Eastman Exports Global Clothing (P) Ltd. Vs Assistant Commissioner (CT) (Madras High Court)
Reversal of Input Tax Credit (‘ITC’) on the loss of inputs which is inherent to the process of manufacturing
The Division Bench of Hon’ble Madras High Court recently in the case of Eastman Exports Global Clothing Pvt limited Vs Asst.Commissioner of CT, Tirupur settled an interesting question of law pertaining to the reversal of Input Tax Credit (‘ITC’) on the loss of inputs which is inherent to the process of manufacturing.
The decision will have a significant bearing on similar claims of ITC made under the present GST regime as well. Have a Look on the judgment enclosed
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The common question that arises for consideration in this batch of Writ Appeals/Petitions revolves around the construction/interplay of Section 19(2)(ii) vis-a-vis Section 19 (9) of the Tamil Nadu Value Added Tax Act, 2006 (hereinafter referred to as “the TNVAT Act”). Though the issue/question that arises for consideration is common in this batch of Writ Appeals/petitions, the facts and nature of products are different. However, that in our view it would not have any bearing on the issue which needs to be resolved.
2. History of the litigation:
This is the 2nd round of litigation. The learned Single Judge had recorded / traced the history of the litigation leading up to the writ petitions. The learned Judge has inter-alia recorded the following while dealing with the background to the present litigation:
a. A representation was made by the Textile Exporters Association to the Joint Commissioner Taxes Enforcement as well as Joint Commissioner of Commercial Taxes, Coimbatore, in view of the fact that there was a slew of proceedings initiated whereby input tax credit on the portion treated as manufacturing/invisible loss was directed to be reversed.
b. The Principle Secretary / Commissioner of Commercial Taxes issued a circular dated 20.10.2011 instructing the assessing authorities that Input Tax availed on raw materials to the extent of the wastage was to be treated as manufacturing / invisible loss and reversed. In the event of refund having been granted the excess refunds ought to be deducted while granting subsequent refunds.
c. The Textile Exporters Association filed a Writ Petition in W.P.No.28114 of 2011 to prohibit the revenue from reversing or disallowing the claim on input tax credit relating to manufacturing/invisible loss in respect of the members of the Association. The Writ Petition was dismissed vide order dated 14.12.2011 on the ground that the Association has no locus standi.
d. The matter was carried by way of appeal in W.A.No.966 of 2012, by the Association which was dismissed by the Division Bench. However, it was observed that it is open to the Association to approach the appropriate authority as and when required and conduct demonstration with regard to manufacturing/invisible loss.
e. Thereafter, individual notices came to be issued on some of the Petitioners/Appellants proposing to reverse the input tax credit availed towards alleged manufacturing/invisible loss at fixed percentages.
f. The Petitioners / Appellants submitted their objections. After about two years the Respondent proceeded with assessment. Some of the Writ Petitioners challenged the notices while a few challenged the assessment proceedings directing the petitioners/ appellants to reverse the Input Tax Credit at fixed rates as representing manufacturing/invisible loss. Writ Petitions were filed challenging the Circular dated 20.10.2011 as well.
g. As stated above, the goods involved in this batch are not the same. However, in all the cases proceedings were initiated on the premise there was manufacturing/invisible loss attracting Section 19 (9) of the TNVAT Act, warranting reversal of credit.
3. Order of the learned Single Judge:
In this batch of writ petitions before the learned Single Judge there were challenges to the proceedings proposing / directing reversal of Input Tax Credit on account of manufacturing / invisible loss. Apart therefrom there was also a challenge to the Circular dated 20.10.2011 by which instructions were issued stating that wastage at all levels must be considered taking into account the nature of commodity and that the credit was to be reversed in respect of manufacturing/invisible loss in terms of Section 19 (9) of the TNVAT Act. The following issues were framed:
“(1) Whether the impugned Circular No.22/2011 dated 20.10.2011 is bad in law for want of jurisdiction to issue the same under the provisions of the TNVAT Act and the effect of such Circular on the assessments made by the Assessing Officer?
(2) Whether Section 18 of the TNVAT Act is a Scheme by itself or whether the benefit to a dealer under Section 18 is subject to the conditions prescribed under Section 19 more particularly Section 19(9) of the TNVAT Act ?
(3) Whether in the given facts and circumstances would it be sufficient for a dealer who claims refund under Section 18(2) of the TNVAT Act of the input tax paid on the purchase of the goods, to show that those goods are used in the manufacture and nothing more ? Whether the Assessing Authority should embark upon a fact finding exercise to ascertain the quantum of loss, if any?
(4) If it is held that the relief under Section 18(2) of TNVAT Act is subject to Section 19 of TNVAT Act, whether the circumstances mentioned in Section 19(9)(i),(ii) and (iii) would cover manufacturing loss ?
(5) Whether the respondent assessing authorities were justified in adopting a uniform percentage as invisible loss and calling upon the dealer to reverse the Input Tax Credit availed to that extent?
(6) Whether the petitioners/dealers are justified in contending that there is no machinery under the TNVAT Act to reverse the refund granted pursuant to an order passed on an application filed by the dealer in Form W under Rule 11(2) of the TNVAT Rules ?”
The learned Judge proceeded to answer the issues as under:
“63. In the result, (1) the challenge to the impugned circular is held to be unnecessary since the circular is a non statutory circular and is in the nature of guideline and the prayer for quashing the circular is rejected.
(2) Section 18 of the TNVAT Act is not an independent or a separate stand alone provision under the provisions of TNVAT Act but subject to other provisions of the Act including Section 19 of the VAT Act.
(3) For the reasons assigned, it is not sufficient for a dealer claiming refund under Section 18(2) of the Act to show that he has paid input tax on the goods purchased; that those goods are used in the manufacture and nothing more but there is duty upon the dealer to satisfy the Assessing Authority that the claim is not hit by any of the restrictions or conditions contained under Section 19 of the VAT Act. In this regard, it is essential for the Assessing Authority to embark upon the fact finding exercise to ascertain the quantum of loss of the goods which were purchased on which tax was paid vis-a-vis the goods manufactured from and out of the goods purchased and to examine as to whether they fall within any of the restrictions contained in Section 19 of the VAT Act. The Assessing Officer has to conduct an exercise by which it is to be ascertained as to whether the representation made by the dealer is justified and is not hit by any of the restrictions and conditions contained in Section 19 and in particular Section 19(9) of the VAT Act.
4) It is held that the Assessing Authorities are not justified in adopting uniform percentage as invisible loss and calling upon the dealer to reverse the input tax credit availed to that extent. Consequently, all notices issued to the petitioner for reopening and all consequential order passed reversing the input tax credit to the extent of either 4% or 5% or on adhoc percentage stands set aside. However, liberty is granted to the concerned Assessing Officer to issue appropriate show cause notices to the petitioners clearly setting out under what circumstances they propose to revise or call upon the petitioner to reverse refund sanctioned and after inviting objections proceed in accordance with law.
(5) The undertaking given by the dealer in Form W is with regard to information furnished for the purpose of verification by the Assessing Officer under Rule 11(2) of the VAT Rules for being entitled to refund under section 18(2). Therefore, it is not as if the Act does not provide a remedy in the event of a wrong or erroneous refund sanctioned when Section 18 cannot be treated as an independent provision but subject to restrictions and conditions under Section 19 of the VAT Act.”
It is relevant to note that the learned Judge had recorded that the relief sought for in all the Writ Petitions was more or less identical and the grounds raised are common. That the revenue has advanced common arguments resisting the contention of the petitioner / assessee. The batch of writ petitions was disposed by the learned Judge vide his order dated 26.11.2014. It is this order of the learned Judge which is the subject matter of challenge in these Writ Appeals. It must be noted that it was consented by all parties concerned that the common question that arises for consideration is whether manufacturing / invisible loss of goods used in manufacture would attract Section 19 (9) of the TNVAT Act, thereby warranting reversal of credit. It was also consented/submitted that the facts in Writ Appeal Nos.1094 and 1095 of 2015 can be taken as the lead matter and the facts in the said appeals can be considered as being typical for resolving the controversy. It was made clear that we do not propose to examine the facts and we only intend to resolve the legal issues raised.
The following table would give a broad overview of the activity and also the nature of inputs used in the manufacturing or processing of goods in some of the writ petitions/appeals, forming part of the present batch.
