Hello friends greetings for the, in the current article we will discuss blocking of input tax credit (ITC) under section 17 in case of input tax credit which cannot be availed. There has always been ambiguity or confusion regarding ineligible credit as certain terms are not self-explanatory itself. As per section 17(5)(h), the input tax credit would be blocked in case of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples however these terms are not defined so recent judgment by Hon’ble madras high court has brought some light on the confusion pertaining to this section which we will discuss in detail.
As per section 17(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, the input tax credit shall not be available in respect of the following, sub-clauses from (a) to (i), however as we are discussing sub-clause (h) which says Input tax credit would be restricted in the following cases:-
1. Goods lost
2. Stolen
3. Destroyed
4. Written off
5. Goods disposed of by way of gifts or free sample
It can be understood that in case of goods which are used in the course or furtherance of business are either Stolen, Destroyed, written off or goods disposed of due to gifts or free sample then input tax credit of those goods would not be available however in case of “Goods Lost“ that is goods lost on “Inherent manufacturing loss of Input “there is widespread confusion as in day to day manufacturing process there would always be normal input loss. Department has taken a view that any kind of loss of input and input tax credit associated with it has to be reversed. Several registered persons were being issued notice for non-reversal of ITC.
In a recent judgment by Hon’ble Madras High Court in ARS Steel & Alloy International Pvt. Ltd. v. the State Tax Officer, the court has set aside the assessment order passed by the revenue department rejecting a portion of the ITC on inherent manufacturing loss claimed by the assessee Held that reversal of ITC under Section 17(5)(h) of the CGST Act in case of loss of input which is inherent to manufacturing loss is misconceived, as such loss is not contemplated or covered by situations adumbrated under Section 17(5)(h) of the CGST Act.
The petitioner was engaged in the manufacturing of MS Billets and the latter, in turn, constitutes an input for the manufacture of TMT/CTD Bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The court observed 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 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 that is inherent to the process of manufacture itself.
Court also Relied on the judgment of the Hon’ble Madras High Court in the 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. 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. The situations as set out above 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 that is inherent to the process of manufacture itself.
Conclusion: The above judgment by the court has shed some light on the issue but as this is a single bench judgment of the High court it has its own limitations, the issue remains unresolved and maybe in the near future department will come out with an explanation for better working by the department officials for resolving the issue and input tax credit which is genuine there should not be any kind of restrictions involved.
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