NO ITC REVERSAL REQUIRED IN CASE OF LOSS ARISING FROM THE MANUFACTURING PROCESS
In the recent order passed by the Hon’ble High Court of Madras in the matter of M/s. ARS Steels & Alloys International Private Limited v/s The State tax officer, Group-1, Inspection, Intelligence – 1, Chennai (2021 VIL-484-MAD) in respect of the requirement for reversal of ITC in relation to loss arising from the manufacturing process has held that no ITC reversal required under section 17(5) of CGST Act 2007 in the case on the normal loss of material during the manufacturing process as it is inevitable to avoid such manufacturing losses.
Brief facts:
- M/s ARS Steels & Alloys (P) Ltd (hereinafter to be referred to as “the petitioner”) are engaged in the manufacture of MS Billets and Ingots. MSscrap is an input in the manufacture of MS Billets and the latter, in turn, constitutes an input for the manufacture of TMT/CTD Bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process.
- The State Tax Officer, Intelligence (hereinafter to be referred to as “the respondent”) in the impugned orders, seek to reverse a portion of the ITC claimed by the petitioner referring to provisions under Section 17(5)(h) of the CGST Act,2017.
- Section 17(5)(h) restricts ITC on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
- The petitioner has filed a writ petition before the Hon’ble High Court of Madras against the order passed by the respondent.
Respondent’s contention
The respondent contended that the manufacturing loss arising out of the manufacturing process is squarely covered by the situations outlined under Section 17(5)(h) of the CGST Act, 2017. Accordingly, the respondent stated that the petitioner is required to reverse the ITC claimed, proportionate to the loss of input.
Observations of the Hon’ble High Court:
- The loss that is occasioned by the process of manufacture cannot be equated to any of the instances set out in clause (h) of Section 17(5). The said clause indicates loss of inputs that are quantifiable and involve external; factors or compulsions. A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself.
- The Hon’ble High Court reiterated a judgment in the matter of Rupa & Co. Ltd. Vs Cestat, Chennai (2015-VIL-373-MAD-CE).
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- A certain amount of input had been utilized by the assessee, whereas the input in the finished product was marginally less. The department proceeded to reverse the CENVAT credit on the difference between the original quantity of input and the input in the finished product.
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- In the above mentioned matter, the Court held that some amount of consumption of the input was inevitable in the manufacturing process. CENAVT credit should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product.
- Reversal of ITC involving Section 17(5)(h) by the revenue, 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).
