2021 (6) TMI 957 - HC - GST

Reversal of Input Tax Credit - loss arising from manufacturing process - Section 17(5)(h) of the GST Act - HELD THAT - The impugned assessment orders reject a portion of ITC claimed, invoking the provisions of clause (h). This relates to goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. The loss that is occasioned by the process of manufacture cannot be equated to any of the instances. In the case of M/S. RUPA CO. LIMITED, TIRUPUR VERSUS THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, THE COMMISSIONER OF CENTRAL EXCISE 2015 (9) TMI 293 - MADRAS HIGH COURT , 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 - 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. The reversal of ITC involving Section 17(5)(h) by the Revenue, in cases of loss by consumption of input which is inherent to manufacturing loss is misconceived, as such loss is not contemplated or covered by the situations adumbrated under Section 17(5)(h)

Summary

Issues Involved:
1. Interpretation of provisions of the Goods and Services Tax Act, 2017 regarding the reversal of Input Tax Credit (ITC) in cases of loss arising from the manufacturing process.

Analysis:
The judgment by the Madras High Court pertains to a batch of Writ Petitions involving assessment orders passed under the Goods and Services Tax Act, 2017 for the periods 2017-18, 2018-19, and 2019-20. The primary legal issue in question is whether a reversal of Input Tax Credit (ITC) is warranted concerning the loss incurred during the manufacturing process. The petitioners, engaged in the manufacture of MS Billets and Ingots, faced a situation where a portion of ITC claimed was sought to be reversed proportionate to the loss of input, citing Section 17(5)(h) of the GST Act.

In the judgment, the court examined the legislative history of the provision in question, comparing it to the erstwhile Tamil Nadu Value Added Tax Act, 2006. The court highlighted the relevant sections of both acts that dealt with the grant and reversal of ITC, emphasizing the denial of ITC in cases where goods are lost, stolen, destroyed, or disposed of in specific circumstances.

The court delved into the provisions of Section 17 of the GST Act, particularly sub-section (5), which outlines situations where ITC claimed shall be restricted. The impugned assessment orders invoked clause (h) of Section 17(5), which pertains to goods lost, stolen, destroyed, or disposed of by way of gift or free samples. However, the court opined that the loss inherent to the manufacturing process cannot be equated to the instances outlined in clause (h).

Drawing on a precedent involving Cenvat credit entitlement, the court emphasized that some amount of input consumption is inevitable in the manufacturing process. The judgment cited the case of Rupa & Co. Ltd. v. Cestat, Chennai, where it was held that credit should be granted on the original amount of input used, even if the entire quantity does not appear in the finished product.

Ultimately, the court set aside the impugned orders, ruling that the reversal of ITC concerning losses inherent to the manufacturing process is misconceived and not covered by the provisions of Section 17(5)(h). The Writ Petitions were partly allowed, and costs were not imposed.