Reversal of input tax credit (ITC) by revenue in case of loss by consumption of input which was inherent to manufacturing loss was not correct as such loss was not contemplated or covered by situations represented under section 17(5)(h)

  • vide decision of High Court of Madras in ARS Steels & Alloy International (P.) Ltd. v. State Tax Officer, Group-I, Chennai

Facts of the case:

  1. The petitioners are engaged in the manufacture of MS Billets and Ingots. MS scrap is an input in the manufacture of MS Billets and the latter, in turn, constitutes an input for manufacture of TMT/CTD Bars.
  2. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The impugned orders seek to reverse a portion of the ITC claimed by the petitioners, proportionate to the loss of the input, referring to the provisions of Section 17(5)(h) of the GST Act.
  3. This batch of Writ Petitions relates to two sets of assessment orders passed in the case of two assessees under the provisions of Goods and Services Tax Act, 2017 (in short 'GST Act') for the periods 2017-18, 2018-19 and 2019-20. They are disposed by way of this common order, since the legal issue that arises in these cases is one and the same.
  4. The admitted position as far as this issue is concerned is that the vehicle
    movement register correlating to the vehicle gate passes issued, have been specifically sought for by the authorities but not produced at the time of assessment.
  5. Though the learned counsel for the petitioner states that the details have produced before this Court, learned counsel for the respondent would point out that this issue is factual in nature and as such, it would be better that the petitioner approach the appellate authority by way of a statutory appeal.
  6. As regards the Legislative history of this provision, the erstwhile Tamil Nadu Value Added Tax Act, 2006 (in short 'TNVAT Act') contained an equivalent provision in Section 19 thereof, which deals with various situations arising from the grant and reversal of ITC. Section 19 (1) grants eligibility to ITC of the amount of tax paid under the TNVAT Act by a registered dealer. It sets out situations where such ITC shall be denied as well.
  7. The prescription in Section 19 is echoed in the provisions of Section 17 of the GST Act. Section 17 (1) to (4) set out the entitlement of the assessee to ITC. Sub-section (5) and its sub-clauses provide for situations where ITC claimed shall be restricted.
  8. Section 17(5)(h) states that Input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
  9. The learned counsel of the petitioner argued that the loss that is occasioned by the process of manufacture cannot be equated to the above instance. A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself.
  10. In the case of Rupa & Co. Ltd. v Cestat, Chennai (2015 (324) ELT 295), a Division Bench of this Court decided a question of law in regard to the entitlement to Cenvat credit involving the measure of inputs used in the manufacturing process, in terms of the provisions of Section 9A and 2(g) of the CENVAT Credit Rules, 2002.
  11. In that case, a certain amount of input had been utilised by the assessee, whereas the input in the finished product was marginally less. The department proceeded to reverse the cenvat credit on the difference between the original quantity of input and the input in the finished product.
  12. The Bench held that cenvat credit should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product.
  13. It further added that 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.
    The High Court of Madras held that Section 17(5)(h) of CGST Act, does not contemplate or cover the case of consumption loss which is inherent to manufacturing loss. Hence, reversal of ITC invoking Section 17(5)(h) by the revenue in such case is misconceived.