Input tax credit reversal for invisible manufacturing loss rejected; statutory limits and notice requirements still control
Input tax credit cannot be reversed merely on alleged invisible loss of inputs consumed in manufacture, because the statutory reversal provision applies only to destruction, loss, transit damage, or destruction at an intermediary stage of production. Section 18 of the Tamil Nadu Value Added Tax Act, 2006 is not a self-contained provision and remains subject to the restrictions and conditions in Section 19. Circulars and notices directing ad hoc reversal on a uniform percentage basis were therefore unsustainable, though the authorities may issue fresh notices in accordance with law and state the basis for any proposed reversal or revision.
Issues: (i) Whether input tax credit can be reversed on the basis of alleged invisible loss of inputs consumed in the manufacture of final products; (ii) whether Section 18 of the Tamil Nadu Value Added Tax Act, 2006 is an independent stand-alone provision or is subject to the restrictions contained in Section 19 of that Act; (iii) whether the impugned circular and notices calling for reversal of input tax credit on an ad hoc percentage basis could stand.
Issue (i): Whether input tax credit can be reversed on the basis of alleged invisible loss of inputs consumed in the manufacture of final products.
Analysis: The governing provision permits reversal only where inputs are destroyed, lost, damaged in transit, or destroyed at some intermediary stage of manufacture. Inputs that are actually consumed in the manufacturing process are not the same as inputs destroyed at an intermediary stage. The expression cannot be extended to cover normal consumption or invisible loss occurring in the course of manufacture. Uniform reversal on an assumed percentage basis is not supported by the statutory scheme.
Conclusion: Input tax credit cannot be reversed merely on account of invisible loss of inputs consumed in the manufacture of final products.
Issue (ii): Whether Section 18 of the Tamil Nadu Value Added Tax Act, 2006 is an independent stand-alone provision or is subject to the restrictions contained in Section 19 of that Act.
Analysis: Refund or credit under Section 18 is available only within the framework of the Act and the dealer must satisfy the assessing authority that the claim is not hit by the restrictions and conditions in Section 19. The undertaking in Form W and verification under Rule 11(2) do not make Section 18 a self-contained provision immune from the statutory restrictions.
Conclusion: Section 18 is not an independent stand-alone provision and remains subject to Section 19.
Issue (iii): Whether the impugned circular and notices calling for reversal of input tax credit on an ad hoc percentage basis could stand.
Analysis: The circular was treated as an unnecessary non-statutory guideline, and the notices based on a uniform invisible-loss percentage were held unsustainable. The authorities were left at liberty to issue fresh notices in accordance with law by stating the basis for any proposed revision or reversal.
Conclusion: The circular and consequential notices invoking ad hoc reversal were set aside.
Final Conclusion: The challenge succeeded to the extent that reversal of input tax credit on alleged invisible loss was disapproved, while the statutory power to examine eligible claims and issue fresh notices in accordance with law was preserved.
Ratio Decidendi: Normal manufacturing consumption of inputs does not amount to inputs destroyed at an intermediary stage of manufacture, and input tax credit cannot be reversed on an assumed invisible-loss percentage unless the case falls within the specific statutory disqualifications.
TaxTMI 
AI Drafter ✕
TaxTMI 
