Input tax credit reversal for inevitable manufacturing loss is not covered by Section 17(5)(h) of the CGST Act.

Section 17(5)(h) of the CGST Act does not require reversal of input tax credit for loss that is inherent and inevitable in the manufacturing process. The clause applies to goods lost, stolen, destroyed, written off, or given as gifts or free samples, and that statutory language was read against the nature of manufacturing loss and the corresponding treatment under the Tamil Nadu VAT Act. Inherent process loss is a normal incident of manufacture and is not equivalent to the external contingencies covered by the provision. On that basis, the revenue action seeking reversal for such loss was held unsustainable in favour of the assessee.

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Issues: Whether reversal of input tax credit is permissible under Section 17(5)(h) of the Central Goods and Services Tax Act, 2017 in respect of loss of input that is inherent to the manufacturing process.

Analysis: Section 17(5)(h) blocks credit where goods are lost, stolen, destroyed, written off, or disposed of by gift or free samples. The provision was read in the context of the corresponding treatment under the Tamil Nadu Value Added Tax Act, 2006 and the nature of manufacturing loss. Loss that occurs as an inevitable part of consumption in manufacture is not the same as loss caused by theft, destruction, write-off, or similar external contingencies. Such inherent process loss is a normal incident of manufacture and cannot be equated with the situations specified in clause (h).

Conclusion: Reversal of input tax credit for inherent manufacturing loss is not contemplated by Section 17(5)(h) and the revenue's action to that extent is unsustainable, in favour of the assessee.

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