Reversal of ITC in case of MEIS/SEIS sales?

Question :- Whether reversal of Common credit as per Rule 42 of CGST rules is required in case MEIS/SEIS sales?

Background

♦ Under the FTP 2015-20, MEIS/SEIS intends to incentivise exports of goods manufactured in India or produced in India. The duty credit scrips can be utilised to pay customs duties on import of inputs or goods, safeguard duty, anti-dumping duty and any other customs duty under FTP 2015-20. The scrips can also be transferred as well as used for importing goods against them i.e exporters who are able to use the same for their own consumption use the same and exporters who are not able to use for their own consumption sell the same to another person

 Relevant Legal Provisions  

♦ As per entry number 122A of notification number 2/2017-Central Tax (Rate), dated 28-6-2017, sale of duty credit scrips are exempted from GST.

♦ Section 17(2) of the CGST Act, 2017 (“CGST Act”), which provides that where the goods or services or both are used by a registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

• There are some exclusions given through explanation 1 to Rule 43 which excludes some particular exempt income from calculation of exempt supplies like services by way of accepting deposits, extending loans or advances.
• However there is no specific exclusion given to above subject matter which leaves us pondering on whether reversal is required of Common credit for MEIS/ SEIS sales?

My view

In our view, though there is no dispute that sale of SEIS/MEIS scrips is exempted supply. Also it should not be disputed that common credit/ input services like CHA expense is used specifically for Export and SEIS/MEIS is just a By-product of the same. So reversal of ITC related to such services should not be reversed at all. When we critically examine the supreme court decision in Union Of India & Ors vs M/S Hindustan Zinc Ltd on 6 May, 2014, rule 57CC and Rule 6 of the Modvat/ CENVAT Rules respectively require the literal rule of interpretation which needs to be applied, as the language of these was unambiguous in this behalf. Significantly, the question as to whether Rule 57 CC will apply when by- products are cleared without payment of duty came for discussion in that case, and it was in favor of assessee.

Now the only question which needs to be analyzed whether it other common expenses that registered person has used common input/ input services for sale of duty credit scrips and export of services, which are awarded by Government of India under Foreign Trade Policy as an incentive to exporter of goods/services consequently requiring reversal of ITC on common Input Services.

To analyse the above question, it is important to note that MEIS Scrips/SEIS scrips are incentives given by the government of India to exporters of goods/services. Exporters of goods/services incur all expenses primarily for export of goods/services. At the time of incurring expenses of inward supply of common input/input services, objective of the exporter remains export of goods/services and making profit from thereof. Also it is important to note that MEIS sale only occurs when the same cannot be used to pay custom duty and only extra is sold (thus shows that it is not intention of taxpayer to sell the same). Thus in my view, it can be said that incentives in form of scrips are by- products to such exporter of goods/services

Important Case laws upheld on the same ground 

Keeping the same view point, high court in JSW STEEL LTD-2015 held the “that credit of that quantity of inputs which are necessary to manufacture the intended quantity of final product will be allowed. If in that process certain unintended by-products emerge as a technical necessity then it cannot be said that part of the said inputs have been used in manufacture of the by-products”

Position held in Excise period (Pre-GST Era)

There is Circular No. 973/07/2013-CX  4th September, 2013 related to pre-GST period   ” In view of these provisions it has been decided that such debit of duty in these scrips shall be treated as payment of duty for the purpose of determining the applicability of rule 6 of the Cenvat Credit Rules, 2004. Therefore, it is clarified that in respect of goods cleared availing the benefit of any of notifications no. 29/2012-CE, 30/2012-CE, 31/2012-CE, 32/2012-CE and 33/2012-CE all dated 9 th July, 2012, payment of amount under rule 6(3) of the Cenvat Credit Rules, 2004 is not applicable”

Conclusion

From all the above points, inferences can be drawn from above discussion that exempted supply which is not intentionally effected by registered person but takes place consequent to principal taxable supply cannot be considered as exempted supply for the reversal of common input and input services whose quantum is not affected by the quantum of such exempted supply.