No reversal of Input Tax Credit on manufacturing process losses, says Madras HC

The Madras High Court has ruled no reversal of Input Tax Credit (ITC) on material losses incurred during manufacturing process. Many exerts hailed the ruling saying it could help help a number of manufacturing companies across India.

“I am of the view that the 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) (of GST Act),” a single judge bench of Justice Anita Sumanth said, while allowing appeals filed by Chennai-based companies ARS Steels & Alloy International and GBR Metals Private Limited against the assessment order passed by GST authority.

Section 17 of the GST law deals with apportionment of credit and blocked credits. While sub-sections 1-4 set out the entitlement of the assessee to ITC sub-section (5) and its sub-clauses provide for situations where ITC claimed will be restricted. Sub clause (h) says ITC will not be available in case of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Loss of inputs

The petitioners are engaged in the manufacture of MS Billets and Ingots. MS scrap is an input in the manufacture of MS Billets and the latter, in turn, constitutes an input for manufacture of TMT/CTD Bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The impugned assessment orders seek to reverse a portion of the ITC claimed by the petitioners, proportionate to the loss of the input, referring to the provisions of Section 17(5)(h) of the GST Act.

The bench noted that the assessment order rejected a portion of the ITC claimed invoking sub section (h). “In my considered view, the loss that is occasioned by the process of manufacture cannot be equated to any of the instances set out in clause (h),” the bench said, while allowing appeals.

According to Rajat Mohan, Senior Partner with AMRG & Associates, the loss that is occasioned by consumption in the process of manufacture is inherent to the process of manufacture itself and thereby does not necessitate any reversal of ITC on the same.

“This ruling will strongly support the argument of manufacturers that no reversal of ITC is required in case of the normal loss of inputs during the process,” he said.

Prateek Bansal, Associate Partner with law firm with White and Brief said that the legislative intent of Section 17(5) of the CGST Act is to restrict the credit pertaining to inputs which are not used or intended to be used in the course or furtherance of business.

“This decision of the Madras High Court affirms and endorses that any proposal/ attempt to seek reversal of input tax credit when the inputs are actually utilised for business purposes, would be without authority of law and violative of Articles 265 and 300A of the Indian Constitution,” he said.

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