The Petitioner contended that:

  • The respondent has reversed the ITC by invoking provisions of Section 17(5)(h) of CGST Act which means ITC related to goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
  • However, loss occurred during the manufacturing process can not be considered as loss due to reasons mentioned above.
  • Scenarios given under Section 17(5)(h) are loss of inputs which are quantifiable and involve external factors or compulsion. However, loss in the manufacturing process is inherent in nature.

4. Finding by Hon’ble High Court

  • Hon’ble High Court relied on the case of  Rupa & Co. Ltd. V. Cestat, Chennai (2015 (324) ELT 295) wherein Division Bench of this Court decided a question of law about entitlement of ITC with respect to inputs used in the manufacturing process, under Section 9A and 2(g) of the CENVAT Credit Rules, 2002.
  • In that case, Input in finished goods was marginally less as compared to input utilised by assessee and the department reverses the ITC on difference between the original quantity of input and the input contained in the finished product.
  • The Hon’ble Bench held that some amount of consumption of the input was inevitable in the manufacturing process. Therefore, ITC should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product and also added:
    • The expression ‘inputs of such finished product’ and ‘contained in finished products’ cannot be interpreted in a theoretical manner.
    • It has to be understood in the context of the manufacturing process.
    • If there is no dispute about the fact that every manufacturing process would automatically result in some kind of a loss such as evaporation, creation of by-products, etc.,the total quantity of inputs that went into the making of the finished product represents the inputs of such products in entirety’

5. Decision of Hon’ble High Court

Considering the finding, Hon’ble High Court held:

  • Reversal of ITC on account of loss by consumption of input which is inherent to manufacturing loss under section 17(5)(h) is misconceived.
  • Such losses are not covered under Section 17(5)(h) of CGST Act.
  • Therefore, impugned order is liable to be set aside.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on whatsapp
WhatsApp
Related Post
ITC is ineligible in relation to construction work of immovable property which is further let out
Input Tax Credit
CA. Sachin Jindal

ITC is ineligible in relation to construction work of immovable property which is further let out

The Company constructed a warehouse and let it out. The Company paid the GST on such outward supply. The Company sought an advance ruling from WBAAR that whether the company is entitled to claim ITC on inward supplies received for construction of such warehouse. The Hon’ble WBAAR held that the restriction given under Section 17(5)(d) of CGST Act in respect of ITC on goods or services used for construction of warehouse is applicable in the instant case, i.e., the Company is not eligible for ITC with respect to inward supplies to the extent such expenditure is capitalised. However, where construction expenses are not capitalized in books, the claim of ITC is admissible.

Read More »
Interest is not payable on late filing of GSTR-3B when the tax amount is deposited in Electronic Credit Ledger by the due date
Input Tax Credit
CA. Sachin Jindal

Interest is not payable on late filing of GSTR-3B when the tax amount is deposited in Electronic Credit Ledger by the due date

The Petitioner was having an accumulated Input Tax Credit under pre-GST regime. The petitioner filed GST TRAN-01 for transmission of such accumulated ITC under GST. However, due to technical glitches, entire amount of ITC was not transmitted under GST and complete amount was not available under electronic credit ledger of the petitioner.

Read More »
Deduction made by the applicant from employees for canteen services is not supply and ITC will be available for obligatory canteen services
Judgements
CA. Sachin Jindal

Deduction made by the applicant from employees for canteen services is not supply and ITC will be available for obligatory canteen services

The Kohler India Corporation Private Limited (“The Applicant ”) was mandatorily required to provide a canteen facility to the workers. The Applicant entered into a contract with Canteen service provider wherein invoice is raised by the CSP in the name of the applicant. Cost of CSP is borne by the applicant partially and the balance amount is recovered from the employees by way of deduction from salary. The amount is collected by the applicant from the employees without any commercial objective, i.e., without any profit markups. The question before Hon’ble AAR is Whether the subsidized deduction made by the applicant from the employees would be considered as ‘supply’ under CGST Act. Further, whether the applicant is entitled to claim ITC on invoice raised by the CSP.

Read More »

V J M & Associates LLP

Contact Us

X