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Issues: (i) Whether the impugned circular directing reversal of input tax credit on manufacturing or invisible loss required judicial scrutiny and could be sustained. (ii) Whether inputs used in manufacture, though not forming part of the finished product because of inherent manufacturing loss, fall within the exclusion in Section 19(9) of the Tamil Nadu Value Added Tax Act, 2006, so as to require reversal of credit.
Issue (i): Whether the impugned circular directing reversal of input tax credit on manufacturing or invisible loss required judicial scrutiny and could be sustained.
Analysis: A circular issued by the highest tax authority, even if described as non-statutory, can materially influence quasi-judicial assessment. Its validity therefore cannot be ignored merely because it is styled as a guideline. Where such a circular has the effect of guiding subordinate officers on the treatment of credit, its legality remains open to examination.
Conclusion: The circular was liable to judicial review and could not be treated as beyond scrutiny merely because it was non-statutory.
Issue (ii): Whether inputs used in manufacture, though not forming part of the finished product because of inherent manufacturing loss, fall within the exclusion in Section 19(9) of the Tamil Nadu Value Added Tax Act, 2006, so as to require reversal of credit.
Analysis: Section 19(2)(ii) of the Tamil Nadu Value Added Tax Act, 2006 grants input tax credit for goods used as inputs in manufacturing or processing of goods in the State. The expression "use" is concerned with employment of the input in the manufacturing process, not with whether the input is physically traceable in the finished product. Section 19(9) operates in different situations, namely goods not sold because of theft, loss or destruction, inputs destroyed in fire or lost before use, or inputs damaged in transit or destroyed at an intermediary stage. Manufacturing loss that is inherent, inevitable, or unavoidable in the course of production is neither destruction in the relevant sense nor a basis to deny credit. The provisions must be read harmoniously, and a construction that creates an irrational distinction between inputs that remain visible in the output and those that are consumed in the process was rejected.
Conclusion: Inherent manufacturing or invisible loss does not attract Section 19(9) and cannot be used to reverse input tax credit admissible under Section 19(2)(ii).
Final Conclusion: The assessee's entitlement to input tax credit on inputs consumed in the manufacturing process was upheld, and the revenue's blanket approach of reversing credit on the basis of invisible loss was rejected. Assessment action based on the impugned circular and uniform percentage reversal could not stand to that extent.
Ratio Decidendi: Input tax credit under a provision allowing credit for inputs used in manufacture cannot be denied on the ground that part of the input is inevitably consumed or lost in the manufacturing process, because such inherent manufacturing loss is not equivalent to destruction or loss of goods within the exclusionary provision.
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