In the given case, the petitioner was engaged in manufacturing MS Billets and Ingots. Due to the inherent nature of the manufacturing process, a portion of input losses during the manufacturing process. The Respondent reversed ITC corresponding to such lost Input under Section 17(5)(h) of CGST Act on account of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. The petitioner contended that scenarios given under Section 17(5)(h) are for such losses which are quantifiable in nature and also involve external factors or compulsion. However, loss in the manufacturing process is inherent in nature.

Hon’ble High Court relied on the case of Rupa & Co. Ltd. V. Cestat, Chennai (2015 (324) ELT 295) wherein it was held that some amount of consumption of the input was inevitable in the manufacturing process.

Therefore, ITC should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product. Therefore, Hon’ble High Court held that loss due to inherent nature of manufacturing process is not covered under Section 17(5)(h) of CGST Act, 2017 and impugned order is liable to be set aside.

Detailed discussion is carried out as follows:

1. Brief facts of the case:
The petitioners are engaged in manufacturing of MS Billets and Ingots. MS scrap is an input which is used to manufacture billets and Ingots and such Billets and Ingots become input for the manufacture of TMT/CTD Bars.
As per inherent nature of the manufacturing process, a portion of Input losses during manufacturing process.
The respondent issued an impugned order to reverse a portion of ITC claimed by the Petitioners with respect to inputs lost under section 17(5)(h) of CGST Act, 2017.
Therefore, petitioner filed a petition before Hon’ble High Court of Madras challenging Impugned order.
2. Relevant Legal Extracts
Provisions for eligibility of ITC and reversal were also provided Tamil Nadu Value Added Tax Act, 2006 (“TNVAT Act”). Section 19 of TNVAT Act provided for various situations for grant and reversal of ITC.
Inclining with provisions of Section 19, similar provisions are also incorporated under Section 17 of CGST Act, 2017.
Section 17(1) to (4) provides for cases where assessee is entitled to claim ITC. Whereas, Section 17(5) provides for scenarios where ITC is not admissible.
Relevant extract of Section 17(5)(h) is as follows:
“Section 17: Apportionment of credit and blocked credits

(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.”

3. Submission made by The Petitioner:
The Petitioner contended that:

The respondent has reversed the ITC by invoking provisions of Section 17(5)(h) of CGST Act which means ITC related to goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
However, loss occurred during the manufacturing process can not be considered as loss due to reasons mentioned above.
Scenarios given under Section 17(5)(h) are loss of inputs which are quantifiable and involve external factors or compulsion. However, loss in the manufacturing process is inherent in nature.
4. Finding by Hon’ble High Court
Hon’ble High Court relied on the case of Rupa & Co. Ltd. V. Cestat, Chennai (2015 (324) ELT 295) wherein Division Bench of this Court decided a question of law about entitlement of ITC with respect to inputs used in the manufacturing process, under Section 9A and 2(g) of the CENVAT Credit Rules, 2002.
In that case, Input in finished goods was marginally less as compared to input utilised by assessee and the department reverses the ITC on difference between the original quantity of input and the input contained in the finished product.
The Hon’ble Bench held that some amount of consumption of the input was inevitable in the manufacturing process. Therefore, ITC should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product and also added:
The expression ‘inputs of such finished product’ and ‘contained in finished products’ cannot be interpreted in a theoretical manner.
It has to be understood in the context of the manufacturing process.
If there is no dispute about the fact that every manufacturing process would automatically result in some kind of a loss such as evaporation, creation of by-products, etc.,the total quantity of inputs that went into the making of the finished product represents the inputs of such products in entirety’
5. Decision of Hon’ble High Court
Considering the finding, Hon’ble High Court held:

Reversal of ITC on account of loss by consumption of input which is inherent to manufacturing loss under section 17(5)(h) is misconceived.
Such losses are not covered under Section 17(5)(h) of CGST Act.
Therefore, impugned order is liable to be set aside.

Facts:

ARS Steel & Alloy International Pvt. Ltd. (“the Petitioner”) is 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.

This batch of writ petition has been filed against the assessment order (“impugned order”) passed by the State Tax Officer (“the Respondent”) that seeks to reverse a portion of the ITC claimed by the Petitioner, proportionate to the loss of the inputs, referring to the provisions of Section 17(5)(h) of the CGST Act for the periods 2017-18, 2018-19 and 2019-20.

Issue:

Whether a reversal of ITC is contemplated in relation to loss arising from manufacturing process?
Held:

The Hon’ble Madras High Court in W.P. Nos. 2885,2888,2890,3930,3936 and 3933 of 2020 and WMP. Nos. 3341,3345,3336,4664,4656 and 4661 of 2020 and W.P. No. 2885 of 2021 dated June 24, 2021, held as under:

Noted that, to interpret Section 17(5)(h) of the CGST Act, an equivalent provision was contained in the erstwhile GST regime, under Section 19 Tamil Nadu Value Added Tax Act, 2006 (“the TNVAT Act”) which deals with various situations arising from the grant and reversal of ITC by the registered dealer.
Observed that, the provisions of Section 19 of the TNVAT Act is reiterated in the provisions of the Section 17 of the CGST Act, and stated that, Section 17(5)(h) of the CGST Act 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.
Relied on the judgment of the Hon’ble Madras High Court in case of Rupa & Co. Ltd. V. CESTAT, Chennai (2015 (324) ELT 295), wherein, the Court noted that some amount of consumption of the inputs was inevitable in the manufacturing process, and held that CENVAT credit should be granted on the original amount of inputs used notwithstanding that the entire amount of inputs would not figure in the finished product.
Set aside the impugned order passed by the Respondent.
Held that, 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.
Relevant Provisions:

Section 19(1) of the TNVAT Act:

“19. Input tax credit-

(1) There shall be input tax credit of the amount of tax paid Omitted[or Payable] under this Act, by the registered dealer to the seller on his purchases of taxable goods specified in the First Schedule :

Provided that the registered dealer, who claims input tax credit, shall establish that the tax due On purchase of goods has actually been paid in the manner prescribed by the registered dealer who sold such goods and that the goods have actually been delivered Provided further that the tax deferred under section 32 shall be deemed to have been paid under this Act for the purpose of this sub-section. ………..

(8) No input tax credit shall be allowed to any registered dealer in respect of any goods purchased by him for sale but given away by him by way of free sample or gift or goods consumed for personal use.

(9) No input tax credit shall be available to a registered dealer for tax paid Omitted[or Payable] at the time of purchase of goods, if such-

(i) goods are not sold because of any theft, loss or destruction, for any reason, including natural calamity. If a dealer has already availed input tax credit against purchase of such goods, there shall be reversal of tax credit; or

(ii) inputs destroyed in fire accident or lost while in storage even before use in the manufacture of final products; or

(iii) inputs damaged in transit or destroyed at some intermediary stage of manufacture.”

Section 17(5)(h) of the CGST Act:

“17. Apportionment of credit and blocked credits.

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (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;”