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Whether it is the manufacture of ghee or steel products, interpretation of provision related to Input Tax Credit (ITC) will not change.
The Madras High Court has held that no ITC reversal would be required on losses that occur during the manufacturing process of ghee. This is third ruling in less than two months on an issue that is affecting the manufacturing sector across the nation.
On June 24, in the matter involving ARS Steel & Alloy International Private Limited, a Single Judge Bench of Justice Anita Sumanth had said that reversal of ITC in cases of loss of consumption of input, which is inherent to manufacturing loss, is misconceived.
As such, loss is not contemplated or covered by the situations adumbrated under GST law, it said while setting aside the order by GST authority.
TN ghee-maker
In the case of Tamil Nadu-based ghee manufacturer, exporter and supplier, RK Ganapathy Chettiar, the same Bench said: “The above order has been passed in the context of Tamil Nadu VAT and would be applicable to the facts and legal position in this case as well.
“The sole distinction is that the commodity in that case was steel, whereas the product in the present case is ghee and this difference is not material.”
No exceptions
Under the GST Law, Section 17(5)(h) of the CGST Act 2017 provides for non-availability of ITC on goods lost or destroyed. The law does not provide any exception to the said provision.
Experts say that taking the shelter of the said provision, the GST tax authorities are disputing the eligibility of ITC on normal losses that occur in the manufacturing process
Commenting on the ruling, Harpreet Singh, Partner (Indirect Tax) at KPMG in India, said that the recent Madras High Court rulings and rulings under erstwhile VAT and Excise laws have provided relief to assessees by differentiating between goods destroyed/ scrapped in manufacturing process vis-a-vis goods lost/ destroyed otherwise.
“In view of these rulings, it is expected that the authorities, going forward, would not allege reversal of ITC for any manufacturing loss,” he said.
Prateek Bansal, Associate Partner, Tax & Customs at White & Brief, said that while the Madras HC has reiterated the legal position (both under GST and erstwhile VAT) that ITC cannot be denied qua incidental loss of inputs during manufacturing process for any final product (whether steel or ghee), in the recent case of RK Ganapathy Chettiar, the parties and the court have not dwelled into the detailed manufacturing process of ghee so as to examine whether such loss of inputs is truly inevitable / unavoidable for producing final product, as the question of what constitutes incidental loss may be debated depending on facts and circumstances of each case.
“It will be interesting to see if the tax department accepts this blanket ruling or challenges this position before the Supreme Court. However, given that this issue will have country wide tax implications, it will be critical to examine each case / manufacturing process to rule out any ITC ineligibility,” he said.
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