“No ITC cancellation on loss of manufacturing process”


Whether it is the manufacture of ghee or steel products, the interpretation of the input tax credit (ITC) provision will not change.

The Madras High Court ruled that no ITC reversal would be required on losses that occur during the ghee manufacturing process. This is the third decision in less than two months on an issue affecting the manufacturing sector across the country.

On June 24, in the case involving ARS Steel & Alloy International Private Limited, Single Judicial Judge Anita Sumanth said that the ITC’s cancellation for loss of input consumption, which is inherent in the manufacturing loss, is wrong.

As such, the loss is not contemplated or covered by the situations provided for by the GST law, he said in rescinding the order of the GST authority.

TN ghee maker

In the case of Tamil Nadu-based ghee manufacturer, exporter and supplier RK Ganapathy Chettiar, the same bench said: so too.

“The only distinction is that the product in this case was steel, while the product in this case is ghee and that difference is not significant.”

No exceptions

Under the GST Act, Section 17 (5) (h) of the CGST Act of 2017 provides for the non-availability of ITC on lost or destroyed goods. The law does not provide for any exception to this provision.

Experts say sheltered from said provision, GST tax authorities are challenging ITC’s eligibility on normal losses that occur in the manufacturing process

Commenting on the ruling, Harpreet Singh, partner (indirect tax) at KPMG in India, said recent Madras High Court rulings and rulings under the old VAT and excise laws have relieved assessors in distinguishing between goods destroyed / discarded in the manufacturing process versus goods lost / destroyed otherwise.

“In view of these rulings, it is expected that the authorities, in the future, will not allege the cancellation of the ITC for any manufacturing loss,” he said.

Prateek Bansal, Associate Partner, Tax & Customs at White & Brief, said that although the Madras HC has reiterated the legal position (both under the GST and the old VAT), the ITC cannot be refused as an accidental loss of inputs during the manufacturing process for any final product. (be it steel or ghee), in the recent case of RK Ganapathy Chettiar, the parties and the tribunal did not dwell on the detailed manufacturing process of ghee in order to consider whether such Loss of inputs is really inevitable / unavoidable for the production of the final product, as the question of what constitutes an incidental loss can be debated depending on the facts and circumstances of each case.

“It will be interesting to see if the tax authorities accept this general decision or challenge this position before the Supreme Court. However, as this issue will have tax implications nationwide, it will be essential to review each case / manufacturing process to rule out ITC ineligibility, ”he said.


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