• Dated 11^th August, 2021

Input tax creditreversal not requiredfor inherent loss of inputsoccurred during the manufacturing process

Brief Facts:

The Petitioner is engaged in manufacturing of Billets and Ingots. MS scrap is an input in the manufacture of MS Billets and the later, in turn constitutes an input for manufacture of TMT/CTD Bars. During the manufacturing process there is loss of small portion of inputs on which ITC was already claimed. The impugned order was issued by the department relating to reversal of ITC claimed by the Petitioner proportionate to the loss of input.

Contention of the Department:

Department contested that input tax credit availed in respect to the loss of input is blocked credit as per the provision of Section 17(5)(h). Therefore, input tax credit should be proportionately reversed in respect of goods destroyed and damaged. Hence, the department demanded the reversal of input tax credit and thereby the impugned order was issued as per provision of Section 17(5)(h).

Contention of the Petitioner:

It was contended that the allegation of the respondent to reverse input tax credit by invoking of Section Provision of Section 17(5)(h) of CGST Act is not justifiable. In this regard the relevant provision was reproduced below for easy reference: -

Section17: Apportionment of credit and blocked credit

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(h) "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples."

It wascontended that the situations set out in clause (h) of Section 16(1) of CGST Act 2017,indicate loss of inputs that are quantifiableand involve external factors or compulsions. A loss that is occasioned by consumption in the process of manufacturing is one which is inherent to the process of manufacturing process itself and hence ITC reversal cannot be demanded in such situation and therefore the above demand should be set aside.

In reference to above petitioner submitted the judgement of Hon'ble Madras High Court in which court held that the cenvat credit is allowed on the original amount of input used in the manufacturing process.

Decision of Madras High Court:

Hon'ble Madras High Court in the given case held that the situations as set out in clause (h) of Section 16(1) of CGST Act 2017, indicate loss of inputs that are quantifiable and involve external factors or compulsions.Any loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself.

Hence the reversal of ITC involving Section 17(5)(h) of the CGST Act by the Revenue Department, 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) of the CGST Act. Thus, the impugned order was set aside, and the petitions are allowed.

Our Comments: -

Input tax credit reversal not required on goods destroyed during manufacturing considering such loss as inherent part of the manufacturing process.

1.M/s ARS Steels and Alloy International Pvt Ltd. Vs The State Tax Officer 2021-TIOL-1393-HC-MAD-GST