2021 (6) TMI 957 - HC - GST

Madras High Court: Input Tax Credit not to be reversed for manufacturing losses

The Madras High Court ruled in a batch of Writ Petitions under the Goods and Services Tax Act, 2017 that the reversal of Input Tax Credit (ITC) due to ... Reversal of Input Tax Credit - Input Tax Credit - blocked credits - Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples - Loss inherent to the manufacturing process - Interpretation of Section 17(5)(h) of the GST Act - Comparative application of antecedent VAT provision on input tax creditReversal of Input Tax Credit - Loss inherent to the manufacturing process - Interpretation of Section 17(5)(h) of the GST Act - Input Tax Credit - blocked credits - Whether reversal of Input Tax Credit under Section 17(5)(h) is permissible in respect of loss of input that is inherent to the manufacturing process. - HELD THAT: - The Court examined the scheme of input tax credit under the antecedent VAT provision and under Section 17 of the GST Act, noting that clause (h) of Section 17(5) enumerates instances of loss which are external, quantifiable or involve disposal by way of gift or free samples. A loss occasioned by consumption or inherent wastage in the manufacturing process is integral to the manufacturing operation and is not one of the situations contemplated by clause (h). The Court relied on the reasoning in Rupa & Co. Ltd. (para 13 of that decision) which recognised that manufacturing processes necessarily involve some consumption or loss of input, and that credit should be available on the original quantity of input used notwithstanding that the finished product may contain a lesser measurable quantity. Applying that reasoning, the Court held that revenue's reversal of ITC on the ground of manufacturing loss was misconceived because such loss does not fall within the ambit of goods 'lost, stolen, destroyed, written off or disposed of by way of gift or free samples' as set out in Section 17(5)(h). [Paras 6, 10, 11, 15]Reversal of ITC under Section 17(5)(h) on account of loss inherent to manufacturing is not permissible; impugned orders to that extent are set aside.Stock reconciliation - Admission of evidence before appellate/departmental authority - Whether the question of stock reconciliation, where vehicle movement registers were not produced at assessment but have been produced before the Court, should be adjudicated afresh by departmental authorities. - HELD THAT: - The Court observed that the vehicle movement register and related evidence bearing on stock reconciliation were not produced at the time of assessment and have been tendered only at the stage of these proceedings. Given the factual nature of the issue and the late production of evidence, the Court declined to decide the factual controversy and directed that the petitioner may approach the appellate authority by way of statutory appeal so that the departmental authorities can examine the evidence in the first instance. The Court thereby permitted the filing of a statutory appeal within four weeks for determination of the stock reconciliation issue by the appropriate fora. [Paras 2, 3]Stock reconciliation issue remanded for fresh consideration by the departmental/appellate authority; petitioner permitted to file statutory appeal within four weeks.Final Conclusion: The challenge to reversal of ITC insofar as it was made on account of loss inherent to the manufacturing process is allowed and the impugned orders are set aside to that extent. The stock reconciliation matter is remitted to the departmental/appellate authority for fresh consideration, with liberty to the petitioner to file a statutory appeal within four weeks. Writ petitions are accordingly allowed in part as indicated; no costs. 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.