Judgement on non-reversal of ITC u/s 17(5) for loss of Inputs arising during manufacturing process

Petitioner: M/s ARS Steels & Alloy International Pvt Ltd.

Respondents: State Tax Officer, Tamil Nadu

Authority: Madras High Court

Date: 24th June 2021

Case: The petitioners are engaged in manufacture of MS Billets & 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 orders seek reversal of 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.

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

Court’s Observation:

1. The situations as set out in clause (h) indicate 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.

2. In the case of Rupa & Co. Ltd. Vs. CESTAT, Chennai, the Division bench decided that some amount of consumption of the input was inevitable in the manufacturing process. It held that Cenvat 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.

Judgement: Reversal of ITC u/s 17(5) (h) by the Revenue in case of loss of input by consumption which is inherent to manufacturing process is misconceived as such loss is not covered by the situations adumbrated u/s 17(5)(h).